MUMBAI: RBI has allowed banks to provide partial credit enhancement (PCE) to bonds issued by systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) and Housing Finance Companies (HFC), apparently to help them raise funds from bond market with ease.
The PCEs issued by banks will help NBFCs and HFCs get better credit rating for their bonds, which in turn will encourage insurance companies and pension funds to invest in such bonds.
“The tenor of the bonds issued by NBFC-ND-SIs/HFCs for which PCEs are provided shall not be less than three years and the proceeds from the bonds backed by PCE from banks shall only be utilized for refinancing the existing debt of the NBFC-ND-SIs/HFCs,” RBI has stated.
The banks will have to introduce appropriate mechanisms to monitor and ensure that the end-use condition is met. The exposure of a bank by way of PCEs to bonds issued by each such NBFC-ND-SI/HFC has to be limited to one per cent of capital funds of the bank within the extant single/group borrower exposure limits; and the exposure of banks to NBFC-ND-SIs/HFCs by way of PCEs shall be within the aggregate PCE exposure limit of 20 per cent.
PCE, which was introduced in 2015, is expected to improve the credit rating of such bonds issued by NBFCs and HFCs and hence will encourage insurance and provident or pension funds to invest in the bonds issued by these NBFCs and HFCs.
The move comes at a time when NBFCs and HFCs have sought the regulators for relaxation on several fronts after their markets have taken a beating following the IL&FS debacle.
Banks are allowed to provide PCE as non-funded subordinated facility in the form of a contingent line of credit to be used in case of shortfall in cash flows for servicing the bonds and thereby improve the credit rating of the bond issue.
“The regulatory requirement for insurance and provident/pension funds is to invest in bonds of high or relatively high credit rating. However, bonds issued for funding projects by corporates/SPVs do not necessarily get high ratings from the credit rating agencies (CRAs) because of the inherent risk in the initial stages of project implementation,” RBI had said in 2015 when PCE was introduced for corporates.