The Reserve Bank of India's (RBI) move to allow partial credit enhancement (PCE) to bonds issued by non-banking finance and housing finance companies may not generate interest from banks due to the tight liquidity, says a report.
According to a report by India Rating and Research, the RBI circular comes at the time when the overall NBFC sector is facing liquidity concerns and banks are highly selective about providing additional lending or renew their existing facilities.
"There may not be any sufficient interest from banks, as a 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," the report said.
It expects that PCE-backed bond issuances by NBFCs and HFCs, which are subordinated instruments for banks, will take time to take off.
The report said the move is likely to improve funding access for entities rated IND A or lower.
RBI has said the proceeds from the bonds backed by PCE from banks should only be utilised for refinancing the existing debt of the NBFC-ND-SIs/HFCs.
The report said 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 guidelines on PCE extended to NBFCs/HFCs for bonds issuances require a minimum debt maturity period of three years.
"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," it said.
The PCE exposure of an individual bank to any bond issued by each entity is limited to 20 per cent of the issuance amount, with a cumulative total PCE exposure of 50 per cent of issue size provided by multiple banks.
The agency expects such enhancement levels may improve the ratings of the PCE-enhanced bonds by at least two-to-three notches above the standalone issuer rating.