RBI clamps on evergreening of stressed loans via the AIF route; select NBFCs to be impacted

20 Dec 2023 , 10:17 AM

What was the regulator’s concern?

As per media reports, the SEBI and the RBI had been probing about a dozen cases involving $1.8 billion-$2.4 billion, where the Alternate Investment Funds (AIFs) were allegedly being used by lenders (mainly the NBFCs) to evergreen stressed loans. The typical modus operandi allowed the lender from classifying stressed loan as NPAs and thus avoid making adequate provisions.

What is the regulatory change?

1. Lenders cannot make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a company that has borrowed via loans/investments (currently or anytime during the preceding 12 months) from them.
2. In case lenders have aforementioned AIF investments, then they will have to liquidate them within 30 days. If the lenders are unable to liquidate within 30 days, then they shall make 100% provision on these investments.
3. Investments in the subordinated units of any scheme with a ’priority distribution model’ will be fully deducted from the lenders’ capital.

What shall be the implications from this tightening?

1. Expect redemptions by the banks/NBFCs from the AIFs. AIFs have total commitments of ~US$ 100 billion (17% of MF industry AUM) and have made investments of US$ 42 bn (7%) as of June-23
2. It will reduce the pool of investable assets for the AIFs
3. Potential MTM loss for lenders as they liquidate these investments within prescribed 30-day timeline, or alternatively make provisions
4. With the loophole plugged, expect some stressed accounts to be recognized as NPAs in the coming quarters.
5. AIF exposure is higher for NBFCs like Edelweiss, PEL and IBHFL; immaterial for banks