RBI allows banks to provide partial guarantee to NBFC bonds

Proceedings to be used only for refinancing existing debts

November 02, 2018 09:50 pm | Updated 09:54 pm IST - Mumbai

KARNATAKA - BENGALURU - 02/01/2017 :  Large number of policemen posted outside Reserve Bank of India (RBI) on  Nrupathunga Road, in Bengaluru on January 02, 2017. After protests from the many people who had come to RBI for exchanging of banned old Rs 500 and Rs 1000 currency notes, and was turned away, by saying at the RBI had not received any communication from their head office to exchange old notes.   Photo: K. Murali Kumar.

KARNATAKA - BENGALURU - 02/01/2017 : Large number of policemen posted outside Reserve Bank of India (RBI) on Nrupathunga Road, in Bengaluru on January 02, 2017. After protests from the many people who had come to RBI for exchanging of banned old Rs 500 and Rs 1000 currency notes, and was turned away, by saying at the RBI had not received any communication from their head office to exchange old notes. Photo: K. Murali Kumar.

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.

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