The Reserve Bank of India (RBI) on Friday permitted banks to provide partial credit enhancement (PCE), or a partial guarantee, to bonds issued by systematically important NBFCs and Housing Finance Companies, a move that will enhance their liquidity position.

"It has now been decided to allow banks to provide PCE to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the Reserve Bank of India and Housing Finance Companies (HFCs) registered with National Housing Bank," the RBI said in a notification.

In an interview to CNBC-TV18, PK Gupta, MD, SBI and RK Bakshi, former executive director, Bank of Baroda discussed the impact of this move on the NBFC sector.

Gupta said, “Partial credit enhancement has already been there for the infrastructure sector and for the other corporates. However, somehow this has not been used much by the corporates or the other companies who are allowed to use it so far.

The question ultimately is that whether the banks are the right entities to take on this credit exposure because already the banks do have some liquidity, Gupta said.

Bakshi said, “It is only for some maturing obligations, refinancing. If a NBFC decides to issue further bonds, a bank can provide credit enhancement. If the NBFC is already AA or AAA, what further credit enhancement? However, credit enhancement even up to 20 percent even for AA rate NBFC will make it more palatable and more acceptable to the investor community at large.”