What if a bond came with a safety net, but not a full one? That’s the idea behind PCG bonds in India, where a strong institution promises to cover part of an issuer’s payments if it falls short. Known in India as partial credit enhancement (PCE) and globally as a partial credit guarantee (PCG), the idea has moved from theory to practice.
The Union Budget 2025-26 announced a PCE facility under NaBFID (National Bank for Financing Infrastructure and Development, a government-owned infrastructure lender), the RBI loosened its rules, and the first NaBFID-backed deal was lined up for July 2026. If you’ve read our guide to full guaranteed bonds, think of this as the sequel. Here’s how PCG bonds work, who they protect, and where the gaps are.
What Is a PCG Bond?
Fixed-income investing simply means lending money in exchange for regular interest (the coupon) and your principal back at maturity. In a PCG bond, a guarantor promises to step in if the issuer can’t pay, but only up to a fixed share of the bond. A full guarantee is like a parent paying your entire rent. A partial one is like a parent who covers a slice of it.
The guarantor often provides first-loss cover, meaning it pays the first portion of any shortfall. You’ll spot these bonds by the “(CE)” tag, short for credit enhancement, on their rating. The rating the bond would get without the guarantee is called the unsupported (or standalone) rating.
Partial Credit Guarantee (PCG) Bonds & Schemes
- Government-Backed PCGS (PCGS 1.0 & 2.0): Launched by the Government of India under the Aatmanirbhar Bharat Abhiyan, the Partial Credit Guarantee Scheme allows Public Sector Banks (PSBs) to purchase pooled assets, bonds, and commercial papers (CPs) issued by financially stressed or low-rated Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and Microfinance Institutions (MFIs). [1, 2]
- Sovereign First-Loss Guarantee: Under PCGS 2.0, the government offers a sovereign portfolio guarantee of up to 20% of the first loss for purchasing bonds or CPs rated AA and below (including unrated short-term paper). [1]
- Purpose: It acts as a liquidity bridge (typically 9 to 18 months for bonds) to help finance companies manage short-term liability redemptions without defaulting. [1]
- Multilateral PCGs: Institutions like the Asian Development Bank (ADB) have also issued partial credit guarantee facilities in India (such as for IIFCL) to enhance infrastructure project bonds up to an AA rating, helping attract pension and insurance funds into domestic debt markets
Why India Needs Partial Credit Enhancement
Many infrastructure projects, such as roads, solar plants, and city gas networks, are decent businesses rated around A. That’s investment grade, but it can fall short of what big long-term investors want. Life insurers generally need corporate bonds rated AA or above, with some exceptions, and EPFO wants at least AA from two agencies. NPS pension funds can hold A-rated paper, but only within a 10% limit. PCE is meant to bridge that gap: it can lift infrastructure paper from A to AA, and the Budget asked NaBFID to set up the facility.
Regulation followed. The RBI’s August 2025 directions widened the pool of PCE providers beyond banks to include all-India financial institutions and larger NBFCs and raised the cover limit from 20% to 50% of a bond issue. The rules came into force on 1 April 2026, though lenders could adopt them earlier. It still took time: NaBFID launched its facility in September 2025, but the first sanctioned deal took nearly ten months to arrive.
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How a PCG Bond Works: The Think Gas Ludhiana Example
That first deal makes a handy case study. Think Gas Ludhiana, a city gas distribution company in Punjab, planned ₹620 crore of debentures with NaBFID’s cover. Here’s the structure:
| Feature | Details |
| Bond size | ₹620 crore |
| Cover provider | NaBFID (rated CARE AAA, fully government-owned) |
| Cover amount | 43% of the bond (₹266.60 crore) |
| Rating without cover | A (CARE) |
| Rating with cover | AA+ (CE), provisional as of April 2026 |
| Type of cover | Non-fund-based, irrevocable standby credit line |
Now the mechanics. NaBFID’s cover is a contingent line of credit, a standby loan used only if needed. Non-fund-based means NaBFID doesn’t hand over cash upfront. Before NaBFID is called, two other layers kick in. Four days before a payment, the issuer must park enough money with the trustee. At T-3, any gap is filled from a debt service reserve account (DSRA), a cash cushion equal to two quarters of payments. At T-2, the trustee calls on NaBFID, which has two business days to pay (T represents the date on which interest or principal is due).
