The new Reserve Bank of India’s (RBI) latest directives will help corporates to raise cheaper funds and gain more efficient access to capital markets. The RBI’s non-fund based credit facilities directions, 2025, particularly the provisions around partial credit enhancement (PCE), aim to improve the credit ratings of corporate bonds. This enhancement enables corporates/special purpose vehicles (SPVs) and even municipal bodies to tap into the bond market at more favorable terms, effectively lowering their cost of borrowing.
The final directive, issued on August 6, will come into effect from April 1, 2026. These directions consolidate and harmonise the regulatory framework for non-fund based (NFB) instruments such as guarantees, letters of credit, and co-acceptances across regulated entities (REs), including banks, cooperative banks, All India Financial Institutions (AIFIs), and NBFCs/HFCs in the middle layer and above.
A New Framework for Cheaper Capital
The framework aims to enhance credit intermediation, improve governance, and broaden funding avenues, especially for infrastructure financing. The final guidelines have also expanded eligibility by permitting PCE for bonds issued by non-deposit taking NBFCs with an asset size of Rs 1,000 crore and above. This marks a significant expansion from the draft guidelines issued in April 2025, which did not include municipal bonds under the PCE ambit. Additionally, the maximum credit enhancement limit has been raised to 50% of the bond issue size, up from 20% proposed earlier.
Strategic Push to Deepen India’s Bond Market
“This will boost the credit rating of the borrower. By allowing regulated entities to provide (partial) credit enhancement up to 50% of the bond issue size, the RBI enables issuers to achieve higher credit ratings, which directly translates into lower interest rates on bonds,” says a banker of a domestic bank. He stated that the RBI’s move can also be viewed as a strategic push to deepen India’s corporate bond market, reduce dependence on bank credit and make infrastructure and long-term financing more accessible and cost-effective for borrowers.
“By enabling corporates to refinance existing debt through credit-enhanced bonds, the guidelines help free up bank limits and shift funding reliance toward market-based instruments,” he adds. The capital requirements for REs remain unchanged from the draft norms. For a scheduled commercial bank providing Rs 50 crore PCE to a BBB-rated bond, it must maintain Rs 4.5 crore in capital (based on 100% risk weight and 9% capital to risk-weighted assets ratio (CRAR)). Further, the aggregate PCE exposure of any RE is capped at 20% of its tier 1 capital, and individual exposures to NBFC/HFC bonds are limited to 1% of the RE’s capital funds.
The RBI directives also introduce stringent operational controls for electronic guarantees and mandate detailed disclosures. By repealing over 78 legacy circulars in respect of scheduled commercial banks and 13 urban cooperative banks, the RBI has created a unified, forward-looking framework that supports market development and financial stability.