Chapter 1: Introduction to the project

1.1: Concept and significance of the study:

The project is basically related to the use of project finance. Project finance is the long term
financing of infrastructure and industrial projects based upon the projected cash flows of the project
rather than the balance sheets of the project sponsors. Usually, a project financing structure involves
a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans
to the operation. The loans are most commonly non-recourse loans, which are secured by the project
assets and paid entirely from project cash flow, rather than from the general assets or
creditworthiness of the project sponsors, a decision in part supported by financial modeling. The
financing is typically secured by all of the project assets, including the revenue-producing contracts.
Project lenders are given a lien on all of these assets, and are able to assume control of a project if
the project company has difficulties complying with the loan terms.

1.2: Scope of the Study:

This study will help in comprehensive analysis of project finance by banks and NBFCs Bank
enjoys a major market share among the borrowers and NBFC firms are lagging
far behind and will slowly lose their market share if adequate steps are not
taken. Banks are usually preferred over NBFC firms due to the security aspect
and brand name. The documentation process is one such process which
borrower finds lengthy and tiresome in both categories of lenders.

Awareness regarding project finance is more with nationalized banks than the
NBFC firms providing the same.
1.3: Objective of the study: (2)

• To understand the basics of project financing.

• To understand the various types of project finance.

• To know the project finance by various banks and NBFCs.

• To understand the risks involved.

• To understand the difference between the project finance by the banks

and NBFCs.

1.4: Literature Review:

The Economic Motivations for Using Project Finance by Benjamin C. Esty

One of the key assumptions underlying Modigliani and Miller’s irrelevance proposition is that
financing structures do not affect firm value. Yet the rise of project finance, from less than $10
billion per year in the late 1980s to almost $220 billion in 2001, provides strong prima facia
evidence that financing structures do, indeed, matter. Analysis of sponsoring firms and project
companies illustrates how financing structures affect managerial investment decisions and
subsequent cash flows. Project finance creates value by reducing the agency costs associated with
large, transaction-specific assets, and by reducing the opportunity cost of underinvestment due to
leverage and incremental distress costs. Besides describing the economic motivations for using
project finance, this paper provides institutional details on project companies and sheds new light on
existing theories of capital structure, corporate governance, and risk management.

Modigliani and Miller (1958) show that corporate financing decisions do not affect firm value under
certain conditions. Their “irrelevance” proposition is powerful because it highlights the factors that
make financing decisions value relevant. One of the key assumptions underlying their irrelevance
proposition is that that financing and investment decisions are separable and independent activities.
When this assumption holds, various financing decisions such as the firm’s organizational, capital,
board, and ownership structures do not affect investment decisions or subsequent cash flows.

CHAPTER 2

INTRODUCTION TO PROJECT FINANCE

2.1 Origins of Project Finance

Project finance is generally sought for Infrastructure projects. Its linkages to the economy are
multiple and complex, because it affects production and consumption directly, creates positive and
negative externalities and involves large flow of expenditures.

Prior to world war-1, private entrepreneurs built major infrastructure projects all over the world.
During the 19th century ambitious projects like Suez Canal and the Trans- Siberian Railway was
constructed, financed and owned by private companies. However the private sector entrepreneurs
disappeared after world war -1 and as colonial powers lost control, new government financed
infrastructure projects through public borrowings. The state and public organizations became main
clients in the commissioning of public works, which were than paid out of general taxation.

After world war-II most infrastructure projects in industrialized countries were built under the
supervision of the state and were funded with the respective budgetary resources of sovereign
borrowing.

The traditional approach of government in identifying needs, setting policies and procuring
infrastructure was by and large followed by developing countries with the public finance being
supported by bond instruments or direct sovereign loans by such organizations like World Bank, The
Asian Development Bank and the International Monetary Fund.

Development in earlier 1980’s

The convergence of a number of factors by the early 1980’s lead to the search of alternative ways to
develop and fiancé infrastructure projects around the world. These were:
Continued economic and population growth meant the need for additional infrastructure, road,
power plants and water treatment plants continued to grow.

The debt crisis meant the countries had less borrowing capacities and fewer budgetary resources of
finance badly needed projects, compelling them to look to the private sector for the investors for the
projects which would have in the past financed and developed by the public sector.

A major international contracting firm, which in the mid 1970’s kept busy, particularly in the oil rich
Middle East, was by the early 1980’s facing a downturn in business and looking for creative ways to
promote additional projects.

Competition for global markets among major equipment suppliers and operators led them to
become promoter of projects to enable them to sell their products and services.

Outright privatization was not acceptable in some countries or appropriate in some sector for
political and strategic reasons and government were reluctant to relinquish total control of what may
be regarded as the state assets.

During the 1980’s, as the number of governments, as well as international lending institutes, became
increasingly interested in promoting the development for the private sector, and the discipline
imposed by its profit motive, to enhance the efficiency and productivity of what had previously been
considered public sector services. It is now increasingly recognized that private sector can play a
dynamic role in accelerating growth and development. Many countries are encouraging direct
private sector involvement and making strong efforts to attract new money through neo project
financing techniques.

Such encouragement not solely born out of the need for additional financing, but it has been
recognize that the private sector involvement can bring with it the ability to implement projects in a
shorter time, the expectation of more efficient operation, better management and higher technical
capability and in some cases, introduction of an element of competition in monopolistic structures.

However the private sector driven by commercial objectives, would not want to take up any project
whose return are not commensurate with the risk. Infrastructure projects typically have a long
gestation period and returns are uncertain. What then is incentive to private capital providers to
participate in infrastructure projects, which fraught with huge risks? Project finance provides
satisfactory answers to these questions.
2.2 Definition of Project Finance (1)

Project finance is typically defined as limited or non-recourse financing of a new project

through separate incorporation of vehicle or Project Company. Project finance involves non-
recourse financing of the development and construction of a particular project in which the lender
looks principally to the revenues expected to be generated by the project for the repayment of
its loan and to the assets of the project as collateral for its loan rather than the general credit
to its sponsor.

In other words the lenders finance the project looking at the creditworthiness of the project, not
the creditworthiness of the borrower. Project financing discipline includes understanding the
rationale for project financing, how to prepare the financial plans, assess the risk, design the
financing mix and raise the funds?

A knowledge base is required regarding the design of contractual agreements to support project
financing, issues for the host government provisions, public/private infrastructure partnership,
public/private financing partnership, credit requirement of lenders and how to determine project
borrowing capacity, how to prepare cash flow projections and use them to calculate expected rate of
returns, tax and accounting considerations, and analytical techniques to validate the project
feasibility.
2.3 Comparison between corporate finance and project finance (3)

Traditional is corporate finance, where the primary source of repayment for investor and
creditor is the sponsoring company, backed by its entire balance sheet not the project alone.
Although creditors will usually seek to assure themselves of economic viability of the project being
financed so that it is not a drain on the corporate sponsor’s existing pool of assets, an important
influence on their credit decision is the overall strength of the sponsor’s balance sheet, as well
as their business reputation. If the project fails, lenders do not necessarily suffers, as long as the
company owing project is financially viable.

