RBI Issues New Investment Guidelines for Regulated Entities in Alternative Investment Funds, Effective from January 1, 2026.

In July 2025, the Reserve Bank of India (RBI) issued the RBI (Investment in Alternative Investment Funds) Directions, 2025, introducing strict caps on the investments made by Regulated Entities (REs) such as banks and NBFCs in Alternative Investment Fund (AIF) schemes. The new norms will be applicable from January 1, 2026, with voluntary early adoption permitted.

      - The new framework aims to limit the aggregate exposure of the financial system to a single Alternative Investment Fund scheme by capping investments by Regulated Entities (REs) to a maximum of 20% of the scheme’s corpus. These directions were issued under the leadership of RBI Governor Shaktikanta Das, in response to concerns about indirect credit exposure risks in the AIF ecosystem.

      - The directions are applicable to a broad spectrum of financial institutions including Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks (SFBs), Primary (Urban) Co-operative Banks (UCBs), State and Central Co-operative Banks, Non-Banking Financial Companies (NBFCs) including Housing Finance Companies (HFCs), and All-India Financial Institutions (AIFIs) such as NABARD, EXIM Bank, SIDBI, and NHB.

      - As per the RBI guidelines, no single Regulated Entity is allowed to invest more than 10% of the total corpus of any AIF scheme. Furthermore, all REs combined are restricted from contributing more than 20% of the scheme’s total funds. These limitations are intended to avoid concentration of systemic risk in any single AIF.

Main Point :-   (i) The directions also include strict provisioning requirements. If a Regulated Entity has invested over 5% in an AIF that, in turn, makes downstream investments in companies that are debtors of the same RE (excluding equity instruments), then the RE must create a 100% provision equivalent to the exposure amount. This clause is introduced to prevent indirect credit enhancement to stressed or related companies.

      (ii) The Reserve Bank has allowed a transition period until January 1, 2026, for institutions to align their AIF exposures under the revised norms. However, REs may voluntarily adopt the guidelines earlier. The RBI expects this reform to promote prudence in investment behaviour and minimize financial interconnectedness in high-risk sectors of the market.

(iii) This policy reform aligns with RBI's continued efforts to tighten systemic risk management in the shadow banking and fund investment sectors. It is also in sync with the government's financial sector stability objectives under the Ministry of Finance, led by Union Finance Minister Nirmala Sitharaman.
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