India's central bank on Wednesday eased its recently tightened rules that mandated lenders set aside higher provisions if they have bought into alternative investment funds (AIFs) that, in turn, have invested in the lender's borrowers.
This was to ensure the rules were uniformly implemented among lenders and to address stakeholders' concerns, the Reserve Bank of India (RBI) said in a release. These concerns, Reuters has reported, include slowing the AIF industry's growth.
In December, the RBI barred banks and non-banking finance companies (NBFCs) from investing in AIFs that have investments in existing and recent borrowers.
And should the fund invest in a lender's existing borrower, that lender would need to liquidate their investment in the AIFs in 30 days, failing which it would have provision for its full investment.
Now, rather than a 100% provision, banks need to set aside funds to only cover that part of their investment in an AIF that is further invested in the debtor company, the RBI said on Wednesday.
The RBI had tightened its rules after concerns over instances where AIFs, including private credit funds, were used to mask bad loans in the financial system.
But the unintended consequences of these rules had forced the central bank and market regulator to consider exemptions, Reuters had reported.
The RBI clarified that investments in equity shares of a lender's debtor company will not be considered, but that all other investments, including in hybrid instruments, would come within the scope of its rules.
It further said that a bank's investments in AIFs through intermediaries, such as fund of funds or mutual funds, would not fall within the scope of its rules.