Project finance is one of the key focus areas in today’s world because of continuous growth and expansion of the industries at a rapid rate. Project finance is different from traditional forms of finance because 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.
As per International Project Finance Association (IPFA)“The financing of long term infrastructure, industrial projects and public services based upon a non- recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flows generated by the project.”
In simple words Project finance is a method of financing very large capital intensive projects, with long gestation period, where the lenders rely on the assets created for the project as security and the cash flow generated by the project as source of funds for repaying their dues.
- Full Recourse Loan: A loan in which the lender can claim more than the collateral as repayment in the event that the loan is enforced. Thus a full recourse loan places the Sponsor’s assets at risk.
- Non Recourse Loan: A loan in which the lender cannot claim more than the collateral as repayment in the event that the loan is enforced.
- Limited Recourse Loan: A loan in which the lender can claim more than the collateral, subject to some restrictions, as repayment in the event that the loan isenforced.
Advantages of Project financing:
- Maximise Leverage of the project
- Permit Off-Balance-Sheet Treatment
- Maximize Tax Benefit
- 5. Avoid restrictions binding the sponsors under their respective financial obligations.