In order to further prevent potential evergreening of loans by lenders through alternative investment funds, the Reserve Bank of India has issued revised draft guidelines for investments by regulated entities in AIFs, according to a release issued by the central bank on Monday.
Evergreening, which the banking sector regulator aims to prevent, refers to the practice of extending a new loan to repay an existing loan, which leads to the masking of non-performing assets.
Alternative investment funds are privately pooled investment vehicles that collect funds from high-net-worth individuals, either domestic or foreign.
The RBI has said that a single entity's contribution to any AIF scheme must be capped at 10% of its corpus and collectively a ceiling of 15% must be applied for investment by all entities in an AIF scheme.
Investments by a regulated entity up to 5% of the corpus of an AIF scheme will be allowed without any restriction, but if the investment surpasses 5% and has a downstream debt investment in a debtor company of the entity, then it will be required to make 100% provisions to the extent of its proportionate exposure.
RBI also said that it may exempt certain AIFs, in consultation with the government, that have been set up for strategic purposes.
The revised guidelines will be applicable prospectively and existing investments or commitments will follow the extant norms. The central bank has called for comments and feedback on the draft circular by June 8.
These guidelines have come as the central bank in December 2023 had tightened investment norms for banks and non-banking finance companies that invest in AIFs.
It had asked lenders to not invest in any AIF that has direct or indirect downstream investments in a debtor company of the regulated entities. The RBI had also asked entities to liquidate their investments in AIFs with such downstream investments within 30 days or make 100% provisions for such investments.
Following this move, the RBI observed that these regulatory measures brought financial discipline among lenders regarding their investment in AIFs, the central bank said on Monday.
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