To give a leg up to the infrastructure sector, the Reserve Bank of India on Tuesday issued “draft guidelines” allowing banks to provide partial credit enhancements to bonds issued for funding infrastructure projects by companies/Special Purpose Vehicles (SPVs).
The RBI plans to allow banks to provide partial credit enhancements to bonds as the regulatory requirement for insurance and provident/ pension funds is to invest in bonds of high or relatively high credit rating. Currently, bonds issued for funding infrastructure projects by companies/SPVs do not get high ratings by the credit rating agencies, because of the inherent risk in the initial stages of project implementation.
Feedback soughtThe “draft guidelines” come in the backdrop of huge credit needs of the infrastructure sector. The RBI has sought comments/feedback on the various proposals enumerated in the “draft guidelines” by June 30.
The bond market should be the natural choice for corporates to raise resources to meet the credit needs of the infrastructure sector. However, Indian corporate bond market is in a nascent stage of development. Therefore, there is a pressure on the banking system to fund the credit needs of infrastructure sector. Due to asset-liability mismatch in infrastructure financing, banks are exposed to liquidity risk. The insurance and provident/ pension funds whose liabilities are long term, are better suited to finance infrastructure projects.
The objective of allowing banks to extend partial credit enhancement is to enhance the credit ratings of the bonds raised to set up the infrastructure project so as to enable corporates to access funds from the corporate bond market.
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