Clipped from: https://www.thehindubusinessline.com/opinion/editorial/rbis-crackdown-on-aifs-points-to-serious-violations/article67662477.ece
The fear of loan delinquencies in retail lending, and now among a section of commercial lenders, seems to have got the RBI worried
On Tuesday, the Reserve Bank of India (RBI) came out with directives pertaining to investments in alternative investment funds (AIFs) made by regulated entities (banks and NBFCs). The directive is aimed at curbing the practice of “possible evergreening”. Under this arrangement, the regulated entities invest in an AIF, which in turn routes the money to the borrower so that the latter can repay the loan or a portion of it to the regulated entity. As a result, a loan does not turn into a non-performing asset, which helps the borrower retain creditworthiness. The bank too is able to show a low NPA ratio.
The RBI has not acted a moment too late to stop this practice. AIFs, which come under the regulatory purview of SEBI, attracted the scrutiny of the latter, and the markets regulator alerted the RBI to ‘egregious regulatory violations’. According to reports, SEBI is investigating cases involving ₹15,000-20,000 crore. The RBI’s circular has set the cat among the pigeons by stipulating that in cases where the regulated entity (banks or NBFCs) are locked in an AIF loop with the borrower, the banks or NBFCs concerned should unwind their holdings within a month. If the regulated entity is unable to exit the investment, it needs to make 100 per cent provisioning. Some amount of value destruction here is inevitable as this loop is broken, as there are no listed markets to offload this investment — as reported by this newspaper. But this is perhaps the price to be paid for dubious practices. The sums at stake are unknown but SEBI’s investigation throws up a ballpark figure of well over ₹20,000 crore. The contagion effects cannot be brushed aside, as the borrower, freed of an NPA tag, can access credit again.
In cases where banks are not directly able to participate in a lending opportunity because it may not satisfy the regulatory standards, or the borrower doesn’t meet the required underwriting parameters of the lender, lending has been channelised through AIF models, mainly private credit. What’s also noteworthy is that some of the large, established, and renowned business houses with debt burgeoning in recent years have resorted to availing credit from non-traditional sources, including private credit. TheRBIshould spell out further details at the earliest so that uncertainty in this respect is addressed. It’s the second clampdown on AIFs that the RBI has introduced in about two years. It recently tightened the norms around AIF investments in asset reconstruction companies.
The fear of loan delinquencies in retail lending, and now among a section of commercial lenders, seems to have got the RBI worried. The problem has cropped up in the wake of relaxation of lending norms and risk weightages post-Covid. With monetary tightening, and the restoration of pre-Covid risk weights, the lending irregularities that mushroomed in the interim are under stress. While the RBI has acted well, the question remains as to whether it could have done so earlier.
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