Banks Not be Motivated by RBI's Special Recommendation to Allow Partial Credit Enhancement for NBFC, HFC bonds

The Reserve Bank of India’s (RBI) move to allow partial credit enhancement (PCE) to bonds issued by non-banking finance and housing finance companies may not generate interest from banks due to the tight liquidity, says a report.

Recently, the RBI has permitted banks to provide PCE to bonds issued by systematically important NBFCs and housing finance companies (HFCs), a move aimed to enhance their liquidity position.

According to a report by India Rating and Research, the RBI circular comes at the time when the overall NBFC sector is facing liquidity concerns and banks are highly selective about providing additional lending or renew their existing facilities.

“There may not be any sufficient interest from banks, as a PCE provider in the near-term, due to their lower desire to take standard senior exposure of NBFCs or HFCs under the prevailing market conditions,” the report said.

It expects that PCE-backed bond issuances by NBFCs and HFCs, which are subordinated instruments for banks, will take time to take off.

The report said the move is likely to improve funding access for entities rated IND A or lower.

RBI has said the proceeds from the bonds backed by PCE from banks should only be utilised for refinancing the existing debt of the NBFC-ND-SIs/HFCs.

The report said this has the potential of reducing refinancing risk for issuers, given insurance/mutual funds may be able to participate in the offerings with enhanced ratings.

The guidelines on PCE extended to NBFCs/HFCs for bonds issuances require a minimum debt maturity period of three years.