The National Bank for Financing Infrastructure and Development (NaBFID) has sought the RBI’s nod to increase the exposure limit under the partial credit enhancement facility to 50% of the bond issue size, according to sources. As per existing norms, credit enhancement can be provided by the financial institutions for only up to 20% of the bond issue size.
“There has been multiple communications between the RBI and NaBFID regarding partial credit enhancement facility and an encouraging sign is that there is no major objection from the banking sector regulator to it,” said a source.
Finance minister Nirmala Sitharaman said in her last Budget speech that NaBFID will set up a partial credit enhancement facility for corporate bonds in the infrastructure sector. The objective behind partial credit enhancement facility is to enhance the credit rating of the bonds issued so as to enable corporates to access the funds from the bond market on better terms.
NaBFID has also requested the Reserve Bank of India (RBI) to reduce risk weight requirements. As per current norms, even if an entity is providing credit enhancement for 20% of the bond issue size, the exposure of the guaranteeing entity will be treated for the entire 100% bond size. NaBFID has requested the RBI to keep risk weights equal to the level of exposure of the guaranteeing entity. The RBI had first allowed banks to provide partial credit enhancement to bonds issued by corporate entities and special purpose vehicles for funding projects in 2015. But this product could not become popular due to the 20% cap on credit enhancement.
Market participants say that due to the cap, the savings from rating upgrade due to credit enhancement is not significantly higher than the premium a company currently pays to the guaranteeing entity. NaBFID is expected to launch its new partial credit enhancement facility from next month. This facility will help lower-rated companies lower their cost of borrowing by getting rating upgrade to their bond issuances.
The credit enhancement facility contributes to the overall development of the corporate bond market by encouraging more issuers to raise funds through bonds rather than relying solely on bank loans. The bond market is dominated by highly rated issuers. At present, around 75% of bond issuers are rated AAA, and more than 90% of the issuances are by entities rated AA and above.