1st January, 2026 – for Repeal of provisions on Enhancing Credit Supply for Large Borrowers through Market Mechanism.
1st April, 2026 – for other amendments
Banks may decide to implement such amendments from an earlier date
In case of any breach in exposure limits pursuant to the Amendment Directions, the exposures to be brought down within 6 months from the date of issuance of the Amendment Directions, i.e., 3rd June, 2026.
Intent behind the Amendments and Key changes
Repeal of requirements pertaining to credit supply to Large Borrowers through Market Mechanism (draft Circular proposing such repeal can be accessed here)
This is based on the Statement on Developmental and Regulatory Policies dated 1st October, 2025, wherein the extant guidelines pertaining to Large Borrowers were proposed to be withdrawn, in view of the reduced share of credit from the banking system to such large borrowers, and existence of LEF to address the concentration risks at an individual bank level.
The repeal relates to a 2016 Notification (forming part of Chapter IV of the existing Concentration Risk Management Directions), whereby certain “specified borrowers” were identified, meaning those entities which had borrowed, on an aggregate from the banking system, including by way of private placed debt instruments, in excess of Rs 10000 crores.
There is a notable difference between LEF and the “specified borrowers” as covered by the 2016 Notification – the latter relates to large borrowers on an aggregate basis, whereas LEF still looks at the size of exposure relative to the Tier 1 capital of a single lender. However, the “specified borrower” regime is said to have lost its relevance.
Alignment of requirements w.r.t. Intra-group transactions and exposures (ITEs) with the Large Exposure Framework (LEF) [see press release on the proposed amendments here]
Computation of exposure under ITEs to be made consistent with that under LEF
Linking exposure thresholds for ITEs with Tier 1 capital instead of existing paid-up capital and reserves.
Clarifications w.r.t. prudential treatment of exposures of foreign bank branches operating in India to their group entities
A track change version of the Reserve Bank of India (Commercial Banks – Concentration Risk Management) Directions, 2025, as amended vide the present Amendment Directions can be accessed here.
Capital markets are subject to higher fluctuations and volatility, and hence, Capital Market Exposures (CME) carry a higher risk, naturally requiring higher level of control and prudential norms by the regulator. The RBI recently released Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025, consolidating and amending the regulatory directions pertaining to CMEs. The proposed amendments are significant, providing for a flexibility of financing “acquisitions” in the secondary market while also strengthening the prudential requirements in relation to CMEs.
As a part of the RBI’s recent consolidation exercise, RBI has released Draft Reserve Bank of India (Commercial Banks – Governance) Directions, 2025. This exercise integrates decades of existing circulars into a streamlined framework, enhancing clarity and ease of governance. While primarily a consolidation, the RBI has undertaken extensive clause shifting, reorganisation, and pruning of redundancies to improve accessibility. Further, new provisions have been introduced for Private Sector Banks (PVBs) in line with the Discussion paper on Governance in Commercial Banks in India dated 11th June, 2020 or in alignment with the provisions applicable to Public Sector Banks (PSBs). Below are some of the key highlights from this consolidated framework for PVBs:
1. Additional disqualifications for Fit and Proper Criteria
The Draft Directions specify additional disqualification conditions for a person proposed to be appointed as a director in a PVB. These include:
Common directorship with a Non-Banking Financial Institution (NBFI) or
Association of the proposed candidate with such institutions in any other capacity.
The institutions engaged in the following activities are covered by the said restriction:
finance,
investment,
money lending,
hire purchase,
leasing,
chit / kuri business,
Mutual funds,
Asset Management Companies and
other para-banking companies.
The term “NBFI” has not been used in the Draft Directions, however, taken from the 2020 Discussion Paper. The 2020 Discussion Paper permitted common directorship with NBFIs subject to certain conditions, and defined NBFI as:
Non-banking financial institutions (NBFI) are entities engaged in hire purchase, financing, investment, leasing, money lending, chit/kuri business and other para banking activities such as factoring, primary dealership, underwriting, mutual fund, insurance, pension fund management, investment advisory, portfolio management services, agency business etc.)