Corporate finance is often used for shorter, less capital intensive projects that do not warrant
outside financing. The company borrows funds to construct a new facility and guarantees to repay
the lenders from its available operating income and its base of assets. However private companies
avoid this option as it strains their balance sheet and capability and limits their participation in future
projects. Project finance is different from traditional form of finance because financer principally
looks for the assets and revenue of the project in order to secure and service the loan.

In project finance a team or consortium of private firm establishes a new project company to
build, own and operate a separate infrastructure project. The new project company is capitalized
with equity contributions from each of the sponsors. In contrast to an ordinary borrowing situation,
in project financing financer usually has a little or no recourse to the non- project assets of the
borrower or the sponsors of the projects. The project is not reflected in the sponsor’s balance
sheet.
2.4 Extent of recourse

Recourse refers to the right to claim a refund from another party, which has handled a bill at earlier
stage. The extent of recourse refers to the range of reliance on the sponsors and other project
participants for enhancement to protect against certain project risk. In project finance there is limited
or no recourse. Non- recourse project finance is an agreement where in investor and creditor has no
direct recourse to the sponsor. In other words, the lender is not permitted to request repayment from
the parent company if borrower fails to meet its repayment obligations. Although creditor’s security
will include the assets being financed, lenders rely on the operating cash flows generated from those
assets for repayment.

When the project has assured cash flows in form of a reliable off taker and well allocated
construction and operating risks, the lenders are comfortable with non-recourse finance. Lenders
recourse limited recourse when the project has significantly higher risk. Limited recourse project
finance permits creditors and investors some recourse to the sponsor.

This frequently takes form of a pre completion guarantee during a project’s completion period, or
other assurance of some form of support for the project. In most developing markets projects and in
other projects with significant project risks, project finance is generally of limited recourse type.

2.5 Merits and demerits of project finance (4)

Project finance is continuously used as a financing method in capital intensive industries for project
requiring large investments of fund, such as the construction of a power house, pipelines,
transportation system, mining facilities, industrial facilities and heavy manufacturing plants. The
sponsors of such projects, frequently, are not creditworthy to obtain traditional financing. Project
financing permits the risk associated with such projects to be allocated among number of parties at
levels acceptable to each party. The advantages of project finance are as follows:

1. Non-recourse: the typical project financing involves a loan to enable the sponsor to
construct a project where the loan is completely “Non Recourse” to the sponsor i.e. the
sponsor has no obligation to make repayment on the project loan if revenues generated by the
project are insufficient to cover principle and interest payable on the loan. This safeguards
 the assets of the sponsor. The risk of new projects remains separate from the existing
business.

2. Maximizes Leverage: The sponsors typically seek to finance the cost of development and
construction of project on highly leverage basis. Frequently such costs are financed using
80 to 100 percent debt. High leverage in an non-recourse financing permits a sponsor to put
less in funds at risk, permits a sponsor to finance a project without diluting its equity
investment in the project and in certain circumstances, also may permit reduction in cost of
capital by substituting lower cost, tax deductable interest for higher cost taxable return
on equity.
3. Off balance sheet treatment: depending upon the structure of project financing sponsors
may not be required to report any of the project debt on its balance sheet because such
debts is non- recourse or limited recourse to the sponsor. Off balance sheet treatment can
have the added practical benefit of helping the sponsor comply with convenient and
restrictions related to board.
4. Maximizes tax benefits: project finance is generally structured to maximize tax benefits and
to assure that all available tax benefits are being used by the sponsors or transferred to the
extent possible to another party through a partnership or lease vehicle.
5. Diversifies the risk: by allocating the risk and financing need of the project amongst a group
of interested parties or sponsors, project financing makes it possible to undertake project that
would be too large or would pose too great a risk for one party on its own.
Demerits

1. Complexity of risk allocation: Project financing is complex transaction involving many

participants with diverse interest. If a project is to be successful, risk must be allocated
among the participant in an economically efficient way. However there is necessary tension
between the participants. For e.g. between the lender and the sponsor regarding the degree of
recourse, between the sponsor and the contractor regarding the nature of guarantees, etc.
which may slow down the realization of the project.

2. Increase transaction cost: it involves higher transaction cost compared to other type of
financing, because it requires an expensive and time consuming due diligence conducted by
the lenders, lawyers, the independent engineers etc., since the documentation is usually
complex and lengthy.

3. Higher interest rates and fees: the interest rate and fees are higher in project finance as
compared to direct loan since the lender takes on more risk.

4. Lender supervision: in accordance with a higher risk taken in project financing the lender
imposes a greater supervision on the management and operation of the project to make sure
that the project success is not impaired. The degree of lender supervision will usually result
in higher cost which will typically have to be borne by the borrower.
2.6 Importance of project finance

Whether expanding manufacturing facilities, implementing new processing capabilities, or

leveraging existing assets in new markets, innovating financing is often at the core of long-
term projects to transform a company’s operations. Akin to the underlying corporate
transformation, the challenge with innovative financial structures such as project finance is
that the investment is made upfront while the anticipated benefits of the initiative are realized
years later.

There has been a rise in number of companies that need innovative financing to satisfy their
capital needs, in a significant number of instances they have viable goods but find that
traditional lenders are unable to understand their initiatives. And so the need emerges for
project finance.
Project financing is a specialized form of financing that may offer some cost advantages
when very large amounts of capital are involved. It can be tricky to structure, and is usually
limited to projects where good cash flow is anticipated.

Project finance can be defined as : financing of an industrial (or infrastructure) project with myriad
capital needs, usually based on non-recourse or limited recourse structures, where project debt and
equity (and potential leases) used to finance the projects are paid back from the cash flow generated
by the project, with the project’s assets, rights and interest held as collateral. In other words, it’s an
incredibly flexible and comprehensive financing solution that demands a long term lending
approach not typical in today’s market place.

Infrastructure is the backbone of any economy and the key to achieving rapid sustainable rate of
economic development and competitive advantage. Realizing its importance, government commits
substantial portions of their resources for development of the infrastructure sector. As more
projects emerged getting them financed will continue to require a balance between equity and debt.
With infrastructure stocks and bonds being traded in the markets around the world, the
traditionalist face change. A country in the crest of change is India. Unlike many developing
 countries India has developed judicial framework of trust laws, company laws and contract laws
necessary for project finance to flourish.

CHAPTER 3

Types of project financing (5)

Build Operate Transfer (BOT)

Build Own Operate Transfer (BOOT)

Build Own Operate (BOO)

3.1 Build Operate Transfer

Build operate transfer is a type of project financing that has found an application in recent years
primarily in the area of infrastructure in the developing countries. It enables direct private
investment in large scale infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period. The public
agency pays the contractor a fee, which may be a fixed sum, linked to output or, more likely, a
combination of two. The fee will cover the operators fixed and variable cost, including recovery of
the capital invested by the contractor. In this case ownership of the facility rests with the public
agency.

