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New RBI window for NBFCs unlikely to improve their credit: Report

On November 2, RBI had allowed banks to provide PCE for debt raised by non-deposit-taking systematically important NBFCs

Press Trust of India  |  Mumbai 

Representative image
Representative image

The partial enhancement (PCE) facility by the Reserve Bank of India's (RBI) for non-bank lenders is unlikely to have the desired impact of increasing flow to the troubled sector, a report said Friday.

On November 2, had allowed banks to provide PCE for debt raised by non-deposit-taking systematically important non-banking financial companies (NBFCs) and companies (HFCs).

"The issuance volumes for NBFCs/HFCs under the PCE framework are likely to remain muted," domestic rating agency Icra said in the note.

enhancement is a tool typically aimed at improving credit worthiness of a borrower, in this case the The move came amid a strong pitch for many, including its central board members, to increase the credit supply to the troubled sector.

and HFCs are facing a crisis of confidence following the default by IL&FS since late-August, which led to its takeover by the government last month. This, in turn, led to a liquidity crunch for the sector, which has a credit demand of around Rs 1 trillion to redeem their debt obligations in November.

It can be noted that even in immediate reactions, analysts were doubtful about the impact which can be created through the new regulations.

Icra drew parallels between the corporate sector and the and voiced its fears of the non-bank lenders also not issuing any PCE-backed debt instruments like the corporate sector, which has not been able to raise any debt despite the same facility being around for three years.

Additionally, it said the guidelines on PCE state that the drawn PCE facility would become payable within a period of 30 days, which is a "restriction".

"This restriction makes the nature of PCE facility akin to a liquidity facility (providing only a liquidity cushion of 30 days) rather than a genuine long-term first loss credit enhancement facility," it said.

In the absence of any significant rating enhancement, the cost savings to the issuer may not be significant.

Although PCE debt structures have the potential to help issuers reach out to a wider set of investors like those who would be unable or unwilling to invest in their stand-alone debt; "in reality", in the absence of any significant rating enhancement, this benefit is unlikely to be achieved in a big way, the agency said.

First Published: Fri, November 16 2018. 17:00 IST