RBI AIF deadline ends today: Most lenders are making provisions on investments, say experts

Banks provision

Most lenders are opting to make provisions on their investments in Alternative Investment Funds (AIF) rather than making redemptions, say AIF experts. The Reserve Bank of India had given the lenders 30 days, until January 19, to liquidate their holdings or make provisions. Most lenders have retained their AIF investments, making provisions rather than liquidating them.

“So far, it appears that most Regulated Entities (REs) have chosen to take the provisions rather than selling the units in the market at distressed levels,” said Shyamal Karmakar, MD & CIO, RV Capital India.

Last month, the RBI said regulated entities, such as banks, non-bank lenders and home financiers, cannot invest in AIFs that have directly or indirectly invested in companies that have borrowed money from the lenders.

In a press release, the 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 lenders regulated by it.

Ankur Jain, Managing Director, InCred Alternative Investments, said that currently, regulated entities are in wait and watch mode. These lenders are making provisions, but in parallel, they are also talking to the regulator and saying “either give us time or maybe think of an alternative solution”.

An AIF is a special investment category that differs from traditional investment instruments. It is a privately pooled fund, and generally, institutions and High-Net Worth individuals (HNIs) invest in AIFs as they require substantial investments. There are three types of AIF: category 1, 2 and 3.

Elaborating, Saurabh Bhushan, Chief Executive Officer, Torus AIF, said that whenever an investment is made in an AIF, the tenure is longer, so redemption is not possible every time. If the AIF has invested in an unlisted entity, “you cannot simply redeem it because of the lack of liquidity”.

Saurabh of Torus AIF added that while these norms would bring transparency and the AIF industry would grow, the immediate impact would be negative.

Also read: AIF regulations modified to align with 'beneficial ownership' in anti-money laundering rules

Experts are of the view that the central bank cracked down to tackle the growing practice of loans being evergreened by lenders.

Evergreening of loans happens when a bank tries to save a loan from defaulting so that it does not appear as a non-performing asset (NPA) in its books. This is done by giving a fresh loan to a borrower to pay up an old loan.

Incred’s Jain said the immediate impact of the move will be that AIF fundraising from regulated entities will drop to zero.

HDFC Bank has made a 100 percent contingent provision of its alternative investment funds (AIF), said Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Moneycontrol reported the news on January 17.

“Our AIF book is Rs 1,220 crore and the current applicable Reserve Bank of India 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.

Experts are of the view that more banks and non-banking finance companies are likely to disclose their investment in AIFs in coming days.

Also read: Mutual funds are not permissible investment for Cat III AIFs: Sebi's informal guidance

Investment in AIF industry

The combined investment in all three AIF categories stood at Rs 3.54 lakh crore as on September 30, 2023, according to Securities and Exchange Board of India (SEBI) data.

Of the total amount, the investment in category-2 is the highest, at Rs 2.49 lakh crore, followed by Rs 78,686.59 crore in category-3, and Rs 25,757.82 crore in category-1, SEBI data showed.

Investment made in AIF as on September 30, 2023, was around 0.9 percent up compared to June 30, 2023.

“These norms will reduce investments in the AIF industry by 20-30 percent,” said Torus AIF’s Bhushan.