RBI Eases AIF Investment Norms for Banks, NBFCs

The Reserve Bank of India (RBI) has announced a significant relaxation in its rules governing how much banks and non-banking financial companies (NBFCs) — together referred to as regulated entities (REs) — can invest in Alternative Investment Funds (AIFs).

Under the new framework, the RBI has capped the cumulative investment exposure of all REs in an AIF scheme at 20% of the scheme’s corpus. Additionally, the investment by any single RE is capped at 10% of the scheme’s corpus.

These new directions will take effect from January 1, 2026, or earlier if a particular RE chooses to adopt them under its internal policy.

What Are AIFs?

Alternative Investment Funds are privately pooled investment vehicles that collect funds from investors, domestic or foreign, for investing in accordance with a defined investment policy. They typically invest in areas such as real estate, private equity, venture capital, and hedge funds.

The RBI regulates investments in AIFs by banks and NBFCs to ensure they do not become channels for loan evergreening or circumvent other regulatory restrictions.

The Earlier Proposal vs. New Decision

In May 2025, the RBI had floated a draft circular proposing a stricter 15% cap on the overall investment by REs in any AIF scheme, while keeping the single-RE limit at 10%.

After consultations with stakeholders and industry bodies, the RBI decided to relax the total exposure limit from 15% to 20% while maintaining the 10% limit for single REs.

Key Relaxations in the New Rules

1. Equity Instruments Excluded

One of the most significant changes is that equity instruments in downstream investments by AIFs have been excluded from the stricter provisioning requirements.
This means that if an RE invests in an AIF that, in turn, invests in equity instruments of a company, those equity holdings will not be treated as indirect exposure for provisioning purposes.

2. Provisioning for Certain Downstream Investments

If an RE contributes more than 5% to the corpus of an AIF scheme that has downstream investments — other than equity — in a debtor company of that RE, then the RE must make a 100% provision for its proportionate investment in that debtor company via the AIF.
However, the provision will be capped at the amount of the RE’s direct loan and/or investment exposure to that company.

3. Treatment of Subordinated Units

If an RE’s contribution to an AIF is in the form of subordinated units (lower-ranking investment tranches), then the entire investment will be deducted from the RE’s capital funds — proportionately from both Tier-1 and Tier-2 capital.

Background: Why These Rules Were Needed

In December 2023, the RBI had prohibited REs from investing in AIFs that had exposure to their existing or recent borrowers.
This came after SEBI (Securities and Exchange Board of India) flagged instances where the AIF route was being used for evergreening loans — a practice where lenders extend fresh loans to enable borrowers to repay old ones, thereby avoiding bad loan classification.

The December 2023 restrictions led to capital call issues for many AIFs, as REs were unable to meet funding commitments. The RBI later eased provisioning norms in March 2024 to address some of these operational challenges.

Industry Reaction to the New Rules

Industry representatives have welcomed the RBI’s decision.

• Siddarth Pai, Co-chair of IVCA Regulatory Affairs Council, said the carving out of equity investments and exclusion of certain companies from the definition of “debtor company” will give investors greater comfort.
• Pallabi Ghosal, Partner at Trilegal, highlighted that clarifying equity instruments to include compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs) was a long-standing industry request that has now been met.
• The implementation date of January 2026 gives fund managers enough time to adjust fundraising plans.

The Scale of AIF Investments in India

As of March 2025:

• Total commitments made to AIFs stood at ₹13.49 trillion.
• Total investments made were ₹5.38 trillion.
• Investments in equity and equity-linked securities accounted for ₹3.5 trillion.
• Domestic investors accounted for ₹4.08 trillion of the total ₹5.63 trillion raised.
• Real estate topped the sectoral list with ₹69,896 crore, followed by IT, financial services, and NBFCs.

Alignment with SEBI Guidelines

The new RBI guidelines align more closely with SEBI’s due diligence and investment norms.
They aim to:

• Prevent misuse of AIF structures for loan evergreening.
• Bring uniformity and clarity to investment rules.
• Allow equity-focused AIFs more freedom while keeping private credit under tighter oversight.

Summary of Key Points

• Overall RE exposure limit in AIF schemes: 20% of corpus.
• Single RE exposure limit: 10% of corpus.
• Equity investments excluded from stricter provisioning rules.
• 100% provisioning required if RE’s >5% contribution in AIF with downstream debt investments in its own debtor company.
• Subordinated units fully deducted from capital.
• Effective date: January 1, 2026 (or earlier at RE’s discretion).