RBI Issues Advisory On Banks’ Investments In AIFs

The Reserve Bank of India (RBI) has issued a significant advisory concerning banks' investments in alternative investment funds (AIFs), outlining specific directives on the extent of these investments.

According to the advisory released on Wednesday, banks are instructed to provision only for the portion of their investment in the AIF scheme that is subsequently invested by the AIF in the debtor company. The central bank clarified that banks need not provision for the entire investment made by the lender in the AIF scheme.

In a bid to ensure consistency in implementation across regulated entities (REs), the RBI mentioned that downstream investments should exclude investments in equity shares of the debtor company of the AIF. However, all other investments, including those in hybrid instruments, are to be included.

This directive comes in the wake of concerns raised in December 2023, prompting the RBI to issue a circular governing investments by banks, non-bank lenders, and other REs in the AIF sector. The circular aimed to address apprehensions regarding the potential misuse of AIF investments as a means to conceal non-performing loans (NPLs), particularly through practices like evergreening.

The revised circular also outlined that deductions from capital will be evenly split between Tier-1 and Tier-2 capital of a regulated entity. This is targeted at commercial banks, cooperative lenders, Non-Banking Financial Companies (NBFCs), housing finance companies, and other financial institutions.