Home Alternative Investments Top banks provide for AIF investments post RBI diktat

Top banks provide for AIF investments post RBI diktat

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At least five Indian banks have made a combined provision of over Rs 890 crore on their investments in alternative investment funds after the recent diktat from the Reserve Bank of India (RBI), a Moneycontrol analysis showed.

These banks are HDFC Bank, Union Bank of India, Kotak Mahindra Bank, RBL Bank, and ICICI Bank. IDBI Bank and IDFC First Bank did not disclose the amount.

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This is in line with Moneycontrol’s January 19 report citing experts, which said that most lenders are opting to make provisions on their investments in Alternative Investment Funds (AIF) rather than making redemptions.

The central bank 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, experts added.

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.

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.

Also read: AIFs circumventing regulations: Over 40 cases involving Rs 30,000 crore, says SEBI

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Provisions

In the third quarter of the financial year 2023-24, HDFC Bank made a 100 percent provision on their AIF investment. The total AIF book of the lender stood at Rs 1,220 crore.

“Our AIF book is Rs 1,220 crore and the current applicable Reserve Bank of India (RBI) 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,” Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank said at the post-results press conference on January 17.

Union Bank of India made a provision of Rs 12.17 crore, Kotak Mahindra Bank Rs 143 crore, ICICI Bank Rs 627 crore, and RBL Bank worth Rs 115 crore.

The Chief Executive Officer (CEO) and Managing Director (MD) of the RBL Bank said during an earnings call that these investments (in AIF) are primarily in venture debt funds which have been made over years for building inroads into new-age digital businesses.  After the RBI circular, the bank has made provisions.

Similarly, Sandeep Batra, Executive Editor, ICICI Bank during an earnings call said the provision of Rs 627 crore is the result of RBI’s recent regulations.

Also read: Piramal, Edelweiss & other NBFCs under scanner as RBI cracks whip on loan evergreening via AIFs; provisions to rise

Concerns on AIF investment

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

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.

On May 29, RBI Governor, Shaktikanta Das, highlighted cases of banks evergreening loans. In an address to banks in Mumbai, Das said that the central bank had found instances where innovative ways were being used to conceal the real status of stressed loans, and in some cases, evergreening of stressed loans.

“We have also come across a few examples where one method of evergreening, after being pointed out by the regulator, was replaced by another method,” Das added.

“I have mentioned these instances,” Das said, “to sensitise all of you to keep a watch on such practices. Such practices beg the question as to whose interest such smart methods serve.”

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 from June 30, 2023.


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