RBI tightens rules for banks, NBFCs’ investments in Alternate Investment Funds

The RBI's move is aimed at stopping banks and NBFCs from using the AIF channel as a way to artificially sustain or extend the life of their loans

PGurus Newsdesk

December 19, 2023

The RBI's move is aimed at stopping banks and NBFCs from using the AIF channel as a way to artificially sustain or extend the life of their loans

RBI shares guidelines on AIFs investments for lenders

On Tuesday, the Reserve Bank of India (RBI) barred regulated entities (REs) such as banks and non-banking finance companies (NBFCs), from investing in any scheme of alternative investment funds (AIFs) which has downstream investments either directly or indirectly in the debtor company of the RE.

The debtor company of the RE, for this purpose, shall mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months, the RBI notification stated.

The tighter rules, which come into immediate effect, have been issued due to concerns over instances where AIFs mask bad loans in the financial system. The RBI pointed out that certain transactions of REs involving AIFs raise regulatory concerns over possible “evergreening through this route”.

RBI said that lenders would need to liquidate their investments in AIFs within 30 days should the fund invest in an existing borrower.

If the regulated entity is unable to do so, they will be required to make 100 percent provisions on these investments, the RBI added.

In instances where a regulated entity has invested in subordinate units of a fund that follows a ‘priority distribution’ model, the investment shall be subject to full deduction from the entity’s capital.

[With Inputs from IANS]

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