Home >Industry >Banking >RBI allows banks to provide partial credit enhancement of NBFC bonds

Mumbai: The Reserve Bank of India (RBI) on Friday allowed banks to provide partial credit enhancement (PCE) to bonds issued by systemically important non-deposit taking non-banking financial companies (NBFCs) registered with the RBI and housing finance companies (HFCs) registered with the National Housing Bank.

The move is aimed at enhancing the credit rating of the bonds and enabling these NBFCs to access funds from the bond market on better terms. PCE, which was introduced in 2015, is expected to help NBFCs and HFCs raise money from insurance and provident or pension funds who invest only in highly-rated instruments.

The RBI said the tenure of these bonds shall not be less than three years and that proceeds from them shall only be utilized to refinance existing debt. “Banks shall introduce appropriate mechanisms to monitor and ensure that the end-use condition is met," said the central bank.

The incentive comes at a time when NBFCs and HFCs have requested the government and regulators to ensure that confidence returns to the market. They have sought relaxations of the National Housing Bank’s credit rating norms related to refinance, lowering of the criterion on years of existence to one year, providing for 10% of the loan loss by the government and capital infusion in banks.

The central bank on Friday restricted the exposure of a bank through PCEs to bonds issued by each such NBFC or HFC to 1% of capital funds of the bank within the current single and group borrower exposure limits.

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.

The Indian corporate bond market is at a nascent stage of development, resulting in excessive pressure on the banking system to fund credit for project development, RBI had said. “Due to greater asset-liability mismatch in infrastructure and project financing, banks are exposed to liquidity risk. The insurance and provident/pension funds, whose liabilities are long term, may be better suited to finance such projects," it had said.

The liquidity crunch that followed the Infrastructure Leasing & Financial Services crisis saw the RBI giving certain incentives to banks to allow flow of funds to NBFCs. It has allowed banks to use government securities as level 1 high-quality liquid assets equivalent to the bank’s incremental lending to NBFCs and HFCs after 19 October. The central bank has also allowed banks to lend up to 15% of their capital funds to a single non-infra funding NBFC from the earlier 10%. The measures are available up to 31 December.

The RBI has, through a series of open market operations (OMO), injected liquidity into the system. In October, it announced 36,000 crore of OMO purchases and met its target in three tranches throughout the month. It has announced another 40,000 crore through the same route in November.

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