Traditionally, infrastructure development in India has heavily relied on loans from financial institutions and banks, which often face challenges such as difficulties in balancing long-term assets with short-term liabilities, with higher rates of interest and credit exposure limits. As the need for long-term financing grows, there has been a concerted effort to strengthen the corporate bond market. However, infrastructure bonds, often with lower credit ratings, tend to be less attractive to investors. The PCE facility aims to address this issue by providing credit support that enhances the ratings of these bonds, thereby improving their marketability to institutional investors who are then willing to subscribe for the same.
Brief Overview of NaBFID
NaBFID is a specialised financial institution created under the National Bank for Financing Infrastructure and Development Act, 2021, by the Government of India, with the primary aim of addressing India’s long-term infrastructure financing requirements. As the country’s leading development finance institution (DFI), NaBFID seeks to overcome the limitations of traditional banking, such as asset-liability mismatches and risk aversion toward large-scale infrastructure funding.
The institution is dedicated to offering stable, non-recourse financial support to major infrastructure projects while promoting a dynamic market for bonds, loans, and derivatives. It serves as a key player in the infrastructure ecosystem by directly or indirectly offering financing through various instruments such as term loans (including for both greenfield and brownfield projects), bonds, debentures, and guarantees, as well as equity investment opportunities.
NaBFID focuses on a wide range of sectors, including Transport and Logistics (roads, ports, airports, railways, inland waterways), Energy, Water and Sanitation, Communication, and Social and Commercial Infrastructure. The institution supports project financing needs with tailored offerings, including bid bonds, mobilisation/advance payment guarantees, performance guarantees, and Capex Letters of Comfort (LCs). Furthermore, NaBFID facilitates investments through structured products like investment trusts, bond subscriptions, and ESG (environmental, social, and governance)-focused lending, promoting sustainable development initiatives aligned with ESG standards.
Building on the foundation of government backing, multilateral partnerships, and institutional investments, NaBFID intends to close critical financing gaps in infrastructure funding and drive economic growth. Additionally, to direct project financing, NaBFID plays a key role in restructuring existing infrastructure debt, attracting foreign capital, and facilitating investment opportunities in the sector.
Understanding the PCE Facility
The PCE facility refers to a mechanism through which NaBFID, as the authorised financial entity under the Budget, improves the credit rating of corporate bonds issued for infrastructure projects. Infrastructure companies or special purpose vehicles (SPVs) typically issue bonds to raise capital for the projects undertaken. To enhance the attractiveness of such bonds to potential investors, NaBFID will provide a credit enhancement facility, supporting the issuing company’s repayment obligations in the event of default arising from project abandonment, insolvency, bankruptcy, or other financial distress. This facility serves to mitigate credit risk, thereby improving the credit rating of the bonds and increasing their marketability to investors. However, the threshold for providing this facility is capped at a maximum of 20% of the bond issue size for an individual bank and an aggregate of 50% of the bond issue size from the entire banking sector, in accordance with the Reserve Bank of India’s (RBI) circular on ‘Partial Credit Enhancement to Corporate Bonds’, bearing reference no. RBI/2015-16/183, DBR.BP.BC.No. 40/21.04.142/2015-16, dated September 24, 2015 (“RBI Circular of 2015”) and the subsequent amendment vide RBI circular bearing reference no. RBI/2016-17/43 DBR.BP.BC.No.5/21.04.142/2016-17, dated August 25, 2016 (“RBI Circular of 2016”).
The purpose of providing financial support, in turn enhancing the credit rating of infrastructure bonds, is to address the inherent financial instability of infrastructure projects, which often receive lower credit ratings, typically in the ‘BBB’ or ‘A’ range. Long-term investors, such as overseas pension and insurance funds, generally seek investments rated ‘AAA’, which ensures better financial security for the investors. Therefore, by increasing the credit rating of the bonds, the PCE facility aims to attract not only these investors but also other private investors interested in financing infrastructure development.
Banks, including NaBFID, may offer the PCE facility as a non-funded, irrevocable credit line, which can only be utilised if there is a deficiency in cash flows to service the bonds. The PCE facility will be exclusively available for bond servicing and will be enforceable through a legally binding agreement entered between the bond issuer (or the infrastructure company in this case), the PCE providing bank(s), and all other lenders to the project. The agreement defines the terms and conditions under which the facility may be utilised. This agreement must outline the precise circumstances in which the PCE will be drawn, and the operational details, including the timing of drawdowns, will be determined by the PCE-providing banks according to their internal policies.
According to the RBI Circular of 2015, several conditions apply to banks offering the PCE facility, in addition to the threshold limit. Certain key conditions are listed below:
- Banks may offer PCE only for bonds with a pre-enhanced rating of ‘BBB minus’ or higher.
- PCE exposure to a single party or group of parties must not exceed 5% of the bank’s single borrower/group borrower limit.
- The bank providing the PCE facility must maintain capital reserves equivalent to the difference between the capital required for the bond at its pre-enhanced rating and post-enhanced rating, based on applicable risk weights under Basel III regulations, ensuring adequate coverage for potential risks associated with the bond issuance.
For example, if the face value of the bond is ₹100, and the bond’s rating is upgraded from ‘BBB’ to ‘AA’ through the PCE, the capital reserve needed by the bank will be calculated based on the risk weight for each rating. If the pre-enhanced bond rating requires a capital reserve of ₹9 and the enhanced bond rating reduces this to ₹2.70, the bank must hold a capital reserve of ₹6.30 to cover the exposure resulting from the PCE provided.
In addition to these conditions, further conditions were introduced on this facility vide RBI’s circular bearing no. RBI/2016-17/305, DBR.No.BP.BC.70/21.04.142/2016-17, dated May 18, 2017, (“RBI Circular of 2017) which stated that the credit rating of the bonds must be conducted by at least two external credit rating agencies at all times and that for capital computation purposes, the lower of the standalone credit rating and the enhanced rating will be used.
As seen above, the capital requirements imposed under the PCE facility, alongside various other restrictions, significantly increase the burden on banks, making it challenging for them to extend such facilities.
Hence, despite the announcement in the Union Budget 2025 that NaBFID will establish the PCE facility, its practical implementation remains uncertain due to the stringent conditions outlined in the circulars. The capital reserve requirements, along with exposure limits, and the need for multiple credit ratings, have so far deterred banks from undertaking this facility since its inception. Although the PCE facility is intended to enhance the creditworthiness of infrastructure bonds and attract long-term investors, its execution may require greater flexibility and collaboration between the government and NaBFID.
Additionally, at this stage, it remains unclear whether the cost of utilising this facility is genuinely more advantageous than that of traditional loans as the facility has yet to be fully tried and tested, its potential appeal to investors will need to be carefully assessed in the years ahead.
Therefore, to ensure the success of this facility, it is crucial for the government and NaBFID to work together to address any potential obstacles and consider providing leeway or modifications to the terms where necessary so that investors can benefit from this mechanism.
Conclusion
In conclusion, the introduction of the PCE facility by NaBFID under the Union Budget represents a positive step forward in enhancing the creditworthiness of infrastructure bonds, thereby attracting a wider base of investors to subscribe to these bonds which support India’s infrastructure development. However, the facility comes with significant challenges, primarily due to various regulatory restrictions imposed on banks. These requirements increase the operational burden on financial institutions, making it difficult for them to actively participate in the facility. Although the potential benefits of the PCE facility are clear, its successful implementation will depend on the ability of NaBFID and the Government of India to navigate these complexities and operational hurdles. The facility currently remains a concept waiting for full-scale realisation, and it will require close monitoring to determine if it can achieve its intended objectives.