Stock price, net worth of NBFCs take knock as RBI curbs investments in AIFs

RBI tightening has minimal impact on banks as their AIF exposures small

The stock price of select non-banking finance companies took a beating on the prospects of erosion in their net worth after the Reserve Bank of India tightened norms for investment in Alternative Investment Funds by NBFCs and Banks.

In the midst of concerns about the circumvention of regulations by alternative investment funds (AIFs), the RBI issued an advisory on Tuesday to banks and financial companies to curb the evergreening of loans and misuse of the AIF route.

Piramal Enterprises' stock was down by 8 per cent at Rs 885 per share, and IIFL Finance stock closed 6.8 per cent down at Rs 618.4, according to Bloomberg data. Meanwhile, the members of the Indian Private Equity and Venture Capital Association (IVCA)--an industry body for AIFs, convened a meeting on Wednesday to discuss their submissions on the RBI directive.

RBI restricted banks, NBFCs and HFCs from investing in units of AIFs that have downstream investment either directly or indirectly in a debtor firm where the lender had exposure anytime during the prior 12 months. Investment by the lender in subordinated units of AIF with a priority/structured distribution model shall be subject to full deduction from the lender's capital.

Foreign brokerage Jefferies, in a research note, said while we await further clarity, it appears the impact of the RBI circular on two finance companies, Piramal and IIFL, may be limited. If they have to provide against their entire AIF exposure (incl. pre 12 months), the hit to net worth could be -8 per cent (IIFL) and -10 per cent (PIEL). Exposure of covered banks is NIL/nominal.

Another broking firm, IIFL Securities, said it expected redemptions by the banks/NBFCs from the AIFs. AIFs have total commitments of $100 bn (17 per cent of the MF industry's Assets Under Management) and have made investments of $42 bn (7 per cent) as of June 2023.

It will reduce the pool of investable assets for the AIFs, and there could be potential MTM loss for lenders as they liquidate these investments within the prescribed 30-day timeline, or alternatively make provisions, it added.