A Regulation on Regulations – Rule of law checks by the Reserve Bank of India

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– Aditya Iyer, Manager (Legal) | (finserv@vinodkothari.com) 

Background

In Rajeev Suri v. Delhi Development Authority, the Supreme Court of India[1] noted that the ‘Rule of Law’ (RoL) posits four universal tenets, of which two are: (i) The laws must be just, clear, publicized, and stable; (ii) Open Government – the process by which laws are enacted, administered, and enforced are accessible, fair, and efficient. Further, it was noted that an integral part of a participatory democracy is public participation regarding decision-making (to a reasonable extent).

We have written elsewhere about how a strong RoL framework may play a role in improving investor confidence and encouraging investments in a given jurisdiction. Predictability and transparency are verily the lifeblood of the RoL.

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SEBI Securitisation Regulations: Track Record, Risk retention and Investment size among several new requirements

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– Dayita Kanodia (finserv@vinodkothari.com)

Requirements to apply to all listed issuances, from financial and non-financial issuers

Below are the major highlights of the SDI amendment regulations:

SEBI on May 5, 2025 has issued the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) (Amendment) Regulations. 2025. It may be noted that the SDI Regulations, was first notified on 26th May, 2008, after public consultation on the proposed regulatory structure with respect to public offer and listing of SDIs, following the amendments made in the SCRA. The Regulations, originally referred to as the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, were subsequently renamed as SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, w.e.f. 26th June, 2018.

In order to ensure that the regulatory framework remains in accordance with the  recent developments in the securitisation market, a working group chaired by Mr. Vinod Kothari was formed to suggest changes to the 2008 SDI regulations. Based on the suggestions of the working group and deliberations of SEBI with RBI, the amendment has been issued. The amendment primarily aims to align the SEBI norms for Securitised Debt Instruments (SDIs) with that of the RBI SSA Directions which only applies in case of securitisations undertaken by RBI regulated entities.

It can be said that these amendments are not in conflict with the SSA Directions and therefore for financial sector entities while there may be some additional compliance requirements if the securitisation notes are listed, there are as such no pain points which discourages such entities to go for listing. Further, certain requirements such as MRR, MHP, minimum ticket size have only been mandated for public issue of SDIs and therefore are not applicable in case of privately placed SDIs.

This article discusses the major amendments in the SDI Framework.

Major Changes

Definition of debt

The amendment makes the following changes to the definition of debt:

  1. All financial assets now covered – In order to align the SDI Regulations with the RBI SSA Directions, the definition of ‘debt’ has been amended to cover all financial assets as permitted to be originated by an RBI regulated originator. Further, this is subject to the such classes of assets and receivables as are permissible under the RBI Directions. Note that the RBI SSA Directions does not provide a definition of ‘debt’ or ‘receivables’, however, provides a negative list of assets that cannot be securitised under Para 6(d) of the RBI SSA Directions.
  2. Equipment leasing receivables, rental receivables now covered under the definition of debt.
  3. Listed debt securities – The explicit mention of ‘listed’ debt securities may remove the ambiguity with regard to whether SDIs can be issued backed by underlying unlisted debt securities, and limits the same to only listed debt securities. The second proviso to the definition further clarifies that unlisted debt securities are not permitted as an underlying for the SDIs.
  4. Trade receivables (arising from bills or invoices duly accepted by the obligors) – As regards securitisation of trade receivables, acceptance of bills or invoices is a pre-condition for eligibility of the same as a debt under the SDI Regulations.

‘Acceptance’, in literal terms, would mean acknowledgement of the existence of receivables. Under the Negotiable Instruments Act, 1881, ‘acceptance’ is not defined, however, ‘acceptor’ is defined to mean the drawee of a bill having signed his assent upon the bill, and delivered the same, or given notice of such signing to the holder or to some person on his behalf.

Note that a bill or invoice may either be a hard copy or in digital form. In the context of digital bill, acceptance through signature is not possible; therefore, existence of no disputes indicating a non-acceptance, should be considered as a valid acceptance.

