Context:
While announcing the facility of Partial Credit Enhancement (PCE) under the Union Budget 2025-26, this might facilitate low rated companies to better the rating and, thus upgrade it for such institutional investors which, hitherto, generally have been going in for AAA rated or better rated bonds.
Partial Credit Enhancement (PCE)
Partial Credit Enhancement (PCE) is a facility that allows banks to upgrade the credit rating of bonds issued by some companies. This way, these companies can raise funds from the bond market and from investors like pension funds and insurance companies.
- How it works?
- Banks offer PCE for bonds issued by non-banking financial companies (NBFCs) and housing finance companies (HFCs).
- PCE is an unfunded subordinated facility, a line of credit that gets drawn if the company has cash flow issues.
- PCE enhances the credit rating of the bond, which makes it more attractive to investors.
- This allows the company to raise funds at a lower yield.
- Benefits
- PCE enables companies to access funds from the bond market on better terms.
- PCE makes bonds more attractive to investors who can use them as a long-term investment.
- PCE can help democratize the corporate bond market.
- Introduced by
- The Reserve Bank of India (RBI) introduced the PCE program in 2015.
Key Highlights:
Effects on Lower Rated Bonds
- Raises credit ratings so that lower rated infrastructure companies can raise long term funds.
- Makes the bonds more attractive to pension funds & insurance companies as they are otherwise restricted from investing in lower rated securities.
- Helps open up more diversified investment channels as government bond issuance slows with fiscal consolidation.
Role of NaBFID
- NaBFID will establish the PCE facility.
- Offers credit enhancement to corporate infrastructure bonds, thereby making them more attractive to institutional investors.
Challenges & Concerns
- Regulatory Barriers
- The present RBI guidelines insist on full capital commitment for the entire value of the bond and not merely for the guaranteed part, thus going against the commercial viability of PCE.
- Credit rating methodologies need reforms, development of secondary market and flexible structures for bonds.
