Partial credit enhancement to improve funding for smaller NBFCs/HFCs in medium term

MUMBAI: The Reserve Bank of India’s (RBI) guidelines, issued on 2 November 2018, allowing partial credit enhancement (PCE) to bond issuances by non-banking financial companies (NBFCs) and housing finance companies (HFCs), is likely to improve funding access for entities rated ‘IND A’ or lower, says India Ratings and Research (Ind-Ra).

The guidelines on PCE extended to NBFCs/HFCs for bonds issuances require a minimum debt maturity period of three years. The long tenor PCE-backed bonds will provide adequate time to the issuer to recover from any cash flow shortfall arising from non-performing loans or asset-liability tenor mismatch, according to the rating agency.

The purpose of PCE bonds issued is to refinance any existing debts of NBFCs/HFCs. This has the potential of reducing refinancing risk for issuers, given insurance/mutual funds may be able to participate in the offerings with enhanced ratings.


The PCE exposure of an individual bank to any bond issued by each entity is limited to 20% of the issuance amount, with a cumulative total PCE exposure of 50% of issue size provided by multiple banks. According to the agency, this may improve the ratings of the PCE-enhanced bonds by at least two-to-three notches above the standalone issuer rating.

However, the RBI circular comes at the time when the overall NBFC sector is facing liquidity concerns and banks are highly selective to provide additional lending or renew their existing facilities. Hence, the agency expects that PCE-backed bond issuances by NBFCs and HFCs which are subordinated instruments for banks, will take time to take off.

“The agency feels that there may not be any sufficient interest from banks, as 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,” Ind-Ra said in their report.