vaibhav project report

8/6/2019 Vaibhav Project Report

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Chapter 1 : Introduction to the project

1.1: C oncept 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: S cope 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: L iterature 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 andnegative 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 atlevels 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 andconstruction 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, acombination 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 isusually 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 purchasethe 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 bringconsiderable 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 deliverychannels 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

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➢ 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 toimproving 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 andsubmitted 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, whenimplementing 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 inconstructing 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 projectviability, 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 producecommodities (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 costcompetitive 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 andalso 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, catastrophicmechanical 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 theadditional 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 fundsCost 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 awarenessregarding the same

• The documentation process involved in financing a project is very lengthy and also thatapproval 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 asthere 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 theinteraction between the lenders and borrowers is pleasant.

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

• Also documentation process should be shortened as this affect the decision of choosinglenders.



• 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 isvery 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:

http://www.rbiorg.com/

http://www.sbi.com/

http://www.icici.com/

http://www.idbi.com/

http://www.sbi.com/

http://www.icici.com/

http://www.idbi.com/

http://www.rbiorg.com/



Magazines & Journals

✔ Banking Finance

✔Professional Banker

News Papers:

✔ Business Standard

✔ Economic Times

A QUESTIONAIREONBANK 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 previouslyc) 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) SBIb) ICICIc) DENAd) 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

vaibhav project report

Documents