The scope of restriction under point (b) is wider, and covers association “in any other capacity”. However, directorship is permitted in such cases, subject to compliance with certain conditions, viz.,
The institution does not enjoy any financial accommodations from the concerned PVB;
Person does not hold whole time appointment in the institution; and
The person does not have substantial interest’ in the institution as defined in Section 5(ne) of the Banking Regulation Act, 1949.
Note that the meaning of “institution” itself is vast, and covers, incorporated and unincorporated entities including individuals.
The proposed inclusion is also in partial alignment with the condition specified in fit and proper criteria for PSBs that states:
A person connected with hire purchase, financing, money lending, investment, leasing and other para banking activities shall not be considered for appointment as elected director.
2. Clarity w.r.t. the role of Board, EDs and NEDs
The 2020 Discussion Paper had elaborate discussion on the role of the board of the banks, primarily drawing reference from the Basel Committee on Banking Supervision Guidelines of 2015, in addition to the existing requirements specified through various circulars.
The Draft Directions further sets out the expectations from the MD/ CEO/ WTDs vis-a-vis NEDs, alongside the role of board.
Para 51 and 52 of the Draft Directions specifies role of the board, which includes:
Conduct affairs in a solvent, adequately liquid and reasonably profitable manner
Ensure that the Memorandum and the Articles of Association spell out the duties, functions and obligations of the directors towards the PVB
Institutionalise discussions between its management and the Board on quality of internal control systems
Set and enforce clear lines of responsibility and accountability for itself as well as the senior management and throughout the organization.
For NEDs, Para 52 & 53 of the Draft Directions sets out the expectations from the NEDs, including areas that NEDs should pay particular attention to. Para 54 further provides various positive and negative stipulations, some of which are stated below:
Negative stipulations
Positive stipulations
not be an employee of the PVB.
have no power to act on behalf of the PVB
nor can they give any direction to the employees of the PVB on behalf of the management.
desist from sending any instructions to the individual officers on any matters and such cases, if any, shall be routed through the MD&CEO / CEO of the PVB.
exercise power only as a member of a collective body, unless specifically authorised by a Board resolution,
not sponsor any individual proposal, nor shall they approach directly the Branch Managers to sanction loans or other facilities to any constituent.
not sponsor individual cases of employees or officers regarding their recruitment, transfers, promotions, postings and other related matters.
act with ordinary person’s care and prudence
disclose the nature of interest to Board wherever directly or indirectly interested or concerned in any contract, loan, arrangement or proposal entered/ proposed to be entered and not to vote on any such proposal [similar to sec. 184 of CA]
As regards CEO & MD/ CEO/ WTDs, Para 56 of the Draft Directions state that they should act as a bridge between the board and management. They are charged with the responsibility of efficient management of the bank on behalf of the Board. It is through them that the programmes, policies and decisions approved by the Board are made effective and again it is through them that the Board gets the responses and reactions of those at various levels of the organisations to its deliberations.
A mapping of the various provisions of the Draft Directions as applicable to PVBs vis-a-vis the existing applicable circular setting out such requirements can be accessed here.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-19 20:54:312025-10-21 18:14:38RBI’s Corporate Governance Blueprint Aims at Reshaping Bank Boards
The proposed ECL framework marks a major regulatory shift for India’s banking sector; it is long overdue, and therefore, there is no case that the RBI should have deferred it further. However, it comes coupled with regulatory floors for provisions, which would cause a major increase in provisioning requirements over the present requirements. Our assessment, on a very conservative basis, is that the first hit to Bank P/Ls will be at least Rs 60000 crores in the aggregate.
A major impact that the draft directions will have on the Banking sector is the need to maintain increased provisioning pursuant to a shift from an incurred loss framework to the ECL framework. Under the existing framework, banks make provisions only after a loss has been incurred, i.e., when loans actually turn non-performing. The proposed ECL model, however, requires banks to anticipate potential credit losses and set aside provisions for such anticipated losses.
Banks presently classify an asset as SMA1 when it hits 30 DPD, and SMA2 when it turns 60. Both these, however, are standard assets, which currently call for 0.4% provision. Under ECL norms, both these will be treated as Stage 2 assets, which calls for a lifetime probability of loss, with a regulatory floor of 5%. Thus, the differential provision here becomes 4.6%.
