Partial Credit Enhancement (PCE): Budget 2025-26 Explained
Why in the news
Union Budget 2025-26 announced a Partial Credit Enhancement facility that may help lower-rated firms upgrade bond ratings and attract institutions that usually buy only AAA or better paper.
About Partial Credit Enhancement (PCE)
- Meaning: banks raise the rating of bonds issued by certain companies so they can tap pension and insurance funds.
- Covered: bonds of NBFCs and housing finance companies (HFCs).
- Nature: an unfunded subordinated facility, a credit line used only if the issuer faces cash-flow stress.
- Effect: better rating, so the issuer borrows at a lower yield.
- Origin: RBI brought in the PCE programme in 2015.
Benefits
- Better terms for bond-market funds and more suitable long-term investments.
- Helps democratise the corporate bond market and lets lower-rated infrastructure firms raise long-term money.
- Widens investment channels as government bond supply falls with fiscal consolidation.
Role of NaBFID
NaBFID is to set up the PCE facility and give credit enhancement to corporate infrastructure bonds.
Concerns
- RBI norms require capital for the bond’s full value, not just the guaranteed portion, hurting PCE’s viability.
- Rating methods, secondary markets and bond structures need reform.
Exam angle
- PCE: unfunded, subordinated; introduced 2015; run by NaBFID under Budget 2025-26.