Banking News

investment norms: Tighter norms for investment by banks in AIFs


India’s banking regulator Tuesday tightened investment norms for banks and non-banking finance companies that invest in Alternative Investment Funds (AIF), potentially disrupting the flow of institutional money into these high-risk, aggressively managed corpuses and helping prevent likely evergreening of doubtful credit.

RBI has asked banks and NBFCs not to invest in AIFs that invest in companies they had a loan or investment exposure to in the past 12 months.

Under scrutiny
These AIFs were under regulatory scrutiny for being allegedly used to extend the life of loans, often unpaid or restructured. RBI, along with Sebi, had been investigating several cases where AIFs are misused to circumvent financial regulations.

“Against the backdrop of ‘evergreening’, the existing structures in the market operated in a regulatory vacuum of not being prohibited and in more instances than not, failed to pass the smell test on account of the spirit of the existing RBI regulations,” said Veena Sivaramakrishnan, a partner at law firm Shardul Amarchand Mangaldas & Co.

Also, the RBI has said that if a bank or financial institution has a lending relationship with a company that an AIF invests in, they must sell their investment in that AIF within the next 30 days. If they can’t do that, the banks or NBFCs concerned need to set aside 100% of the money they put into that AIF.

The RBI directive will help prevent the misuse of AIFs, which have seen significant growth in the past 5 years. Sebi data showed investments in AIFs have more than doubled over the past three years to ₹3.11 lakh crore, from ₹1.53 lakh crore.

HFCs could see some pressure to either divest or fully provide for some assets as some of them have investments in AIFs, and those funds have invested in real estate companies. “It may also significantly impact the existing investments from the likes of banks, NBFCs and Sidbi in several AIFs,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal.

The RBI mandate that such investments be either liquidated in 30 days or be provided for entirely would create genuine concerns, especially due to the close-ended nature of AIFs.

Through Tuesday’s circular and through another issued last month on special situation funds, the banking and capital-markets regulators are trying to curb evergreening of loans through AIF structures, market participants said. “The regulators are trying to ensure transparency and stop the misuse of AIFs – whether through a defaulting borrower getting back access to the asset or finance firms not providing enough for a bad debt,” an executive at an AIF said, declining to be named.


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