Project Finance
Project finance business consists mainly of extending medium-term and long-term rupee and foreign currency loans to the manufacturing and infrastructure sectors. Banks also provide financing by way of investment in marketable instruments such as fixed rate and floating rate debentures. Lending banks usually insist on having a first charge on the fixed assets of the borrower.
During the recent years, the larger banks are increasingly becoming involved in financinglarge projects, including infrastructure projects. Given the large amounts of financing involved,banks need to have a strong framework for project appraisal. The adopted framework will need to emphasize proper identification of projects, optimal allocation and mitigation of risks.
The project finance approval process entails a detailed evaluation of technical, commercial, financial and management factors and the project sponsor's financial strength and experience.
As part of the appraisal process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and risk allocation.
Project finance extended by banks is generally fully secured and has full recourse to the borrower company. In most project finance cases, banks have a first lien on all the fixed assets and a second lien on all the current assets of the borrower company. In addition, guarantees may be taken from sponsors/ promoters of the company. Should the borrower company fail to repay on time, the lending bank can have full recourse to the sponsors/ promoters of the company. (Full recourse means that the lender can claim the entire unpaid amount from the sponsors / promoters of the company.) However, while financing very large projects, only partial recourse to the sponsors/ promoters may be available to the lending banks.
