RBI Issues Stricter AIF Investment Norms For Lenders, Caps At 10%
Collective investment by all regulated entities in a scheme has been capped at 20%.
The Reserve Bank of India has tightened norms for investments by regulated entities in alternative investment funds, issuing a revised set of directions to replace its earlier circulars from December 2023 and March 2024.
These new guidelines will come into force from Jan. 1. Under the revised norms, a single bank or a non-bank financial company cannot contribute more than 10% of an AIF's scheme's corpus, according to a press release on Tuesday.
"By restricting the individual contribution to 10% of the corpus of an AIF, the concentration risk shall be mitigated," Sudhir Chandi, director at Resurgent India, said.
Collective investment by all regulated entities in a scheme has been capped at 20%. If an entity invests over 5% in an AIF that in turn invests in a debtor company of the entity, 100% provisioning will be required for the bank's proportional exposure. This will be excluding equity instruments.
While the guidelines are relaxed from previous draft circulars, the RBI has still tightened AIF investments for lenders.
"The final guidelines are relaxed as these allow regulated entities to invest up to 20% of the corpus of AIF as against 15% allowed in draft guidelines," Anil Gupta, senior vice president at ICRA, said.
If the investment is through subordinated units, it must be fully deducted from tier-1 and tier-2 capital.
The directions apply to a wide range of entities, including commercial banks, co-operative banks and NBFCs, including housing finance companies, and all-India financial institutions, the RBI said.
The RBI also provided exemptions for investments made under earlier approvals or commitments. Older investments may continue under the previous circulars or the new ones, but no new AIF commitments post Jan. 1 will be allowed under the old regime.
The updated directions are aimed at plugging regulatory loopholes, ensuring that banks and financial institutions do not use AIFs to circumvent exposure norms or engage in indirect lending to their own borrowers.
"The guidelines directly seek to address the concern relating to the misuse of the AIF route for evergreening of the loans and advancing by using AIF to finance the existing stress loans portfolio," Chandi said.
Regulated entities will need to strengthen their internal mechanisms to handle investment portfolios with care and close monitoring based on sound investment, he said.
