Mint Explainer: The big fuss about RBI’s AIF circular

livemint.com:

Mint looks into the details and implications. As per markets regulator Securities and Exchange Board of India, AIFs are privately pooled investment vehicles comprising funds from sophisticated investors. RBI’s new regulation is an example of collaboration between Sebi and the central bank.

In fact, Sebi had informed RBI about instances of non-bank financiers evergreening loans through the AIF route, as per a Mint report from November 2022. Evergreening is a method of masking the true extent of bad loans by allowing delinquent borrowers to take more loans and repay existing ones. Since evergreening of loans conceals credit stress, it also delays recognition of the stress and therefore its on-time resolution.

There were concerns that some lenders were investing in certain AIFs just so that the money could flow to their borrower, who in turn, could repay the loans and avoid default. RBI has been warning lenders against evergreening and current governor Shaktikanta Das, former governor Raghuram Rajan, and former deputy governor NS Vishwanathan have all warned against the practice and its ill-effects. Needless to say that AIFs are not too happy with RBI’s decision, which, as per a Mint report from 20 December, could affect ₹20,000-40,000 crore of assets under management if lenders have to unwind their investments.

RBI has given lenders 30 days to liquidate their investments if those come under the purview of its circular. RBI’s move will shrink the pool of investable assets for the AIFs, as per analysts at IIFL Securities. There will also be a potential mark-to-market loss for lenders as they liquidate these investments within 30 days, or make provisions, as prescribed by RBI.