Banks and Non-Banking Financial Companies (NBFCs) are limited to investing no more than 10% of their resources in Alternative Investment Funds (AIFs), according to new regulations set by the Reserve Bank of India (RBI).

RBI Issues Revised Guidelines for Banks and NBFCs Investments in Alternative Investment Funds

The Reserve Bank of India (RBI) has issued revised guidelines for investments by banks and Non-Banking Financial Companies (NBFCs) in Alternative Investment Funds (AIFs), effective from January 1, 2026. The new regulations aim to increase transparency, reduce financial contagion risk, and improve overall risk management frameworks among financial institutions investing in AIFs.

Investment Caps

Under the new guidelines, a single regulated entity (RE), such as a bank or NBFC, can invest up to 10% of an AIF scheme's total corpus. The collective investment of all regulated entities in a single AIF scheme cannot exceed 20% of that scheme’s corpus. These caps apply to commercial banks, cooperative banks, housing finance firms, all-India financial institutions, and NBFCs.

Equity instruments held downstream by the AIF are excluded from these caps and provisioning requirements. If a bank or NBFC holds more than 5% in an AIF scheme, and that scheme invests (excluding equity) in a company that has been a current or past debtor of the investing bank/NBFC within the last 12 months, the investing entity must make 100% provisioning against its exposure to that company.

Provisioning Norms

These norms are intended to ensure prudent risk management and prevent indirect exposure to stressed borrowers via AIFs. The restrictions aim to curb backdoor funding of stressed borrowers, enhance clarity around common exposures, and fortify financial stability by controlling concentration risk and interconnected credit exposures across regulated entities and AIFs.

Implementation and Voluntary Early Adoption

The guidelines come into effect from January 1, 2026, but regulated entities can adopt these rules earlier based on their internal policies. The RBI may exempt certain AIFs, in consultation with the government, from the scope of the existing circulars and the revised guidelines.

Key Changes from Draft Guidelines

Compared to the draft guidelines released in May, the final guidelines allow for a collective investment of up to 20% of the AIF's corpus, which is an increase from the 15% allowed in the draft. However, the new guidelines do not mention any changes in the cap on investment by an individual-regulated entity at 10% of an AIF's corpus or the collective exposure of banks and NBFCs in AIFs at 20%.

Anil Gupta, Senior Vice President at ICRA, has stated that the final guidelines are relaxed as they allow for proportionate provisioning on investments with common exposures, rather than 100% provisioning as required earlier. The new guidelines issued by the RBI have revised the definition of Debtor company with greater clarity, excluding downstream investment excluding equity instruments.

In summary, these revised RBI norms introduce explicit investment caps on banks’ and NBFCs’ participation in AIFs and impose stringent provisioning requirements to manage potential credit and concentration risks. By limiting single and aggregate investments, and mandating provisioning when AIFs invest in the entity's borrower companies, RBI aims to increase transparency, reduce financial contagion risk, and improve overall risk management frameworks among financial institutions investing in AIFs.

The new guidelines issued by RBI for banks and NBFCs investments in Alternative Investment Funds (AIFs) aim to increase transparency and improve risk management frameworks.
Under the revised guidelines, a single regulated entity can invest up to 10% of an AIF scheme's total corpus, while the collective investment of all regulated entities in a single AIF scheme cannot exceed 20%.
If a bank or NBFC holds more than 5% in an AIF scheme and that scheme invests in a company that has been a current or past debtor of the investing bank/NBFC within the last 12 months, 100% provisioning against the exposure to that company is required.
Regulated entities like banks, cooperative banks, housing finance firms, all-India financial institutions, and NBFCs are subject to these investment caps and provisioning norms.
The revised guidelines have relaxed provisions by allowing for proportionate provisioning on investments with common exposures instead of 100% provisioning as required earlier.

Banks and Non-Banking Financial Companies (NBFCs) are limited to investing no more than 10% of their resources in Alternative Investment Funds (AIFs), according to new regulations set by the Reserve Bank of India (RBI).