  1. Such Debt/ receivable including sustainable SDIs as may be notified by SEBI – In addition to the forms of debts covered under the SDI Regulations, powers have been reserved with SEBI to specify other forms or nature of debt/ receivable as may be covered under the aforesaid definition. Further, the clause explicitly refers to sustainable SDIs, for which a consultation had been initiated by SEBI in August 2024[1].

Conditions governing securitisation

SEBI has mandated the following conditions to be met for securitisation under the SDI Framework:

  1. No single obligor to constitute more than 25% of the asset pool – This condition has been mandated with a view to ensure appropriate diversification of the asset pool so that risk is not concentrated with only a few obligors. However, it may be noted here that the RBI regulations does not currently prescribe any such obligor concentration condition. Only in case of Simple, Transparent and Comparable securitisation transactions, there is a mandate requiring a maximum concentration of 2% of the pool for each obligor.

However, SEBI has retained the power to relax this condition. In our view, this may be relaxed by SEBI for RBI regulated entities considering that RBI does not prescribe for any such condition.

  1. All assets to be homogenous – This is yet another provision which is only required by RBI in case of STC transactions. However, even in the context of RBI regulations, what exactly constitutes a homogenous asset is mostly a subjective test. SEBI has defined homogenous to mean same or similar risk or return profile arising from the proposed underlying for a securitised debt instrument. This has made the test of homogeneity even more subjective. For the purpose of determining homogeneity, reference can be made to the homogeneity parameters laid out by RBI in case of Simple, Transparent and Comparable securitization transactions.
  2. SDIs will need to be fully paid up-  The SDIs will need to be fully paid up, i.e., partly paid up SDIs cannot be securitised. 
  3. Originators to have a track record of 3 financial years: Originators should be in the same business of originating the receivables being securitised for a period of at least three financial years. This restricts new entities from securitising their receivables. However, this condition in our view should only apply to business entities other than business entities, complying with this condition does not seem feasible. 
  4. Obligors to have a track record of 3 financial years– The intent behind this seems to to reduce the risk associated with the transaction as the obligors having a track record in the same operations which resulted in the creation of receivables being securitized. However, this condition cannot be met in most types of future flow securitisation transactions such as toll road receivables and receivables from music royalties.

SEBI has made it clear that the last two conditions of maintenance of track record of 3 years for originators and obligors will not apply in case of transactions where the originators is an RBI regulated entity.

Amendments only applicable in case of public issue of SDIs

The following amendments will only be applicable if the SDIs are issued to the public. Here, it may be noted that the maximum number of investors in case of private placement of SDIs is limited to 50.

Minimum Ticket Size

The Erstwhile SDI Regulations did not provide for any minimum ticket size. However, with a view to align the SDI regulations with that of RBI’s SSA Direction, a minimum ticket size of Rs. 1 crore has been mandated in case of originators which are RBI regulated as well as of non-RBI regulated entities. It may however be noted that the minimum ticket size requirement has only been introduced in case of public offer of SDIs. Further, in cases with SDIs having listed securities as underlying, the minimum ticket size shall be the face value of such listed security.

Securitisation is generally perceived as a sophisticated and complex structure and therefore the regulators are not comfortable in making the same available to the retail investors. Accordingly, a minimum ticket size  of Rs. 1 Crore has been mandated for public issue of SDIs. In case of privately placed SDIs, the issuer will therefore have the discretion to decide on the minimum ticket size. However, since the RBI also mandates a minimum ticket size of Rs. 1 Crore, financial sector entities will need to adhere to the same.

Here, it is also important to note that in case of public issue of SDIs with respect to originators not regulated by RBI, SEBI has made it clear that the minimum ticket size of Rs. 1 Crore should be seen both at initial subscription as well as at the time of subsequent transfers of SDIs. However, nothing has been said for subsequent transfers in cases where the originator is a RBI regulated entity. The RBI SSA Directions also requires such minimum ticket size of Rs. 1 Crore to be seen only at the time of initial subscription. This in many cases led to the securitisation notes being broken down into smaller amounts in the secondary market.

