RBI’s New AIF Caps: What’s Behind the Sudden Clampdown?

In a significant regulatory move, the Reserve Bank of India (RBI) on July 29, 2025, issued the final version of its Investment in Alternative Investment Funds (AIF) Directions, 2025. These new norms aim to curb excessive exposure by regulated entities (REs) such as banks and non-banking financial companies (NBFCs) to AIF schemes, while enhancing transparency and financial discipline across the investment ecosystem.

 

Key Highlights from the RBI’s New Directions

- No regulated entity shall individually contribute more than 10 percent of the corpus of any AIF scheme.

- The collective contribution by all regulated entities in any AIF scheme shall not exceed 20 percent of the scheme’s total corpus.

- These limits are designed to prevent concentration risk and potential regulatory arbitrage through indirect exposures.

 

Applicability and Effective Date

- The new framework applies to:

- Commercial banks (including small finance banks and regional rural banks)

- Co-operative banks

- All-India financial institutions

- NBFCs, including housing finance companies

- The directions will come into force from January 1, 2026. However, regulated entities may choose to adopt the norms earlier based on their internal policies.

 

Provisioning Requirements and Risk Mitigation

- If a regulated entity contributes more than 5 percent to an AIF scheme that has downstream debt investments in a debtor company of the same entity, it must make 100 percent provisioning for its proportionate exposure.

- A debtor company is defined as any firm that has received a loan or investment (excluding equity instruments) from the regulated entity in the past 12 months.

- If the investment is made in subordinated units under the Priority Distribution Model, the entire amount must be deducted from the entity’s capital funds, split equally between Tier-1 and Tier-2 capital.

 

Strategic Implications for Financial Institutions

- The move is expected to reduce the risk of evergreening of loans via AIF structures, a concern flagged by regulators in recent years.

- Financial institutions will need to reassess their investment strategies and risk models to comply with the new caps.

- The RBI has emphasized that all REs must update their internal investment policies to reflect these changes and ensure compliance in both letter and spirit.

 

Exemptions and Transitional Provisions

- Outstanding investments or commitments made with prior RBI approval under earlier circulars are exempt from the new limits.

- The RBI may, in consultation with the Government of India, exempt certain AIFs set up for strategic purposes from these restrictions.

- Previous circulars issued in December 2023 and March 2024 stand repealed from the effective date of the new directions.

 

Industry Reaction and Forward Outlook

- Market participants have welcomed the clarity and structure of the new framework, though some concerns remain about reduced flexibility in portfolio allocation.

- Analysts believe the move will lead to more prudent investment behavior and better alignment with SEBI’s due diligence norms for AIFs.

- The RBI’s proactive stance reflects its broader goal of safeguarding financial stability while supporting innovation in capital markets.

 

Conclusion

The RBI’s revised AIF investment norms mark a decisive shift in how financial institutions engage with alternative assets. By capping exposure and tightening provisioning rules, the central bank aims to strike a balance between enabling investment and mitigating systemic risk. As the January 2026 deadline approaches, regulated entities must recalibrate their strategies to align with this new regulatory landscape.

 

Sources: RBI Notification, CNBCTV18, Moneycontrol