📅 May 19, 2025 | By Prashant Marathe | EduInvesting.in

🔍 At a Glance:

The Reserve Bank of India has just released revised draft Directions for how banks and NBFCs (called “Regulated Entities” or REs) can invest in Alternative Investment Funds (AIFs). After December’s crackdown and March’s clarifications, this new draft (open for public comments till June 8, 2025) aims to strike a balance between financial discipline and flexibility, while keeping shady evergreening schemes out.

🧠 What’s This All About?

Let’s break it down in EduInvesting style:

Think of AIFs like that risky but exciting group project — it can score big or tank your GPA (or in this case, your capital adequacy ratio). RBI wants to ensure regulated entities don’t just throw public money into these funds without supervision.

In December 2023, RBI first said “No shady stuff!” — mainly to stop banks from using AIFs to evergreen loans (a trick where old, possibly defaulting borrowers are indirectly funded via third parties — like using your friend’s credit card to pay your EMI).

Now with SEBI also laying down stricter due diligence norms on AIFs, RBI is saying, “Let’s streamline this whole thing.”

🧾 Key Proposals (With Bonus Edu-Translations):

💸 1. Limit on Investment Per RE

• Old Style: Do whatever, hope for the best.
• New Style:
  • Individual RE limit: Max 10% of AIF corpus
  • Collective RE limit: Max 15% of corpus
    (No more gang-ups where all banks pile into one AIF like it’s Diwali shopping.)

🆓 2. Freedom Up to 5%

• If your RE invests up to 5% of the AIF’s corpus — no questions asked.
• Kind of like a free trial — use responsibly.

🚨 3. The Provision Trap

• If an RE crosses the 5% threshold, and the AIF puts money into a debtor company of that RE, then…
  • 💥 The RE must fully provision (100%) for its exposure.
  • This excludes equity, CCPS, or CCDs — aka long-term instruments not related to short-term patch-up jobs.
  • Basically, “If you’re funding your own defaulters, you better book that loss upfront.”

🛡️ 4. Strategic Exceptions

• Some AIFs may get exemptions if they are set up for strategic national purposes, like infrastructure, defence, or perhaps saving Air India again?
• This will be in consultation with the government. Yes, babus still matter.

⏳ 5. Prospective Application Only

• These rules won’t apply retroactively.
• Existing AIF investments and commitments will follow old guidelines — no need to panic if you’re already in the pool.

📮 Want to Complain (or Compliment)?

If you’ve got strong views — good, bad, or regulatory — send your thoughts to RBI by June 8, 2025:

📨 Email: helpdoc@rbi.org.in
📬 Or Mail to:
The Chief General Manager,
Credit Risk Group,
Department of Regulation,
RBI Central Office, Fort, Mumbai – 400001

They’ve also opened comments via the ‘Connect 2 Regulate’ section on rbi.org.in.

📈 Why This Matters for You (Yes, You Too):

• Investors: If you’re betting on bank-backed AIFs, expect more transparency — and possibly less flow of lazy money.
• Banks/NBFCs: Time to build better AIF risk teams. No more hiding defaults under AIF rugs.
• AIF Managers: Your investor pool just got stricter. That fundraising pitch needs to look more Warren Buffet, less Wolf of Wall Street.

🧠 EduInvesting Take:

RBI’s clearly in no-nonsense mode when it comes to AIF investments. The 10–15% caps and the 100% provisioning rule together form a tight leash around evergreening attempts — no more REs investing through AIFs to fund their own bad loans in disguise.

This move, coupled with SEBI’s tightening of AIF norms, cleans up a grey area in India’s shadow finance ecosystem. The days of using AIFs like financial juggler’s hats are over.

But will it also slow down legitimate AIF investments that fuel innovation, startups, and alternative credit? That’s the trillion-rupee question. Or perhaps the 10% corpus-limited question.

❗Quick Recap Table:

🔮 Final Word:

AIFs may still be the cool kids on the investment block, but RBI’s basically said, “No more partying without parental supervision.”

And just like that, another financial loophole begins to close