In the absence of anything mentioned for RBI regulated entities, it can be said that there is no change with respect to the ticket size for RBI regulated entities even in the case of publicly issued SDIs which should be seen only at the time of initial subscription.

It is worth mentioning that under the SSA Directions of RBI requires that in case of transactions carried out outside of the SSA Directions (the transactions undertaken by non-RBI regulated entities), the investors which are regulated by RBI have to maintain full capital charge. This therefore discourages Banks from investing in securitisation transactions which are carried out outside the ambit of the SSA Directions.  Therefore, both retail investors as well RBI regulated entities will not be the investors which will hinder liquidity and overall growth of the SDI market.

Minimum Risk Retention

Aligning with RBI’s SSA Direction, a Minimum Risk Retention (MRR) requirement for public issue of SDIs has been mandated requiring retention by the originator of a minimum of

  1. 5% in case the residual maturity of the underlying loans is upto 24 months and
  2. 10% in case residual maturity is more than 24 months

Further, in case of RMBS transactions, the MRR has been kept at 5% irrespective of the original tenure.

SEBI has aligned the entire MRR conditions with that of the RBI SSA Directions, including the quantum and form of maintenance of MRR. Accordingly, for financial sector entities, there is no change with respect to MRR.

By introducing MRR in the SDI Regulations, non-financial sector entities will be held to similar standards of accountability, skin-in-the-game, reducing the risks associated with the originate-to-sell model and aligning their practices with those of financial sector originators. This will strengthen investor confidence across the board and mitigate risks of moral hazard or lax underwriting standards.

It may however be noted here that in case of non financial originators, there could be situations where retention is being maintained in some form (for example in leasing transactions, the residual value of the leased assets continues to be held by the originator) and therefore such originators will be required to hold MRR in addition to the retention maintained.

Minimum Holding Period

SEBI has aligned the MHP conditions as prescribed under the SSA directions for all RBI regulated entities. Accordingly, there is no additional compliance requirement for RBI regulated entities. For receivables other than loans, the MHP condition will be specified by SEBI.

Exercise of Clean up Call option by the originator

The provisions for the exercise of the clean up call option has been aligned with those prescribed under the SSA Directions. The option to exercise a clean up call has only been provided in case of public issue of SDIs. There however does not seem any reasonable justification for not providing such a clean up call option in case of private placement of SDIs.

Since, the RBI permits exercise of clean up call options, in our view for RBI regulated entities such an option will also be available even after listing of the SDIs on a private placement basis.

Other Amendments

  1. Norms for liquidity facility aligned with that of RBI regulations
  2. All references to the Companies Act 1956 has been changed to Companies Act 2013
  3. Chapter on registration of trustees has been removed and reference has been made to SEBI (Debenture Trustees) Regulations, 1993
  4. Disclosure requirements for the originator and the SPDE have been prescribed; however the disclosure formats are yet to be issued by SEBI.
  5. Public offer of SDIs to remain open for a minimum period of 2 working days and upto a maximum of 10 working days.

Amendments proposed in the SEBI(LODR) Regulations

There are primarily two regulations which govern the listing of SDIs:

  1. SEBI SDI Regulations
  2. SEBI LODR Regulations

The following amendments have been proposed in the LODR regulations:

  1. SCORES registration to be taken at the trustee level
  2. Outstanding litigations, any material developments in relation to the originator or servicer or any other party to the transaction which could be prejudicial to the interests of the investors to be disclosed on an annual basis.
  3. Servicing related defaults to be disclosed on an annual basis.

