A PCE enhances the credit rating of bonds enabling the NBFCs to raise more resources from the bond market at lower borrowing costs
In a bid to ease the ongoing liquidity conditions, the Reserve Bank of India (RBI) has allowed partial credit enhancement by banks to corporate bonds issued by the important non-banking financial institutions (NBFCs).
A PCE enhances the credit rating of bonds enabling the NBFCs to raise more resources from the bond market at lower borrowing costs.
“The key mandate of a PCE is to provide credit support in times of distress and also provide project companies time to turn around if they reach a situation of distress,” said India Ratings in a note in October.
The central bank said the bonds, not less than three years, will be utilised only for the purpose of refinancing the existing debt of the non-bank lenders.
“It has now been decided to allow banks to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the Reserve Bank of India and Housing Finance Companies (HFCs) registered with National Housing Bank,” RBI said in a notification on its website.
It added that banks shall 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 shall be restricted to one percent of capital funds of the bank within the extent single/group borrower exposure limits,” the notification said.Also, the exposure of banks through this route shall be within the aggregate PCE exposure limit of 20 percent, it added.