The Hindu Business Line : Ministry not averse to credit enhancement cos

New Delhi, Sep 14 International credit enhancement agencies may get to operate in India, with the Finance Ministry urging the Reserve Bank of India (RBI) to frame appropriate regulations for the entry of such companies.

Credit enhancement agencies are basically institutions whose backing enhances the credit worthiness of debt issuances of municipal corporations and other organisations and helps them raise funds at better rates.

Proposal turned down

In the recent past, there has been growing interest among foreign companies to enter the credit enhancement services market here. But, in the absence of regulatory framework for such services, the Foreign Investment Promotion Board (FIPB) had to recently turn down a proposal of private investment firm Old Lane, which wanted to set up a wholly-owned subsidiary in India with a capital of Rs 200 crore to offer such services.

Official sources said that the Finance Ministry may not be averse to allowing foreign companies providing such services to function in India (with 100 per cent ownership), but quickly pointed out that ultimately it was for the Reserve Bank of India to decide on how and whether such activities should be allowed in the Indian financial sector.

The Finance Ministry has written to the RBI, urging it to frame regulations on this matter and was awaiting the central bank’s response on the same.

Credit enhancement services assume financial obligations under a debt financial instrument in the event of a default by the issuer. In other words, it is a form of financial guarantee that enhances the issuer’s credit worthiness, thereby allowing him to access funds at lower cost as result of the guarantee.

Useful for raters

Moreover, credit enhancement is useful to credit rating agencies while rating a securitisation transaction. Official sources also held that there was no reason why credit enhancement companies should not be allowed when there was a liberal foreign investment regime for credit rating agencies.

Meanwhile, sources said that the issue of allowing up to 49 per cent foreign investment in credit information companies was at the last stage of finalisation. The proposed cap of 49 per cent would include foreign direct investment (FDI) and foreign institutional investors (FII) investment.

In India, Credit Information Bureau (India) Ltd or CIBIL, which was incorporated in 2000, was the first to enter into credit information market. Currently, CIBIL has diversified shareholding including foreign investment component of 20 per cent. With growing consumerism, credit information market has grown tremendously and more players including credit card agencies are eyeing this space.

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