[1] Read an article on the concept of sustainable SDIs at – https://vinodkothari.com/2024/09/sustainable-securitisation-the-next-in-filling-sustainable-finance-gap-in-india

Co-Lending and loan sourcing:Draft RBI (Co-Lending Arrangements) Directions,2025

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– finserv@vinodkothari.com

Draft Co-lending PPT_finalDownload

Other Resources on the topic:

Our Resources on Co-lending

Securitisation of Stressed Assets (SOSTRA)

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Team Finserv | finserv@vinodkothari.com

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NBFC Regulatory Refresher

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RBI Updates for NBFCs- A rerun of the regulatory changes introduced during FY 24-25

– Team Finserv (finserv@vinodkothari.com)

Watch our youtube video: https://youtu.be/Vg4vFrWfzsw

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Bond Credit Enhancement Framework: Competitive, rational, reasonable

Balancing between Bling & Business: RBI proposes new Gold Lending rules

Unified framework for Non-fund based facilities, by banks and NBFCs

SOSTRA: The New shastra of liquidating Non-performing loans

Bond Credit Enhancement Framework: Competitive, rational, reasonable

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-Vinod Kothari (vinod@vinodkothari.com)

The RBI’s proposed framework for partial credit enhancement for bonds has significant improvements over the last 2015 version

The RBI released the draft of a new comprehensive framework for non-fund based support, including guarantees, co-acceptances, as well as partial credit enhancement (PCE) for bonds. The PCE framework is proposed to be significantly revamped, over its earlier 2015 version.

Note that PCE for corporate bonds was mentioned in the FM’s Budget 20251, specifically indicating the setting up of a PCE facility under the National Bank for Financing of Infrastructural Development (NaBFID).

A quick snapshot of how PCE works and who all can benefit is illustrated below:

The highlights of the changes under the new PCE framework are:

What is PCE?

Partial Credit Enhancement (PCE) is a risk-mitigating financial tool where a third party provides limited financial backing to improve the creditworthiness of a debt instrument. Provision of wrap or credit support for bonds is quite a common practice globally. 

PCE is a contingent liquidity facility – it allows the bond issuer to draw upon the PCE provider to service the bond. For example, if a coupon payment of a bond is due and the issuer has difficulty in servicing the same, the issuer may tap the PCE facility and do the servicing. The amount so tapped becomes the liability of the issuer to the PCE provider, of course, subordinated to the bondholders. In this sense, the PCE facility is a contingent line of credit. 

A situation of inability may arise at the time of eventual redemption of the bonds too – at that stage as well, the issuer may draw upon the PCE facility. 

Since the credit support is partial and not total, the maximum claim of the bond issuer against the PCE provider is limited to the extent of guarantee – if there is a 20% guarantee, only 20% of the bond size may be drawn by the issuer. If the facility is revolving in nature, this 20% may refer to the maximum amount tapped at any point of time.

Given that bond defaults are quite often triggered by timing and not the eventual failure of the bond issuer, a PCE facility provides a great avenue for avoiding default and consequential downgrade.  PCE provides a liquidity window, allowing the issuer to arrange liquidity in the meantime. 

Who can be the guarantee provider?

PCE under the earlier framework could have been given by banks. The ambit of guarantee providers has been expanded to include SCBs, AIFIs, NBFCs in Top, Upper and Middle Layers and HFCs. However, in case of NBFCs and HFCs, there are additional conditions as well as limit restrictions. 

As may be known, entities such as NABFID have been tasked with promoting bond markets by giving credit support. 

Who may be the bond issuers?

The PCE can be extended against bonds issued by corporates /special purpose vehicles (SPVs) for funding all types of projects and to bonds issued by Non-deposit taking NBFCs with asset size of ₹1,000 crore and above registered with RBI (including HFCs).

What are the key features of the bonds?

  1. REs may offer PCE only in respect of bonds whose pre-enhanced rating is “BBB minus” or better.
  2. REs shall not invest in corporate bonds which are credit enhanced by other REs. They may, however, provide other need based credit facilities (funded and/ or non-funded) to the corporate/ SPV. 
  3. To be eligible for PCE, corporate bonds shall be rated by a minimum of two external credit rating agencies at all times.
  4. Further, additional conditions for providing PCE to bonds issued by NBFCs and HFCs:
    1. The tenor of the bond issued by NBFCs/ HFCs for which PCE is provided shall not be less than three years. 
    2. The proceeds from the bonds backed by PCE from REs shall only be utilized for refinancing the existing debt of the NBFCs/ HFCs. Further, REs shall introduce appropriate mechanisms to monitor and ensure that the end-use condition is met. 

