Advisory on AIF Investment Aims to Prevent Evergreening of Loans

To prevent evergreening of loans, the Reserve Bank of India (RBI) has come out with directions to regulated entities (REs) such as banks, NBFCs, etc. with respect to their investments in units of Alternative Investment Funds (AIFs). The instructions have become operative with immediate effect.

REs engage in evergreening of loans so that the default in loan repayment does not turn it into a non-performing asset (NPA) requiring the entities to make higher provisions. On previous occasions, REs have been cautioned against engaging in such practices. Noting that certain investments in units of AIFs raise concerns regarding evergreening since the transactions “entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs”, the RBI considered it necessary to issue these instructions.

The circular dated December 19, 2023, specifies that REs must not make investments in AIF schemes having downstream investments, directly or indirectly, in one of RE’s debtor companies to which the RE has had a loan or investment exposure in the last 12 months.

If the RE has invested in an AIF scheme and such scheme makes a downstream investment in the RE’s debtor company, the RE has to liquidate its investment in the AIF scheme within 30 days from the date of the downstream investment. In case the downstream investment has been made by such scheme before the issuance of the circular, the liquidation has to be carried out by the REs within 30 days from the date of the circular.

Any non-compliance with the liquidation requirements will put REs under an obligation to make 100 per cent provision on such investments.

If an AIF scheme has adopted a priority distribution model, and the RE has invested in subordinate units of such scheme, the same would be subject to full deduction from the RE’s capital funds.