The theory of BOT is as follows:

Build – a private company (or consortium) agrees with the government to invest in a public
infrastructure project. The company then secures their own financing to construct the facility.

Operate – The private develop, then operates, maintains, and manages the facility for an agreed
concession period and recovers their cost through charges and tools.
Transfer- After concessionary period the company transfers ownership and operations of the facility
to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances its
construction and operates and maintain it over a period often as long as 20 to 30 years. This period is
referred as “concession” period. In short, under BOT structure, a government typically grants a
concession to the project company under which the project company has the right to build and
operate a facility. The project company borrows from the lending institutions in order to finance the
construction of the facility. The loans are repaid from “tariffs” paid by the government under the off
take agreement during the life of the concession. At the end of the concession period the facility is
usually transferred back to the government.

3.2 Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT) provider who
designs, builds, owns and operate the scheme for a defined period of time and then transfers this
ownership across to a agreed party. BOOT projects are a way for government to bundle together
the design and construction, finance, operation and maintenance and potentially marketing
and customer interface aspects of a project and let these as a package to a single private sector
provider. The asset is transferred back to the government after the concession period at little or no
cost.

The components of BOOT

B for build

The concession grants the promoter the right to design, construct, and finance the project. A
consortium contract will be required between the promoter and a contractor. The contract is often
among the most difficult to negotiate in a BOOT projects because of the conflict that increasingly
arises between the promoter, the contractor responsible for building the facility and those financing
its construction.

Banks and other providers of funds want to be sure that the commercial terms of the construction
contract are reasonable and that the construction risk is placed as far as possible on the contractors.
The contractor undertakes responsibility for constructing the assets and is expected to build project
on time, within budget and according to a warrant that the asset will perform its desired function.
Typically this is done by a lump-sum turnkey project.

O for Own

The concession from the states provides concessionaire to own, or at least possess, the assets that are
to be built and to operate them for a period of time i.e. the life of the concession. The concession
agreement between the state and the concessionaire will define the extent to which ownership, and
its associated attributes of possession and control lies with the concessionaire.

O for Operate

An operator assumes the responsibility for maintaining the facility’s assets and operating on the
basis that maximizes the cost on behalf of the concessionaire and, like the contractor undertaking
construction and be a shareholder in the project company. The operator is often an independent
through the promoter company.

T for transfer

This relates to a change in ownership of the assets that occurs at the end of the concession period,
when the concession assets revert to the government grantor. The transfer may be at book value or
no value and may occur earlier in the event of failure of concessionaire.

Stages of BOOT project:

➢ Build

➢ Design

➢ Manage project implementation

➢ Carry out procurement

➢ Finance
 ➢ Construct

Own

Hold in interest under concession

Operates

Manage and operate facility

Carryout maintenance

Deliver products\services

Receive payment for product\services

Transfer

Hand over project in operating condition at the end of concession period

3.3 Build Own Operate

In BOO, he concessionaire constructs the facility and then operates it on behalf of the public agency.
The initial operating period (over which the capital cost will be recovered) id defined. Legal title to
the facility remains in the private sector, and there is no obligation for the public sector to purchase
the facility or take title.

The private sector partners own the project outright and remain the operating revenue risk and all of
the surplus operating revenue in perpetuity. As an alternative to transfer, a further operating contract
(at a lower cost) may be negotiated.
3.4 Design Build Finance Operate (DBFO)

Under this approach the responsibility for designing, building, financing and operating are bundled
together and transferred to private sector partners. They are also often supplemented by public sector
grants in the form of money or contributions in kind, such as right of way.

In certain cases, private partners may be required to make equity investment as well. DBFO shifts a
great deal responsibility for developing and operating for private partners, the public agency
sponsoring a project would retain full ownership over the project.

3.5 Others

3.5(i) Build Transfer Operate (BTO)

The BTO model is similar to BOT model except that the transfer to the public owner takes place at
the time construction is completed, rather than at the end of the franchise period. The concessionary
builds and transfers a facility ti the owner but exclusively operates the facility on behalf of the owner
by means of management contract.

3.5(ii) Buy Build Operate (BBO)

A BBO is a form of asset that includes a rehabilitation or expansion of an existing facility. The
government sells the assets to the private sector entity, which then makes the improvements
necessary to operate the facility in a profitable manner.

3.5(iii) Lease Own Operate (LOO)

This approach is similar to BOO, but an existing asset is leased from the government for a specified
time, the asset may require expansion.

3.5(iv) Build Lease Transfer (BLT)

The concessionaire builds a facility, lease out the operating portion of the contract, and on
completion of the contract, returns the facility to the owner.

3.5(v) Build Own Lease Transfer (BOLT)

It is a financing scheme in which the asset is owned by the asset provider and is then leased to the
public agency, during which the owner receives lease rentals. On completion of the contract the asset
is transferred to the public agency.

3.5(vi) Build Lease Operate Transfer (BLOT)

The private sector design, finance and operate a facility under a long term lease and operate the
facility during the term of the lease. The private operator transfers the new facility to the public
owner at the end of the lease.

3.5(vii) Design Build (DB)

A DB is when the private partner provides both design and construction of project to the public
agency. This type of partnership can reduce time, save money, provide stronger guarantees and
allocate adequate project risk to the private sector. It also reduces conflict by having a single entity
responsible to the public owner for the design and construction. The public sector partners owns the
assets and has the responsibility for operations and maintenance.

3.5(viii) Design Bid Build (DBB)

It is the traditional project delivery approach, which segregates design and construction
responsibility by awarding them to an independent private engineer and a private contractor. By
doing so design bid build separates the delivery phases into the three tier phases: design, bid, build.
 The public sector retains responsibility for financing, operating and maintaining infrastructure
procured using the traditional design, bid, build approach.

CHAPTER 4

PROJECT FINANCE BY BANKS

4.1 Project Finance Strategic Business Unit (SBU)

A one stop shop for financial services. New project as well as an expansion, diversification and
modernization of existing projects in infrastructure and non-infrastructure sector.

Since its inception in 1995 the Project Finance SBU has build up a strong reputation for its in depth
understanding of infrastructure as well as non infrastructure sector in India and they have the ability
to provide tailor made financial solutions to meet the growing and diversified requirements for
different levels of the project. The recent transactions undertaken by the PF-SBU include a wide
range of project undertaken by the Indian corporate. Wide branch networking ensuring ease of
disbursement.

