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.