AIFs may aid roll-over of stressed loans: Reserve Bank of India report

New Delhi / Mumbai, Jan 3, 2024

The RBI's recent regulatory actions on regulated entities investing in alternatives investment funds (AIFs) are meant to check evergreening and check possible spillover effects on the financial system due to growing linkages between various actors in the system. AIFs are pooled investment vehicles that can operate in India as an infrastructure fund, venture capital fund, debt fund, private equity fund or fund of funds.

In the Financial Stability Report, released last week, RBI has flagged its concern on how the growing interlinkages of AIFs with traditional segments such as banks, NBFCs and asset management companies (AMCs) in terms of sponsor relationships, exposures to each other and common investor base.

A big worry is over possible evergreening of stressed loans. "In particular, AIFs with 'priority distribution model' are being set up to potentially aid in evergreening of stressed assets of some financial institutions/ regulated lenders," the report noted, adding that the Sebi's decision to bar them from making fresh investments will solve the problem to an extent.

The observation also indicates that there is a joint regulatory effort.

While limited disclosure poses problems in monitoring, RBI also fears that non-residents taking the AIF route can potentially invest in domestic markets without adhering to rules.

[The Times of India]