Expertise

• Being India’s largest bank and with the rich experience gained over generations, SBI bring
considerable expertise in engineering financial packages that address complex financial
requirements.
• Project Finance SBU is well equipped to provide a bouquet of financial structured solutions with the
support of largest treasure in India i.e. SBI’s International division of SBI and SBI Capital Markets
Limited.
• The global presence and wide spread branch network of SBI ensures that the delivery of your project
specific financial needs are totally taken care of.
• Lead role in many projects.
• Allied roles such as security agent\TRA agent etc.
• Synergy with SBI caps (exchange of leads, joint attempt for bidding projects, joint syndication etc.
In a way the two institutions are complementary to each other.
• In house expertise in infrastructure as well as non- infrastructure sectors. Some of the areas are as
follows;

Infrastructure sector:

1. Road & Urban infrastructure

2. Power & Utilities

3. Oil &Gas, Other Natural Resources.

4. Ports & Airports

5. Telecommunications

Non-infrastructure sectors:

1. Manufacturing: steel, cement, mining, engineering, auto components, textiles, pulp & papers,

chemicals & pharmaceuticals etc.

2. Services: Tourism & Hospitality, educational institutions, healthy industries etc.

Expertise

• Rupee term loan

• Foreign currency term loan\ convertible loans\ GDR\ADR

• Debt advisory services

• Loan syndication

• Loan advisory

• Deferred payment guarantee

• Other customized products i.e. receivables, securitization etc.

 Services offered

Single window solutions

• Appetite for large values

• Proven ability to arrange\syndicate loan

• Competitive pricing

Professional team

• Dedicated group with sector expertise

• Panel of legal and technical experts

Procedural ease

• Standardized information requirements

• Credit appraisal\ delivery time period is minimized

Eligibility

The infrastructure wing of PF-SBU deals with projects wherein project cost is more than Rs. 100
Crore. The proposed share of SBI in term loan is more than Rs. 50 crores. In case of projects in road
sector alone, the cut off will be project cost of Rs. 50 crores and SBI term loan will be Rs. 25 crores
respectively.
The commercial wing of PF-SBU deals with projects wherein minimum project cost is Rs. 200
crores (Rs. 100 crores in respect of service sec

4.2

ICICI bank is second largest amongst all the companies listed on Indian Stock Exchange in terms if
free float market capitalization. The bank has around branches with presence in almost 17 countries
worldwide. The bank offers a variety of financial services and products through a variety of delivery
channels and subsidiaries and affiliates in the area of investment banking, life and non-life insurance
products, venture capital and asset management.

The bank currently has subsidiaries in United Kingdom, Russia and Canada, branches in United
States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai. International finance centre in
United Arab Emirates, China, South Africa, Bangladesh, Thailand, Indonesia and Malaysia

Corporate Services

ICICI Bank guide one through the universe of strategic alternatives - from identifying potential
merger or acquisition targets to realigning your business’s capital structure.

ICICI Bank has been the foremost arranger of acquisition finance for cross border transaction and is
the preferred financer for acquisitions by Indian companies in overseas market.

The bank has also developed forex risk hedging products for clients after comprehensive research of
the risk a corporate body is exposed to. E.g. interest rate, forex, credit etc.

Loan Syndication

The bank provides syndication of loan to corporate clients. They ensure the participation of banks
and financial institutions for the syndication of loan. Some of the products syndicated are:

➢ Project finance
➢ Corporate term loans
➢ Working capital loan
 ➢ Acquisition finance etc.

Sell Down

ICICI Bank is the market leader in the securitization and asset sell down market. From its portfolio
the bank offers variety of products to its clients in this segment. The products are:

➢ Asset Backed Securities (ABS)

➢ Mortgage Backed Securities (MBS)
➢ Corporate loan sell down
➢ Direct Loan Assignment

Buyouts

As a part of risk diversification and portfolio churning strategy, ICICI offers buyouts of the assets of
its clients.

Resources

The bank also raises resources from is clients, for internal use by issue a gamut of products, which
runs from Certificate of Deposits (CD), Term Deposits, Term Loans.
4.3

IDBI was set up under an act of parliament as a wholly subsidiary of Reserve Bank of India in July
1964.

Services offered by IDBI bank for corporate are:

➢ Corporate finance
➢ Infrastructure finance
➢ Advisory
➢ Carbon credit business
➢ Working capital
➢ Cash management services
➢ Trade finance
➢ Tax services
➢ Derivatives

SME Finance

IDBI has been actively engaged in providing a major thrust to financing of SME’s with a view to
improving the credit delivery mechanism and shorten the Turn Around Time (TAT), IDBI has set up
centralized Loan Processing Cells (CLPC) at major centers across the country. To strengthen the
credit delivery process the CART (Credit Appraisal & Rating Tool) module developed by Small
Industrial Development Bank of India (SIDBI). It combines both rating and credit appraisal
mechanism for loan proposals. Recently a number of products have been rolled out for SME sector,
which considerably expanded IDBI’s offering to its customers. Also the German Technical Co-
operation and IDBI entered into an understanding for strengthening the growth and competitiveness
of SME’s by providing better access to demand oriented business development and financial
services.

Agri Business

Agriculture continues to be the largest and the most dominant sector in India, contributing 22% to its
GDP. It provides a source of employment and livelihood to over 60% of the population. Its linkages
are growing with increasing stress on food and agriculture processing industry on account of
changing demand patterns of processed food by consumers.

The bank has launched several products catering to the rural and agriculture community.

Project Finance Scheme

Under the project finance scheme IDBI provides finance to the corporate for projects. The bank
provides finance both in rupee and foreign currencies for Greenfield projects as also for expansion,
diversification and modernization. IDBI follows the global best practices in project appraisal and
monitoring and has a well diversified industry portfolio. IDBI has signed a Memorandum of
Association (MoU) with LIC in 2006 for undertaking joint and take out financing of long gestation
projects including infrastructure projects.
 CHAPTER 5

NON BANKING FINANCE COMPANIES

(NBFC)

5.1 REGISTRATION OF NBFC

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be
registered with RBI to commence or carry on any business of non-banking financial institution as
defined in clause (a) of Section 45 I of the RBI Act, 1934.

However, to obviate dual regulation, certain category of NBFCs which are regulated by other
regulators are exempted from the requirement of registration with RBI viz. venture capital
fund/merchant banking companies/stock broking companies registered with SEBI, insurance
company holding a valid certificate of registration issued by IRDA, Nidhi companies as notified
under Section 620A of the Companies Act, 1956, chit companies as defined in clause (b) of Section
2 of the Chit Funds Act, 1982 or housing finance companies regulated by National Housing Bank.

5.2 THE FUTURE

Over the last decade or so, The Reserve Bank of India is blowing hot or cold about Non Banking
Finance Companies (NBFC). The RBI reacted to a series of defaults and misdemeanors by a few
NBFC are, restricting their abilities to take deposits.

This unfortunately led to the collapse of many NBFC’s which depend on a continuous inflow of
deposits to meet redemption obligations, subsequently there seems to have been a better realization
of the role of NBFC’s in financing the small scale industries, particularly the transport sector.
The RBI in its latest monetary policy statement has cautioned that NBFC’s should be encouraged to
exit from the public deposits, in essence saying that NBFC’s should not take the public deposits.
This is, indeed extraordinary. The reasons given that, nowhere in the world private financing
institutes are allowed to accept deposits.

