Easier provisioning of AIF investments may help lenders allot more to such funds, say experts

The central bank also said that 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.

The Reserve Bank of India’s (RBI) latest directive on investments by banks and non-banking financial companies (NBFCs) in alternative investment funds (AIFs) may lead to more investments in such funds, experts said. An AIF is typically a privately pooled fund, and generally, only institutions and high net-worth individuals (HNIs) invest in AIFs, as the outlay is substantial.

On March 27, 2024, the RBI clarified its earlier guidelines on investments by banks and NBFCs in AIFs, which have, in turn, invested in borrower companies linked to the lenders.

Also read: Banks may gain from provision reversal in Q4 post RBI's rule changes on AIF investments: Experts

Per the RBI clarification, lenders will need to provision only the amount invested by the AIF in a debtor company linked to the lender, and not on the bank's entire investment in the AIF scheme.

“This is a welcome move. Excluding investments through funds of funds and mutual funds will increase capital participation in AIFs,” said Siddarth Pai, Founding Partner, 3one4 Capital, and Co-Chair, Regulatory Affairs Committee, Indian Venture and Alternate Capital Association (IVCA).

Speaking on condition of anonymity, a senior private bank executive said that this would help banks invest more in AIFs. “We are expecting that banks will make some additional investments in AIFs as the rules have eased. But let’s see,” the executive added.

A treasury head with a private sector bank said that if a lender invested Rs 5 crore in a Rs 100-crore AIF, and the AIF, in turn, invested Rs 2 crore in a debtor company of the lender, the provisioning would be on the entire Rs 5 crore, as per the earlier circular. However, now the provisioning will be only to the extent of  Rs 2 crore.

The central bank also said that 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.

December 19, 2023, AIF circular

On December 19, 2023, the RBI  restricted banks and financial institutions from investing in AIFs which have an exposure to firms that have borrowed from the lenders, in order to address the ever-greening of loans.

The regulator had asked banks and NBFCs to provision 100 percent of investments in such AIF schemes.