RBI modifies AIF norms in a relief to lenders

In a relief to banks and non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) relaxed the norms it announced on investments in Alternative Investment Funds (AIFs) in December last year.

The RBI had restricted banks and financial institutions from investing in AIFs where there is an exposure to a firm to which they have already lent to, in order to address evergreening on loans. The regulator had asked banks and NBFCs to make 100 per cent provisions for the entire investment in such AIF schemes.

In a circular issued, the RBI said that its regulated entities (REs) will now be required to make provisioning only to the extent of the amount invested by the AIF scheme in the debtor company and not the entire investment.

Industry experts said that this would lower the burden on the NBFCs which had done 100 per cent provisioning for the total investments in AIFs after the lapse of the 30-day period given by RBI to liquidate such assets. As some of the entities have already made provision, there could be write back of provision in the current quarter.

“The circular helps to address the issue that the provisioning that these entities need to make will be applicable only where the AIF has a debt exposure (since equity has been carved out) to a portfolio company where the REs have a direct exposure by the way of debt,” said Siddharth Shah, Partner, Khaitan & Co.