The Reserve Bank of India (RBI) has released new draft guidelines on PCE. New rules make it easier and cheaper, especially in infrastructure, to raise money through bonds.
A Partial Credit Enhancement (PCE) is a limited guarantee or support provided by a third party (like a bank, Non-banking finance companies and development finance institutions to improve the credit rating of bonds. Higher ratings help the companies to borrow at lower interest rates.
Changes done in PCE guidelines
– When giving a credit guarantee, banks can now set aside less capital. This makes it cheaper for banks to offer support to companies.
– The PCE limit is increased from 20% to 50%. It means previously banks could only use PCE to cover up upto 20% risk on a loan or investment, now banks could cover 50% risk.
Impact of these changes
– It will lower bank credit limits and will allow banks to lend new projects.
– Pension and insurance funds can now be invested in safer and high-rated bonds and can earn better returns than government securities.
– In the infrastructure sector like renewable energy, ports, airports, etc. they can raise funds more easily.
New guidelines could transform the way infrastructure projects are financed in India.
Companies can raise long-term money in a better and cheaper way by reducing costs and improving credit ratings. Certain changes can make the whole system efficient and growth focused.
Final guidelines are expected to be released by June 2025. RBI has opened the comment section for the public till 12th May.
