NEW DELHI: Cracking down on what is a likely method of evergreening of loans, the Reserve Bank of India has asked banks and financial institutes to avoid having indirect exposure to their existing borrowers through Alternate Investment Funds (AIFs) such as private equity or debt funds, hedge funds, etc.
The banking regulator in a circular issued on Tuesday said that entities regulated by it (banks and financial institutions) should not make investments in any scheme of AIFs which directly or indirectly invests in an existing borrower of the bank. And in case, an AIF scheme does invest in an existing borrower of the bank, the bank must liquidate its investment in the scheme within 30 days. In case if the banks are not able to liquidate their investments within the above-prescribed time limit, they will have to make 100% provision on such investments
“…certain transactions of REs (regulated entities) involving AIFs that raise regulatory concerns have come to our notice. These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs,” the RBI said in its circular.
The new rule is applicable for borrowers in which the bank has currently had exposure or had provided loan in the last 12 months. Evergreening is a practice of offering new loans to borrowers who are not able to service their existing loans.
The circular follows other recent regulatory measures, to ensure that while taking lending or investment decisions, banks and regulated entities are appropriately measuring risk and capital adequacy requirements (for instance, the higher risk weightage prescribed by the RBI for unsecured consumer finance loans).
According to Abhijeet Das, partner, Cyril Amarchand Mangaldas, the most immediate impact of the circular is that where the regulated entities have exposure to the same borrower (both through their balance sheets and through the AIF), the regulated entities will have to exit their investment in the AIF within 30 days, failing which they will be required to provide for the investment completely.