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RBI's latest move expected to enhance liquidity position of NBFCs

RBI's latest move expected to enhance liquidity position of NBFCs
(Image Credit: Twitter)

The Reserve Bank Friday permitted banks to provide partial credit enhancement (PCE), or a partial guarantee, to bonds issued by systematically important NBFCs and Housing Finance Companies, a move that will enhance their liquidity position.

Global ratings agency Moody's in a recent report had warned that non-banking financial companies (NBFCs) may be impacted significantly if the liquidity situation, triggered by Infrastructure Leasing & Financial Services (IL&FS) default, continues to remain tight.

"It has now been decided to allow banks to provide PCE to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the Reserve Bank of India and Housing Finance Companies (HFCs) registered with National Housing Bank," the RBI said in a notification.

It further 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.

For this, banks should introduce appropriate mechanisms to monitor and ensure that the end-use condition is met, it added.

"The exposure of a bank by way of PCEs to bonds issued by each such NBFC-ND-SI/HFC shall be restricted to one per cent of capital funds of the bank within the extent single/group borrower exposure limits," said the notification.

PCE is a mechanism through which a bond issuer attempts to improve its debt or creditworthiness by providing an additional comfort to the lender. It provides the bond purchaser reassurance that the borrower will honour its repayment through additional collateral, insurance, or a third party guarantee.

(With inputs from agencies.)



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