FAQ Project Finance - Faq's

Project Finance is credit facilities extended by way of Term Loan, ECB/FCTL and NonFund Based facilities viz. Bank Guarantee, Letter of Credit etc. for setting up of an economic venture. The economic venture may be under (1) Infrastructure Sector – as notified by the Govt. of India or (ii) Non-infrastructure Sector like Steel, Cement, Textiles etc. It is the long-term financing of projects based on its projected cash flows.

Bank provides financing for setting up of Infrastructure projects as defined by the Department of Economic Affairs - Govt of India vide Harmonized Master List of Infrastructure Sub-Sectors (http://www.infrastructureinindia.gov.in/harmonized_list)

The list includes the following 5 broad categories; which in turn includes various other infrastructure sub-sectors:

• 1. Transport and Logistics,
• 2. Energy,
• 3. Water and Sanitation,
• 4. Communication and Social and
• 5. Commercial Infrastructure.

• Largely executed through Special Purpose Vehicles (SPVs)
• Capital intensive
• Long gestation period
• Employment intensive
• Self-liquidating as repayment of project loan is mostly through Project Cashflows
• Assets not easily transferable
• Output is non-tradable (the output is produced and sold at the same location)
• Vulnerable to regulatory policies
• Limited/ non-recourse financing arrangement

• A loan in which the lender’s claim on assets is limited to the assets generated from the loan, in case of a default, is called limited/ non-recourse financing.
• Limited recourse/ non-recourse financing arrangement is often used in financing of long-term projects.
• As the name suggests, lenders have limited/ no-recourse to the Sponsors in case of default by the SPV/ delay in project implementation
• Lenders have to rely on the cash flows generated by the project for repayment of loans and for security.
• Ring-fencing of Cash Flows of the Project is an important aspect.