Shadow lenders decline after RBI tightened norms for investments by banks

By Advait Palepu and Alex Gabriel Simon

Indian Shadow lenders declined after the nation’s central bank tightened norms for investments by banks and other regulated entities into alternative investment funds to plug lending loopholes. 

Piramal Enterprises Ltd. declined as much as 7.1% and IIFL Finance Ltd. slipped 7.7%, the most since December 2022. Edelweiss Financial Services Ltd., Sundaram Finance Ltd., and L&T Finance Holdings Ltd. were also among the losers on Wednesday.

The tighter norms for banks and other RBI-regulated entities barred investments in any scheme of alternative investment funds that have downstream investments either directly or indirectly in a debtor company of the entity, the central bank said on Tuesday. Existing investments will either have to be liquidated in 30 days or the lenders have to provision their investment in the AIFs.

Lenders plunged on concerns they will face potential mark-to-market losses if they liquidate the investments, or their balance sheets take a one-time hit in case of provisions. The move comes after the member of Securities and Exchange Board of India, the nation’s stock market regulator, early this month flagged concerns over instances of AIFs being used to mask loans in the financial system. 

The move is aimed at addressing concerns relating to the so-called “possible evergreening.” according to the RBI. Certain transactions have raised “regulatory concerns,” where lenders have taken indirect loan exposure to their borrowers through investments in these funds, the central bank said in a notification Tuesday. 

“With the loophole plugged, expect some stressed accounts to be recognized as non-performing assets in the coming quarters,” IIFL Securities analysts Rikin Shah and Viral Shah, wrote in a note.