Tweak in rule brings relief to banks, AIFs

Banks to provide for only the amount AIF invested in debtor firm

The Reserve Bank of India (RBI) on Wednesday tweaked rules governing investments in alternative investment funds (AIFs), offering some relief for lenders forced to make large provisions, and investors suddenly facing a drought of capital.

In December, RBI ordered banks and non-bank lenders to sell their investments in AIFs, which had further invested in companies to which the lenders had given loans in the previous 12 months; otherwise, they had to make 100% provisions against them.

On Wednesday, the central bank clarified that lenders need to provide for only the amount the AIF invested in the debtor company, and not the entire amount the lender invested in the AIF. RBI also said its directive does not cover equity shares of the debtor company, but all other investments, including hybrid instruments.

Dipen Ruparelia, head of products at Vivriti Asset Management, said that earlier, if a bank or a nonbanking financial company (NBFC) had a ₹100 crore investment in an

AIF, which further makes a ₹50 crore investment in a debtor entity, then the lender had to make a provision for the entire ₹100 crore; with the latest tweak, the provisioning requirement will be only ₹50 crore.

“This is a welcome change to that effect,” Ruparelia said.

The central bank’s December action had come in the wake of concerns that some lenders were misusing the AIF route for evergreening loans, a practice where lenders extend new loans to pay off old ones. However, this forced banks and NBFCs to make steep provisions, and tightened capital flows for AIFs. On 26 February, Mint reported that top banks, including State Bank of India, HDFC Bank and Axis Bank, had walked back on capital commitments to avoid falling foul of rules.