RBI introduces rules on AIF investments by banks and NBFCs

RBI introduces rules on AIF investments by banks and NBFCs

The Central Bank has capped exposures and tightened risk provisions

The Reserve Bank of India (RBI) has initiated Reserve Bank of India (Investment in AIF) Directions, 2025, providing a revised regulatory framework for investments by regulated entities (REs) in the Alternative Investment Funds (AIFs).

The rules, effective from 1 January 2026, or earlier, if adopted voluntarily by entities, apply to categories of financial institutions.

These include Commercial Banks (small finance banks, regional rural banks and local area banks); Co-operative Banks (urban, state and central); All-India Financial Institutions, and Non-Banking Financial Companies (NBFCs), including Housing Finance Companies.

The highlights of the notification state that no regulated entity would be allowed to invest more than 10 percent of an AIF scheme’s total corpus individually. And the combined investment by all REs in a single AIF scheme will be capped at 20 percent.

The provisions in the risky exposures have been explained to state that if an RE invested over 5 percent in an AIF, which, in turn, invests in a ‘debtor company’ to whom the RE provided a loan or had investment exposure in the past 12 months (excluding equity), then the RE must make a 100 percent provision for the exposure. However, if the RE’s investment in the AIF is in the form of subordinated units, it must deduct the entire investment from its regulatory capital (Tier-1 and Tier-2).

As for policy and compliance requirements, the REs must have an internal investment policy that governs AIF-related investments, ensuring adherence to applicable laws and the Securities and Exchange Board of India Regulations.

It further clarifies the exemptions and transitional provisions - Investments made under prior approval from the RBI, under the 2016 Master Directions, are exempt from the new percentage limits. The RBI may exempt specific AIFs from these rules (except for the policy requirement), in consultation with the Government of India, and the new rules repeal the earlier 19 December 2023 and 27 March 2024 circulars. However, it will offer regulated entities the option to follow either the old or the new framework for commitments made before the compliance deadline.