What will be the form of PCE? 

PCE shall be provided in the form of an irrevocable contingent line of credit (LOC) which will be drawn in case of shortfall in cash flows for servicing the bonds and thereby may improve the credit rating of the bond issue. The contingent facility may, at the discretion of the PCE providing RE, be made available as a revolving facility. Further, PCE cannot be provided by way of guarantee. 

What is the difference between a guarantee and an LOC? If a guarantor is called upon to make payments for a beneficiary, the guarantor steps into the shoes of the creditor, and has the same claim against the beneficiary as the original creditor. For example, if a guarantor makes a payment for a bond issuer’s obligations, the guarantor will have the same rights as the bondholders (security, priority, etc). On the contrary, the LOC is simply a line of liquidity, and explicitly, the claims of the LOC provider are subordinated to the claims of the bondholders.

If the bond partly amortises, is the amount of the PCE proportionately reduced? This should not be so. In fact, the PCE facility continues till the amortisation of the bonds in full. It is quite natural to expect that the defaults by a bond issuer may be back-heavy. For example, if there is a 20% PCE, it may have to be used for making the last tranche of redemption of the bonds. Therefore, the liability of the PCE provider will come down only when the outstanding obligation of the bond issuer comes to less than the size of the PCE.

Any limits or restrictions on the quantum of PCE by a single RE?

The existing PCE framework restricts a single entity to providing only 20% of the total 50% PCE limit for a bond issuance. It is now proposed that the sub-limit of 20% be removed, enabling single entity to provide upto 50% PCE support. 

Further, the exposure of an RE by way of PCEs to bonds issued by an NBFC/ HFC shall be restricted to one percent of capital funds of the RE, within the extant single/ group borrower exposure limits.

Who can invest in credit-enhanced bonds?

Under the existing framework, only the entities providing PCE were restricted from investing in the bonds they had credit-enhanced. However, the new Draft Directions expand this restriction by prohibiting all REs from investing in bonds that have been credit-enhanced through a PCE, regardless of whether they are the PCE provider. The draft regulations state that the same is with an intent to promote REs enabling wider investor participation.

This is, in fact, a major point that may need the attention of the regulator. A universal bar on all REs from investing in bonds which are wrapped by a PCE is neither desirable, nor optimal. Most bond placements are done by REs, and REs may have to warehouse the bonds. In addition, the treasuries of many REs make opportunistic investments in bonds.

Take, for instance, bonds credit enhanced by NABFID. The whole purpose of NABFID is to permit bonds to be issued by infrastructure sector entities, by which banks who may have extended funding will get an exit. But the treasuries of the very same banks may want to invest in the bonds, once the bonds have the backing of NABFID support. There is no reason why, for the sake of wider participation, investment by regulated entities should be barred. This is particularly at the present stage of India’s bond markets, where the markets are not liquid and mature enough to attract retail participation. 

What is the impact on capital computation?

Under the Draft Directions the capital is required to be maintained by the REs providing PCE based on the PCE amount based on applicable risk weight to the pre-enhanced rating of the bond. Under the earlier framework, the capital was computed so as to be equal to the difference between the capital required on bond before credit enhancement and the capital required on bond after credit enhancement. That is, the existing framework ensures that the PCE does not result into a capital release on a system-wide basis. This was not a logical provision, and we at VKC have made this point on various occasions2. 

Related Resources –

  1.  Union Budget 2025: Key Highlights and Reforms focusing on Financial Sector Entities ↩︎
  2. Partial Credit Enhancement: A Catalyst for Boosting Infrastructure Bond Issuances? ↩︎

Webinar on 4 new major regulations on NPL Securitisation, Co-lending, Gold lending and NFB facilities

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Balancing between Bling & Business: RBI proposes new Gold Lending rules

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– Team Finserv | finserv@vinodkothari.com

Genesis of the change

The RBI on September 30, 2024, flagged several concerns in gold lending practices of financial entities. Further, there were separate guidelines for banks and NBFCs leading to regulatory arbitrage and operational ambiguity. On April 09, 2025, the RBI introduced the Reserve Bank of India (Lending Against Gold Collateral) Directions, 2025 (Draft Directions).

