Final norms on non-fund credit a boost to infra companies

MUMBAI: The central bank's final guidelines on non-fund based credit facilities would permit regulated entities such as banks, alternative investment funds, non-bank lenders and development finance institutions to provide credit enhancement, helping infrastructure companies to improve their ratings while freeing up bank limits for these companies.

All regulated entities have been allowed to provide partial credit enhancement (PCE) to bonds issued by corporates/ special purpose vehicles (SPVs) for funding all types of projects and to also bonds issued by non-deposit taking NBFCs with asset size of ?1,000 crore.

The RBI has permitted regulated entities to also provide credit enhancement support to municipal bonds in the final guidelines, marking a change from the draft guidelines issued in April.


Capital requirements for regulated entities (REs) have also not been changed from the April draft norms. Similarly, REs can provide a credit enhancement limit of 50% of the bond issue from 20% earlier. The proceeds of money raised from the credit enhanced bonds to pay off bank loans.

The new norms are expected to free up limits for infrastructure financing and bring more companies into the bond market. REs have to ensure that the cash flows of the project assets created out of the bond issue which has been provided a PCE are ring-fenced through an escrow account mechanism administered under a bond trustee arrangement.

"The manner in which the project cash flows would be shared for servicing loans, if any, and the bonds and PCE, shall be decided and agreed upon before the issue of bonds and shall be properly documented," the RBI said.

To be eligible for PCE, corporate bonds shall be rated by a minimum of two credit rating agencies. The guidelines say that so long as the loan exposure to a project is classified as standard and the borrower is not in any financial distress providing a PCE to enhance the rating of a bond issue, would not amount to restructuring.