The fact is that NBFC’s are active in other economies. They accept deposits in developed economies
as well as in the same developing economies, like Malaysia. The existence of thrift societies in the
US Housing societies in the UK is well known.

Thrift and saving associations are almost omnipresent in the US. Credit unions of employees are
employees are in effect, self help groups, present in every organization. So are housing societies in
UK. They perform a useful role in garnering public savings and extending credits to those in needs.
The same is the situation with NBFC’s in Malaysia.

The position in US is that as against deposits of $4391 billion held by commercial banks, thrift
institutions and NBFC’s holds $1,247 billion. These as a non bank hold 28.4% of the deposits of the
banks. However in India public deposits of NBFC’s are only 0.003 percent of the banks in India.

Non banking finance companies in US are even covered by deposit insurance even as they are
subject to supervision by a special office of thrift supervision. These institutes handles a substantial
channel of local savings and transfers them as loan to desired borrowers, besides small and medium
scale industries, as well as housing needs. These institutions are liberally allowed to access the
capital market, where banks subscribe to bond issued by them.

The situation in UK is broadly similar. Building societies in UK have a big share of business
compared to their analogues in India, which holds deposits amounting to 18% of total retail deposit
balances.

They are also entitled to receive compensation from the financial services compensation scheme in
the event of failure in the business of deposit taking among others. In Malaysia NBFC’s deposits as
a percentage of bank deposits amounting to 21%. It is therefore; wrong to argue that NBFC cannot
access public deposits in other countries. Again the new fangled notion of Grameen Bank and self
help groups is nothing but thrift societies in another form. Traditionally in India, chit funds have
performed the role of collecting deposits from savers and lending money to those who are in need.
Constrained as they are by numerous restrictions, they still perform a signal service in funding small
and medium business, trade and support.

The fact is that NBFC’s in India have played a useful role in financing various sectors of the
economy, particularly those who have been un served by the banks. No business flourishes unless
there is a need for it and it fulfills the need efficiently.

The success of NBFC’s bears testimony to its role. Anywhere in India the small entrepreneurs goes
first to a NBFC for funds before going to the banks in view of the former’s easy access, freedom
from red-tape and quick response. The large expansion of the consumer durable business in India in
the last few years would not have taken place if NBFC’s had not entered the trade.

Similarly housing activity has also been encouraged by NBFC’s. the role of NBFC in funding
transport activity is well known. Latterly some NBFCs have been involved in funding infrastructure
quite successfully using the securitization of obligations.

NBFCs in India have played useful role in financing various sectors of the economy. The tendency
of regulators to deny access to public deposits for these institutions is a confession of inability to see
the economic reality, which calls for a flexible and customer friendly financial intermediary.

In fact many banks are forming NBFCs to take advantage of their greater flexibility to deal with
customers. The fact that some NBFCs were found abusing their position in 1990s seems to have
scared the regulator to out of its wits. The answer lay in better regulation, supervision and prudential
norms.

The RBI has strengthened its machinery in registration and supervision and extended prudential
norms to NBFCs. Denying access to deposits seems to throw a baby out of bathwater. On the
contrary, the RBI should apply its mind to strengthen the functioning of NBFCs, if necessary,
facilitating access to capital markets.
It is however interesting to note that RBI is thinking of using, in some form, an instrument like
NBFCs to extend its credit reach. Observations in recent RBI report shows that the central would
prefer to use microfinance credit agencies dedicated to serving SME cluster.

The RBIs report on Trend and Progress of Banking in India 2004 mentions that “banks should
extend wholesale financial services assistance to non-governmental organizations\microfinance
intermediaries and work as innovative model for securitization of MFIs receivable portfolios. Such
micro credit institutions can take the form of NBFC funded by individuals, or a group of banks, but
not permitted to take public deposits.”

A strange requirement, indeed of exclusion from public deposits. The recommendation of setting up
an institute in the form of NBFC is significant, although excluding such institutions from taking
deposits is not correct.

After all let us recognize that NBFCs have a set of characteristics that have made them an effective
form of financial intermediates. It is these characteristics that the RBI wants to incorporate in its
version of microfinance groups. The path of wisdom is to incorporate NBFCs as such into India’s
financial structures rather than reinventing them in another form.

There are of course some, persistent problems for NBFCs, apart from deposit taking. These relate to
flexible handling of their capital issues. Both SEBI and RBI need to revisit their case for relaxations
with sympathy, especially since they are rated and supervised. These specific relaxations are more a
matter of confidence building. The request made by NBFCs deserves sympathetic treatment from
both the securities market regulator and central bank.
5.3 PROCEDURIAL ASPECTS OF PROJECT FINANCE IN BANKS AS
WELL AS NBFC

Development operations financed by follow a procedural cycle, which is almost identical for all
kinds of projects whose technical, economical and financial feasibility has been established. These
projects must have a reasonable rate of return and should be intended to promote development in the
beneficiary country. The procedure consists of the following:

1. Identification of the project

The projects idea is introduced to providers to by various sources, a request from the
government concerned or financial missions may identify a proposal from other financiered,
or it. Applicants for financing are then sorted out and classified, projects to be financed are
selected from amongst projects which have top priority in the development plans of
beneficiary countries and which meet the requirements established by the rules for financing
set out by the providers and agreed upon by the government concerned. In all the cases, an
official request from the government should be submitted to financials before it decides to
participate in financing.

2. Desk review and determination of the project scope

Experts, each in the field of his specializations, study all the documents available on the
project and examine its components, its established local and foreign cost, the preliminary
financing plan, the position of other sources of financing, the current economic situations and
 the development policy of the beneficiary country and generally, review all the elements
which may help in making project successful.

3. Preliminary approval

The finding of the project’s review are set out in a report prepared by financial experts and
submitted to board of directors for preliminary approval for undertaking further studies on the
said project with the intention of considering the possibility of organization’s participation in
financing.

4. Project approval and submission to the board

After the project has been granted preliminary approval, organizations usually dispatches an
appraisal mission to the project’s site. This appraisal stage is considered to be one of the key
stages of the procedure. In this stage the project’s objectives, components, cost, financing plan,
justification and all its economic, technical and legal aspects are determined. The project’s
implementation schedule, the methods of procurement of goods and services, the economical and
financial analysis and the implementing and operating agencies are also examined at this stage.
Based on the results of the appraisal mission, an appraisal report is prepared, as well as a director
general’s report which is submitted to the Board of Directors for final approval is submitted.

5. Consultation with other co financiered

Consultations are considered to be one of the most important stages of approval. It is during this
stage that agreement is reached regarding the financing plan, the type of financing, and
distribution of the components of the project so as to ensure the smooth flow of disbursement
during execution of the various components of the project. This coordination should continue
throughout the project implement period so as to ensure the fulfillment of its objectives.

