RBI 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.
About:
PCE is a mechanism through which a bond issuer attempts to improve its debt or credit worthiness 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.
Recent notification:
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 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 exposure of a bank by way of PCEs to bonds issued by each such NBFC-ND-SI/HFC shall be restricted to one percent of capital funds of the bank within the borrower exposure limits.
Comment:
The move comes in the aftermath of Global ratings agency Moody's recent report that had warned that non-banking financial companies (NBFCs) may be impacted significantly if the liquidity situation, triggered by IL&FS default, continues to remain tight.
Dear Student,
You have still not entered your mailing address. Please enter the address where all the study materials will be sent to you. (If applicable).
