Partial Credit Enhancement Facility for corporate bonds may help AA and below rated issuers

corporate-bonds - NaBFID

The introduction of setting up Partial Credit Enhancement Facility by National Bank for Financing Infrastructure and Development (NaBFID) is expected to help AA and below rated issuers to tap bond market and reduce their dependence on traditional bank borrowing, experts said.

Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP said this move strategic move aims to democratize the corporate bond market by enabling below AA-rated infrastructure companies to tap into bond financing, reducing their traditional dependence on bank funding.

Finance Minister Nirmala Sitharaman on February 1 while presenting Union Budget 2025, announced that NaBFID will set up a ‘Partial Credit Enhancement Facility’ for corporate bonds for infrastructure.

Nikhil Aggarwal, Founder & Group CEO, Grip Invest said this measures are expected to broaden capital access, lower financing costs, and promote long-term stability in India’s credit and bond markets.

NaBFID is a specialized Development Finance Institution in India aimed at supporting the country's infrastructure sector, which can significantly gain from an enabling credit flow by means of attractive instruments and channelized investment.

On January 31, Economic Survey 2025 said that the bond market is skewed towards high-rated (AAA and AA) bonds, which account for more than 85 per cent of all issuances. Usually, most AA and below rated issuers rely on the bank term loans or other route of fund raising.

Srinivasan further said that this initiative promises to bridge the critical gap between issuer creditworthiness and investor requirements, its success demands key market adjustments.

Regulatory processes need streamlining through standardized guidelines, while guarantee fees require optimization to make Partial Credit Enhancement structures cost-competitive against conventional financing options.

The value of corporate bond issuances stood at Rs 7.3 lakh crore from April to December 2024, with an average monthly issuance of Rs 0.8 lakh crore, higher than the average of Rs 0.66 lakh crore in the corresponding period of the previous year.

Private placements remained the preferred channel for corporates, accounting for 99.1 percent of total resources mobilised through the bond market. Increasing investor demand and elevated costs of borrowing from banks have made these markets more attractive for corporates for funding requirements, Economic Survey said.

Investor confidence in effective bankruptcy resolution is crucial to develop a deep and liquid bond market for the lower rated firms, the Economic Survey 2024-25, released on January 31, has said.

Insurance and pension funds cannot be invested in bonds that are lower than AA-rated. This effectively crowds out small players in the corporate bond market. Liquidity is also bottled through regulations that prevent provident funds from investing in corporate bonds for more than three years. Moreover, insurance funds are not allowed to invest in debt issued by private companies.

An effective bankruptcy resolution regime is critical for bond investors to develop confidence in the Indian market, the Economic Survey has said.