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India’s central bank is introducing a game-changing financial reform aimed at revitalizing its junk debt market. By allowing banks to bundle non-performing loans into tradable securities, the Reserve Bank of India (RBI) is expected to attract foreign portfolio investors (FPIs) and private credit funds. This shift, which now includes the securitization of stressed assets alongside performing loans, marks a significant step toward deepening liquidity and participation in the country’s debt markets, analysts and investors say.
Recent data from India Ratings and Research shows a sharp 25% rise in securitized performing loans, reaching ₹2.3 trillion ($26.74 billion) in 2024–25. The new framework enables banks to group together retail and personal loans that have become distressed, offering them a route to offload bad assets and clean up their balance sheets. According to Hari Hara Mishra, CEO of the Association of Asset Reconstruction Companies (ARCs), this strategy not only helps banks but also creates high-yield investment products that can lure in new investors and add much-needed depth to the market.
In recent years, Indian banks have shifted focus from corporate to retail lending, especially unsecured personal loans, resulting in a surge of defaults. Between April and September last year, personal loans and credit card debts made up over half of all new non-performing assets in retail portfolios. Previously, banks had little choice but to sell these stressed assets to ARCs at massive discounts of up to 95%. But now, with the potential for securitization, they have access to more lucrative alternatives, which are likely to catch the eye of yield-hungry investors globally.
Ajit Velonie of Crisil Ratings notes that the yield on these bundled loans could exceed that of conventional junk bonds, making them especially attractive to distressed debt investors. U.S. and European funds, which are already on the lookout for high-yield opportunities in emerging markets, see India’s latest move as a promising frontier. These investors often seek returns akin to those expected by distressed asset funds, making securitized stressed loans a natural fit in their portfolios.
However, challenges remain—particularly in pricing these new securities. Manisha Shroff, partner at Khaitan & Co., highlights that asset quality, recovery rates, historical default patterns, and market sentiment all influence how these deals are valued. Despite these complexities, the potential benefits—greater financial flexibility for banks and compelling investment prospects for global capital—make this new RBI policy a pivotal moment in India’s financial landscape.