After the conflict between the government and the Reserve Bank of India on the issue of providing liquidity to the non-banking financial companies or NBFCs, the RBI on Friday allowed banks to provide a lifeline to some of the NBFCs through the partial credit enhancement (PCE) route.

In a notification issued on Friday, the RBI said it will allow banks to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the RBI and housing finance companies (HFCs) registered with National Housing Bank. Partial Credit Enhancement as the term itself denotes enhances the credit rating of bonds, and hence, enables corporates to raise more resources.

In September 2015, the RBI had come out with guidelines on PCE, allowing banks to provide PCE to bonds issued for projects. “To begin with, banks can provide PCE to a project as a non-funded subordinated facility in the form of an irrevocable contingent line of credit which will be drawn in case of shortfall in cash flows for servicing the bonds,” the RBI had said.

The latest RBI move is aimed at improving liquidity in the sector amid complaints from the NBFC sector about a squeeze in funds in the sector in the wake of defaults by the IL&FS group. The liquidity squeeze faced by NBFCs has led to a conflict between the government and the Reserve Bank of India, with the Finance Ministry pushing for easier fund flows while the RBI insists there’s enough money available in the system.

The RBI has said the tenor of the bonds issued by these NBFCs and HFCs for which PCEs are provided should not be less than three years. “The proceeds from the bonds backed by PCE from banks will only be utilized for refinancing the existing debt of the NBFC-ND-SIs and HFCs,” the RBI said.

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The exposure of a bank by way of PCEs to bonds issued by each such NBFC-ND-SI or HFC should be restricted to one percent of capital funds of the bank within the existing single/ group borrower exposure limits. The exposure of banks to these firms by way of PCEs should be within the aggregate PCE exposure limit of 20 percent, the RBI said in the notification.

The RBI which was under pressure from the government to open a special liquidity window for NBFCs and housing finance companies resisted such a move on fears that such a facility was likely to be misused. Once a special window or dispensation to provide liquidity is opened, the RBI may have to provide liquidity to all companies approaching the central bank for funds.

Several corporates, mutual funds, and insurance companies had invested in short-term instruments such as commercial papers (CPs) and non-convertible debentures (NCDs) of the IL&FS group that has been defaulting on payments since August. This has stoked fears that many of them could have funds stuck in IL&FS debt instruments which, in turn, could lead to a liquidity crunch in their own backyard. Liquidity conditions had tightened, with a deficit of Rs 1.37 lakh crore on October 22, 2018, though this has declined since. There are rising fears that the funding cost for NBFCs will zoom and result in a sharp decline in their margins.

The RBI said it will allow banks to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the RBI and housing finance companies (HFCs) registered with National Housing Bank

The liquidity squeeze faced by Non-Banking Financial Companies (NBFCs) has led to a conflict between the government and the Reserve Bank of India, with the Finance Ministry pushing for easier fund flows while the RBI insists there’s enough money available in the system.
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Source: – indianexpress.com

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