India Central Bank Tightens Rules for Financing of Alternative Investment Funds

The Central Bank of India on Tuesday, December 19, banned banks and non-bank financial companies that are in the area of its regulation from sending financing to alternative investment funds.

India Central Bank Tightens Rules for Financing of Alternative Investment Funds

In this case, it means funds that are investments in existing and recent borrowers. The Reserve Bank of India (RBI) said that the new measures apply to companies in which creditors have current risks, including investments or loans, and risks over the past 12 months.

The tightening of the rules is the result of concerns related to cases where the specified funds, including private credit institutions, were used to disguise bad loans in the financial system. The RBI stated that banks will need to liquidate their investments in the mentioned funds within 30 days if this functional structure provides money to an existing borrower.

If a financial institution located in the regulatory area of the central bank cannot comply with the new requirement, an impact measure in the form of an obligation to create 100 percent investment reserves will be applied to it. The relevant information was released by the RBI.

If a financial institution subject to regulation by the central bank has invested in subordinate units of a fund following the priority distribution model, investments are subject to a full deduction from the organization’s capital. This was also reported by the RBI.

Under the priority distribution model, the fund pays a certain category of investors before others. Subordinate units in this case are the least significant category in terms of priority.

Currently, the Indian market regulator is investigating cases in the amount of 150 billion to 200 billion rupees (from $1.8 billion to $2.4 billion) on the use of alternative investment funds to circumvent the current rules in the financial system of the South Asian country.

In November, the RBI asked banks to increase buffers for some consumer loans. This decision is due to the desire to curb the rapid growth of risky debts in the country. Risk weights on consumer credit were raised by 25 percentage points to 125%. The November decision concerns mortgages, gold-backed debt, loans for education, and car purchases.

RBI Governor Shaktikanta Das called on financial institutions to strengthen internal oversight. This call was made after it became known that the growth of unsecured loans is almost twice the intensity level of a similar dynamic of total loans.

Analysts said that the RBI’s decision will increase the cost of borrowing and is likely to have an impact on consumer spending. Suresh Ganapathy, an expert at Macquarie Capital Securities, believes that banks will be forced to raise the price of loans to protect the profitability of assets.

The RBI is currently positively assessing India’s prospects in the sphere of the economy. In early December, the financial regulator left its benchmark repurchase rate unchanged at 6,5%. The RBI predicts the rapid growth of the Indian economic system, which is the third largest in Asia. At the same time, the financial regulator notes the existence of risks associated with the cost of food.

As we have reported earlier, RBI Released Assistant Admit Card 2023.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.