PARTIAL CREDIT ENHANCEMENT (PCE)

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.