The Indian government’s plan to allow the National Bank for Financing Infrastructure & Development (NaBFID) to set up a partial credit enhancement (PCE) facility for infrastructure corporate bonds may face resistance from the Reserve Bank of India (RBI). RBI has strict capital norms and investment regulations for these instruments, which makes it challenging for banks and non-banking financial companies (NBFCs) to offer PCE. Despite RBI allowing banks to offer PCE on bonds issued by corporate entities and special purpose vehicles (SPV) of infrastructure projects in September 2015, no transactions have been completed on these instruments due to the high capital and risk weight requirements.
Bankers and analysts have expressed concerns that the costs savings for issuers from PCE are not enough to make these instruments viable. Even with an enhanced credit rating, issuers may not be able to access long-term investors like insurance and pension funds, who demand a premium for investing in high-risk infrastructure projects. Additionally, the lack of liquidity in these instruments means that banks and NBFCs may not be able to issue these bonds at competitive rates.
To make PCE effective, RBI would need to relax its capital and risk weight criteria for these instruments. Currently, banks and NBFCs are required to set aside 100% of the bond amount as capital, which makes them unviable. The risk weightage for these instruments is also higher, making them more expensive than bank loans. Unless these regulatory hurdles are addressed, it is difficult to see PCE instruments taking off.