Banks May Stay Away From Housing Finance Companies, NBFC Bonds Under Special Window
The Reserve Bank of India’s move to allow partial credit enhancement to bonds issued by non-banking finance and housing finance companies may not generate interest from banks due to tight liquidity, a report said.
The RBI, on Nov. 2, permitted banks to provide partial credit enhancement to bonds issued by systematically important NBFCs and HFCs, a move aimed at enhancing their liquidity position.
According to a report by India Rating and Research, the RBI circular comes at the time the overall NBFC sector is facing liquidity concerns and banks are highly selective about providing additional lending or renewing their existing facilities.
There may not be any sufficient interest from banks as a partial credit enhancement provider in the near term due to their lower desire to take standard senior exposure of NBFCs or HFCs under the prevailing market conditions.India Rating and Research report
It expects that partial credit enhancement-backed bond issuance by NBFCs and HFCs, which are subordinated instruments for banks, will take time to take-off. The report said the move is likely to improve funding access for entities rated “IND-A” or lower.
The RBI said the proceeds from the bonds backed by partial credit enhancement from banks should only be utilised for refinancing the existing debt of the NBFC-ND-SIs/HFCs.
The report said this has the potential of reducing refinancing risk for issuers, given insurance/mutual funds may be able to participate in the offerings with enhanced ratings. The guidelines on partial credit enhancement extended to NBFCs/HFCs for bonds issuance require a minimum debt maturity period of three years.
“Long tenure partial credit enhancement-backed bonds will provide adequate time to the issuer to recover from any cash flow shortfall arising from non-performing loans or asset-liability tenor mismatch,” it said.
The partial credit enhancement exposure of an individual bank to any bond issued by each entity is limited to 20 percent of the issuance amount, with a cumulative total partial credit enhancement exposure of 50 percent of issue size provided by multiple banks.
The agency expects such enhancement levels may improve the ratings of the partial credit enhancement-backed bonds by at least two to three notches above the standalone issuer rating.