RBI Proposes New Rules for Bank and NBFC Investments in AIFs

In December 2023, the Reserve Bank of India restricted investments by regulated entities such as banks and non-banking financial companies in Alternative Investment Funds that had exposure to their own borrowers. This decision followed concerns raised by the Securities and Exchange Board of India about the misuse of AIF structures, including evergreening of loans and potential circumvention of financial regulations.

As a result of the restrictions, many AIFs reported that regulated entities were unable to meet capital commitments. To provide relief, the RBI subsequently relaxed provisioning norms in March 2024.

Read More: RBI Opens Applications for Account Aggregator Self-Regulatory Body. 

New Proposal: Key Limits on AIF Investment

On reviewing the situation, the RBI has now proposed a framework that introduces specific investment caps rather than a complete ban. These are the key aspects of the proposal:

• Investment by a single regulated entity in an AIF scheme must not exceed 10% of the scheme’s corpus.
   
• The total contribution of all regulated entities to any AIF scheme is proposed to be capped at 15%.

This approach is intended to maintain financial discipline while allowing limited participation.

Provisioning Requirements for Higher Exposure

The proposed guidelines also include specific provisioning rules in cases of higher exposure. If a regulated entity invests more than 5% in a particular AIF scheme, and that scheme has downstream investments in companies that are borrowers of the same regulated entity, then the entity must make 100% provision for its proportionate exposure.

This clause is aimed at ensuring there is no indirect exposure to borrower companies through the AIF route, thereby preserving transparency and reducing systemic risk.

Exemptions for Strategic Funds

The RBI has proposed that certain AIFs set up for strategic purposes may be exempted from these norms. Such exemptions will be made in consultation with the government. This indicates a degree of flexibility in the framework for funds that serve broader economic or policy goals.

Proposed Norms to Apply Prospectively

The new rules, once finalised, will apply only to fresh investments. Existing investments and commitments will continue to be governed by the current regulatory provisions. This ensures that there is no retrospective impact on prior decisions made by financial institutions.

Conclusion

The RBI has invited comments from stakeholders on the draft proposal. The deadline for submitting feedback is June 8, 2025. This consultation process provides an opportunity for industry participants to share their views and suggest refinements to the proposed guidelines.
 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

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