6. Negotiations and signature on loan agreement

After the beneficiary government is informed of the Board of Director’s decision to extend
the loan according to the terms agreed upon during the appraisal of project, the loan
agreement is prepared and negotiated, and eventually agreed by the government concerned.

7. Declaration of the effectiveness of the loan agreement

A loan agreement is declared effective after continuous contacts with the government
concerned and the other co- financiered and after fulfillment of all conditions precedent to
effectiveness stipulated in the loan agreement.

8. Project implementation and disbursement from the loan

After the declaration of effectiveness of loan agreement, the project’s implementation and
consequently, the disbursement from the loan funds starts according to the plan agreed upon
during the appraisal process and in line with the rules and regulations of the loan agreement
signed between the two parties.

9. Super visioning and follow-up

Financials undertake the follow ups of the project’s implementation through its field mission
is sent to the project’s site or through the periodic reports which requires the beneficiary
countries to provide on a quarterly basis. These reports enable them to advise the government
concerned on the best ways to implement the project.
 10. Current status report
Whenever necessary, experts prepare status reports which include the most recent
information and developments on the implementation of the project. This report enables
organizations to make use of experience gained from the completed projects, when
implementing similar projects in the future. In addition, it may help in identifying a new
project in the same field.

5.4 Risk involved in project financing

Each of these risks, along with their possible mitigates, is discussed in the following
section.

➢ Completion risk
It refers to the inability of a project to commence commercial operations on time and within
stated cost. Given that project financers are often reluctant to underwrite the completion risk
associated with associated with a project, project structures usually incorporate recourse to
the sponsors during the construction stage. However, this links gets served once the project
starts generating its own cash flows. Hence, during the construction period, risk perception is
significantly influenced by the credit worthiness and track record of the sponsors and their
ability and willingness to support the project via contingent equity\subordinated debt for
funding cost and time overruns, if any.
The risks are also dependent on the complexity of construction, as greater the complexity (for
instance, in the case of a petrochemical facility), higher the risk arising on this count. In
addition, for projects with strong vertical linkages, the non availability of upstream and
downstream infrastructure is an important source of incompletion risk.

Typical examples of such projects would be Liquefied Natural Gas (LNG), natural gas, and
toll road projects. In certain types of projects, such ports and roads, project completion is also
a function of the permitting risks associated with obtaining the necessary Rights of Ways
(ROW), environmental cleanliness and government approvals.

Completion risk is usually mitigated through strong fixed price; date certain, turnkey
contracts with credit worthy contractors, along with the provisions of adequate liquidated
 damages for delays in construction, which need to be seen in relation to debt service
commitments.

While assessing completion risk, adequate attention is also paid to the experience of
engineering, procurement and construction (EPC) contractor and its track record in
constructing similar projects, on time and within the cost budgets. Further it looks at the
seasonableness of the time available for project completion, which does not provide for
adequate contingency provisions, is often viewed negatively.

➢ Funding and Financing Risks

A project company’s financial structure and its ability to tie up the requisite finances are the
focus of analysis here. The financing structures is usually reviewed for the capital structure
of a project, which is evaluated to assess whether the debt equity ratio is in line with the
underlying business risks and that of other projects of similar size and complexity.
The protections provided to bondholders such as minimum coverage ratios that must be met
before shareholders distribution id made, and the availability of substantial debt reserves to
meet unforeseen circumstances. The matching of project cash flows (under various
sensitivity scenarios) with the debt service payouts and the potential for cash flow
mismatches.
The pricing structure adopted for debt and the exposure of the debt to interest rate and
currency risks. Such risks are particularly significant where the project raises variable rate
debt or liabilities in a currency other than the one in which its revenues would be
denominated. The presence of an experienced trustee to control cash flow and monitor
project performance on behalf of the bondholders.
Limitations on the ability of the project company to take new debt. The average cost of debt,
given that the cost of financing is increasingly becoming a key determinant of project
viability, in view of the fact that differences in technical and operating abilities have virtually
become indistinguishable among front runners.

Usually, most projects have a high leverage, and while equity is arranged privately from
sponsors, the project would be dependent on financial institutions and banks for arranging
 the debt component. In assessing the funding risk, the extent to which the funding is already
in place and the likelihood of the balance funding being available in time is considered, so
that the project’s progress is not delayed.

➢ Operating and technology risks

Operating and technology risk refers to the project’s inability to function at the desired
production levels and within the design parameters on a sustainable basis. Such risk usually
arises in projects using complex technology. Technology risk arises because of the newness
of technology or the possibility of its obsolescence, most often seen in telecom projects.
Where technology is well established, the focus of analysis is usually on determining its
reliability and the sustainability of the technology platform over the tenure of debt. The
Independent Engineer’s Report (IER) is used to review and assess whether the engineer’s
findings support the view of the sponsors and the EPC contractor. Technology risk, where
imminent, are usually mitigated through performance guarantees\warranties from the
manufacture, contractor or operator, and the availability of adequate debt reserves to allow
for operating disruptions.
The sponsors would conduct a due diligence to establish credit worthiness of the technology
suppliers\operators and the ability of these participants to compensate the project for failure
of the technology adopted. The risk associated with disruptions in operation due to
mechanical failure of equipment is usually mitigated through Operations & Maintenance
(O&M0 contracts.

➢ Market Risk
Market risk usually arises because of insufficient demand for products\services, changing
industry structures, or pricing volatility. Given the long term nature of project financing, a
considerable source of market risk is the possibility of dramatic changes in demand pattern
 for the product, either because of obsolescence or sudden and large capacity creations, which
could severely affect the economics of the project under considerations.

For analytical convenience, one can group projects into two categories, one, which produce
commodities (e.g. LNG projects, refinery projects and power projects), and two, where
certain natural monopolies exist (e.g. roads, ports, airports, power or gas transmission
projects). While the first category of projects is exposed to most of the risk indentified above,
the market risk for the latter type of projects are more demand related, with the piecing being
usually subject to regulatory or political controls.

Until recently, the implementation of some of those “commodity” projects, such as power
and LNG projects, in the international market was supported by long-term off-take contracts,
which provided considerable comfort for project financiered. However with the development
of a spot market for these commodities, customers of such projects are not willing to commit
themselves to such long term contracts; this has considerably increased the market risk
associated with the projects.
Under the circumstances, cost competitiveness and the nature (local or global) and adequacy
of demand have emerged as critical determinants of a project’s long term viability.

➢ Counter party risk

As discussed earlier, a project involves a number of counterparties who are bound to it by the
contractual structure. Therefore an evaluation of the strength and reliability of such
participants assumes considerable importance in ascertaining the credit strength of the
project. Counter parties to the project usually includes feedstock\raw material suppliers,
principal off takers, and EPC contractors.

Even a sponsor can become a source of counter party risk, as it needs to provide equity
during the construction stage. Because projects have inherently complex structures, a
counterparty failure can put a project’s viability at risk. The counterparty risk are usually
 addressed through performance guarantees, letters of credit and payment security mechanism
(such as escrows) , most commonly seen in the power projects.

