RBI issues new rules for banks and NBFCs investing in AIFs; here is what it means

The Reserve Bank of India (RBI) issued a notification on July 29, outlining how commercial banks, non-banking financial companies (NBFCs), and other financial institutions can invest in Alternative Investment Funds (AIFs). The central bank has tightened norms to curb indirect exposure to stressed companies. The updated regulations will take effect on January 1, 2026.

The new guidelines of the RBI on Alternative Investment Funds aim to better govern and strengthen the risk management process within the Investment Portfolios of regulated entities. The previous guidelines issued in December 2023 and March 2024 have been repealed.

According to the RBI circular, Reserve Bank of India (Investment in AIF) Directions, 2025, the move follows feedback from the financial industry and new regulations introduced by the Securities and Exchange Board of India (Sebi). The RBI stated that these changes are aimed at ensuring due diligence in the investment process and safeguarding the financial system from hidden credit risks.

Under the new guidelines, a single regulated entity (RE), which includes commercial banks, cooperative banks, all-India financial institutions, and NBFCs, cannot invest more than 10% of an AIF scheme’s total corpus. Collectively, all such REs can invest only up to 20% of the corpus of any one scheme.

Here is what it means

Sudhir Chandi, Director at Resurgent India, said, "The guidelines are now brought into alignment with Sebi guidelines on due diligence and investment to ensure uniformity and clarity. The guidelines directly seek to address the concern relating to the misuse of the AIF route for evergreening of the loans and advancing by using AIF to finance the existing stress loans portfolio."

"By restricting the individual contribution to 10% of the corpus of an AIF, the concentration risk shall be mitigated. Similarly, the restriction on the collective contribution of all REs will further spread the risk and entail wider participation of more regulated entities," said Chandi.

The provisioning norms have been further strengthened to 100% in specific cases to discourage the higher level of investment in the designated category of existing borrowers.

"The idea is to deter any diversion of funds from the AIF route for wrongful purposes contrary to the best practices of robust income recognition and assets classification," said Chandi.

The new guidelines have also tweaked the definition of what constitutes the debtor company with greater clarity, excluding downstream investment through equity instruments.

The regulated entities will need to strengthen their internal mechanisms to handle investment portfolios with care and close monitoring based on sound investment.

However, the RBI has granted some exemptions. Investments approved earlier under the 2016 Financial Services Master Directions are exempt from the new caps.

Furthermore, the RBI may exempt specific AIFs in consultation with the government, although the basic compliance requirements will continue to apply.

"Certain exemptions in the fresh guidelines have been rightly kept taking care of past specific investments already undertaken with RBI approval," said Chandi.