The Reserve Bank of India’s (RBI) proposal on credit enhancements to corporate bonds will help corporate borrowers get easier and cheaper access to the bond market, bankers said. However, it is likely to put a stop to the practice of banks offering guarantees to lower rated issuers.
In its second quarter monetary policy review on Tuesday, RBI proposed to allow banks to offer partial credit enhancements to corporate bonds by way of providing credit facilities and liquidity facilities to the corporates ‘and not by way of guarantees’. Complete guidelines will be announced soon, the policy document said.
According to VR Iyer, chairperson & managing director, Bank of India, this will prod banks to open up lines of credit for lower rated or unrated corporates, which will help them tap the corporate bond market better. In case of a default, however, the banks will be liable to take the burden of the entire market borrowing.
“It will be a credit risk that each bank will take depending on their risk perception,” Iyer said. Earlier, banks had never considered these credit enhancements as there was no regulatory provision, she said.
Banks, however, will no longer be able to offer their own guarantee to back bond issues by lower rated corporates. While this practice had been frowned upon in the past, banks have issued guarantees in one-off cases like Suzlon. In March this year, SBI backed a $650-million bond issue of the beleaguered company, which meant that although Suzlon did not have an international rating, the bonds were rated BBB-. The Indian lenders to Suzlon had also restructured the company’s R11,500-crore debt, giving the firm a host of concessions.
“How is it different from giving guarantees? In all cases, the bank offering these guarantees was liable if the company defaulted. So, I don’t think this is anything new,” said Shyamal Acharya, deputy managing director, SBI.
As per reports, the finance ministry wants public sector banks to follow stricter norms while issuing bank guarantees or letters of credit to borrowers, concerned that such practices result in double financing and lead to financial indiscipline among borrowers. Also recent cases ? like Winsome Diamonds ? where banks have been forced to make good on letters of credit, have raised a red flag in the eyes of the government and regulators.