Once an asset turns NPA, the present regulatory requirement is a 15% provision; the ECL framework puts these assets under Stage 3, where the regulatory minimum provision, depending on the collateral and ageing, may range from 25% to 100%. Our Table below gives more granular comparison.
Type of asset
Asset classification
Existing requirement
Proposed requirement
Difference
Farm Credit, Loan to Small and Micro Enterprises
SMA 0
0.25%
0.25%
–
SMA 1
0.25%
5%
4.75%
SMA 2
0.25%
5%
4.75%
NPA
15%
25%-100% based on Vintage
10%-85% based on Vintage
Commercial real estate loans
SMA 0
1%
Construction Phase -1.25%
Operational Phase – 1%
Construction Phase -0.25%
Operational Phase – Nil
SMA 1
1%
Construction Phase -1.8125%
Operational Phase – 1.5625%
Construction Phase -0.8125%
Operational Phase – 0.5625%
SMA 2
1%
Construction Phase -1.8125%
Operational Phase – 1.5625%
Construction Phase -0.8125%
Operational Phase – 0.5625%
NPA
15%
25%-100% based on Vintage
10%-85% based on Vintage
Secured retail loans, Corporate Loan, Loan to Medium Enterprises
SMA 0
0.4%
0.4%
–
SMA 1
0.4%
5%
4.6%
SMA 2
0.4%
5%
4.6%
NPA
15%
25%-100% based on Vintage
10%-85% based on Vintage
Home Loans
SMA 0
0.25%
0.40%
0.15%
SMA 1
0.25%
1.5%
1.25%
SMA 2
0.25%
1.5%
1.25%
NPA
15%
10%-100% based on Vintage
(-)5% – 85% based on Vintage
LAP
SMA 0
0.4%
0.4%
–
SMA 1
0.4%
1.5%
1.1%
SMA 2
0.4%
1.5%
1.1%
NPA
15%
10%-100% based on Vintage
(-)5% – 85% based on Vintage
Unsecured Retail loan
SMA 0
0.4%
1%
0.6%
SMA 1
0.4%
5%
4.6%
SMA 2
0.4%
5%
4.6%
NPA
25%
25%-100% based on Vintage
0%-75% based on Vintage
The actual impact of such additional provisioning will be a hit of more than 3% to the profit of banks1. Based on the RBI Financial Stability Report of FY 24-252, the current level of SMA and NPA is estimated to be ₹3,78,000 crores (2%) and ₹4,28,000 crores (2.3%), respectively.
Accordingly, an additional provision of approximately₹ 18,000 crores (4.6% of SMA volume) and ₹ 42,000 crores (10% of NPA volume) will be required for SMA and NPA respectively, leading to a total impact of at least ₹60,000 crores. This estimate has been arrived at by considering the % of NPAs and SMA-1 & SMA-2 portfolios of banks. The actual impact may be higher, as lot of loans may be unsecured, and may have ageing exceeding 1 year, in which case the differential provision may be higher.
It may be noted that while the draft directions allow Banks to add back the excess ECL provisioning to the CET 1 capital, it does not neutralize the immediate profitability impact, as the additional provisions would still flow through the profit and loss account.
How do we expect banks to smoothen this hit that may affect the FY 27-28 P/L statements? We hold the view that it will be prudent for banks, who have system capabilities, to estimate their ECL differential, and create an additional provision in FY 25-26, or do technical write-offs.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-09 13:30:392025-10-09 17:53:13Expected to bleed: ECL framework to cause ₹60,000 Cr. hole to Bank Profits
In its current hectic phase of revamping regulations, the RBI has issued Draft Directions for lending and contracting with related parties. Separate sets have been issued for commercial banks, other banks, NBFCs and financial institutions.
