HDFC Bank wrote back Rs 200 crore on AIF provisions post RBI clarification, says CFO

On more investments to AIFs, Vaidyanathan said that investments will depend as and when opportunities come.

HDFC Bank has done a write back of around Rs 200 crore or 20 percent on its provisions made to its alternative investment funds (AIFs), said Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. “We have released around 200 crore from our provisions to our AIFs investments. This is around 20 percent of our total provisioning,” Vaidyanathan said at a post-result press conference on April 20.

On more investments to AIFs, Vaidyanathan said that investments will depend as and when opportunities come.

Earlier, the lender had made a 100 percent contingent provision on its AIF investments. "Our AIF book is Rs 1,220 crore and the current applicable Reserve Bank of India (RBI) circular asks us to take a provision on that and by January 18. On a prudent basis, we have done the assessment and taken the provision now. We have made a contingent provision of 100 percent of our AIF book," Vaidyanathan said at the post-results press conference of the Q3FY24 results.

Also read: RBI clarifies on lenders' investments in AIFs linked to debtor companies

RBI’s latest clarification

The Reserve Bank of India (RBI) on March 27 issued certain clarifications on its earlier guidelines on investments by lenders in alternative investment funds (AIFs), which have further investments in borrower companies linked to the lenders.

As per the clarification, the definition of downstream investments will exclude investments in equity shares of the debtor company of the lender. However, the rules will apply to all other investments, including investments in hybrid instruments.

Further, provisioning by lenders that have investments in AIFs will be required only to the extent of investment by the lender in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme, RBI said.

Also, investments by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the earlier RBI circular, RBI said.

These rules have been brought in with a view to ensuring uniformity in implementation among the lenders and to address the concerns flagged in various representations received from stakeholders, the RBI said.

December 19 rule

On December 19, 2023, the RBI barred regulated entities, such as banks, non-bank lenders, and home financiers, from investing in AIFs that have directly or indirectly invested in companies that have borrowed money from the lenders.

In a press release, RBI highlighted regulatory concerns regarding certain transactions involving AIFs by regulated entities that have come to its notice and released guidelines for investments in AIFs by the lenders regulated by it. “These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs,” the RBI said. The guidelines, RBI said, have been introduced to address concerns about potential evergreening through this route.

Also read: HDFC Bank Q4 Results: Net profit rises to Rs 16,511 crore, NII at Rs 29,007 crore

Regulated entities (REs) shall not make investments in any scheme of AIF that has downstream investments either directly or indirectly in a debtor company of the RE. The RBI said lenders need to liquidate their investment in the scheme within 30 days of the AIF scheme, in which lenders are already investors, and make a downstream investment in any such debtor company, the RBI said.

Further, if lenders have already invested in schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from the date of issuance of this circular, the RBI added. If lenders fail to liquidate their investments within 30 days, they need to make 100 percent provision on such investments, RBI said.

The central bank also said that investment by REs in the subordinated units of any AIF scheme with a "priority distribution model" shall be subject to full deduction from RE’s capital funds.