RBI eases restrictions on Bank investments into AIF – Why and what next?

RBI eases restrictions on Bank investments into AIF – Why and what next?

Key Takeaways

  • ‘Evergreening’ of loans by banks, NBFCs, etc. through fund structures shut down through 2 circulars – Banking entities can no longer indefinitely extend loan tenures by transferring their loan exposures to AIFs
  • In RBI’s first circular, banks having indirect exposure to a borrower through an AIF required to either liquidate their entire AIF investment or make 100% provision against it (significantly reducing available capital) – Well intended, but likely a case of ‘too much’ in a haste
  • RBI’s second circular provides helpful clarifications (i.e., relaxed provisioning, and carve-outs for funds of funds and for AIF’s holding equity), but still fall short – Banks who bona fide invest in AIFs remain at a loss (e.g., if an investee obtain loans from a bank only after the bank has invested in the AIF)
  • Balancing commercial freedom against systemic risk is complex – where should the RBI draw the line?

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