The Reserve Bank of India (RBI) has tightened certain norms with the objective of checking evergreening of loans by lenders through alternative investment funds (AIFs).

The central bank has barred banks and non-banking financial companies (NBFCs) from investing in any scheme of AIFs having investment in companies that have taken loan from the lenders concerned in the past 12 months.

Banks and NBFCs, which are Regulated Entities (RE) under the RBI, make investments in units of AIFs as part of their regular investment operations.

Venture capital funds, angle funds, infrastructure funds, private equity funds and hedge funds, among others, are AIFs. 

In a circular on Tuesday, RBI said, “Certain transactions of REs 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, it said. 

RBI said that in order to address concerns relating to possible evergreening through this route”, REs cannot make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the lender.

The RBI further directed lenders that such investments would be required to be liquidated within 30 days.

In case, REs are not able to liquidate their investments within the prescribed time limit, they need to make 100% provision on such investments, it added.

The debtor company of the RE means any entity to which the lender currently has or previously had a loan or investment exposure anytime during the preceding 12 months.