The Reserve Bank of India has proposed easing norms for investments by banks, NBFCs and other regulated entities in alternate investment funds (AIFs).

Earlier in December 2023, the RBI had tightened the norms to bring in financial discipline due to concerns relating to possible evergreening through this route. The central bank had barred regulated entities (REs), including banks and non-banking finance companies (NBFCs), from investing in AIFs that have investments in existing and recent borrowers.

In a draft proposal released on Monday, the RBI said a single RE's contribution to any AIF scheme shall be capped at 10% of its corpus. Collectively, a ceiling of 15% would apply for investments by all REs in an AIF scheme.

Further, investments by an RE up to 5% of the corpus of a AIF scheme shall be allowed without any restriction.

"If the investment by any RE exceeds 5% of the corpus of the scheme, and if the scheme has a downstream debt investment in a debtor company of the RE (excluding equity shares, compulsorily convertible preference shares and compulsorily convertible debentures), then the RE shall be required to make 100% provisions to the extent of its proportionate exposure," the draft said.

The RBI further proposed that it may exempt certain AIFs, in consultation with the government, which have been set up for strategic purposes.