RBI Curbs Evergreening Of Loans Via AIF Route

The Reserve Bank of India, on Tuesday, directed lenders investing in alternative investment funds to liquidate their holdings, if the funds invest in a debtor firm. The new norms have been introduced to "address concerns related to possible evergreening" of loans, according to the central bank.

"These transactions entail substitution of direct loan exposure of regulated entities to borrowers, with indirect exposure through investments in units of AIFs," the RBI said in a circular.

A debtor firm is any company to which the lender currently has or previously had a loan or investment exposure anytime during the preceding 12 months.

Evergreening of loans is a practice of extending new or additional loans or investments to a borrower who is unable to repay the existing loans, thereby concealing the true status of the non-performing assets.

In the circular, the RBI said that lenders will not invest in AIFs which directly or indirectly invest in a debtor company of the bank. If there is any such investment, the banks must liquidate their holdings in the AIF within 30 days, the regulator said.

Failing to do so, the banks will have to make 100% provisions against such loans in the coming months, the RBI said.

The guidelines come into effect immediately.

Further, any investments by lenders in the subordinated units of any AIF scheme under the priority distribution model will be deducted entirely from the lender's capital funds, the RBI said.

In a priority distribution model, the AIF bifurcates its investor portfolio into two parts, wherein the senior investors hold superior rights, such as the distribution of proceeds. Then, the junior investors are paid.

In case of a loss, senior investors take the hit more than the junior tranche investors.

In November last year, Securities and Exchange Board of India had temporarily restricted AIFs with priority distribution models from accepting fresh capital or deploying fresh capital in new entities.

In October, Reuters had reported that the Sebi and RBI began investigating into "dozens of cases" of AIFs being used to violate regulations, including evergreening of bad loans. Non-banking financial companies had allegedly sold stressed loans to AIFs partially set up by the lender itself, wherein fresh funds were raised to repay the original debt and prevent the loans from turning bad, Reuters had reported.