Last week, the Reserve Bank of India restricted banks and non-banks from investing in schemes of alternative investment funds, or AIFs, that have made investments in a borrower or investee of that particular bank or non-bank financier. The regulator said this was meant to address concerns regarding possible evergreening of loans using this channel. Mint looks into the details and implications.
Why has RBI asked lenders to refrain from investing in certain AIF schemes?
As per markets regulator Securities and Exchange Board of India, AIFs are privately pooled investment vehicles comprising funds from sophisticated investors.
RBI’s new regulation is an example of collaboration between Sebi and the central bank. In fact, Sebi had informed RBI about instances of non-bank financiers evergreening loans through the AIF route, as per a Mint report from November 2022.
Evergreening is a method of masking the true extent of bad loans by allowing delinquent borrowers to take more loans and repay existing ones. Since evergreening of loans conceals credit stress, it also delays recognition of the stress and therefore its on-time resolution.
There were concerns that some lenders were investing in certain AIFs just so that the money could flow to their borrower, who in turn, could repay the loans and avoid default. RBI has been warning lenders against evergreening and current governor Shaktikanta Das, former governor Raghuram Rajan, and former deputy governor NS Vishwanathan have all warned against the practice and its ill-effects.
What is the impact of RBI’s diktat?
Needless to say that AIFs are not too happy with RBI’s decision, which, as per a Mint report from 20 December, could affect ₹20,000-40,000 crore of assets under management if lenders have to unwind their investments. RBI has given lenders 30 days to liquidate their investments if those come under the purview of its circular.
RBI’s move will shrink the pool of investable assets for the AIFs, as per analysts at IIFL Securities. There will also be a potential mark-to-market loss for lenders as they liquidate these investments within 30 days, or make provisions, as prescribed by RBI. IIFL Securities also expects some stressed accounts to be recognised as non-performing assets in the coming quarters given that the route can no longer be used to mask stress.
Which entities will RBI’s regulation impact?
The circular is expected to impact non-bank financiers more than banks. As per the IIFL Securities report, non-banking financial companies such as Piramal Enterprises, Indiabulls Housing Finance, and Edelweiss have higher share of AIF investments.
Jeffries said in a report on 19 December that Piramal Enterprises and IIFL Finance had ₹4,500 crore (7% of assets under management) and ₹1,100 crore (2% of assets under management including AIF) of investments in AIFs, respectively, as on 31 March.
While these AIFs, Jefferies said, have investments in debtor firms, the investments are mostly in accounts where Piramal and IIFL have exposure preceding the last 12 months. But investment in debtor firms where these lenders had any exposure in the last 12 months may be limited.
On 21 December, Piramal Enterprises (PEL) informed the stock exchanges that as of 30 November the value of investments by it and Piramal Capital and Housing Finance in AIF units was ₹3,817 crore. Of this, ₹653 crore pertained to funds that have no exposure to any debtor companies of PEL, it said. Of the remaining ₹3,164 crore, ₹1,737 crore worth of downstream investments had been made by the AIF into three entities that are, or were in the last 12 months, debtor companies of PEL on a consolidated basis.
The company said that based on a conservative view of the regulatory intent, it intends to adjust the entire ₹3,164 crore in its financial statements through capital funds or provisions.