However it has been observed that such contractual risk mitigates, however strong, may not
be effective in insulating a project from this risk, unless the project is fundamentally cost
competitive and makes commercial sense for all project participants.

35

➢ Regulatory and political risk

Political and regulatory risk continues to play an important role in the development of the
project finance business in India. Most project financing transactions carry an element of
political risk by virtue of the fact that they are often related to capital intensive infrastructure
developments and the resultant goods\services are consumed by the masses, directly or
indirectly.

Political and regulatory risk could manifest themselves in various forms, and significantly
impact the economics of the project under evaluation. For instance, such risk may take the
form of: Lack of transparency and predictability in the functioning of the regulatory
commissions which are typically involved in granting license, specifying the terms and
conditions for use of infrastructure as a “common carrier basis and fixing tariffs.

For instance, some of the stand alone LNG projects being set up in the country require a
change in regulatory policies for allowing them to use the available gas evacuation
infrastructure on a common carrier basis. Resistance to increase in user charges for common
utilities such as water charges, toll tax charges, and energy charges, despite such tariffs
increases being envisioned in the project documents. Changes in enviournmental norms,
 which could impact power plants and refinery projects by requiring them to invest
substantially in meeting such norms.

Problems in acquisition of land, which is typical in the case of road projects. As is apparent
from the proceeding discussion, regulatory and political risk is often difficult to quantify and
also mitigate. While assessing such risks, an attempt is often made to understand the
vulnerability of the project to such risk and also the nature of the relationship between the
local/central government and the project under review.

➢ Force majeure risk

Project finance transactions, which are different from corporate or structured finance because
of their dependence on a single asset for generating cash flow, are potentially vulnerable to
force majeure risk. The legal doctrine of force majeure excuses the performance of the
parties when they are confronted by unanticipated events beyond their control. A careful
analysis of force majeure events is critical in project finance because such events, if not
properly recompensed, can severely disrupt the careful allocation of risk on which project
financing depends.

Natural disasters, such as floods and earthquakes, civil disturbances, and strikes can
potentially disrupt a project’s operations and hence its cash flow. In addition, catastrophic
mechanical failure, due to either human error or material failure can be a form of force
majeure events that may excuse a project from its contractual obligations. Projects are not
usually able to cope up with force majeure events as well as large corporations, which have a
diversified portfolio of assets.
 It is therefore important that force majeure events be tightly defined, and that such risks are
allocated away from the project through suitable insurance covers taken from financially
strong insurance companies. One usually studies the nature, coverage and appropriateness of
the insurance policies taken and also evaluates the adequacy of debt reserves for meeting
debt service commitments in force majeure circumstances.

5.5 SECTOR WISE CREDIT EXPOSURE LIMIT

Real Estate Sector Exposure limit

The total exposure to real estate including individual housing loan and commercial real estate may
be limited to 15 per cent of the total deposit resources of a bank.

However, the above limit may be exceeded to the extent of funds obtained for the purpose from
higher financing agencies and refinance from the National Housing Bank.

Financing equipment leasing and hire purchase financing

Financial institutions should maintain a balanced portfolio of equipment leasing, hire purchase vis-à-
vis aggregate credit. Credit exposure to each of these activities should not exceed 5% of total
advances.

Financing for infrastructure projects

Infrastructure would include developing, maintaining and operating projects in power, roads,
highways, bridges, ports, airports, rail systems, water supply, irrigation, sanitation and sewerage
systems, telecommunication, housing, industrial park or any other public facility of a similar nature.
Credit exposure limits: Credit exposure to borrowers belonging to a group may exceed the
exposure norm of 40 per cent of the bank's capital funds by an additional 10 per cent (i.e. up to 50
per cent), provided the additional credit exposure is on account of extension of credit to
infrastructure projects. Credit exposure to single borrower may exceed the exposure norm of 15 per
cent of the bank's capital funds by an additional 5 per cent (i.e. up to 20 per cent) provided the
additional credit exposure is on account of infrastructure projects. Credit exposure would also
include investment exposure.

CHAPTER 6
Difference between project finance by bank and NBFC

➢ Cost of funds
Cost of funds has a significant role for financial institutes. In India where banks enjoys major
share of excess surplus lying with individuals as well as institutes as a part of their deposits,
NBFC’s always deprived of lendable funds. Also some of the NBFC’s are restricted to accept
deposits, wherein; it increases the cost of funds for NBFC.
High cost of funds ultimately has an impact on the agreed rate of lending to borrowers. So
NBFC’s are facing a problem in acquiring deposits which results in costlier lending as
compared to banks.

➢ Exemption to NBFC-AFCs from TDS Requirements U/s 194A (3) (iii) of The I.T. Act

Benefit allowed to banks, but NBFC-AFCs left out

As per Section 194A of the Income Tax Act 1961, tax has to be deducted out of the interest
payments made by specified borrowers to the lender at the rates in force. The rates vary
depending on the constitution of the payee (lender). For the category of domestic companies in
which NBFC-AFCs fall, the rate of TDS is presently 22.44% including surcharge of 10% and
education cess of 2%.

Banking companies, Cooperative societies engaged in banking business, public financial

institutions, LIC, UTI, Insurance companies and some other notified institutions are exempted
from the purview of this section, implying that if the payment of interest is made to these
entities, the borrower is not required to deduct TDS out of the interest payment. This is not
available to NBFC-AFCs even though they are in similar lending activities. Consequently, their
margins and cash-flow are severely affected.

➢ Requirement of expertise:
Project finance, being such a financing; wherein there is huge capital requirement and the
revenues are generated in the form of future cash flows are more prone to risks like
technology risk, counter party risk, delay risk etc. In order to determine and assess these risk
expertise in related specializations are required. Banks being a major and elder player
facilitates the required expertise for assessment of the risk. NBFC on the other hand lacks in
this aspect, therefore inviting more complications at later stages.

➢ Sense of security
Banks are considered to be the most regulated among the financial institutes in India. Hence
there is more sense of security in the minds of the borrowers regarding banks as compared to
NBFCs.

➢ Approachability
Banks are more approachable to the borrowers as compared of NBFCs due to their wide
branch networks. So bank becomes the first preference as compared with NBFCs.

➢ Processing length
Since project finance appraisal is a lengthy and complex process and also lot of expertise and
government approvals are required, thus a project finance processing is more lengthy with
NBFCs as compared to banks because of lack of expertise, lack of interference in
government approvals etc.
 Chapter 7

Research Methodology

7.1: Research Design: Research design followed by the Following steps

1.Research Problem:

• Increase the awareness level of project financing.

• Seek the general perception of companies towards the project financing.
• Seek the perception towards the NBFCs.

2. Research Objectives & Related Sub Objective

• To Know the other sources of finance preferred by the companies.
• To know the reasons behind selecting a particular company for finance.
• To know the reasons behind obtaining project finance.

