RBI Strengthens Norms for Regulated Entities

• 23 Dec 2023

Recently, the Reserve Bank of India (RBI) has implemented stricter norms for Regulated Entities (REs), comprising banks, all India Financial Institutions, and Non-Banking Financial Companies (including Housing Finance Companies), aiming to prevent the evergreening of loans through investments in Alternative Investment Funds (AIFs).

Key Points

• Indirect Exposure through AIFs: The RBI expressed concerns about certain transactions involving REs and AIFs, emphasizing the substitution of direct loan exposure with indirect exposure through AIF investments.
• A circular issued by RBI emphasizes that REs should avoid investing in AIF schemes with downstream investments in debtor companies of the RE.
• Mandatory Liquidation within 30 Days: If an AIF scheme, in which an RE is already an investor, makes a downstream investment in a debtor company, the RE is required to liquidate its investment in the scheme within 30 days from the date of such downstream investment.
• The circular specifies that the 30-day period starts from the circular's issuance date for existing investments.
• Provisions for Non-Compliance: In instances where REs are unable to liquidate their investments within the specified timeframe, the circular mandates a 100% provision on such investments.
• Additionally, investments in the subordinated units of AIF schemes with a 'priority distribution model' will face full deduction from RE's capital funds.
• Enforcement: The RBI has enforced these instructions with immediate effect, signalling a proactive approach to address potential risks associated with loan evergreening through AIF investments.