Importantly, NaBFID’s money is a loan. The issuer must repay it within 30 days, and failing to do so triggers a default under the deal. NaBFID is also subordinated. In the waterfall, which is the order in which project cash gets used, bondholders are paid before NaBFID is repaid.
How PCG Bonds Protect Fixed-Income Investors
So what does this mean for your money?
- A better rating, a bigger buyer pool. CARE and India Ratings rated the bonds AA+ (CE), four notches above the standalone A. On ratings alone, that clears the AA bar that insurers and provident funds apply, and EPFO wants it from two agencies.
- Layers before you’re hit. The issuer’s cash comes first, then the DSRA, then NaBFID’s cover.
- A strong backer. NaBFID is wholly owned by the Government of India and rated CARE AAA.
- A second pair of eyes. NaBFID has said it will carry out a full risk assessment of each issuer and monitor its performance.
What PCG Bonds Don’t Protect You From
A PCG is a safety net with a size limit, and it can fall short in a few places. First, the cover is partial. Here it’s 43%, so a bigger collapse leaves you exposed beyond that.
Second, your rating rides on the guarantor. CARE says any weakening in NaBFID’s strength would hit the enhanced rating, no matter how well the company itself is doing. It also notes that NaBFID has a limited track record, and the asset quality of its loan book is still untested.
Third, there’s refinancing risk, the danger that a company can’t raise fresh money to repay an old bond. About 75% of this bond’s principal is due at the end.
Finally, business risks remain. CARE flagged West Asia tensions that disrupted gas supply, with the government cutting piped gas to industrial and commercial users by about 20%. A guarantee doesn’t change how a business performs.
Conclusion: Is a PCG Bond Right for You?
Think of a PCG bond as a seatbelt, not a force field. Before you invest, compare the unsupported and enhanced ratings, because the gap shows how much work the guarantee is doing. RBI rules require rating reports to disclose both, so you won’t have to hunt. Check what percentage of the bond is covered, how strong the guarantor is, and whether the final rating has replaced the provisional one. Since the protection is priced in, also ask whether the coupon still pays you fairly for the uncovered part.
Partial Credit Guarantee (PCG) FAQs
A PCG bond is a debt security where a third party agrees to cover a specified portion of the issuer’s payment obligations if defined default conditions occur. The guarantee provides an additional layer of credit support, but investors remain exposed to the portion that is not covered.
Coverage is generally expressed as a percentage of the bond issue, outstanding principal, or another defined exposure amount. The calculation depends on the agreement. Investors should establish the original coverage, whether it reduces as the bond amortizes and whether it can be replenished after being drawn.
Depending on the program and structure, support may come from banks, financial institutions, development finance institutions, government-backed entities or other eligible guarantors.
The value of the guarantee may weaken if the guarantor becomes less capable of meeting its obligations. This could lead to a rating downgrade or reduced confidence in the protection. A partial guarantee transfers some credit risk to the guarantor; it does not eliminate that risk.
A PCG generally describes a contractual guarantee covering part of a debt obligation. RBI’s PCE framework for eligible regulated entities provides a subordinated, non-funded, and irrevocable contingent line of credit that can be drawn when bond-servicing cash flows fall short.
Check the guarantor’s identity, the amount and scope of coverage, invocation triggers, claim documentation, payment timelines, expiry date, exclusions, replenishment provisions and whether the support remains effective during insolvency proceedings. The agreement should also clarify who is authorised to invoke the guarantee.
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