7.2 Data Collection Technique And Tool

1. Primary data:

Take interview and then according to the interview make the questionnaire.
Primary data is collected through the questionnaire to the 15 respondents.

2. secondary data :

secondary data is collected through the internet, literatures.

Chapter 8
Data Analysis And Interpretation
Q1 Have you obtained project finance previously?

First time taker 2

Taken previously 11
Not aware 2

Of the 15 respondents, 2 were first time taker of project financing, 2 had never taken project
financing, 11 of the respondents had taken project finance previously.

Q2. If yes, how many times?

0 to 3 10
4 to 6 2
>10 3
We can see that the most of the respondents have taken project fiancé 1 to 3 times and only 3
respondents have taken more than 10 times. This shows that project finance is not such a favorable
option of finance among the borrowers. This his is be due to the documentation process involved is
very lengthy and also that approval time for funding is long. Also the borrowers have the other
options like loan from banks, deposits, loan from relatives etc.

Q3 please name the lenders from whom you have obtained project financing in past?

SBI 8
ICICI 4
DENA 1
Others 2

None of respondent had taken project finance from NBFCs, all of them had opted banks as there is
more security and also it is backed by strong brand name, further of all the banks, nationalized have
more market share then private banks in terms of popularity.

Q4. What was/were the reason/s for selecting this particular project financing
company?

Reference 8
Time frame 5
Documentation process 2

From the above the chart we can see that the most respondents choose a particular firm because of
reference i.e. either they had a account there or someone recommended the firm. After that
respondents gave importance to time frame.
The lender should promote project finance facility to all its existing customers as we can see that
most of the respondents choose a particular firm because of reference. The lender should take care
that the time needed for approval of project should also be shortened as this one of the factors which
gives advantage to the competitor.

Q5. Which other source of finance would you prefer for financing projects?

Loans from banks 7

Loan from relatives 4
Deposits 3
Investments in bonds 1

Apart from taking project finance to finance their project, there are various other avenue from where
the borrowers can finance their projects. The major competitor of project finance is the loan
provided by the banks, we can say this as this is the most favored option of the respondents.

Q6. What are/were your reasons for obtaining project finance?

Equipment purchase 3
New unit setup 7
Further investment 4
Ongoing projects 1

44
We can observe that project finance is usually proffered for new unit setup. This is because such
project usually requires more capital for initialization and also as the finance is provided on the
merits of the project, approval time is less. Close to new unit setup, the next is further investment in
business for which project finance is taken.

Q7. Are you aware of the factors considered by the lender before providing you project financing?

YES 10
NO 5

These Respondents were about some factors like feasibility of the project, credit worthiness and
availability of documents. They were not aware that the lenders also consider the current govt.
policies, market scenario, and macro economic factors.

Q8. Which type of repayment schedule do you prefer?

Bullet 4

Installment 11

73% of the respondents were more comfortable with the installment repayment system, and 27%
with the bullet repayment method.
Q9. For future projects from whom would you prefer to take project finance?

Banks 15

NBFCs 0

All the respondents opted for banks rather then NBFCs for project financing for their
future projects. The banks have majority of mind share among the borrowers. Also
the lenders feel that if they borrow from banks they will not face any problem
regarding availability of finance and also that banks will keep up to their words, in
short they will not face a problem with regarding to working capital when it comes to
banks. But same they do not feel regarding the NBFCs.

Chapter 9
FINDINGS and SUGGESTIONS
• Project finance is not popular among CAs. They prefer taking bank loan over project finance.
This due to the fact that the lenders have not made much effort in creating awareness
regarding the same

• The documentation process involved in financing a project is very lengthy and also that
approval time for finding is long. Also the borrowers have other options.

• None of the respondents had taken project from NBFCs. All of them had opted for banks as
there is more security and also it is backed by strong brand name.

• The lenders have taken care to see that the borrowers easily access the officers and also the
interaction between the lenders and borrowers is pleasant.

• Majority of banks get customer for project finance through reference that is either they are
existing customers are they have been recommended by others.

• Also documentation process should be shortened as this affect the decision of choosing
lenders.
• The major competitor of project finance is the loans provided by banks.

• Project finance is usually preferred for new unit set up.

• According to the lenders before giving finance to any project, the feasibility of the project,
credit worthiness of the project and availability of documents are given foremost importance.

• Banks have majority mind share among the respondents. The awareness regarding NBFCs is
very less among all the respondents.

• All the respondents opted for banks rather than NBFC for project financing for their future
projects

SUGGESTIONS

• NBFCs should promote project finance facility to all its existing customers also the
promotion will help in increase their deposit base, which will further decrease the lending
rates of NBFCs.

• Like banks, NBFCs need to be an organized approach to cater their services. It will help
them to acquire more market share, decrease in lending rates, quick and easy government
approvals, benefit of each other’s experiences.

• NBFCs should market themselves as the easiest option available for entrepreneurs, as it is the
only way they can sustain competition.
 • The NBFCs should make their presence felt in the market by organizing financial fares,
sponsoring events and other marketing tools.

BIBLIOGRAPHY

For the references different books, journals, and newspapers have been used and different
websites

Have been used.

Name of websites:
✔ http://www.rbiorg.com
✔ http://www.sbi.com
✔ http://www.icici.com
✔ http://www.idbi.com

Name of book and journal:

 Magazines & Journals
✔ Banking Finance
✔ Professional Banker

News Papers:
✔ Business Standard
✔ Economic Times

A QUESTIONAIRE
ON
BANK Vs NBFC

Name: ______________
Age:
(a) below35yrs
(b) 35-45yrs
(c) 45-60yrs
(d) above 60 yrs
Sex:
 (a) Male
(b) Female
Educational Profile:
(a) Graduate
(b) Post-graduate
(c) Professional degree
Occupational Distribution:
(a) Salaried (b) Business
(c) Professional (d) Retired
Total Income:
(a) below1.5lakh (b) 1.5—2.5lakh
(c) 2.5—5lakh (d) above 5lakh

Q1 Have you obtained project finance previously?

a) First time taker

b) Taken previously
c) Not aware

Q2. If yes, how many times?

a) 1 to 3
b) 4 to 6
c) >10
Q3 please name the lenders from whom you have obtained project financing in past?

a) SBI
b) ICICI
c) DENA
d) Others

Q4. What was/were the reason/s for selecting this particular project financing company?

a) Reference
b) Time frame
c) Documentation process

Q5. Which other source of finance would you prefer for financing projects?

a) Loans from banks

b) Loan from relatives
c) Deposits
d) Investments in bonds

Q6. What are/were your reasons for obtaining project finance?

a) Equipment purchase
b) New unit setup
c) Further investment
d) Ongoing projects

Q7. Are you aware of the factors considered by the lender before providing you project financing?

a) YES
b) NO

Q8. Which type of repayment schedule do you prefer?

a) Bullet
b) Installment
Q9. For future projects from whom would you prefer to take project finance?

a) Banks
b) NBFCs