Project Finance

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Project Finance in India

Entrepreneurship is gradually increases now a day, everyone going to start their own business and every business needs financing to implement in better way and run it successfully.

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Term project finance can be defined as continual financing of infrastructure and industrial project that are based upon the projected cash flows of project with alternative of balance sheets of its sponsor. Often project finance is confused with corporate finance, but these are totally different. Corporate finance refers in which a company can raise funds from equity and dept directly. But in project finance company which invests equity i.e. sponsors, forms a special purpose vehicle (SPV) that control and manages procurement of funds and all management of specific project.

Private sector can funds major projects off balance sheets that’s project finance is especially more attractive to them. In INDIA number of start-up developing, some of them need finance then in this case some bank providing this type of finance.

Characteristics

The main key Characteristics of project financing are

  • Debt is typically secured by project’s assets, including revenue producing contracts. First priority on project cash flows is given to the Lender. Consent of the Lender is required to disburse any surplus cash flows to project.
  • Limited recourse to project sponsor
  • Long term infrastructure financing and/or industrial projects using debt and equity
  • Debt is typically repaid using cash flows generated from the operations of the project

Advantage

  • Project finance maximizes the leverage of a project
  • IT avoids negative impact of a project on the credit standing of the sponsors
  •  Project finance allow lenders to appraise project on stand -alone basis and segregated.
  • Under sponsors respective financial obligations it avoid any restrictions or covenants binding.
  • It permits off-balance sheet treatment of debt financing

Disadvantage

  • Project finance generally takes longer structure than equivalent size of corporate finance
  • Higher transaction costs due to creation of an independent entity. Can be up to 60bp
  • Due to creation of an independent entity it have higher transaction costs (approximately up to 60bp)
  • Due to its non-recourse nature project dept in substantially more expensive
  • It requires greater disclosure of strategic deals proprietary information Stages in Project fin acing

How companies earn which are providing project finance?

These companies or banks earn money by interest income on loan, and apart from this banks have option to sell them on the secondary market as well. There are some market participants like insurance companies who want to purchase these types of loans as like investments.

But question is what risk management in Project finance are? In that case Finance provider perform a large amount of due diligence so as to get a better idea about risks associated with a project in order to ensure lower levels of project risk, equity and debt and one amount of major risk elements in project finance is Repayment risk.

Conclusion

In Indian economy Nowadays importance of project finance is growing, As per announce of Mr Nitin Gadkari, Minister of Road Transport and Highways, and Shipping that government’s target of 25 trillion Investment in infrastructure since three years, i.e. mean future of India will see lot of power, bridges, dams, roads and urban development .