The Reserve Bank on Friday permitted banks to provide partial credit enhancement (PCE), or a partial guarantee, to bonds issued by systematically important NBFCs and Housing Finance Companies, a move that will enhance their liquidity position.
“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 RBI said in a notification.
It further said 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.
Banks should introduce appropriate mechanisms to ensure that the end-use condition is met. “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 extant single/group borrower exposure limits,” the notification said.