Updated March 27th, 2024 at 19:01 IST
RBI relaxes rules on lenders' investments in AIFs to address industry concerns
The RBI's decision follows reports of slowing growth in the AIF industry, prompting a re-evaluation of the regulatory framework.
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The Reserve Bank of India (RBI) on Wednesday announced relaxation of recently tightened regulations pertaining to lenders' investments in alternative investment funds (AIFs). The move comes in response to stakeholders' concerns and aims to ensure uniform implementation of the rules across financial institutions.
The RBI's decision follows reports of slowing growth in the AIF industry, prompting a re-evaluation of the regulatory framework. In December, the RBI had imposed restrictions on banks and non-banking finance companies (NBFCs) from investing in AIFs with holdings in their existing or recent borrowers.
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Under the previous guidelines, lenders were required to set aside higher provisions or liquidate their investments in AIFs within 30 days if the fund invested in the lender's debtor company. Failure to comply would result in provisioning for the full investment.
The RBI has now revised the provisioning requirements, mandating banks to set aside funds only for the portion of their investment in an AIF that is subsequently directed towards the debtor company.
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The tightening of regulations initially stemmed from concerns over the use of AIFs, including private credit funds, to conceal non-performing loans within the financial system. However, unintended consequences prompted a re-evaluation, leading the central bank and market regulator to consider exemptions.
The RBI clarified that investments in equity shares of a lender's debtor company would not be subject to the revised rules. However, all other investments, including hybrid instruments, would fall under the purview of the regulatory framework.
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Additionally, the RBI specified that a bank's investments in AIFs through intermediaries such as fund of funds or mutual funds would not be subject to the revised regulations.
(With Reuters inputs)
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Published March 27th, 2024 at 19:01 IST