On Tuesday, the Reserve Bank of India (RBI) announced new regulations prohibiting banks and non-banking finance companies (NBFCs) from investing in any Alternative Investment Funds (AIFs) that have direct or indirect investments in companies to which these entities have loan or investment exposure in the past 12 months.
The RBI directive specifies that if an AIF, where a regulated entity is already invested, makes further investments in any such company to which the entity has exposure, the entity must divest its investment in the AIF within 30 days of the AIF's investment. Failure to do so will require the entity to make 100 per cent provisions on those investments.
These stricter guidelines aim to address concerns of concealing bad loans through AIFs. The RBI highlighted the risk of masking bad loans through certain transactions between regulated entities and AIFs, citing worries about potential 'evergreening' of loans through this channel.
Lenders are instructed to liquidate their AIF investments within 30 days if the fund invests in an existing borrower. Failing this, they must make full provisions on these investments, as per the RBI's directives.