What is Project Finance?Project finance refers to the process of funding for projects by means of different sources (e.g. in the form of loan or bond) where a lenders accept the future revenues from the asset as a guarantee for the loan. In India, due to lack of presence of a fully liquid debt capital market, project finance has been primarily done by funding from Banks/FIs in the form of long-term loans. Project loans are generally structured as medium to long-term loans depending upon the revenue-earning capability of the projects and leverage/gearing used for financing the projects.
Structure of Project FinancePrimarily there are two sources of meeting the total expenditure of a project; first being the equity/capital brought in by the promoters and second being the debt provided by lenders. In couple of projects, there can be Grant or funding support provided by Government agencies/development agencies for breaching the gap in funding mechanism.
The funding pattern is decided keeping in view on the type of the project and cash flows expected from the project post construction. As a rule of thumb, in India, projects are financed at a Debt:Equity ratio of 3:1.
Project execution is preferred to be done through a Special Purpose Vehicle (SPV) route. It means the project is kept as a separate asset from the parent company/promoter’s balance sheet. This helps the lenders/debt providers to assess the specific risks of a project and enables them to take only those risks while funding the project.
Major Sectors/Segments Attracting FundingProject finance is best suited for developing infrastructure (e.g. Road, Power Plants, Ports, Airports and SEZs) where the capital expenditure is relatively high and the revenue visibility is long term in nature. The projects in infrastructure segment take 10-15 years to repay the loan, which makes them ideal to go for long-term funding by raising funds through SPV.
Project Finance Institutions in IndiaThere are several banks/FIs that have been active in undertaking project finance. Considering the long-term nature of project loans and risks involved in specific projects, banks have specialized teams for carrying out due-diligence of projects. Most of the PSU banks are active in funding infrastructure projects. Amongst private sector banks Axis Bank and ICICI Bank are the major players having an appetite for project funding.
Apart from banks, there are FIs (i.e. IDFC, IFCI, IIFCL, and L&T Finance) who have been active in lending funds to infrastructure projects. Furthermore, there are many syndication agencies such as SBI Capital Markets that are active in syndication of project loans to various Banks/FIs.
Career in Project Finance:Broadly, jobs in project finance in India can be classified into three roles:
- Origination/Relationship Management
- Project Appraisal/ Project Advisory
- Project Syndication/Debt Syndication
Project Appraisal/Project Advisory refers to carrying out the due diligence of projects including doing pre-bid advisory, preparing financial model by estimating cash flows for the project, doing promoter analysis and preparing structure of the funding to meet specific requirements in a project. The role requires financial modeling knowledge and credit appraisal skills.
Project syndication/debt syndication refers to selling of loans to other banks/FIs. Due to large size of the project, it is ideal for multiple banks to fund together for a single project. In such cases, a project syndication team of the lead bank (main bank) plays a role of intermediate in dealing with other Banks/FIs for finalizing the structure and getting sanctions from all the lending agencies involved in the transaction. The role involves interacting with various banks/FIs and negotiating the terms of sanction to best suit the client requirements and alignment of all the terms of agencies involved in lending to a project.
Entry Level Jobs:
Most of the banks/FIs consider MBAs in finance for the role of project appraisal/project advisory. In some FIs one can directly begin career as a relationship manager. Institutions such as Axis Bank, ICIC Bank and SBI Capital Markets offer good exposure in this segment as they are the most active players in infrastructure project finance and syndication. After couple of years the institutions provide flexibility to move to either enter into relationship management roles or to become sector/portfolio managers.