RBI is tightening norms for lenders investing in AIFs

The Reserve Bank of India (RBI) on Tuesday directed regulated entities, including banks and non-banking financial companies, not to make investments in alternative investment funds (AIFs) that make downstream investments in existing and new borrowers.

The banking regulator directed lenders to liquidate their investments in AIFs within 30 days if an AIF scheme in which RE already invests makes a downstream investment in such debtor company.

Regulated entities (REs) make investments in shares of AIFs as part of their regular investment activities. “However, we have noticed certain transactions by REs involving AIFs that raise regulatory concerns. “These transactions involve replacing the direct credit exposure of REs to borrowers with indirect exposure through investments in shares of AIFs,” the central bank says.

The RBI’s move aims to address concerns related to possible evergreening in this route.

As of now, if regulated entities have already invested in such schemes with downstream investments in their debtor companies, the 30-day liquidation period will be counted from the date of publication of this circular, the RBI says, adding that REs must immediately initiate consultation with the AIFs appropriately included in the matter.

In the event that regulated entities are unable to liquidate their investments within the above prescribed period, they will be required to make 100% provision for such investments, the Central Bank said.

Investments by REs in the subordinated shares of an AIF scheme with a “priority distribution model” are subject to full deduction from RE’s capital funds, it said.

“The RE’s debtor company, in this sense, is any company with which the RE currently or has previously had a loan or investment risk in the last 12 months,” says the regulator.

The development comes weeks after the RBI increased the risk weights of consumer credit exposure of banks and NBFCs by 25 percentage points to 125%.

Sybil Alvarez

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