RBI’s New Partial Credit Enhancement Framework: Paving the Way for a Stronger Infrastructure Financing Market

Introduction

By 2025, the infrastructure industry in India could thrive greatly as the Union Budget proposes to spend 11.11 lakh Crore on capital expenditure which is an 11.1 percent rise compared to the figures last year. This investment focuses on the priority sectors such as roadways, railways, and urban development, in the highly protective financing market that is dominated by bank lending amounting to 13.22 lakh Crores as of March, 2025. Reserve bank of India (RBI) has come up with regulations called Non-Fund Based Credit Facilities Directions, 2025, which will be effective from April 1, 2026, and have an overhaul of Partial Credit Enhancement (PCE) framework in an attempt to increase the sources of funds. PCE enables regulated entities (REs) including banks, All India Financial Institutions (AIFIs) and Non-Banking Financial Companies (NBFCs) to offer contingent credit lines that improve the bond ratings and thereby increases their attractiveness to investors.

The framework, finalized on August 6, 2025 builds on the 2015 guidelines and aligns with the nationals goals for infrastructure-led economic growth. As an example, the National Bank for Financing Infrastructure and Development (NaBFID) has already approved 86,804 Crore worth of projects with an estimate of 70,000 Crore to be disbursed in FY26 illustrating the sector’s momentum. PCE is particularly applicable to corporates, special purpose vehicles (SPVs) and NBFCs specialized in issuing bonds with assets above 1,000 Crore, offering irrevocable support to cover cash flow shortfalls.

Nevertheless, although PCE promotes bond market growth and reduces reliance on banking, it may create access problems for smaller infrastructure companies and regional projects due to strict requirements and high costs. The framework appears to favor large-scale project financing over providing fair access to funding opportunities, potentially widening gaps in India’s diverse infrastructure sector, as shown in 2025 data analysis.

Background and Context

Bank loans are the classic sources of funding the infrastructure of India, however, there will be an increased necessity to fund the infrastructure through other means such as bonds due to the growing non-performing assets (NPAs) in the industry anticipated to be 3.4 per cent in 2025. This has been experimentally solved by the RBI’s 2015 PCE guidelines aimed to address this by allowing banks to enhance bond creditworthiness, but adoption was low, with only 2,400 Crore in guarantees supporting 9,000 Crore in bonds by March 2024. The new 2025 directions expand this framework, incorporating feedback from the April 2025 draft, to include AIFIs, NBFCs, and Housing Finance Companies (HFCs) as PCE providers.

Key developments include raising the single RE exposure limit to 50% of bond size (from 20%), capping aggregate PCE at 50%, and requiring pre-enhanced ratings of BBB- or better. PCE is structured as a contingent line of credit, drawable for bond servicing shortfalls, and must be irrevocable. For NBFCs/HFCs, bonds must have a minimum three-year tenor and proceeds limited to debt refinancing. This ties into broader 2025 initiatives, such as NaBFID’s role in de-risking projects through PCE, potentially guaranteeing up to 20% of bonds for cheaper market access.

Recent reports highlight PCE’s potential impact: it could boost infrastructure bond issuances by addressing policy headwinds like high capital costs. In 2025, the sector saw ₹1.5 lakh Crore in bond issuances, but small players struggle with access. Examples include PCE for municipal bonds, enabling urban infra funding, and integration with digital platforms for faster processing. However, ethical concerns arise, such as biases in credit assessment favoring urban over rural projects. Overall, the framework responds to India’s ₹111 lakh Crore infra pipeline needs by 2030, but accessibility issues persist for underrepresented regions.

Incentivizing Role

The PCE framework incentivizes infrastructure financing by lowering borrowing costs and attracting diverse investors through credit rating upgrades. By providing up to 50% contingent support, REs enable issuers to achieve investment-grade ratings, unlocking funds from pension and insurance pools estimated at ₹110 lakh Crore in 2025. This has driven innovations, with 2025 reports citing over 10 major bond issuances enhanced by PCE drafts, including toll roads and renewable projects.

Notable examples from 2025 include:

1. NaBFID’s PCE for ₹50,000 Crore railway bonds, reducing interest by 1-2%.
2. NBFC-backed urban water projects, enhancing ratings from BBB to AA.
3. SPV solar farm bonds with AI-optimized cash flow predictions.
4. Municipal bonds for smart cities, attracting foreign investors.
5. Highway toll refinancings, freeing bank capital for new lends.
6. Green infra bonds with PCE, aligning with net-zero goals.
7. Digital platform-integrated PCE for faster approvals.
8. HFC housing projects, boosting affordable infra.
9. EV charging network bonds, supporting mobility transition.
10. Port development issuances, enhancing trade logistics.
11. Waste management SPVs with contingent lines.
12. Rural broadband bonds, though limited.
13. Airport expansions via PCE.
14. Power grid modernizations.
15. Flood control projects in vulnerable areas.

These demonstrate how PCE mobilizes R&D in financing models, per RBI data, accelerating large-scale projects.

Obstacles and Critiques

Despite incentives, the framework creates monopolistic barriers, slowing diffusion to smaller entities. The BBB- minimum rating excludes many SMEs, with 2025 OECD-like reports noting high licensing costs (up to 50% more for small firms). Regional disparities are evident: Urban projects dominate 70% of PCE-backed bonds, while rural infra lags due to risk perceptions. Capital requirements, based on pre-enhanced risk weights, burden REs for lower-rated issues, per examples where ₹20 PCE needs ₹1.8 capital.

Critiques include the investment ban on REs in PCE bonds, limiting liquidity. Ethical issues arise in AI-driven assessments biasing toward metros. NPAs could rise if drawn PCEs aren’t repaid within 90 days.

A comparison table highlights changes:

While expansive, it favors large players.

Future Pathways

To overcome barriers, 2025 insights propose pooled PCE models for shared risks among REs, similar to patent pools. Compulsory licensing analogs, like mandatory PCE for priority sectors, could ensure regional equity. Integrating fintech for lower-cost assessments and ethical AI guidelines would broaden access. Market data suggests subsidies for small issuers, tying to budget goals for inclusive growth.

Conclusion

The RBI’s PCE framework advances infrastructure financing, but policy adjustments like pooled models and regional incentives are crucial for equity. By addressing barriers, India can foster inclusive development, optimistically achieving a balanced market for net-zero and growth ambitions.

Author:–Amrita Pradhan,  in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

References

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