 The Draft Directions intend to:

  1. Harmonise guidelines w.r.t. gold lending across all REs.
  2. Address previous observations raised by RBI in lending practices and plug any loopholes.

In this write-up, we highlight the major changes for lenders, and particularly for NBFCs (The same are subsequently elaborated in the article).

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Unified framework for Non-fund based facilities, by banks and NBFCs

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– Team Finserv (finserv@vinodkothari.com)

RBI has consolidated the regulatory framework for non-fund based facilities offered by various REs. The draft guidelines provide prudential requirements for non-fund based products being offered by Banks, NBFCs and AIFIs. This would also cover under its ambit guarantees extended by NBFCs, however restricting the exposure to just 5% of the total asset size. Non-fund based (NFB) facilities such as Guarantees, Letters of Credit, and Co-Acceptances are proposed to be governed under these guidelines. 

Additionally, the Draft Directions also provide regulations for providing partial credit support by REs to the bond issuances, including capital against the PCE norms. 

To understand the proposed provisions under the Draft Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025 (“Draft Directions”) dated April 9, 2025, the article is divided into two sections for ease of reference:

  • General compliances for issuance of NFBs
  • Specific norms for Partial Credit Enhancements (PCE)

Applicability

The Draft Directions consolidate multiple circulars for various REs into a single framework. The revised provisions are now proposed to be extended to all REs for their NFB credit exposures unless otherwise specified. Specifically, the Draft Directions is proposed to be made applicable to the following entities –

  1. Commercial Banks (including Regional Rural Banks and Local Area Banks)
  2. Primary (Urban) Co-operative Banks (UCBs)/ State Co-operative Banks (StCBs)/ Central Co-operative Banks (CCBs)
  3. All India Financial Institutions (AIFIs)
  4. All Non-Banking Finance Companies (NBFCs), including Housing Finance Companies (HFCs)

General Conditions Applicable to all NFB facilities 

  • No NFB facility can be extended by an RE unless its credit policy includes specific enabling provisions to that effect. The policy will be required to outline the framework for issuing such facilities, including aspects such as types of NFB facilities, credit appraisal, internal controls, fraud prevention, monitoring mechanisms, delegation matrix, limits to avoid concentration due to NFBs and other necessary safeguards.
  • Credit appraisal of an NFB facility shall be similar in rigour to a funded facility.
  • A key provision under the Draft Directions is that REs can issue NFB facilities only for customers with an existing business relationship—either through a funded credit facility or a deposit account. This intends to ensure closer monitoring and better risk assessment, thereby reducing the risk of exposure to unfamiliar or unverified entities. However, there may be practical difficulties associated with such prerequisite criteria. For example, in case specialised entities intend to issue PCE against bonds issued by certain entities, the business relationship may not exist. 

General Conditions applicable for “Guarantee” Business

  • The Draft Directions mandate that guarantees issued by REs must be irrevocable, unconditional, and incontrovertible. This means the guarantor cannot cancel the guarantee on their own, cannot add conditions that delay payment, and must honour the guarantee promptly and without dispute when invoked. 
  • To manage risk effectively, the Draft Directions advise REs to avoid excessive exposure to unsecured guarantees. REs are expected to set appropriate internal limits both aggregate and individual for issuing such guarantees, to avoid concentration of such exposures .
  • To formulate and implement specific policy on guarantees. As discussed above, REs are not permitted to issue any NFB facility unless their credit policy includes appropriate enabling provisions. The essential components that the policy should cover are illustrated in the diagram below:
  • The Draft Directions highlight the benefits of using electronic guarantees, such as lower costs, quicker processing, and better protection against fraud. REs are encouraged to move towards issuing guarantees in digital form. For this, REs are required to create a clear Standard Operating Procedure.

