Partial credit enhancement: A bold new step forward

By Sawant Singh, Kartikeya Singh and Aditya Bhargava, Phoenix Legal

Noting that the lack of depth and liquidity in India’s corporate bond market is leading to “significant dependence on bank financing”, the Second Quarter Review of Monetary Policy 2013-14 by the Reserve Bank of India (RBI) proposed the issuance of guidelines to allow banks to offer partial credit enhancements (PCEs) to corporate bonds by way of credit facilities and liquidity facilities.

Sawant Singh
Sawant Singh

On 20 May 2014, the RBI issued draft guidelines allowing banks to provide PCEs to corporate bonds issued by companies and special purpose vehicles (SPVs) for financing infrastructure projects. The circular accompanying the draft guidelines notes that this is an initial measure. Presumably based on the success of the final guidelines, the RBI will expand the ambit of such PCEs to sectors other than infrastructure.

Why this measure?

The draft guidelines note that bond financing rather than bank financing should be the “natural choice” for fund raising in the infrastructure sector because insurance companies and pension funds with long-term liabilities are more suited to provide financing to the sector than banks, which are exposed to liquidity risks due to asset-liability mismatches. However, regulations require insurance companies and pension funds to invest in highly rated instruments, and bonds issued by infrastructure companies and SPVs do not normally get high ratings due to risks at various stages of the implementation of the project.

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Sawant Singh is a partner, Kartikeya Singh is a counsel, and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.


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