The Reserve Bank of India (RBI) has recently implemented regulatory measures to address the issue of evergreening, as well as potential spillover effects on the financial system resulting from the increasing linkages between various entities. According to the RBI’s Financial Stability Report released last week, the interconnections between regulated entities, such as banks, non-banking financial companies (NBFCs), asset management companies (AMCs), and alternatives investment funds (AIFs) have raised concerns.
AIFs, which can function as infrastructure funds, venture capital funds, debt funds, private equity funds, or funds of funds, are pooled investment vehicles in the Indian market.
The report highlights the risk of evergreening stressed loans. Specifically, AIFs utilizing the priority distribution model have been set up to potentially help in the evergreening process of distressed assets held by financial institutions or regulated lenders. However, the Securities and Exchange Board of India (SEBI) has taken steps to address this issue by prohibiting these AIFs from making new investments.
The report also emphasizes the importance of joint regulatory efforts in dealing with the growing interdependencies between AIFs and traditional segments. Limited disclosure practices pose challenges in terms of monitoring, while the possibility of non-residents utilizing the AIF route to invest in domestic markets without adhering to regulations is also a concern.
By addressing these issues, the RBI aims to prevent evergreening practices and mitigate the potential risks posed by the interlinkages between AIFs and other entities within the financial system.
As regulatory authorities take steps to safeguard the financial sector and promote transparency, the RBI’s report highlights the need for increased vigilance and collaborative efforts. By doing so, they aim to ensure the stability and resilience of India’s financial system in the face of evolving market dynamics.