Implications on Default Loss Guarantees

The Draft Directions clarify that any arrangement involving Default Loss Guarantee, also known as First Loss Default Guarantee (FLDG), whether between REs or with Lending Service Providers (LSPs) in case of digital lending, must follow the existing RBI guidelines on DLG. 

Importantly, the presence of a DLG cover should not replace proper credit assessment. REs are insisted to maintain strong credit appraisal and underwriting standards, regardless of whether they are receiving or providing the guarantee. If an RE provides a DLG, it must evaluate the loans just as thoroughly as if they were part of its own portfolio. This would in a way extend the scope of REs acting as LSPs and sourcing loans for other REs.

Guarantee business for REs

Under the Draft Directions, all NBFCs, UCBs, RRBs, and RCBs are permitted to issue financial guarantees. However, performance guarantees are restricted to scheduled UCBs and NBFCs classified in the middle and upper layers. A performance guarantee is a commitment to pay a certain amount if the borrower fails to meet ‘non-financial obligations’ under a contract—for example, not completing a project on time or not delivering goods as agreed.

To manage risk, it is proposed that these REs cap their total outstanding guarantee exposure at 5% of their total assets based on the previous financial year’s balance sheet. Within this, unsecured guarantees must not exceed 25% of the total guarantee limit. For instance, if an RE has total assets of ₹10,000 crore, it can issue guarantees up to ₹500 crore, of which only ₹125 crore can be unsecured.

Further, the maximum tenor of any performance guarantee issued by these entities is capped at 10 years.

Partial Credit Enhancements

Our detailed write-up on Partial Credit Enhancement covers the concept, its applications, limitations, current regulatory framework, and existing gaps. The PCE framework, introduced by the RBI in 2015, was initially limited to scheduled commercial banks. However, the Draft Directions significantly expand its scope, now permitting AIFIs, NBFCs in the Top, Upper, and Middle Layers, and HFCs to provide PCEs for bonds issued by corporates or SPVs for financing various types of projects. It also allows PCEs for bonds issued by non-deposit taking NBFCs (including HFCs) with an asset size of ₹1,000 crore or more and registered with the RBI.

The primary objective of this move is to improve the credit rating of such bonds, enabling corporates to raise funds from the bond market on more favorable terms.

Amendments in the PCE framework

  • Maximum PCE by a single RE – The existing PCE framework restricts a single entity to providing only 20% of the total 50% PCE limit for a bond issuance. It is now proposed that the sub-limit of 20% be removed, enabling single entity to provide upto 50% PCE support.
  • Investment in credit-enhanced bonds – Under the existing framework, only the entities providing PCE were restricted from investing in the bonds they had credit-enhanced. However, the new Draft Directions expand this restriction by prohibiting all REs from investing in bonds that have been credit-enhanced through a PCE, regardless of whether they are the PCE provider. The draft regulations states that same is with an intent to promote REs enabling wider investor participation
  • External credit rating – To be eligible for PCE, corporate bonds shall be rated by a minimum of two external credit rating agencies at all times.

Capital Requirement for PCE

Under the existing framework, the bank providing PCE does not hold capital based only on its PCE amount. Instead, it calculates the capital based on the difference between: 

  • The capital required on bond before credit enhancement. 
  • The capital required on bond after credit enhancement. 

The objective was to ensure that the PCE provider should absorb the risks that it covers in the entire transaction. 

Under the Draft Directions the capital is required to be maintained by the REs providing PCE based on the PCE amount based on applicable risk weight to the pre-enhanced rating of the bond. 

Additional conditions for providing PCE to bonds of NBFCs and HFCs

The Draft Directions lay down specific conditions for providing PCE to bonds issued by NBFCs and HFCs. 

  • Firstly, the bond must have a minimum tenor of three years. 
  • Secondly, the funds raised through these PCE-backed bonds can only be used to refinance existing debt—not for fresh lending or other purposes. 
  • Lastly, the PCE exposure of an RE to bonds issued by any single NBFC or HFC must be capped at 1% of the RE’s capital funds.