To help non-banking finance companies (NBFCs) and housing finance companies (HFCs) tide over any liquidity problems they may face due to their short-term debt, the Reserve Bank of India on Friday threw them a lifeline by allowing banks to provide partial credit enhancement (PCE) to bonds issued by the companies.
Once banks extend PCE to the bonds, the bonds’ credit rating will be enhanced, enabling the companies to access funds from the bond market on better terms. This move may enthuse long-term providers of funds such as insurance and pension/ provident funds and others to invest in such PCE-backed bonds.
According to market reports, in the three months from October 2018, NBFCs and HFCs together are up against redemption pressure of ₹1.20-lakh crore due to maturing financial instruments. But the fallout of the IL&FS financial crisis has hit liquidity available to NBFCs. It is in this context that the RBI’s latest move gains significance.
The RBI has specified that banks can provide PCE only to bonds issued by the “systemically important non-deposit taking non-banking financial companies” registered with the RBI, and by HFCs registered with National Housing Bank.
The proceeds from the bonds, whose tenor cannot be less than three years, backed by PCE from banks can only be utilised for refinancing the existing debt.
The defaults on debt obligations by the debt-laden IL&FS and some of its subsidiaries has had a cascading impact on the financial sector. Mutual funds that have exposure to the IL&FS Group have been selling commercial papers and non-convertible debentures of NBFCs and HFCs in the secondary market in order to meet redemption pressures.
Watch on rating
Saravana Kumar, CIO, LIC Mutual Fund, said: “Under the current situation, we want to be careful (when it comes to investing in NBFC and HFC debt).…Earlier, we might have gone only by seeing the credit rating agency’s rating — whether it is ‘AAA’ or ‘AA+’ — and would have invested money.”
But now, he said, “we are also trying to find out the cash-flow of NBFCs and HFCs and making a re-assessment of the ratings to see if they they are proper, and trying to figure out their debt repayment commitment over the next one year and accordingly taking an investment decision.”