The Reserve Bank of India on Tuesday directed banks investing in Alternative Investment Funds, which invest in the borrower company, to liquidate their holdings. According to RBI, this loan has been done to deal with evergreening.
What are debtor firms?
The debtor firm is the company to which the borrower has currently or previously taken a loan during the last 12 months. Loan evergreening is giving a new or additional loan to the same borrower who has also failed to repay the previous loan.
RBI said in the circular that banks will not invest in those AIFs that invest directly or indirectly in the debtor company of the bank. If there is any such investment then banks should liquidate it in AIF within 30 days.
Guidelines will be implemented now
Otherwise, banks will have to make 100% provisioning for such loans. The guidelines will come into effect with immediate effect. Apart from this, the investment of banks in subordinate units of any AIF scheme will also be completely deducted from the capital of the bank.
Under the priority distribution model, AIF divides the investment portfolio into two parts in which the senior investor has superior rights. Then payment is made to the junior investor.
In case of loss, the senior investor suffers more loss than the junior investor. In November last year, the Securities and Exchange Board of India (SEBI) had temporarily banned AIFs with priority distribution models from sanctioning fresh capital or infusing capital into new entities.
