Business: RBI cracks down on evergreen loans through AIFs
Cracking down on the potential method of evergreening loans, the Reserve Bank of India has asked banks and financial institutions to raise indirect exposure to their existing borrowers through alternative investment funds (AIFs) such as private equity or debt funds, hedge funds. Avoid. , etc.
The banking regulator, in a circular issued on Tuesday, said entities regulated by it (banks and financial institutions) should not invest in any scheme of an AIF that directly or indirectly invests in an existing borrower of the bank. And if an AIF scheme invests in an existing borrower of the bank, the bank must liquidate its investment in the scheme within 30 days. If banks are not able to liquidate their investments within the time limit prescribed above, they will have to make 100% provision on such investments
“…Certain transactions of RES (Regulated Entities) involving AIFs which raise regulatory concerns have come to our notice. These transactions involve indirect exposure to borrowers through investment in units of the AIF with replacement of direct loan exposure to RES to the borrowers, RBI said in its circular.
The new rule is applicable for borrowers to whom the bank currently has exposure or has provided loans in the last 12 months. Evergreening is a practice of offering new loans to borrowers who are not able to pay off their existing loans.
The circular follows other recent regulatory measures to ensure that when making lending or investment decisions, banks and regulated entities are appropriately weighing risk and capital adequacy requirements (for example, for unsecured consumer finance loans). higher risk weightage prescribed by RBI).
According to Abhijit Das, partner at Cyril Amarchand Mangaldas, the most immediate impact of the circular is that where regulated entities have exposure to the same borrower (both through their balance sheet and through AIFs), regulated entities will have to exit their 30 Invest in the AIF within days, failing which they will have to fully provision for the investment.
