daisymittal
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Banks have a special place in the financial system. Performance of the banking sector is considered as a substitute for the economy as a whole. Indian banks are increasingly becoming a part of globally integrated financial markets, which are expanding rapidly by the imperatives of enlarging volumes of international trade facilitated by technological advancements, offering both opportunities and challenges in its wake. There is certainly a standard shift in banking in India in recent past. At present profitability, capital restructuring, and transparency are considered important. Introduction of ATMs, plastic cards, cyber cash, electronic data interchange and automated clearinghouses are few such developments.
The process of computerization in banking industry in India has just begun. It has become all the more significant keeping in view the fast developments and trends towards consolidation through mergers and acquisitions taking place in the international financial markets and the need for Indian banks to keep pace with them for the emergence of competitive and vibrant banking system in India. The project financing is one of them. It was mainly the work of financial institutions but now all nationalized banks are funding the corporate projects.
Project finance is the generic term used to describe a project where the debt finance for that project is provided in reliance upon an assessment of the viability of the project. The lender's recourse is usually solely to the cash flow and, if necessary, the assets of the project, including contracts for the supply of raw materials, the sale of the finished product and a host of other arrangements relating to the continuing operation of the project. In contrast to funding the general business activities of a borrower, project finance concentrates on the financial viability of the project and ensuring that it will continue to be robust in any reasonably foreseeable circumstance, rather than placing substantial reliance on the continued creditworthiness of the borrowing entity.(Nabhi’s , 2003)
It has been used on many high-profile corporate projects it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects.
Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. Also one must understand the well-argued analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility.
According to Machiraju’s ( 2001 ) Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.
In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialised and possibly in a remote location. If saleable, they may have little value outside the project. Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided.
Project financing is usually chosen by project developers in order to
eliminate or reduce the lender’s recourse to the sponsors, maximize the leverage of a project, avoid any negative impact of a project on the credit standing of the sponsors, obtain a better tax treatment for the benefit of the project, the sponsors or both.
As stated previously, each project financing is different. Each project gives rise to its own unique risks and hence poses its own unique challenges. In every case, the parties - and those advising them - need to act creatively to meet those challenges and to effectively and efficiently minimise the risks embodied in the project in order to ensure that the project financing will be a success.
The process of computerization in banking industry in India has just begun. It has become all the more significant keeping in view the fast developments and trends towards consolidation through mergers and acquisitions taking place in the international financial markets and the need for Indian banks to keep pace with them for the emergence of competitive and vibrant banking system in India. The project financing is one of them. It was mainly the work of financial institutions but now all nationalized banks are funding the corporate projects.
Project finance is the generic term used to describe a project where the debt finance for that project is provided in reliance upon an assessment of the viability of the project. The lender's recourse is usually solely to the cash flow and, if necessary, the assets of the project, including contracts for the supply of raw materials, the sale of the finished product and a host of other arrangements relating to the continuing operation of the project. In contrast to funding the general business activities of a borrower, project finance concentrates on the financial viability of the project and ensuring that it will continue to be robust in any reasonably foreseeable circumstance, rather than placing substantial reliance on the continued creditworthiness of the borrowing entity.(Nabhi’s , 2003)
It has been used on many high-profile corporate projects it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects.
Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. Also one must understand the well-argued analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility.
According to Machiraju’s ( 2001 ) Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.
In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialised and possibly in a remote location. If saleable, they may have little value outside the project. Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided.
Project financing is usually chosen by project developers in order to
eliminate or reduce the lender’s recourse to the sponsors, maximize the leverage of a project, avoid any negative impact of a project on the credit standing of the sponsors, obtain a better tax treatment for the benefit of the project, the sponsors or both.
As stated previously, each project financing is different. Each project gives rise to its own unique risks and hence poses its own unique challenges. In every case, the parties - and those advising them - need to act creatively to meet those challenges and to effectively and efficiently minimise the risks embodied in the project in order to ensure that the project financing will be a success.