RBI Draft AIF Investment Norms – 10% Cap per Regulated Entity

Press Release: 2025-2026/366, Dated 19.05.2025

1. Background & Regulatory Purpose

The Reserve Bank of India (RBI) released re-drafted Directions on 19 May 2025 governing investments by banks, NBFCs and other Regulated Entities (REs) in Alternative Investment Funds (AIFs). The revision follows RBI’s December 2023 ban (partly eased in March 2024) that sought to stop “evergreening”—the indirect rollover of stressed loans through AIF structures.

2. How the Provisioning Mechanism Works

Example – Bank X holds ₹120 cr (6 %) in Fund Alpha (₹2,000 cr corpus). Fund Alpha later buys ₹50 cr of NCDs issued by one of Bank X’s borrowers.

• Bank X’s proportional downstream debt exposure = 6 % × ₹50 cr = ₹3 cr.
• Under the draft rule, Bank X must make a ₹3 cr (100 %) provision in its books.

This “full-provision” requirement neutralises the benefit Bank X would gain by recycling credit risk through the AIF.

3. Immediate Compliance Considerations for REs

1. Portfolio Scan – Map every AIF holding against borrower lists to identify exposure overlap.
2. Capital Planning – Evaluate incremental provision hit if >5 % thresholds are breached.
3. Investment Agreements – Insert look-through clauses requiring AIF manager to notify downstream debt investments in real time.
4. Board Reporting – Update ALCO/risk committees on revised caps and provisioning triggers.
5. Pipeline Pause – Defer fresh AIF commitments until the final Directions are issued.

4. Strategic Takeaways

• Risk-aligned liberalisation – The draft eases the earlier blanket prohibition but prices the risk via 100 % provisioning where evergreening concerns arise.
• Diversification push – The 10%/15% caps promote a broad investor mix, reducing contagion if a single RE faces stress.
• Coordination with SEBI – Combined with SEBI’s enhanced due diligence norms for AIFs, regulators are closing loopholes while still nurturing the AIF ecosystem.
• Capital discipline – Higher provisions could make >5 % exposures economically unattractive, nudging lenders to keep AIF stakes within the “free” band or shift to equity-only funds.

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