The definition of “related party” is more rationalised and improvised over the existing definitions in Companies Act or LODR Regulations. Loans above a “materiality threshold” [which is scaled based on capital in case of banks, and based on base/middle/upper layer status in case of NBFCs] will require board approval, and nevertheless, will require regulatory reporting as well as disclosure in financial statements. In case of contracts or arrangements with related parties, with the scope of the term derived from sec 188 (1) of the Companies Act, there are no approval processes, but disclosure norms will apply. In the case of banks, trustees of funds set up by banks are also brought within the ambit of “related persons”.
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On April 30, 2025, the Supreme Court of India delivered a landmark judgment in Pragya Prasun & Ors. v. Union of India, declaring digital access as an intrinsic component of the fundamental right to life under Article 21. The Court issued comprehensive directions to make digital KYC processes accessible to persons with disabilities, particularly acid attack survivors and visually impaired individuals.
This judgment fundamentally transforms how banks and NBFCs must approach customer onboarding through digital means, with immediate compliance requirements and potential legal consequences for non-adherence.
The petitioners in these cases highlight significant barriers faced by persons with disabilities in accessing digital KYC processes. WP(C) No. 289 of 2024 involved acid attack survivors who were unable to complete digital KYC, while WP(C) No. 49 of 2025 involves a visually impaired individual facing similar difficulties. A notable incident involved Pragya Prasun, who was denied the opening of a bank account due to her inability to perform the blinking required for liveness verification. These cases are grounded in the protections afforded by the Rights of Persons with Disabilities Act, 2016, and the fundamental right to life and personal liberty under Article 21 of the Constitution.
Current KYC Barriers Identified
The Court recognized that existing digital KYC processes create obstacles for persons with disabilities:
Barrier Type
Specific Issues
Affected Population
Liveness Detection
Mandatory blinking, head movements, reading displayed codes
Acid attack survivors, visually impaired
Screen Compatibility
Lack of screen reader support, unlabeled form fields
Non-acceptance of thumb impressions in digital platforms
Persons unable to sign consistently
Legal Framework and Constitutional Mandate
Supreme Court’s Key Declarations
“Digital access is no longer merely a matter of policy discretion but has become a constitutional imperative to secure a life of dignity, autonomy and equal participation in public life.”
– Justice R. Mahadevan
The Supreme Court has firmly declared that digital access is no longer just a policy choice but a constitutional necessity to ensure individuals’ dignity, autonomy, and equal participation in society. This constitutional and legal mandate is grounded in several provisions: Article 21 guarantees the right to life with dignity, requiring digital services to be accessible to everyone; Section 3 of the Rights of Persons with Disabilities (RPwD) Act, 2016, ensures equality and prohibits discrimination against persons with disabilities; Section 40 mandates that all digital platforms adhere to established accessibility standards and Section 46 sets a two-year timeline within which service providers must achieve compliance with these accessibility requirements.
The Supreme Court issued twenty directives in the said judgement to ensure that services are not denied based on disability and digital services are accessible to all the citizens irrespective of the impairments. Most of these are for the regulators, while a few are for regulated entities.
Following is the list of actionables arising out of the directives for banks and NBFCs:
Undergo mandatory periodic accessibility audits by certified professional[1], may involve PwD in user testing of apps/websites (SC directive ii);
Cannot reject PwD applications without proper human consideration, must record reasons for rejection. Banks and NBFCs may appoint a designated officer who shall be empowered to override automated rejections and approve applications on a case-by-case basis (SC directive xvi and KYC 2nd Amendment to Para 11 of the KYC Directions).
In the process of customer due diligence, REs can accept Aadhaar Face Authentication as valid method for Authentication ( KYC 2nd Amendment to Para 16 of the KYC Directions).
During the V-CIP process, REs cannot rely solely on eye-blinking for liveness verification. They must ensure liveness checks do not exclude persons with special needs. For this purpose, the officials of banks or NBFCs may ask varied questions to establish the liveness of the customer (KYC 2nd Amendment to Para 18(b)(i)).
