RBI Allows Partial Credit Enhancement Of NBFC Bonds

To further ease the funding strains being faced by non-bank lenders, the Reserve Bank of India has allowed banks to offer partial credit enhancement to bonds issued by some of these firms.

Credit enhancement is a facility through which a company improves its creditworthiness by securing a backing from a higher-rated entity, in this case a bank. The decision to allow banks to offer partial credit enhancement to some non-bank financial companies (NBFCs) is intended to help these firms refinance their borrowings and tide over a period of tight liquidity and risk aversion.

In a notification issued on Friday evening, the RBI said:

• Banks can provide partial credit enhancement to bonds issued by systemically important non-deposit taking NBFCs and HFCs.
• Tenor of bonds eligible for partial credit enhancement shall not be less than 3 years.
• Bonds backed by partial credit enhancement of banks shall only be used for refinancing.
• Banks should introduce appropriate mechanisms to monitor and ensure that the end-use condition is met.
• Exposure to bonds issued by these NBFCs by partial credit enhancement should be restricted to 1 percent of the bank's capital funds.

The facility of partial credit enhancement, introduced in 2015, was so far available for bonds issued for project financing. The decision to expand this to systemically important NBFCs and HFCs may aid some of these firms as they seek to refinance their borrowings over the next few months.

The provision will be helpful for smaller NBFCs which are rated below AA, said Anil Gupta, head of financial sector ratings at rating agency ICRA. Gupta explained that credit enhancement is typically used to bring the rating profile to AA or AAA. 

The decision could have a strong  “signalling” impact and help smaller retail focused NBFCs, added Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership.