Post RBI relaxation, top banks write back Rs 457 crore from provisions in AIFs

have made a combined provision of over Rs 1,070 crore on their investments in alternative investment funds after the recent diktat from the RBI.

Some top Indian private banks wrote back Rs 457 crore from provisions they had made for their investments in alternative investment funds (AIF), an analysis of top three banks’ numbers from the January-March quarter of the financial year 2023-24 showed. The three banks are HDFC Bank, ICICI Bank and Kotak Mahindra Bank.

This action came after the RBI on March 27 issued certain clarifications on its earlier guidelines on investments by lenders' AIFs, which have further investments in borrower companies linked to the lenders.

To write back is to add a certain amount to the profit for a period from a possible cost that will not now have to be paid.

Also read: Banks reconsider alternative investment funds after central bank clarifies provisioning rules

What are the numbers?

HDFC Bank has done a write back of around Rs 200 crore on its provisions made to its 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.

ICICI Bank wrote back around Rs 100 crore on provisions made to its alternative investment funds (AIFs), said Anindya Banerjee, Chief Financial Officer, ICICI Bank. “We did a write back of around Rs 100 crore from our provisions to our AIF's investments,” Banerjee said at a post results press conference on April 27.

Kotak Mahindra Bank wrote back Rs 157 crore from its total provision of Rs 190 crore on its AIF investments, the bank’s investor presentation showed.

RBI’s latest relaxation

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.

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

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 diktat

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.

And on January 24, a Moneycontrol analysis showed that at least six Indian banks have made a combined provision of over Rs 1,070 crore on their investments in alternative investment funds after the recent diktat from the RBI.

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.

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.