Changes to the KYC Directions
Changes have been introduced in the KYC Directions via the KYC 2nd Amendment as a result of the SC verdict, these are captured in the diagram:
Implementation Plan
Based on the Supreme Court directive in Pragya Prasun & Ors. vs Union of India and the subsequent RBI notification, here is a comprehensive stage-wise action plan for implementing digital accessibility requirements for banks and NBFCs:
Phase 1: Immediate Compliance and Assessment
Actionables for REs under phase 1 are listed below:
Stage 1.1: Current State Assessment
Inventory all client facing platforms like digital platforms, mobile apps, websites, and KYC systems;
Document current accessibility barriers and non-compliant features and identify high-risk areas requiring immediate attention.
Stage 1.2: Policy Framework Development
Amend the KYC Policy to incorporate accessibility clauses for PwD;
Update existing KYC Policy to incorporate paper based KYC other than video based KYC (provided such verification methods shall not result in any discomfort to the applicant); and
Make necessary changes to internal documents and SOPs to include disability-inclusive customer service protocols.
Phase 2: Technical Foundation and Alternative Methods
Actionables for REs under phase 2 are listed below:
Stage 2.1: Alternative KYC Methods Implementation
Implement alternative means of liveness detection other than blinking of an eye such as:
Gesture-based verification (beyond eye blinking);
Facial movement detection;
Audio-based liveness checks; or
Any other method feasible to the RE
Provide notices regarding the alternative methods of KYC that the RE supports/provides to PwD
In case of biometric based e-KYC verification, accept thumb impressions or AADHAAR face authentication or any other biometric alternatives.
In case of paper-based KYC, strengthen offline processes as accessible alternatives in such a manner that the same shall not cause any discomfort to the applicant.
Remove mandatory blinking requirements in video KYC.
Ensure that assistive technology is integrated into the current systems such as screen reader compatibility, voice navigation, etc.
Stage 2.3: Data Capture Enhancements
Modify KYC templates in such a way to add disability fields(type and percentage) to be able to serve better to the applicants
Update database to capture disability-related information (including preferred communication and customer authentication methods) for appropriate service delivery
Phase 3: Process Redesign and Human Support
Actionables for REs under phase 3 are listed below:
Stage 3.1: Human-Assisted Channels
Establish dedicated helpline for PwD offering step-by-step assistance in completing the KYC process through voice or video support;
Conduct staff sensitization and disability awareness programs across all offices/branches
Authorise/allow support from nominated guardians/family members to assist in the KYC process
In case of persons dependent on sign languages, video calling service with certified interpreters shall be provided
Stage 3.2: Grievance Mechanism Setup
May develop dedicated accessibility complaints system for disability-related issues
Ensure manual assessment of rejected KYC applications
Establish clear timelines and accountability for redressal of grievances
Stage 3.3: Alternative Service Delivery
Train BCs/agents for disability-inclusive KYC assistance
Doorstep customer authentication for severely disabled applicants, provided that such facility shall not cause any discomfort to the applicant
Phase 4: Testing and Validation
Actionables for REs under phase 4 are listed below:
Stage 4.1: User Acceptance Testing
May involve PwD in testing phases
Ensure a diverse disability testing- cover visual, hearing, physical, and cognitive impairments
Ensure testing the complete customer journey from onboarding to service access
Document and address all accessibility issues through feedback integration
Stage 4.2: Third-Party Validation
Engage an IAAP certified professional for conducting the accessibility audit
Conduct security assessment of alternative authentication methods
Phase 5: Training and Capacity Building
Actionables for REs under phase 5 are listed below:
Stage 5.1: Staff Development Programs
Create comprehensive training modules for disability awareness and sensitivity, alternative KYC procedures, assistive technology usage, customer service best practices, etc.
Conduct customized programs for different staff categories and ongoing skill development
Stage 5.2: Vendor and Partner Training
Ensure external partners such as BCs, tech-cendors, third-party service providers, etc. understand accessibility requirements
Phase 6 : Continuous Improvement and Compliance
Actionables for REs under phase 6 are listed below:
Define the frequency of the accessibility audit and ensure that the audit is conducted on a regular basis (as per the decided frequency)
Submit compliance status/plan of implementation to RBI as and when required
Closing Remarks
The Supreme Court’s judgment in the Pragya Prasun case elevates digital accessibility from a moral imperative to a constitutional mandate. Banks and NBFCs must view this not as a burden but as an opportunity to transform compliance into competitive advantage by becoming an accessibility leader.
