RBI loosens restrictions on bank investments in AIFs

The Reserve Bank of India (RBI) has relaxed some of its its December 2023 rules on how banks and other financial institutions can invest in Alternative Investment Funds (AIFs).

Original Concerns:

In December 2023, the RBI had barred banks and NBFCs, known as "regulated entities" (REs), from investing in AIFs that have any involvement with companies they lend money to (debtor companies). This rule aimed to prevent banks from disguising bad loans by transferring them to AIFs.

However, the new clarification issued yesterday offers some relief to REs.

Key Changes:

* Reduced Provisioning: Banks now only need to set aside provisions for the portion of their AIF investment that goes towards existing borrowers, not the entire investment.

 

* Equity Carve-out: Investments in a borrower's equity shares are excluded from the restrictions.

* Intermediary Exemption: Banks investing in AIFs through intermediaries (fund of funds or mutual funds) are not subject to these rules.

Addressing Concerns:

This revision addresses concerns from stakeholders, including potential slowdowns in the AIF industry. It also clarifies the rules for smoother implementation across lending institutions.

Following this news, banks and financial shares were in demand. The Nifty Bank index jumped 1.22% to 47,355.85, and the Nifty Financial Services index climbed 1.45% to 21,094.20.

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