• UGI USER
  • Dec 20, 2023
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CURBING EVERGREENING OF LOANS

Why in the News?

  • RBI prohibits banks, NBFCs, and lenders from investing in AIF schemes having downstream investments in debtor companies.
  • RBI expresses regulatory concerns over certain Regulated Entites (RE) transactions with AIFs leading to evergreening of stressed loans.

Guidelines for Regulated Entities:

  • Regulated entities should avoid investments in AIFs with downstream investments in debtor companies.
  • RBI instructs REs to liquidate investments within 30 days if an AIF downstream invests in debtor companies.
  • Failure to liquidate within the timeframe requires a 100% provision on investments, addressing concerns of misuse.
Key Terms:

·  Alternate Investment Funds: AIF refers to privately pooled investment vehicles collecting funds from sophisticated investors, with 1,220 registered AIFs in India.

·  Evergreening: Evergreening involves lenders reviving loans near default by extending more loans, considered a temporary fix.

·  Debtor company: Debtor company defined as one with current or past loan exposure to RE within the preceding 12 months

Note: RBI’s directive aims to curb potential misuse of AIFs for evergreening loans, ensuring prudential investment practices among regulated entities.