Project Finance

Project Finance is distinct from corporate finance in one fundamental respect: the loan is non-recourse or limited-recourse to the sponsors. This means the lenders' primary security is the project's future cash flows, the physical assets of the project, and the contractual arrangements that support those cash flows (such as power purchase agreements, toll collection rights, or concession agreements). If the project underperforms, lenders cannot typically pursue the sponsors' other assets beyond specific completion or performance guarantees.

The architecture of a project-financed deal typically involves several parties. The sponsors (developers or equity investors) create an SPV — a standalone legal entity — to own and operate the project. Lenders extend debt to the SPV, often through a consortium arrangement led by a major bank. The debt-to-equity ratio (leverage) in infrastructure project finance in India typically ranges from 70:30 to 75:25, with debt making up the majority of project cost. Lenders conduct extensive due diligence on project-specific risks: construction risk (will the project be built on time and within budget?), technology risk, off-take risk (will there be buyers for the output?), regulatory risk, and force majeure scenarios.

In India, RBI has issued specific guidelines on Exposure to Infrastructure Sector and Project Finance, including the Harmonised Master List of infrastructure sub-sectors, stressed asset classification norms tailored for infrastructure accounts (where a project may be under construction and hence in a pre-revenue phase), and directions on escrow accounts that channel project revenues to service debt before sponsors receive any distributions.

Infrastructure financing in India has faced several structural challenges. Long gestation periods mean that banks face asset-liability mismatch risk when funding 20-year projects with 3-5 year deposit liabilities. Regulatory and land acquisition delays have caused cost overruns on road and power projects, triggering NPAs in the banking system during the 2012 to 2017 period. RBI's response included creating frameworks for 'under-construction' project accounts that allow rescheduling without immediate NPA classification if delays are attributable to factors outside the borrower's control.

The National Infrastructure Pipeline (NIP), announced by the government for FY2020-25, targets over Rs 100 lakh crore in infrastructure investment, a significant portion of which is expected to flow through the project finance route involving banks, NBFCs, and multilateral institutions such as the World Bank and Asian Development Bank.