RBI allows partial credit enhancement in corporate bonds

By: | Updated: September 25, 2015 12:51 AM

RBI has been pushing for the need to develop the corporate bond market to take some load off banks, which are already facing a lot of stress from infrastructure loans.

The Reserve Bank of India on Thursday has allowed banks to provide partial credit enhancement (PCE) to bonds issued by corporates/special purpose vehicles (SPVs) for funding all types of projects, subject to guidelines.

The RBI has been pushing for the need to develop the corporate bond market to take some load off banks, which are already facing a lot of stress from infrastructure loans.

Due to greater asset-liability mismatch in infrastructure and project financing, banks are exposed to liquidity risk.

The insurance and provident/pension funds, whose liabilities are long term, may be better suited to finance such projects, RBI said.

However, the regulatory requirement for insurance and provident/pension funds is to invest in bonds of high or relatively high credit rating. Bonds issued for funding projects by corporates/SPVs do not necessarily get high ratings from credit rating agencies (CRAs), because of the inherent risk in the initial stages of project implementation.

The objective behind allowing banks to extend PCE is to enhance the credit rating of bonds issued so as to enable corporates to access the funds from the bond market on better terms, RBI said in a release.

Banks can now provide PCE to a project as a non-funded subordinated facility in the form of an irrevocable contingent line of credit, which will be drawn in case of shortfall in cash flows for servicing the bonds and, thereby, improve the credit rating of the bond issue.

The aggregate PCE provided by all banks for a given bond issue shall be limited to 20% of the bond issue size and the PCE facility shall be provided at the time of the bond issue and will be irrevocable. Banks may offer PCE only in respect of bonds whose pre-enhanced rating is  BBB-minus or better.

Banks cannot provide PCE by way of guarantee and those providing PCE to bonds issued by a corporate/SPV will not be eligible to invest in those bonds, RBI said. “They can, however, provide other need-based credit facilities (funded and/or non-funded) to the corporate/SPV,” the regulator added.

RBI also said that so long as the exposure of a bank to a project loan is classified as standard and the borrower is not in any financial distress, providing a commercially priced PCE to enhance the rating of a bond issue, whose proceeds replace, in whole or in part, the bank’s project loan, would not amount to restructuring.

Banks should also have a board-approved policy on PCE, covering issues such as quantum of PCE, underwriting standards, assessment of risk, pricing, setting limits, etc. “In the event of the project failure/bankruptcy, in terms of repayment priority, the PCE must rank below the claims of the enhanced bond holders,” the central bank said.

PCE exposure to a single counterparty or group of counterparties shall not exceed 5% of the bank’s single borrower/group borrower limit to the counterparty to whom the PCE is provided. The aggregate PCE exposure of a bank shall not exceed 20%of its Tier-1 capital.

Fema norms relaxed

RBI on Thursday said that no proceedings shall lie under the Foreign Exchange Management Act (Fema) against a declarant with respect to an asset held abroad for which taxes and penalties under the provisions of Black Money Act have been paid.

It added that a declarant will not require any permission under Fema to dispose of the asset that has been declared and an individual can bring back the proceeds to India through banking channels within 180 days from the date of declaration.

“In case the declarant wishes to hold the asset so declared, she/he may apply to the Reserve Bank of India within 180 days from the date of declaration,” it said, adding that RBI will deal with such applications as per extant regulations.

“In case such permission is not granted, the asset will have to be disposed of and proceeds brought back to India,” RBI said.

By fe Bureau

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