(Bloomberg) -- A key test is looming for one of India’s recent steps to help its shadow banking sector.
The non-banking financing companies help keep one of the world’s fastest-growing economies humming, but were at risk of seizing up after landmark defaults last year by one of their own, IL&FS Group.
Authorities stepped in with measures to get more liquidity to the NBFCs, including a step targeting an esoteric corner of the credit market: so called partial credit enhancement facilities. These are credit lines that banks offer NBFCs that are looking to roll over bonds. With that extra backing, the theory goes, the non-bank financiers can win over reassured bond investors and issue notes at lower yields.
Policy makers may soon see if it actually works in practice. PTC India Financial Services Ltd., a large lender to the power sector, this week became the first NBFC to get a partial credit enhancement facility, more than two months after the central bank allowed such arrangements for NBFC bonds in November.
Read more about the Reserve Bank of India’s move on the special notes here
PTC India Financial Services got the facility from State Bank of India to raise up to 20 billion rupees ($284 million) of bonds, without saying when it will offer them. Observers will be closely watching to see if it helps the NBFC cut its borrowing costs in the debt market.
“This will enhance the credit ratings of the bonds issued by the non-banks,” according to Krishnan Sitaraman, senior director at rating firm Crisil. “We would see more of such issuance via partial credit enhanced bonds if the cost saving for the issuer through the interest cost reduction is higher than the fee he has to pay the banker.”
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