RBI Eases Investment Norms for Banks and NBFCs in AIFs

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RBI Grade BNABARD ESISEBI

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Context:

On July 30, 2025, the Reserve Bank of India (RBI) revised its regulatory framework on investments by regulated entities (REs) — including banks and NBFCs — in Alternative Investment Funds (AIFs), easing certain norms while reinforcing safeguards against indirect loan evergreening.

Key Highlights of RBI’s Revised AIF Norms:

Overall Cap on Collective Investment:
- Total investment by all REs in a single AIF scheme capped at 20% of the scheme’s total corpus.
Individual Cap:
- Single RE’s contribution capped at 10% of an AIF scheme’s corpus
Exclusion of Equity Instruments:
- Equity investments made by AIFs are now excluded from provisioning requirements, easing the burden on REs
- Instruments such as compulsorily convertible debentures (CCDs) and compulsorily convertible preference shares (CCPS) are classified as equity instruments
Provisioning Mandates:
- If an RE contributes more than 5% to an AIF with downstream non-equity exposure in its debtor company, the RE must make 100% provision for its proportionate exposure
- The provisioning cap is equal to the RE’s direct loan or investment exposure to the same company
Capital Deduction for Subordinated Units:
- Entire investment in subordinated AIF units must be deducted from capital funds, proportionately from both Tier-1 and Tier-2 capital
Effective Date:
- Norms will come into force from January 1, 2026, or earlier if adopted per an RE’s internal policy

To prevent regulatory arbitrage via indirect lending through AIFs.
To mitigate credit and concentration risks from circular or layered exposure to debtor firms.
To align provisioning norms with risk exposure in indirect investments.

Background

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