The Reserve Bank of India (RBI) on Friday allowed banks to partially stand-in as guarantors for bonds issued by some non-banking financial companies (NBFCs) and housing finance companies in a move aimed at easing a liquidity crunch in the shadow banking sector.

Under the latest measure, banks are permitted to offer partial credit enhancement (PCE) on bonds issued by some of the NBFCs.

A credit enhancement is a method through which a bond issuer improves its creditworthiness following a guarantee from a third party. As a result, investors are assured that his obligation will be honoured, at least partially.

The move comes at a time the liquidity crisis faced by NBFCs has been one of the major flashpoints between the central bank and the government.

The Centre feels the current liquidity position will have an adverse impact on these lenders and the economy. It has, therefore, been seeking a special window for NBFCs.

The government had also cited section 7 (1) of the RBI Act to seek consultations with the central bank on various matters.

The move did not go down well with the RBI, prompting deputy governor Viral Acharya to use strong words while calling for the independence of the institution.

The relaxation in norms by the RBI on Friday comes at a time several NBFCs are slated to refinance their borrowings over the next few days.

It is not clear at this stage if the government will be satisfied by the RBI move.

In a notification, the RBI said it has now been decided to allow banks to provide PCE to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the RBI and housing finance companies (HFCs) registered with the National Housing Bank (NHB).

Such a partial credit enhancement is, however, subject to certain conditions.

Here the RBI said that the tenor of the bonds issued by NBFC-ND-SIs or HFCs for which partial credit enhancements are provided shall not be less than three years.

Moreover, the proceeds from the bonds backed by PCEs from banks should only be used for refinancing the existing debt of the NBFC-ND-SIs or HFCs.

The RBI added that banks should introduce appropriate mechanisms to monitor and ensure that the end-use condition is met.

The central bank further said that the exposure of a bank by way of PCEs to bonds issued by each such NBFC-ND-SI or HFC will be restricted to one per cent of the capital funds of the bank within the current single or group borrower exposure limits.

RBI stands firm

RBI deputy governor N.S. Vishwanathan on Friday dismissed calls for lowering capital adequacy norms for lenders to match global levels.

In what may ruffle the ministry mandarins further, he described the February 12 circular for NPA recognition as a “landmark reform”, just like the passage of the Insolvency and Bankruptcy Code.

North Block feels lower capital adequacy norms will push more lendable money to the system. It has also been pushing for relaxing the new NPA recongnition norms selectively.

CURE FOR NBFC CASH CRUNCH

The move: Banks can offer partial credit enhancement (PCE) on bonds issued by some NBFCs

The purpose: A credit enhancement improves the creditworthiness of the bond issuer following the guarantee from a third party and, hence, is more assuring for investors

The conditions: Tenor of the bonds should not be less than three years

The bonds should only be used to refinance debt