PCE was introduced in 2015 to help NBFCs and HFCs raise capital from insurance and provident or pension funds, which invest only in highly-rated instruments. The RBI allowed the banks to provide PCE to NBFC bonds earlier this month.
The Reserve Bank of India’s (RBI) move to allow banks to provide partial credit enhancement (PCE) to NBFCs and HFCs bonds may not get sufficient interest from the banks, given the prevailing tight liquidity conditions. According to a report by India Rating and Research, the move is unlikely to have the desired impact as the banks right now are highly selective about providing additional lending or even renew their existing facilities to NBFCs (non-banking finance companies) and HFCs (housing finance companies).
“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. Therefore, PCE-backed bond issuances by NBFCs and HFCs will take time to take off, it added.
PCE was introduced in 2015 to help NBFCs and HFCs raise capital from insurance and provident or pension funds, which invest only in highly-rated instruments. The central bank then allowed the banks to provide PCE to NBFC bonds earlier this month.
The RBI allowed the banks to provide PCE as a non-funded subordinated facility in the form of a contingent line of credit, which can be used at the time of shortfall in cash flows to service the bonds and hence improving the credit rating of the bond issue. According to the norms, the minimum debt maturity period of these bonds shall not be less than three years. Also, the proceeds from them can only be utilized to refinance existing debt.
However, the agency is of the view that the long-tenor PCE-backed bonds will provide “adequate time to recover from any cash flow shortfall arising from non-performing loans or asset-liability tenor mismatch”.
It may be noted that subsequent to several defaults by the infrastructure lender Infrastructure Leasing & Financial Services (IL&FS) on its short-term debt obligations, the NBFCs in the country are facing a liquidity crunch. To ease the situation, the central bank has injected liquidity into the system through a series of open market operations (OMO). It has also given certain incentives to banks to allow the flow of funds to NBFCs.