Suggested rules on partial credit enhancement can help infra companies

MUMBAI: The central bank's draft guidelines on Wednesday sought to incentivise more bond issues for long-gestation infrastructure projects and boost their ratings, allowing the proceeds of money raised from credit enhanced bonds to pay off bank loans.

"Infrastructure companies can, for example, improve their rating by several notches, raise money from the market and pay off bank loans from the proceeds, which will free up bank limits for them for new greenfield projects. Bullet repayment from bond payments will also allow more leeway in cash flows," said Monika Kalia, deputy managing director, NaBFID.

These guidelines on non-fund based credit facilities make it easier for banks, NBFCs and development finance institutions (DFIs) to provide credit enhancement, allowing infrastructure companies to improve their ratings and freeing up bank limits. Bankers said the new norms will free up limits for infrastructure financing while bringing more companies into the bond market.

Tenor of the bond issued by NBFCs/ HFCs for which PCE (partial credit enhancement) shall not be less than three years, RBI said. Regulated entities have also been asked to monitor the bonds after providing PCE for these instruments. "The total volume of guaranteed obligations of these REs outstanding at any time shall not exceed 5% of their total assets as per the previous financial year's balance sheet, out of which the unsecured guarantees shall be restricted to a maximum of 25% of the overall limit," RBI said.