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The RBI’s regulatory approach to investments by Regulated Entities (REs) in Alternate Investment Funds (AIFs) has undergone a remarkable transformation over the past two years. Initially, the RBI responded to the risks of “evergreening”, where banks and NBFCs could mask bad loans by routing fresh funds to existing debtor companies via AIF structures, by issuing stringent circulars in December 20231 and March 20242 (collectively known as ‘Previous Circulars’). The December 2023 circular imposed a blanket ban on RE investments in AIFs that had downstream exposures to debtor companies, while the March 2024 clarification excluded pure equity investments (not hybrid ones) from this restriction. This stance aimed to strengthen asset quality but quickly highlighted significant operational and market challenges for institutional investors and the AIF ecosystem. Many leading banks took significant provisioning losses, as the Circulars required lenders to dispose off the AIF investments; clearly, there was no such secondary market.
In response to the feedback from the financial sector, as well as evolving oversight by other regulators like SEBI, the RBI undertook a comprehensive review of its framework and issued Draft Directions- Investment by Regulated Entities in Alternate Investment Funds (‘Draft Directions’) on May 19, 20253. The Draft Directions have now been finalised as Reserve Bank of India (Investment in AIF) Directions, 2025 (‘Final Directions’) on 29th May, 2025. The Final Directions shift away from outright prohibitions and instead introduce a carefully balanced regime of prudential limits, targeted provisioning requirements, and enhanced governance standards.
Comparison at a Glance
A compressed comparison between Previous Circulars and Final Directions is as follows –
Particulars
Previous Circulars
Final Directions
Intent/Implication
Blanket Ban
Blanket ban on RE investments in AIFs lending to debtor companies (except equity)
No outright ban; investments allowed with limits, provisioning, and other prudential controls
Move from a complete prohibition to a limit-based regime. Max. Exposures as defined (see below) taken as prudential limits
Definition of debtor company
Only equity shares excluded for the purpose of reckoning “investment” exposure of RE in the debtor company
Therefore, if RE has made investments in convertible equity, it will be considered as an investment exposure in the counterparty – thereby, the directions become inapplicable in all such cases.
Individual Investment Limit in any AIF scheme
Not applicable (ban in place)
Max 10% of AIF corpus by a single RE, subject to a max. of 5% in case of an AIF, which has downstream investments in a debtor company of RE.
Controls individual exposure risk. Lower threshold in cases where AIF has downstream investments.
Collective Investment Limit by all REs in any AIF scheme
Would require monitoring at the scheme level itself.
Downstream investments by AIF in the nature of equity or convertible equity
Equity shares were excluded, but hybrid instruments were not.
All equity instruments
Exclusions from downstream investments widened to include convertible equity as well. Therefore, if the scheme has invested in any equity instruments of the debtor company, the Circular does not hit the RE.
Provisioning
100% provisioning to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme or 30-day liquidation, if breach
If >5% in AIF with exposure to debtor, 100% provision on look-through exposure, capped at RE’s direct exposure5 (see illustrations below)
No impact vis-a-vis Previous Circulars. For provisioning requirements, see illustrations later.
Subordinated Units/Capital
Equal Tier I/II deduction for subordinated units with a priority distribution model
Entire investment deducted proportionately from Tier 1 and Tier 2 capital proportionately
Adjustments from Tier I and II, now to be done proportionately, instead of equally.
Investment Policy
Not emphasized
Mandatory board-approved6 investment policy for AIF investments
One of the actionables on the part of REs – their investment policies should now have suitable provisions around investments in AIFs keeping in view provisions of these Directions
Exemptions
No specific exemption. However, Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds were excluded from the scope of circulars.
Prior RBI-approved investments exempt; Government notified AIFs may be exempt
Provides operational flexibility and recognizes pre-approved or strategic investments.No specific mention of investments through MFs/FoFs – however, given the nature of these funds, we are of the view that such exclusion would continue.
Transition/Legacy Treatment
Not applicable
Legacy investments may choose to follow old or new rules
See discussion later.
