Credit Bulletin

Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.

CRISIL Ratings has taken note of the recent measures by the Reserve Bank of India (RBI)[1] pertaining to the investments made by NBFCs[2] in Alternative Investment Funds (AIFs).

As per the circular, NBFCs are advised against investing in AIF schemes with downstream investments in debtor companies of the NBFC. This refers to any company to which the NBFC currently has or previously had a loan or investment exposure anytime during the preceding 12 months. If an AIF scheme, in which an NBFC is already an investor, makes a downstream investment in a debtor company, the NBFC must liquidate its investment within 30 days of such downstream investment by the AIF. Existing investments in such schemes must also be liquidated within 30 days of issuance of the circular, or the investment should be fully provided if the timeline for liquidation is not met. Furthermore, NBFC’s investments in subordinated units of AIF schemes following a 'priority distribution model'[3] will face full deduction from NBFC’s capital funds.

This regulation is expected to impact the profitability and capitalization of NBFCs depending on the size and structure (senior or subordinated or pari-passu) of their investments in the AIFs. CRISIL Ratings has assessed the ultimate impact of these measures by RBI on the capital position of NBFCs, either directly on the capital funds, or as incremental provisioning through the profit and loss account, and therefore, the networth.

With reference to the content of the circular, CRISIL Ratings understands that the term ‘preceding 12 months’ is being interpreted by NBFCs as the 12 months preceding the date of issuance of the circular. Further, investments in Security Receipts are also being interpreted as being outside the purview of the circular.

Based on the above assumptions, if NBFCs are unable to liquidate their investments within the prescribed 30 days, CRISIL Ratings estimates that the impact on overall capital adequacy ratio could vary from 40 - 400 basis points (based on September 30, 2023, financials) for NBFCs rated by CRISIL Ratings. The NBFCs are also taking steps to comply with the revised RBI guidelines, which should reduce the potential impact.

At this point, CRISIL Ratings believes that the capitalization profile of these NBFCs can withstand the one-time impact of the provisions / deduction. However, there will also be a one-time impact on earnings profile. CRISIL Ratings will re-evaluate the same in case of any change in the understanding or interpretation of the circular. Timely completion of the steps being taken by NBFCs and its impact on their financial risk profile will also be monitorable.

CRISIL Ratings will continue to monitor the developments and incremental disclosures pertaining to this regulation and, its resultant impact on the profitability and capitalization of its rated portfolio.

For accessing the previous rating rationale, refer to the following link:

Company Name	Link to rating rationale
Piramal Enterprises Limited	Click here

[2] Non-Banking Financial Companies (including Housing Finance Companies).

[3] Certain schemes of AIFs adopt a distribution waterfall in such a way that one class of investors (other than sponsor/manager) share loss more than pro rata to their holding in the AIF vis-a-vis other classes of investors/unit holders, since the latter has priority in distribution over the former as part of this priority distribution model.