India’s move to allow stressed loans to be bundled into market-tradable securities is poised to attract a wave of foreign portfolio investors (FPIs) and private credit funds, potentially transforming the country’s nascent junk debt market.
In a landmark policy shift, the Reserve Bank of India (RBI) announced last week that it will permit the market-driven securitisation of stressed assets—not just performing loans—offering banks a new tool to offload risk and investors a fresh source of high-yield opportunities.
According to India Ratings and Research, the volume of securitised standard loans surged 25% in FY 2024-25, reaching ₹2.3 trillion (approx. $26.7 billion). With the RBI now widening the scope to include stressed retail and personal loans, analysts say the market could deepen significantly.
“This opens the door for more liquidity, more investor interest, and a stronger junk debt market overall,” said Hari Hara Mishra, CEO of the Association of Asset Reconstruction Companies (ARCs) in India.
Banks, burdened by rising defaults in unsecured lending, now have an alternative to steep discounts from ARC sales. Traditionally, these loans have been sold at haircuts as deep as 90%–95%. Securitisation provides a chance to package and sell them with more favorable terms.
The shift comes at a critical time. After years spent cleaning up corporate bad loans, Indian banks had pivoted to retail and unsecured credit—a move that’s now backfiring. Personal loans and credit card debt made up over half of all new retail bad loans between April and September 2024, according to RBI data. Overall non-performing assets in the sector are projected to rise to 3% by March 2026, up from a 12-year low of 2.6% last September.
Despite the risks, appetite from high-yield investors is growing.
“There’s strong interest in both stressed corporate and smaller retail loans,” said Nachiket Naik, head of private credit at Axis Asset Management. “And the potential yields in these securitised pools may rival distressed debt investments.”
Ajit Velonie, senior director at Crisil Ratings, agrees. “The expected yield from these bundles could exceed returns from traditional junk bonds—making them highly attractive to distressed funds.”
With distressed debt funds from the U.S. and Europe eyeing emerging markets, India’s new asset class may soon find eager buyers abroad as well, said Sankar Chakraborti, CEO of Acuite Ratings and Research.
Still, challenges remain. Accurately pricing these securities is complex and depends on several variables—ranging from asset quality to investor sentiment, said Manisha Shroff, partner at Khaitan & Co.
Additionally, India’s slow legal recovery mechanisms and regulatory intricacies could temper the pace of market development, she added.
But if these hurdles are addressed, India’s bad loan market could evolve into a mature ecosystem—offering both relief for banks and rich opportunities for investors.
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