The Reserve Bank of India (RBI) has tightened norms for banks and non-banking financial companies (NBFCs) concerning investments in alternative investment funds (AIFs). The move follows concerns raised by the Securities and Exchange Board of India (SEBI) regarding instances of non-bank financiers evergreening loans through the AIF route, amounting to $1.8 billion to $2.4 billion.
Addressing the Issue of Evergreen Loans
Evergreen loans, a practice aimed at presenting lower non-performing asset (NPA) percentages, involve offering borrowers additional loans through AIF as an investment vehicle to repay earlier unpaid loans. The RBI’s guidelines seek to curb this misuse of AIF funds by regulated entities.
Key Guidelines Issued by RBI:
- Investment Restrictions: Regulated entities are prohibited from investing in AIFs that have downstream investments in a debtor company to which the entity has had a loan or investment exposure in the preceding 12 months.
- Liquidation Period: If an AIF scheme, in which a regulated entity is already an investor, makes a downstream investment in a debtor company, the entity must liquidate its investment in the scheme within 30 days.
- Provision on Unliquidated Investments: In cases where entities cannot liquidate their investments within the prescribed time limit, they must make 100% provision on such investments.
- Deduction from Capital Funds: Investment by entities in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from capital funds.
Industry Response and Economic Implications
While the move has been applauded by some for curbing potential risks in the economy, concerns have been raised about unintended negative impacts on the AIF industry, particularly those sponsored by financial services players.
Reports indicate that the credit exposure of banks to NBFCs reached INR 14.8 lakh crore in October 2023, with over 1200 registered alternative investment funds in the country as of December 2023.
