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RBI for 20% credit enhancement by banks to corporate bonds

The Reserve Bank of India (RBI) plans to allow banks to provide partial credit enhancement of up to 20 per cent of the entire bond issue to help companies raise funds for infrastructure projects. Credit enhancement could also be provided by improving the rating of bonds by two notches.

The limit on partial credit enhancement will be set at whichever is lower—20 per cent credit enhancement or the funds needed to raise the rating by two notches.

Banks should adopt a board-approved policy on partial credit enhancements, covering issues such as assessment of risk and setting limits, RBI said in its draft norms released on Tuesday. For the infrastructure sector, they should set an overall exposure limit. This would cover direct exposure (fund-based limit) and non-fund-based exposure to companies, including non-banking financial companies, the central bank said.

The exposure limits will also take into account indirect exposures—sponsoring infrastructure debt funds and partial credit enhancements. The arrangement of banks providing partial credit enhancement to corporate bonds would be reviewed after two years, RBI said.

Currently, India’s corporate bond market lacks sufficient depth and liquidity. Therefore, companies have to depend on bank financing for infrastructure projects.

Banks are being allowed to provide partial credit enhancements to bonds issued to fund infrastructure projects by companies and special purpose vehicles.

A deep and liquid corporate bond market could provide an alternate source of financing companies, RBI added.

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