HDFC Bank, one of India’s leading private sector banks, has reported a significant development in its financial provisions related to alternative investment funds (AIFs). The bank recently announced a write-back of approximately Rs 200 crore, equivalent to around 20 percent of its total provisioning for AIF investments. This move comes following clarifications issued by the Reserve Bank of India (RBI) regarding guidelines on investments by lenders in AIFs.
Srinivasan Vaidyanathan, Chief Financial Officer of HDFC Bank, shared this information during a post-result press conference held on April 20. According to Vaidyanathan, the bank has released the aforementioned amount from its provisions, indicating a positive adjustment in its financial reserves.
Explaining the rationale behind the move, Vaidyanathan stated, “Our AIF book is Rs 1,220 crore and the current applicable Reserve Bank of India (RBI) circular asks us to take a provision on that and by January 18. On a prudent basis, we have done the assessment and taken the provision now. We have made a contingent provision of 100 percent of our AIF book.”
The RBI had issued clarifications on its earlier guidelines regarding investments in AIFs by lenders on March 27, addressing concerns raised by various stakeholders in the banking industry. As per the recent clarifications, downstream investments will exclude equity shares of the debtor company of the lender. However, the rules will apply to all other investments, including hybrid instruments.
Furthermore, the RBI clarified that provisioning by lenders with investments in AIFs will only be required to the extent of the lender’s investment in the AIF scheme, which is further invested by the AIF in the debtor company.
These regulatory changes aim to ensure uniformity in implementation among lenders and address concerns regarding potential evergreening through certain investment routes.
The RBI had earlier barred regulated entities, including banks and non-bank lenders, from investing in AIFs that had directly or indirectly invested in companies borrowing from these entities. This move, announced on December 19, 2023, was intended to address regulatory concerns regarding certain transactions involving AIFs by regulated entities.
Under the new guidelines, regulated entities are required to liquidate their investment in any AIF scheme with downstream investments in a debtor company of the lender within 30 days. Failure to comply with this requirement will result in a 100 percent provision on such investments.
Moreover, investments by regulated entities in the subordinated units of any AIF scheme with a “priority distribution model” are now subject to full deduction from the entity’s capital funds, as per the RBI.
The recent developments in HDFC Bank’s AIF provisions underscore the evolving regulatory landscape in the financial sector, reflecting efforts to ensure transparency and stability in the banking industry.