RBI Relaxes Norms Surrounding Evergreening of Loans

Author: Corporate Practice Team

RBI issues revised AIF investment directions (July 29, 2025), changing how evergreening is assessed and introducing new contribution/provisioning thresholds.

In its bid to practically regulate and prevent evergreening of loans advanced by Regulated Entity(ies) (“RE”) to debtor companies (“DC”), the Reserve Bank of India (“RBI”) has made the following key changes via the RBI (Investment in AIF) Directions, 2025 (“Revised Norms”) on July 29, 2025 (“Publication Date”): investments via equity shares, compulsorily convertible preference shares, and compulsorily convertible debentures will now be excluded for determining (i) RE’s DCs, and (ii) downstream investments of alternative investment funds (“AIF”) in DCs, with emphasis thus laid on debt, as against the previous requirement where even equity securities (barring equity shares) are scrutinised for potential evergreening of loans; in place of the existing blanket restriction (i) an RE will now be permitted to contribute up to 10% (Ten Percent), and (ii) all REs would collectively be able to contribute up to 20% (Twenty Percent), of the AIF scheme’s corpus, unless otherwise already permitted by RBI under the Master Direction – RBI (Financial Services provided by Banks) Directions, 2016; the existing obligation of an RE to make 100% (One Hundred Percent) provisions for any downstream investment made by an AIF (holding RE’s investment) in a DC shall now only come into force upon the RE contributing more than 5% (Five Percent) to that AIF Scheme’s corpus, and any such provisioning shall only be to the extent of the RE’s direct loan/investment exposure in the DC; while the existing requirement prescribed for an RE to deduct the entire amount of investment made in sub-ordinated units of an AIF only if no downstream investment is made by the AIF in DCs, the Revised Norms have removed this precondition of downstream investment for mandating the RE to deduct its entire sub-ordinated unit’s investment from its capital funds; REs’ investments existing and fully honoured (as committed) on the Publication Date shall be subject to the existing norms (and not the Revised Norms); and any investment now made pursuant to the RE’s existing commitment, as on the Publication Date or the effective date of the Revised Norms, shall absolutely comply with either the existing norms or the Revised Norms, with the Revised Norms coming into effect from January 01, 2026, or such earlier date as decided by the RE.