New Delhi, Mar 5 (KNN) The National Bank for Financing Infrastructure and Development (NaBFID) has approached the Reserve Bank of India (RBI) to increase the exposure limit under the partial credit enhancement (PCE) facility to 50 per cent of the bond issue size, sources revealed.

Current norms restrict financial institutions from providing credit enhancement beyond 20 per cent of the bond size.

Discussions between RBI and NaBFID on this proposal have been ongoing, with no major objections from the banking regulator, a source stated.

Finance Minister Nirmala Sitharaman, in her last Budget speech, announced NaBFID’s plan to establish a PCE facility for corporate bonds in the infrastructure sector.

The primary objective is to improve the credit rating of such bonds, enabling corporates to raise funds in the bond market under favourable terms.

Additionally, NaBFID has requested the RBI to revise risk weight norms. Presently, even if an entity provides credit enhancement for only 20 per cent of the bond size, its exposure is considered to be the full 100 per cent.

NaBFID has proposed that the risk weight should align with the actual exposure level of the guaranteeing entity.

The RBI had first permitted banks to offer partial credit enhancement in 2015 to support project financing through corporate bonds.

However, the facility saw limited adoption due to the 20 per cent cap, as the savings from rating upgrades were not substantially higher than the premium charged by guaranteeing entities.

Market participants believe expanding the PCE limit will help lower-rated companies reduce borrowing costs through rating upgrades.

NaBFID is expected to launch its new PCE facility next month, contributing to a more developed corporate bond market by encouraging a shift from traditional bank loans to bond financing.

(KNN Bureau)