The Reserve Bank of India Tuesday imposed restrictions on banks and non-banking finance companies (NBFCs) from investing in private credit funds and other alternative investment funds (AIFs) to stop evergreening of bad loans.
The central bank said in a notification that banks, NBFCs and other financial institutions that come under its purview can’t invest in any scheme of AIFs which has downstream investments either directly or indirectly in a company that has taken a loan from them. The borrower would mean any company to which the bank or NBFC currently has or previously had a loan or investment exposure anytime during the preceding 12 months, the RBI said.
The RBI noted that banks and NBFCs often invest in units of AIFs as part of their regular investment operations. However, certain transactions involving AIFs have raised “regulatory concerns”, it said. These transactions entail substitution of direct loan exposure to borrowers with indirect exposure through investments in units of AIFs, it said.
In another measure, the central bank said that if an AIF scheme in which a bank or an NBFC is already an investor, makes an investment in any such debtor company, then the lender will have to liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF.
“If banks and NBFCs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from date of issuance of this circular,” the RBI said.
The central bank also said that if the lenders are not able to liquidate their investments within the prescribed time limit, they will have to make 100% provision on such investments.
The RBI’s actions come barely days after a senior official of the Securities and Exchange Board of India (SEBI) said that the capital markets regulator and the central bank had noticed instances of AIFs being used to mask bad loans.
Ananth Narayan, a whole-time SEBI member, said the regulator had seen "dozens of cases" of "egregious regulatory violations" by AIFs to avoid recognition of non-performing assets.
India has recorded a surge in private credit funds and other AIFs over the last few years. Reuters reported in October that SEBI was investigating cases involving $1.8 billion to $2.4 billion where AIFs have been misused to circumvent rules.
