Some private sector banks are looking to invest in alternative investment funds (AIF) after the Reserve Bank of India recently clarified provisioning rules for lenders, at least three senior bank executives told Moneycontrol.
An AIF is typically a privately pooled fund, and generally, only institutions and high net-worth individuals (HNIs) invest in them because the outlay is substantial.
As per the RBI’s latest clarifications, lenders will need to provision only the amount invested by the AIF in a debtor company linked to the lender, and not on the bank’s entire investment in the scheme. The central bank in December 2023 restricted banks and financial institutions from investing in AIFs that have exposure to their borrowers.
Also read: Easier provisioning of AIF investments may help lenders allot more to such funds, say experts
Bankers said that they do not plan to invest heavily in AIFs – some of them are targeting Rs 20 crore to Rs 50 crore.
Bank are reconsidering investing in AIFs as these instruments have fared well for them, a senior executive of a mid-size private lender said, asking not to be identified.
“We had some exposure in AIFs before the RBI order in December last year. Post that, we made our provisions and now we are re-looking at investing in some AIFs,” the executive said.
Another private bank executive, who also requested anonymity, said it had internally discussed AIF investments of Rs 20 crore to Rs 50 crore.
“We had some discussions on what we can do on investing in AIFs. Around Rs 20 crore-Rs 50 crore is what we are looking at in terms of investment, but it is all in the initial stages of discussion,” the executive said.
RBI on AIFs
The RBI on March 27 clarified its guidelines on lenders putting in money in AIFs that have invested in companies that have borrowed from them. As per the clarification, provisioning by lenders with such investments will be required only to the extent of the investment in the debtor company, and not on the entire investment in the AIF scheme, the RBI said.
A senior treasury head with a private sector bank said that if a lender invested Rs 5 crore in a Rs 100 crore AIF scheme that in turn invested Rs 2 crore in the debtor company of the lender, the provisioning would be only on Rs 2 crore and not the entire Rs 5 crore.
Also read: MC Explains | All you need to know about RBI’s clarification on AIF circular
The RBI also said 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.
The central bank had on December 19 restricted banks and financial institutions from investing in AIFs to address the evergreening of loans. The regulator asked banks and NBFCs to provision 100 percent of their investments in such AIF schemes.
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.After this announcement, at least six Indian banks made a combined provision of over Rs 1,070 crore on their investments in AIFs. These banks are HDFC Bank, Union Bank of India, Kotak Mahindra Bank, RBL Bank, Axis Bank, and ICICI Bank. IDBI Bank and IDFC First Bank did not disclose the amount.
