RBI Takes Stringent Measures to Curb Loan Evergreening via Alternative Investment Funds (AIFs)

The Reserve Bank of India (RBI) has intensified its regulations to address the issue of "evergreening" of loans facilitated by lenders through Alternative Investment Funds (AIFs). In a decisive move, the RBI has prohibited banks and Non-Banking Financial Companies (NBFCs) from investing in any AIF scheme with holdings in companies that received loans from the concerned lenders in the preceding 12 months.

Regulated Entities (RE), encompassing banks and NBFCs under the purview of the RBI, often engage in investing in AIF units as part of their routine investment activities. AIFs, which include venture capital funds, angel funds, infrastructure funds, private equity funds, and hedge funds, are impacted by these regulatory changes.

The RBI, in a circular, highlighted instances of transactions by REs involving AIFs that raised regulatory concerns. These transactions involve the substitution of direct loan exposure by REs to borrowers with indirect exposure through AIF unit investments.

To address the apprehensions about potential evergreening through this channel, the RBI specified that REs cannot invest in any AIF scheme with downstream investments—directly or indirectly—in a debtor company of the lender. Moreover, the RBI mandated that such investments need to be liquidated within 30 days, and if not possible, REs should make a 100% provision on these investments.

The term "debtor company of the RE" refers to any entity to which the lender currently holds or had loan or investment exposure at any time during the preceding 12 months.

This decisive move by the RBI underscores its commitment to ensuring the integrity of the financial system by preventing malpractices such as loan evergreening and reinforcing transparency in financial transactions.