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RBI for 20% credit enhancement by banks to corporate bonds

The limit on partial credit enhancement will be set at whichever is lower---20% credit enhancement or the funds needed to raise the rating by two notches

May 21, 2014 9:16 IST | India Infoline News Service
The Reserve Bank of India (RBI) plans to allow banks to provide partial credit enhancement of up to 20% of the entire bond issue to help companies raise funds for infrastructure projects. Credit enhancement could also be provided by improving the rating of bonds by two notches.
The limit on partial credit enhancement will be set at whichever is lower---20% credit enhancement or the funds needed to raise the rating by two notches.
The RBI on Tuesday released draft circular on allowing partial credit enhancements to corporate bonds and invited comments/feedback on it. It had, in its Second Quarter Review of the Monetary Policy 2013-14 announced on October 29, 2013 proposed to allow banks to offer partial credit enhancements to corporate bonds.
Indian corporate bond market is in a nascent stage of development. Therefore, there is a pressure on the banking system to fund the credit needs of infrastructure sector. Due to asset-liability mismatch in infrastructure financing, banks are exposed to liquidity risk. The insurance and provident/pension funds whose liabilities are long term, are better suited to finance infrastructure projects.
The regulatory requirement for insurance and provident/pension funds is to invest in bonds of high or relatively high credit rating. However, bonds issued for funding infrastructure projects by Companies/SPVs do not get high ratings by the credit rating agencies (CRAs), because of the inherent risk in the initial stages of project implementation.
With a view to encourage corporates to avail bond financing, it has been decided to allow banks to provide partial credit enhancements to bonds issued for funding infrastructure projects by Companies/Special Purpose Vehicles (SPVs) subject to the guidelines.
Banks should have a Board approved policy on partial credit enhancements covering issues such as permissible types of credit enhancements, assessment of risk, setting limits, etc. Banks should also have an overall exposure limit to the infrastructure sector i.e. on account of their direct exposures by way of fund-based and non-fund based exposures to companies including NBFC-IFCs, indirect exposures by way of sponsoring IDFs, partial credit enhancements, etc.
The arrangement of banks providing partial credit enhancement to corporate bonds will be reviewed after two years.
Comments/feedback on the various proposals enumerated in these guidelines may be sent latest by June 30, 2014 to RBI.


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