The Reserve Bank of India’s recent guidelines allowing banks to offer partial credit enhancement (PCE) to corporate bonds need a relook and some tweaking, say banking and infrastructure financing experts.
The main utility of a PCE is to enable corporate bonds get higher credit ratings, which help attract investments from insurance and pension funds.
India’s infrastructure financing needs are estimated at about $1 trillion over the next five years and a vibrant and deep corporate bond market is considered crucial for meeting this requirement.
“It will be difficult for this product (PCE) to take off unless the RBI’s recently issued guidelines are modified,” SB Nayar, Chairman and Managing Director of India Infrastructure Finance Company (IIFCL), told BusinessLine . An existing stipulation in the guidelines — issued in late September — that caps the aggregate PCE provided by banks for a bond issue to 20 per cent of the issue size, can be a dampener.
At an aggregate exposure level of 20 per cent of the issue size, banks cannot easily make the bonds investment grade for pension and insurance companies/funds to look at it, sources said. This is more so when the banks themselves don’t enjoy AAA rating. If the objective is to create a deep corporate bond market to help fund India’s infrastructure needs, there has to be a better understanding of what investors are looking for, said Nayar.
Currently, most infrastructure bonds enjoy a credit rating of BBB or above and very few are at A level. Pension monies — say, from the National Pension System — flow into corporate bonds that have minimum AA rating.
It is here that PCE by banks is expected to play a role in taking the credit rating a few notches up to help corporate bonds become investment grade.
However, some bankers felt that the PCE in the current form may end up a non-starter among banks.
It would have been better if the RBI had allowed banks to offer PCE in the form of guarantees rather than only as “non-funded irrevocable contingent line of credit”, they feel.
The current RBI guidelines prohibit banks from providing PCE by way of guarantee and stipulate that banks may offer PCE only in respect of bonds with pre-enhanced rating of BBB- or better.
Stating that allowing banks to offer PCE was a “good beginning”, RV Verma, Member of the Pension Fund Regulatory and Development Authority said he was “optimistic” of its success, adding that the RBI had taken a “calibrated approach”.
“It (PCE by banks) may attract attention of other investors to the bonds issued by infrastructure companies,” Verma said.
As on date, pension monies of ₹7,000 crore are already invested in the Indian infrastructure space. This is not much considering the ₹1 lakh crore of overall assets under management of the NPS.