RBI Circular on Partial Credit Enhancement to Corporate Bonds by Banks
Infrastructure companies often face fundraising challenges because of poor credit ratings. This is largely because such companies are heavily indebted in the initial years and take several years to generate profits and repay those debts. Nevertheless, adequate funding of infrastructure companies is crucial for India’s development.
In September, 2015, the Reserve Bank of India issued a circular that allowed infrastructure companies to issue bonds (debt instruments) supported by credit enhancement through an irrevocable contingent line of credit provided by commercial banks up to a limit of 20% of the bond issue size. Such credit enhancement was intended to enable higher credit ratings for such bonds. Higher ratings are crucial for attracting investments from provident and pension funds, which are otherwise unable to invest in bonds issued by infrastructure companies because of the low credit ratings.
The circular was intended to provide an alternative source of finance for infrastructure companies, which are heavily dependent on banks for their financing requirements. Vidhi advised the RBI on certain key aspects of this circular.