Policy Update
Anshu Saroha
Background
The National Bank for Financing Infrastructure and Development (NaBFID) was introduced in 2021 to promote and fund long-term infrastructure projects in India. It began its operation in December 2022 with the disbursement of its first loan. By March 2024, it had sanctioned ₹86,804 crore for projects in various infrastructure sub-sectors, including roads, renewable energy, water sanitation, among others.
It will sanction over ₹3 lakh crore by March 2026. Although it is already collaborating with multilateral institutions to facilitate a long-term credit line and other financial and technical assistance, there have been ongoing funding issues. The Partial Credit Enhancement (PCE) is one such initiative to help India leap over its infrastructure bottleneck.
Through the PCE facility, it can offer guarantees or other forms of credit enhancement to infrastructure companies issuing bonds. In the FY25-26 Union budget, Finance Minister Nirmala Sitharaman introduced the PCE facility to boost the credit rating of corporate bonds issued for infrastructure projects. It further complements the National Infrastructure Pipeline and PM-Gati Shakti to promote patient capital.
Infrastructure entities and Special Purpose Vehicles (SPVs) issue bonds to raise capital for the projects undertaken. This facility will boost credit ratings to make it more attractive to potential investors and will help companies with risk management. PCE will guarantee up to 20% of the bonds and will give access to the capital market at cheaper rates than borrowing from banks. This credit enhancement applies to both the public sector undertakings (PSUs) and private-led infra SPVs.
Currently, it is estimated that India would need to spend $4.51 trillion on infrastructure by 2030 to realise its vision of a $5 trillion economy by 2025, and to continue on an escalated trajectory until 2030. This cannot be possible without the robust growth in the infrastructure sector. But it struggles to get funding from banks because of its long-term loan demand and risky business. With the growing economy and a lot of priorities, PEC will help fund such projects. It will also assist infrastructure companies in securing capital and working effectively. Further, the corporate bond market can be a feasible alternative if utilised coherently.
Issuers with good ratings dominate the corporate bond market, and the top 5 PSU infra bonds rule the market by more than 50%. However, the volatility of this sector leads to lower company ratings, making infrastructure bonds less appealing for investments. Creditors prefer an ‘AAA’ rating to make huge investments, but often these bonds are in the lower rating range. Here, PCE jumps into de-risking infrastructure and attracts more investors at lower interest rates.
For example, if the face value of the bond is ₹10, 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. It raises lower-rated infra projects into the good investment category. This leads to an increase in investors’ confidence, which promises cheaper and long-term funds. It solves the problem for companies that are seeking loans and investments and are not able to secure any.
Challenges
Foremost, it can have problems with getting the desired approval from the Reserve Bank of India. The RBI circulars have strict capital norms and investment regulations for PCE facilities. Though RBI has allowed banks to offer PCE on bonds issued by corporate entities and special purpose vehicles (SPV) of infrastructure projects back in September 2015.
But the truth is, not a single transaction has been completed on these instruments. According to RBI regulations, even though PCE can only be given for 20% of the bond, the bank that provides it must set aside 100% of the bond amount as capital. Additionally, a larger percentage of risk weightage for these tools must be provided by the PCE giving institution. When combined, these two make the instruments more costly than a bank loan, making them unfeasible. Though NaBFID has been in talks with the RBI for a higher credit enhancement cap of 50% but there is no formal confirmation for the same.
Another concern is the accountability for credit enhancement decisions. These decisions are primarily subjective and involve many different levels of evaluation. They are vulnerable to inefficiency or political influence, without any transparency with the general public regarding the decisions made by NaBFID. Further, it should prioritize small companies to prevent the overconcentration of funds in pre-established infrastructure giants.
Moreover, a similar service is offered by the National Investment and Infrastructure Fund, Infrastructure Finance Limited (NIIF IFL), but at a limited scale. NIIF IFL’s credit rating and capital adequacy are considered comfortable, and it has a track record of raising capital for its projects. It manages credit risks with its investments. Besides regulatory hindrances, limited scope for lower rates and premiums demanded by investors to invest in high-risk infrastructure projects in India could limit issuer gains from such instruments.
Way Forward
Moving ahead, a rigorous phased approach is required to make PCE achieve its goals. It needs to be considered that NaBFID is a new agency itself, and it needs more manpower to effectively fulfill all its objectives. The credit enhancement initiative in itself requires a robust risk assessment system to accurately approve projects before issuing any form of credit guarantee. Further, it should also collaborate with SEBI and RBI to streamline project approvals at the state and national levels. Moreover, the process for applying for credit enhancement or any other information regarding the next steps has not yet been made public by the authorities.
Right now, the partial credit enhancement initiative is stuck in the mud without any clear way out.
Conclusion
PCE is a great initiative to minimize the risk and financial delay in the infrastructure sector. It offers a way out for investors by socializing risk but privatizing returns in a calibrated way. But before beginning with anything, NaBFID requires a green chit from the RBI to proceed and fulfill its objectives. Further, transparency and reliable data management are required to counter the accountability issues with this policy. It needs strong risk-pricing models and sectoral due diligence to allot the PCEs effectively. So far, partial credit enhancement is a proposed solution without any implementation or functioning. Reliable data monitoring and an impact report will help us to find out if partial credit enhancement by NaBFID is a hit or a miss.
References
Cambden. (2024). India : Union Finance Minister Smt. Nirmala Sitharaman reviews the performance of the national bank for financing infrastructure and development (NaBIFD. Mena Report.
Kumar, S. (2025). NaBFID for higher credit enhancement cap of 50%. Financial Express.
Kundu, Rhik, & Narayan, S. (2025, March 9). NABFID in talks with the World Bank to boost infrastructure financing. Mint. https://www.livemint.com/companies/nabfid-world-bank-infrastructure-financing-borrowing-costs-private-capital-funding-11741518792614.html
Kundu, Rikh, & Narayan, S. (2025). Debroy panel finalizes infra investment roadmap; report due in May. Mint.
NABFID is required to establish a credit enhancement facility. Fox Mandal. (2024, April 6). https://www.foxmandal.in/News/nabfid-is-required-to-establish-a-credit-enhancement-facility/
Need to create credit enhancement facility: Finance Minister to nabfid. (2024). The Economic Times.
Rebello, J. (2025). NaBFID infra bond credit facility may run into RBI hurdle [budget 2025-26]: regulatory check central bank has prescribed strict norms for such instruments.
Standard, B. (2025, February 1). Budget 2025: NABFID’s partial credit guarantee to boost corporate bond MKT. Business Standard. https://www.business-standard.com/budget/news/budget-2025-nabfid-s-partial-credit-guarantee-to-boost-corporate-bond-mkt-125020101435_1.html
Tiwari, D. (2024, September). NaBFID seeks lower provisioning for credit enhancement players.
About the Contributor: Anshu Saroha is a Bachelor of Arts student at the University of British Columbia and a research intern at the Impact and Policy Research Institute (IMPRI).
Acknowledgement: The author would like to express sincere gratitude to the IMPRI team for their guidance throughout the writing of this article.
