Banking News

aif: RBI circular impact: Banks may have to set aside more cash, AIF inflows to be hit


Mumbai: Provisioning at a few banks hitherto keen on investing in Alternative Investment Funds (AIFs) could surge, while institutional flows into these aggressively managed pooled corpuses face disruption risks, after the central bank Tuesday announced wide investment curbs aimed at preventing evergreening of doubtful corporate loans.

“The (central bank) notification is intended to curb window dressing of loan books and evergreening efforts by a few lenders,” said Hari Hara Mishra, CEO, Association of ARCs in India. “The guidelines address conflict of interest by putting loan and investment transactions at an arm’s length. Proper recognition of a non-performing asset (NPA) is the first step toward faster resolution.”

A Reserve Bank of India (RBI) circular issued Tuesday prohibits banks and NBFCs from investing in AIFs to prevent questionable asset transfers. This will affect large banks and NBFCs involved in AIF investments. “This RBI measure imposes significant requirements on banks and NBFCs,” said Sai Krishna Bharathan, Partner, Trilegal.

“This is bound to impact AIFs’ ability to raise funds from such investors,” said Bharathan. AIFs will now see the cascading impact of these curbs on their portfolio entities as they now need to share the list of contributing lenders in a loan relationship with a recipient of AIF investments.


Universe Shrinkage

The selection of portfolio entities by funds might also reduce, as they will likely refrain from investing in new entities where a regulated entity investor is a lender or where a potential investor is already a lender.Piramal Enterprises and IIFL have ₹4,500 crore (7% of AUM) and ₹1,100 crore (2% of AUM including AIF) of investments in AIFs, respectively, Jefferies said. “These AIFs have investments in debtor firms, but the investments are mostly in accounts where Piramal Enterprises and IIFL have exposure preceding the last 12 months,” the report said. “Investment in debtor firms where PIEL/IIFL had any exposure in the last 12 months may be limited, per our understanding.” However, if Piramal and IIFL must cover their entire AIF exposures (including the pre-12 months), the hit to their net worths could be 10% and 8%, respectively, according to the Jeffries report.The RBI has specified a 30-day deadline for banks/NBFCs to liquidate investments in an AIF if it downstream invests in a debtor company.


Source link