- The RBI has decided to allow banks to provide partial credit enhancements to bonds issued for funding infrastructure projects by companies or special purpose vehicles. This is to:
- Deepen the emerging corporate bond market.
- Enhance credit ratings of the corporate bonds raised to set up infrastructure projects by ensuring repayment and reducing default risks.
- Enable companies to easily access funds from the corporate bond market.
- A mismatch in Asset-liability in infrastructure financing makes banks susceptible to liquidity risks. Long term liabilities, such as those seen in insurance and provident, and pension funds.
- The RBI also said:
- Banks should have a policy on partial credit enhancements in issues like permissible types of credit enhancements, assessment of risk, and setting limits.
- Banks should also have an overall exposure limit to the infra sector on account of their direct exposures by way of fund-based and non-fund based exposures to companies including NBFCs-IFCs, and indirect exposures by way of sponsoring IDFs and partial credit enhancements.
- Read at: http://www.thehindu.com/todays-paper/tp-business/move-to-let-banks-provide-partial-credit-enhancement-to-corporate-bonds/article6031271.ece
Exams Perspective:
- What are credit enhancements?
- What are corporate bonds?
- Asset-liability mismatch