Bankers said the new norms remove legacy bottlenecks in financing, giving a boost to the local corporate bond market as new issuers can access long-term funds from insurance and pension funds with support from bank-led credit enhancements which could improve ratings by several notches.
Rajkiran Rai, managing director at the National Bank for Financing Infrastructure and Development (NaBFID), said the draft guidelines reduce costs for providing PCE and make it commercially viable for both issuers and investors.
“The changes proposed reduce costs for providing a PCE by half and make it commercially viable for issuers to take a PCE, possibly channelling more than Rs 110 lakh crore of pension and insurance funds into infrastructure investment. It will free up bank credit lines and move a lot of fundraising to the bond market, so the benefits are multifold,” said Rai, who championed the changes through representation from NaBFID, a DFI formed to support infrastructure projects.
PCE has been allowed in India since September 2015 but restrictive capital and investment rules made the instrument a non-starter.
In draft guidelines, the RBI has reduced capital requirements for financial institutions. For example on a bond issuance of Rs 100 crore capital requirements which would earlier work out to Rs 6.3 crore is now proposed to be lowered to Rs 1.8 crore.Banks, NBFCs and DFIs can now provide a PCE up to 50% of the bond issue, an increase from 20% earlier. Moreover, proceeds of money raised from the credit enhanced bonds have been explicitly allowed to be used to pay off bank loans.“Going up to 50% of PCE allows us to potentially enhance credit ratings by two notches, making a BBB bond an AA. This could be a game changer, for renewable projects for example. In fact, we already have a pipeline ready to introduce this product after the guidelines are finalised, likely in June,” Rai said.
The draft guidelines are open for comments till May 12.
India’s pension and insurance funds are growing at a faster clip than bank deposits, at more than 20%, as savers are moving towards more sophisticated instruments. But rating restrictions means that a large part of the funds end up investing in lower yielding government securities. A PCE can enhance ratings for infrastructure investments, allowing these funds to earn 2-3 percentage points higher than government bonds over the 20-year to 30-year long gestation period of these projects, Rai said.
A PCE provided by a bank or a DFI like NaBFID allows the credit rating of an infrastructure owning special purpose vehicle (SPV) to be enhanced by a notch or two backed by the guarantee provided by the bank or the DFI.
A higher rating also means lower rates for these projects, making it a better option for these infrastructure SPVs.
Sachin Gupta, chief ratings officer at Care Ratings, said PCE will free up bank balance sheets and make more funds available for infrastructure developers.
“Currently, infrastructure projects in India, be it renewables, ports or airports, are rated around A. If these projects can be provided a credit enhancement, then ratings could possibly improve to AA+ which will lower cost of borrowing and also make a whole lot of long-term money available for investments,” Gupta said.
More importantly, the new norms allow proceeds of money raised from the credit enhanced bonds to pay off bank loans, which will free up bank limits for companies from new greenfield projects. Bullet repayment from bond payments will also allow more leeway in cash flows, bankers said.
It will also prevent banks from holding on to projects for a long time, freeing up resources and funds to support greenfield projects for which banks have developed specialised appraisal capabilities over the years.