Key Takeaways:
Detailed analysis on certain aspects of the Final Directions is as follows:
Prudential Limits
Under the Previous Circulars, any downstream exposure by an AIF to a regulated entity’s debtor company, regardless of size, triggered a blanket prohibition on RE investments. The Final Directions replace this blanket ban with prudential limits:
10% Individual Limit: No single RE can invest more than 10% of any AIF scheme’s corpus.
20% Collective Limit: All REs combined cannot exceed 20% of any AIF scheme’s corpus; and
5% Specific Limit: Special provisioning requirements apply when an RE’s investment exceeds 5% of an AIF’s corpus, which has made downstream investments in a debtor company.
Therefore, if an AIF has existing investments in a debtor company (which has loan/investment exposures from an RE), the RE cannot invest more than 5% in the scheme. But what happens in a scenario where RE already has a 10% exposure in an AIF and the AIF does a downstream investment (in forms other than equity instruments) in a debtor company? Practically speaking, AIF cannot ask every time it invests in a company whether a particular RE has exposure to that company or not. In such a case, as a consequence of such downstream investment, RE may either have to liquidate its investments, or make provisioning in accordance with the Final Directions. Hence, in practice, given the complexities involved, it appears that REs will have to conservatively keep AIF stakes at or below 5% to avoid the consequences as above.
Now, consider a scenario – where the investee AIF invests in a company (which is not a debtor company of RE), which in turn, invests in the debtor company. Will the restrictions still apply? In our view, it is a well-established principle that substance prevails over form. If a clear nexus could be established between two transactions – first being investment by AIF in the intermediate company, and second being routing of funds from intermediate company to debtor company, it would clearly tantamount to circumventing the provisions. Hence, the provisioning norms would still kick-in.
Provisioning Requirements
Coming to the provisioning part, the Final Directions require REs to make 100 per cent provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of its direct loan and/ or investment exposure to the debtor company, if the REs exposure to an AIF exceeds 5% and that AIF has exposure to its debtor company. The requirement is quite obvious – RE cannot be required to create provisioning in its books more than the exposure on the debtor company as it stands in the RE’s books.
The provisioning requirements can be understood with the help of the following illustrations:
Scenario
Illustration
Extent of provisioning required
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure exists as on date or in the past 12 months)
For example, an RE has a loan exposure of 10 cr on a debtor company and the RE makes an investment of 60 cr in an AIF (which has a corpus of 800 cr), the RE’s share in the corpus of the AIF turns out to be 7.5%. The AIF further invested 200 cr in the debtor company of the RE.
The proportionate share of the RE in the investment of AIF in the debtor company comes out to be 15 cr (7.5% of 200 cr). However, the RE’s loan exposure is 10 crores only. Therefore, provisioning is required to the extent of Rs. 10 crores.
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure does not exist as on date or in the past 12 months)
Facts being same as above, in such a scenario, the provisioning requirement shall be minimum of the following two:-15 cr(full provisioning of the proportionate exposure); or-0 (full provisioning subject to the REs direct loan exposure in the debtor company)
Therefore, if direct exposure=0, then the minimum=0 and hence no requirement to create provision.
Some possible measures which REs can adopt to ensure compliance are as follows:
Maintain an up-to-date, board-approved AIF investment policy aligned with both RBI and SEBI rules;
Implement robust internal systems for real-time tracking of all AIF investments and debtor exposures (including the 12-month history);
Require regular, detailed portfolio disclosures from AIF managers;
appropriate monitoring and automated alerts for nearing the 5%/10%/20% thresholds; and
Establish suitable escalation procedures for potential breaches or ambiguities.
Further, it shall be noted that the intent is NOT to bar REs from ever investing more than 5% in AIFs. The cap is soft, provisioning is only required if there is a debtor company overlap. But the practical effect is, unless AIFs develop robust real-time reporting/disclosure and REs set up systems to track (and predict) debtor overlap, 5% becomes a limit for specifically the large-scale REs for practical purposes.
