Expansion in the provision of credit enhancement tools for bond issuance targeted by India's central bank.
The Reserve Bank of India (RBI) has announced an updated Partial Credit Enhancement (PCE) framework for corporate bonds, effective from April 1, 2026. This new rule opens up the PCE provision to a broader range of entities and bond types, aiming to increase the accessibility of credit enhancement facilities for corporate bonds.
Under the new rules, all regulated entities (REs)—including banks, cooperative banks, All India Financial Institutions (AIFIs), and NBFCs/HFCs of a certain size—can now provide PCE. The new framework raises the maximum credit enhancement limit to 50% of the bond issue size (up from 20% previously).
The eligible bonds under the new PCE rules include corporate bonds, bonds issued by special purpose vehicles (SPVs) for all project types, bonds of non-deposit taking NBFCs with an asset size of Rs 1,000 crore and above, and municipal bonds.
To be eligible for PCE, bonds must have a minimum credit rating of BBB (the lowest investment grade). PCE is typically provided as an irrevocable credit line, which is drawn upon if cash flows are insufficient to meet bond repayment.
Regulatory safeguards have been put in place to ensure proper allocation of funds. Cash flows from project assets must be ring-fenced through escrow accounts under bond trusteeship.
This enhanced PCE framework is expected to lower borrowing costs, improve bond credit ratings, and expand access to bond markets—particularly benefiting infrastructure projects and companies seeking efficient capital. The PCE mechanism does not involve the guarantor purchasing the bond but supports enhanced creditworthiness to attract a wider investor base like insurance companies and mutual funds.
Recently, the 10-year yield in India saw its largest jump in two years due to a sell-off in bonds. This sell-off occurred following the Reserve Bank of India's decision to maintain status quo on rates. However, the expanded PCE framework may help mitigate these effects by providing additional credit enhancement for eligible bonds.
In summary, all regulated financial entities as defined by the RBI can now provide PCE for a wider range of corporate and municipal bonds, with a doubled credit enhancement limit of 50%, effective from April 1, 2026.
- Following the updated PCE framework, insurance companies and mutual funds might find the corporate bonds, bonds issued by special purpose vehicles, bonds of non-deposit taking NBFCs with an asset size of Rs 1,000 crore and above, and municipal bonds more attractive, given they now come with enhanced creditworthiness.
- The new PCE rules enable banks, cooperative banks, All India Financial Institutions, and NBFCs/HFCs of a certain size to provide credit enhancement facilities for a broader range of eligible bonds, up to a maximum limit of 50% of the bond issue size.
- The eligibility criteria for PCE now require bonds to have a minimum credit rating of BBB, and regulate the proper allocation of funds, ensuring that cash flows from project assets are ring-fenced through escrow accounts under bond trusteeship.
