RBI Cracks Whip on Evergreening of Loans by Regulated Entities through AIFs
Moneylife Digital Team 19 December 2023
Expressing concerns over the evergreening of loans by regulated entities (RE) like banks and non-banking finance companies (NBFCs) through alternative investment funds (AIFs), the Reserve Bank of India (RBI) directed them to reduce their loan exposure by selling loans of borrowers who have availed the facility from the AIF as well as the (RE). 
In a circular, RBI says, "REs shall not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE. If an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF."
For this purpose, the borrower of the RE means any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months, RBI clarifies.
"If REs have already invested into such schemes having downstream investment in their debtor companies as of date, the 30 days for liquidation shall be counted from the date of issuance of this circular. REs shall forthwith arrange to advise the AIFs suitably in the matter. In case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100% provision on such investments," RBI says.
REs make investments in units of AIFs as part of their regular investment operations. However, certain transactions of REs involving AIFs that raise regulatory concerns have come to the notice of RBI. "These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs," it says.
Further, RBI says investment by REs in the subordinated units of any AIF scheme with a 'priority distribution model' will be subject to full deduction from RE's capital funds.
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