RBI tightens rules for banks and NBFCs’ investments in AIFs; Details here

The RBI said lenders would have to liquidate their investments in AIFs within 30 days if the fund invested in an existing borrower.

Mumbai: The RBI on Tuesday banned regulated entities (REs), such as banks and non-banking finance companies (NBFCs), from investing in any scheme of alternative investment funds (AIFs) that have downstream investments, directly or indirectly in the RBI’s debtor company. REGARDING.

The debtor company of the RE for this purpose means any company to which the RE currently has or has had any loan or investment exposure during the preceding twelve months as stated in the RBI notification.

The stricter rules, which take effect immediately, have been issued amid concerns over cases of AICBs masking bad loans in the financial system. The RBI pointed out that certain transactions of renewable energy sources involving AIFs raise regulatory concerns about possible ‘evergreening through this route’.

The RBI said lenders would have to liquidate their investments in AIFs within 30 days if the fund invested in an existing borrower.

If the regulated entity is unable to do so, it will be required to make 100 percent provision for these investments, the RBI added. In cases where a regulated entity has invested in subordinate units of a fund that follows a ‘priority distribution model’, the investment is fully deducted from the entity’s capital.