In a relief to banks and NBFCs, Reserve Bank of India modifies AIF norms

In a relief to banks and non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) on Wednesday 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 on Wednesday, 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.

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With the changes, the provisioning will be proportionate to the downstream investment in the debtor company by the AIF.

“For instance, if the RE has a total investment of Rs 100 crore in an AIF scheme but only Rs 10 crore of it is invested in the debtor firm by the AIF, then under the new norms, provisioning is required only for Rs 10 crore against a Rs 100 crore provisioning required earlier,” said Dipen Ruparelia, Head of Products, Vivriti Asset Management.

Further, the RBI has also excluded investments made through intermediaries like fund of funds and mutual funds.