Ever greening Loans Through AIFs not possible anymore- RBI's diktat

Описание: The Reserve Bank of India (RBI) has implemented measures to prevent the "evergreening" of non-performing assets (NPAs) through Alternative Investment Funds (AIFs). The RBI's concerns stem from regulated institutions, including banks and non-bank finance companies (NBFCs), investing in AIFs that subsequently fund companies borrowing directly from these institutions. This creates a potential scenario where defaults on debt servicing by a company could be indirectly funded by the lending institution through the AIF route, leading to understated bad debt recovery. The RBI has introduced regulatory measures, effective from December 19, 2023, mandating the liquidation of AIF investments within 30 days if there is exposure to the debtor company. This tightening of AIF exposures may impact credit conditions, particularly for companies with low credit ratings.

The implications extend to the banking system, with significant non-SLR exposure, and large banks and NBFCs actively investing in AIFs are expected to face substantial impacts. The regulatory constraints may disrupt AIF inflows, affecting their ability to attract institutional funds. Specific examples, such as Piramal Enterprises and IIFL, highlight potential impacts on their net worth due to covering entire AIF exposures. The RBI's measures aim to enhance transparency, prevent manipulation of loan books through AIF investments, and strengthen the financial system. The impact is not only on lenders but also on AIFs, facing disruptions in fund inflows and potential adjustments in the regulatory approach.