What changed
RBI expanded credit enhancement facility to capital market instruments (debentures, bonds) for infrastructure firms and IFCs, previously limited to structured obligations under approval route. New framework sets minimum 7-year average maturity, caps guarantee fee at 2% of principal, and specifies all-in-cost ceilings on novated loans.
What it means for you
Banks can now facilitate infrastructure financing through credit-enhanced bonds, reducing risk for lenders. The 7-year lock-in and fee cap ensure long-term stability, while invocation cost rules align with ECB norms. IFCs must hedge forex exposure if novated loan is in foreign currency.
What you must do
- Update internal policies to accept credit-enhanced bonds from eligible non-resident entities for infrastructure and IFC clients.
- Verify that underlying instruments have minimum 7-year average maturity and no prepayment/call/put options before that period.
- Ensure guarantee fee does not exceed 2% of principal and monitor all-in-cost ceilings on novation as per ECB/Trade Credit norms.
- For IFCs, confirm compliance with DNBS.PD.CC No.168/03.02.089/2009-10 and mandate full forex hedging if novated loan is foreign currency.
Who it affects
Category-I Authorised Dealer Banks, Infrastructure companies issuing domestic debt, Infrastructure Finance Companies (IFCs), Non-resident entities providing credit enhancement
What types of instruments qualify for credit enhancement under this circular?
Only capital market instruments like debentures and bonds issued by Indian infrastructure companies or IFCs, with a minimum average maturity of 7 years, are eligible.
What happens if the credit enhancement is invoked and the loan is repaid in foreign currency?
The novated loan must comply with all-in-cost ceilings based on its average maturity: up to 200 bps over 6-month Libor for up to 3 years, 300 bps for 3-5 years, and 500 bps for over 5 years.
Are there any restrictions on prepayment or call/put options for these instruments?
Yes, prepayment and call/put options are not allowed for the first 7 years of average maturity to ensure long-term stability.