ET Explainer: Impact of RBI curbs on sweetheart deals involving lenders, borrowers and AIFs
NBFCs), the Reserve Bank of India tightened the rules of institutional investments in Alternative Investment Funds. Shilpy Sinha explains the impact of the central bank curbs.
What are AIFs? Who are the investors?
Alternative Investment Funds are privately managed funds with just a few investors, usually wealthy family offices, banks, NBFCs and other institutions and even corporate treasuries.
These funds usually invest in high-yielding debt instruments and structure transactions in a complex way that helps hide the genuine nature of the financial strength of the borrower.
What is the RBI's suspicion on the nexus between NBFCs/banks and the AIFs?
The regulator suspects that some NBFCs and banks were using these AIFs to hide their bad loans. There is a suspicion that lender-investors in AIFs used their investments to sell their troubled loans so that it was taken off their books but at the same time, their funds were owning the same loans through the AIFs.
How did these transactions work?
Banks and NBFCs lend money to companies, but when these borrowers were facing financial strain, regulators noticed them getting involved in «evergreening».
Here, the lending institution, either a bank or NBFC, bought units of AIFs. The AIFs then utilised this capital to lend to the struggling borrowing company, which, in turn, repaid the original lender.
Which is the sector that is in focus AS A RESULT OF THIS MOVE?
Several non-banking finance companies (NBFCs) in the past few years were found to have transferred their real estate and other wholesale loans to newly established AIFs, as reported by ET first on August 16, 2022. This was done along with private equity (PE) firms and asset managers.
How did these deals put lenders at a
