RBI bars banks, NBFCs from investing in AIFs of borrowers

Mumbai, December 19

In a move to curb “evergreening” of loans, the RBI on Tuesday barred banks and NBFCs from investing in any scheme of Alternative Investment Funds (AIFs) having investment in companies that have taken loan from the lenders concerned in the past 12 months.

Curbing ‘evergreening’ of debts

• Banks and NBFCs make investments in units of Alternative Investment Funds (AIFs) in companies as part of their regular investment operations
• These transactions entail substitution of direct loan exposure of regulated entities to borrowers, with indirect exposure through investments in units of AIFs, the RBI said

Banks and NBFCs make investments in units of AIFs as part of their regular investment operations. Venture capital funds, angel funds, infrastructure funds, private equity funds and hedge funds, among others, are AIFs.

In a circular, RBI said, “certain transactions of REs involving AIFs that raise regulatory concerns have come to our notice”.

These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs, it said.

Further, the RBI has directed lenders that such investments would be required to be liquidated within 30 days.