Investment Policy
The Final Directions call for framing and implementing an investment policy (amending if already exists) which shall have suitable provisions governing its investments in an AIF Scheme, compliant with extant law and regulations. Para 5 of the Final Directions does not mandate board approval of that policy, however, Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. In light of this broader governance requirement, it is our view that an RE’s AIF investment policy should similarly receive Board approval. Below is a tentative list of key elements to be included in the investment policy:
Limits: 10% individual, 20% collective, with 5% threshold alerts;
Provision for real-time 12-month debtor-exposure monitoring and pre-investment checks;
Clear provisioning methodology: 100% look-through at >5%, capped by direct exposure; proportional Tier-1/Tier-2 deduction for subordinated units; and
Approval procedures for making/continuing with AIF investments; decision-making process
Applicability of the provisions of these Directions on investments made pursuant to commitments existing on or before the effective date of these Directions.
Subordinated Units Treatment
Under the Final Directions, investments by REs in the subordinated units7 of any AIF scheme must now be fully deducted from their capital funds, proportionately from Tier I and Tier II as against equal deduction under the Previous Circulars. While the March 2024 Circular clarified that reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; the same has not been clarified under the Final Directions. However, the scope remains the same in our view.
What happens to positions that already exist when the Final Directions arrive?
As regards effective date, Final Directions shall come into effect from January 1, 2026 or any such earlier date as may be decided as per their internal policy by the REs.
Although, under the Final Directions, the Previous Circulars are formally repealed, the Final Directions has prescribed the following transition mechanism:
Time of making Investments by RE in AIF
Permissible treatment under Final Directions
New commitments (post-effective date)
Must comply with the new directions; no grandfathering or mixed approaches allowed
Existing Investments
Where past commitments fully honoured: Continue under old circulars
Partially drawn commitments: One-time choice between old and new regimes
Closing Remarks
The RBI’s evolution from blanket prohibitions to calibrated risk-based oversight in AIF investments represents a mature regulatory approach that balances systemic stability with market development, and provides for enhanced governance standards while maintaining robust safeguards against evergreening and regulatory arbitrage.
Of course, there would be certain unavoidable side-effects, e.g. significant operational and compliance burdens on REs, requiring sophisticated real-time monitoring systems, comprehensive debtor exposure tracking, board-approved investment policies, and enhanced coordination with AIF managers. Hence, there can be some challenges to practical implementation. Further, the success of this recalibrated regime will largely depend on the operational readiness of both REs and AIFs to develop transparent monitoring systems and proactive compliance frameworks.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-07-31 17:45:492025-08-05 11:10:55Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIFs
I was giving a collateral-free loan only, but the borrower didn’t agree – he voluntarily came and pledged family gold and silver jewellery!
This is perhaps the way Banks will be reacting after the RBI Clarificatory circular on Voluntary Pledge of Gold (‘Voluntary Pledge Circular’). The Voluntary Pledge Circular dated July 11, 2025 which addresses all Scheduled Commercial Banks (including RRBs & SFBs), State Co-operative Banks, District Central Co-operative Banks states that a a voluntary pledge of gold or silver as collateral by a borrower for an agricultural or MSME loan shall not amount to a violation of the Reserve Bank of India (Lending Against Gold and Silver Collateral) Directions, 2025 (‘Gold Lending Directions’), provided that the sanctioned amount is within the collateral-free limit laid down in the earlier RBI guidelines.
It may be noted that as per separate RBI circulars dated December 6, 2024 and July 24, 2017 farm lending upto Rs. 2 lacs and MSE lending upto Rs. 10 lacs shall be done without collateral.
This clarification by the regulator may enable lenders to circumvent the regulations by categorizing collateral as a voluntary pledge for loans within the collateral-free caps, whereas in reality, the borrower may have been directly or indirectly compelled to offer such collateral.
Further, the circular also makes reference to the Gold Lending Directions. A question may arise if the Gold Lending Directions will apply even in the case of voluntary pledge of gold.
The Gold Lending Directions should apply in all such cases of voluntary pledges to avoid a situation of regulatory arbitrage, where lenders could potentially bypass regulatory guidelines merely by categorizing the pledge as voluntary.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-07-22 16:10:222025-07-22 16:12:08Let them pledge but don’t make it count: RBI’s clarification on voluntary pledge
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