The government sponsored National Bank for Financing Infrastructure and Development (NaBFID) can consider providing partial credit enhancement (PCE) or first loss default guarantees to infrastructure companies which will help improve the credit ratings for these projects and make it attractive for long-term investors like pension and insurance funds to invest in these products, Rajeshwar Rao deputy governor, Reserve Bank of India (RBI) said.
“NaBFID could play a critical role in facilitating loans indication for large-ticket loans and play an elite role in supporting the secondary loan market association and development of credit markets as well. As NaBFID develops its internal rating models for credit appraisers, it may also be able to offer products such as credit default swaps, which would go a long way in ushering confidence in the foreign market space,” Rao who is in charge of department of regulations, enforcement and risk monitoring said.
Under a PCE a financial institution like NaBFID provides a guarantee on a portion of the bond’s repayment. This guarantee enhances the credit rating on the bond and also provides comfort to investors putting money in buying the security.
In November 2018, RBI had allowed banks to provide PCE to bonds issued by systemically important non-deposit taking non-banking financial companies (NBFCs) and housing finance companies. The regulator had said the tenure of these bonds shall not be less than three years and that proceeds from them shall only be utilized to refinance existing debt.
Speaking to reporters on the sidelines of a conference organised by NaBFID Rao said that RBI will consider allowing the development finance institution to provide PCE to bonds issued by infratructure companies.
Rao also said that as NaBFID develops its internal rating models for credit appraisers, it may also be able to offer products such as credit default swaps (CDS) which would help the government backed institution improve investor confidence especially in the foreign markets.
CDS is similar to an insurance contract, providing the buyer with protection against risks of default. CDS contracts can mitigate risks in bond investing by transferring a given risk from one party to another without transferring the underlying bond or other credit asset.
Rao institutions like NaBFID need to learn from the past episodes and set up dedicated units tasked with ongoing monitoring and evaluation of funded projects through comprehensive and frequent surveys and assessments, which will not only enable dynamic appraisals for subsequent disbursements but also ensure that finance progress in progress.
“The absence of post-disbursement monitoring or credit utilization was a key design barrier for us to manage our resulted infra-optimal outcomes. Furthermore, efficient management must be repeated to enable liquidation and distribution of assets and sufficient expertise must be built internally towards this end,” Rao said.
NaBFID must focus on equipping itself with necessary resources, skills and knowledge to concentrate efforts on human capital development, on institutional strengthening and in adoption of best practices. “NaBFID would need to quickly develop project appraisal expertise and establish a leader-setting benchmark in the market for project selection, appraisal and monitoring to give comfort to lenders and stakeholders. We also need to learn from past mistakes,” Rao said.
