In News:

In the Union Budget 2025, Finance Minister Nirmala Sitharaman announced that the National Bank for Financing Infrastructure and Development (NaBFID) will set up a partial credit enhancement facility to promote corporate bond issuance in the infrastructure sector.

Need for Credit Enhancement:

• Pension and insurance funds in India, as per regulatory norms, can invest only in AA-rated or higher securities.
• Most infrastructure firms issue bonds rated below this threshold (often "A" rated).
• Partial credit enhancement will elevate such bonds to AA ratings, enabling large-scale participation from long-term institutional investors.

Significance:

• Currently, pension and insurance funds prefer government bonds. However, with the government's ongoing fiscal consolidation, sovereign bond issuance is expected to decline.
• This measure provides alternative, long-term investment avenues for these funds.
• Enhances liquidity in the corporate bond market, especially for infrastructure players.
• Helps in reducing infrastructure companies' dependence on banks for funding.

About NaBFID:

• Established: 2021 under The National Bank for Financing Infrastructure and Development Act, 2021.
• Type: Development Finance Institution (DFI).
• Regulator: Reserve Bank of India (RBI) as an All-India Financial Institution (AIFI).
• Purpose: Bridge gaps in long-term, non-recourse infrastructure financing and promote bond and derivatives markets in India.

Development Finance Institutions (DFIs):

• Government-owned or public sector-backed institutions that finance large-scale, long-gestation projects.
• Provide medium (1–5 years) and long-term (>5 years) financing.
• Raise funds via sovereign borrowings, insurance companies, pension funds, and sovereign wealth funds.
• Offer both financial support (loans, guarantees) and technical support (project viability, consultancy).
• Do not accept public deposits.

Benefits of Partial Credit Enhancement:

• Democratizes access to the corporate bond market for sub-AA-rated firms.
• Attracts long-term capital into infrastructure through safer, credit-enhanced instruments.
• Promotes diversification and deepening of India's debt markets.
• Makes infrastructure financing more cost-efficient and sustainable over the long term.

Challenges Ahead:

• Regulatory streamlining is essential.
• Guarantee fees need optimization to ensure cost competitiveness against traditional bank lending.