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MUMBAI: Lenders have written to RBI seeking a reprieve for some segments from recent directions to prevent the evergreening of loans by routing funds to borrowers through alternate investment funds (AIF).
Evergreening of loans refers to a practice where a lender provides additional funds or extends the maturity date of an existing loan to a borrower struggling to meet repayment obligations. This is done to prevent the loan from being classified as non-performing or in default. In May 2023, RBI governor had cautioned banks that the regulator had found instances of evergreening of loans.
On December 19, RBI barred banks and non-banking finance companies from investing in AIFs linked to borrowing companies. RBI also asked lenders to liquidate investments in funds that have invested in their borrowers’ companies by one month. If lenders failed to liquidate such investments, they were required to make full provisions on the loan.
One of the representations received by RBI is that there should be a differentiation between investments made in funds that invest in healthy companies and funds that are created specifically to invest in distressed businesses.
For instance, the government-backed Swamih Investment Fund (Special Window for Affordable and Mid-Income Housing) is an AIF devised for investment in stuck housing real estate projects in which banks have invested.
Lenders are also worried about the 100% provisioning that is required to be made on exposure to AIFs.
Evergreening of loans refers to a practice where a lender provides additional funds or extends the maturity date of an existing loan to a borrower struggling to meet repayment obligations. This is done to prevent the loan from being classified as non-performing or in default. In May 2023, RBI governor had cautioned banks that the regulator had found instances of evergreening of loans.
On December 19, RBI barred banks and non-banking finance companies from investing in AIFs linked to borrowing companies. RBI also asked lenders to liquidate investments in funds that have invested in their borrowers’ companies by one month. If lenders failed to liquidate such investments, they were required to make full provisions on the loan.
One of the representations received by RBI is that there should be a differentiation between investments made in funds that invest in healthy companies and funds that are created specifically to invest in distressed businesses.
For instance, the government-backed Swamih Investment Fund (Special Window for Affordable and Mid-Income Housing) is an AIF devised for investment in stuck housing real estate projects in which banks have invested.
Lenders are also worried about the 100% provisioning that is required to be made on exposure to AIFs.
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