RBI lets more leverage for companies with partial credit enhancement

MUMBAI: To help companies raise more resources, the Reserve Bank today allowed banks to provide partial credit enhancement (PCE) up to 20 per cent of the issue size of the bonds for specific projects.

"It has been decided to allow banks to provide PCE to bonds issued by corporates/special purpose vehicles (SPVs) for funding all types of projects," the Reserve Bank said in a notification.

However, the central bank said the higher limit is subject to certain conditions like aggregate PCE provided by all banks for a given bond issue shall be limited to 20 per cent of the bond issue size.

A PCE enhances the credit rating of bonds and hence enables corporates to raise more resources from the bond market on better terms.

"To begin with, banks can 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," the RBI notification added.

A view on allowing the PCE as a funded loan facility will be taken in due course after reviewing the implementation and performance of the contingent PCE offered by banks.

In the monetary policy review in October 2013, the RBI had first proposed to allow banks to offer PCE to corporate bonds with a view to enable long-term investors like insurance and provident/pension funds to invest in bonds.

The PCE facility can be provided at time of the bond issue and will be irrevocable, it said.

Banks may offer PCE only in respect of bonds whose pre-enhanced rating is BBB minus or better, it said, adding that PCE cannot be provided by way of guarantees.