RBI caps investment by banks, NBFCs at 20% of corpus of AIF scheme
No RE can individually contribute more than 10% of the corpus of an AIF scheme, as per a circular issued by the RBI on Tuesday (July 29, 2025).
'Collective contribution by all REs in any AIF Scheme shall not be more than 20% of the corpus of that scheme,' it added.
These Directions will come into force from January 1, 2026, or from any earlier date as decided by a RE as per its internal policy.
As per the Directions if a RE contributes more than five per cent of the corpus of an AIF Scheme, which also has downstream investment (excluding equity instruments) in a debtor company of the RE, then the RE will be required to make 100% provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of the direct loan and/ or investment exposure of the RE to the debtor company, the RBI said in the circular.
If a RE's contribution is in the form of subordinated units, then it will need to deduct the entire investment from its capital funds— proportionately from both Tier-1 and Tier-2 capital (wherever applicable).
The REs include Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks), Primary (Urban) Co-operative Banks/ State Co-operative Banks/ Central Co- operative Banks, All-India Financial Institutions and Non-Banking Financial Companies (including Housing Finance Companies).
Commenting on this Sudhir Chandi, director at Resurgent India said, 'The new guidelines aim at better governing and strengthening the risk management process under the Investment Portfolio of the regulated entities. The previous guidelines issued in December 2023 and March 2024 have been repealed. '
'The guidelines are now brought into alignment with SEBI guidelines on due diligence and investment to ensure uniformity and clarity,' he said.
'The guidelines directly seek to address the concern relating to the misuse of the AIF route for evergreening of the loans and advancing by using AIF to finance the existing stress loans portfolio,' he said adding 'By restricting the individual contribution to 10% of the corpus of an AIF, the concentration risk shall be mitigated.'
Similarly, the restriction on the collective contribution of all REs will further spread the risk and entail wider participation of more regulated entities, he said.
'The provisioning norms have been further strengthened to 100 percent in specific cases to discourage the higher level of investment in the designated category of existing borrowers,' he said.
The idea is to deter any diversion of funds from the alternative investment fund route for wrongful purposes contrary to the best practices of robust income recognition and assets classification, he stated.
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