PROJECT FINANCING IN INDIA - A PROMISING PATHBy Vaishnavi Bansal, SkillxProAbstract: COVID-19 has derailed major sectors, having a direct implication on the employment in those sectors. However, one of the sectors which seems to have been largely un-affected is the Infrastructure and Project Finance sector. In fact, we saw a continued upturn in this sector largely due to government’s push to infrastructure & energy project under the ‘Aatmanirbhar Bharat’ mission, creating consequential upturn in employment in this Industry. Let’s analyse this upturn in projects sector.
Project financing is a thriving financing technique for capital intensive projects. Its origin can be traced back to 13th century when English crown negotiated a loan from Frescobaldi, one of the leading merchant bankers of those times, to develop Devon silver mines. It can be used to finance a variety of opportunities not limited to tangible assets. Under this technique, the project funded is considered as a separate business unit than its parent company so that the assets of the parent company cannot be encroached in the failure of the project.
Project financing in India unlike other more evolved jurisdictions, is not completely dependent on the project and project revenues, as the regulatory requirements require promoter guarantees and undertakings. Traditionally, it has been associated with core sectors like highways, airports, roads, power projects etc in India. However, recent trends show the increased focus of the government on urban development and it is expected to increase by 75% by 2030. With this, health and sanitation, waste-to-energy, mass transit will also become the focus sectors for project finance in the coming years.
The banking sector in India however, has experienced erosion in its profits and the accumulation of non-performing assets in the project financing sector. ICICI bank, one of the last banks to have project financing division has also terminated its operations in the sector. Even the public sector banks which invested in the area experienced losses and are retrieving to short term and working capital loans only. It is certainly no coincidence that every financial institution which attempted to focus in this area have resulted in losses. These failures underline the structural problems in the banking industry of India like the dearth of long term financing from the rudimentary bond market, scams, collusions of the bankers and promoters to mask fund diversion from the project costs etc.
In terms of the overall growth in the sector, the future is quite promising as the need for an overhaul in the infrastructure sector is recognised by the government. The 2020 Union budget was aimed at creating incentives for the investment in Indian infrastructure trough 100 per cent tax exemption for sovereign wealth funds of foreign governments in respect of their interest, dividend and capital gains income from infrastructure investments on the condition that such funds should remain invested for a minimum period of three years. The government has also attempted to liberalise offshore lending to encourage Indian developers to reduce dependence on Indian banks and NBFCs. Other regulators are also revamped for a push in this sector like National Highway Authority of India not only increased the quantum and the pace of its operations but also used digital banking to disburse contractors to increase their cash flows, set up a dispute resolution board for the speedy recovery of disputes while they are still in progress, made changes to the concession agreement on hybrid annuity projects, linking annuity payments to bank lending rates etc. These efforts have resulted in an increase in the operations of Engineering, Procurement and Construction (“EPC”) firms and have resulted in three times spike in their order books. Hence, with increased government focus and push the project financing in India is leading its path to the success and minor push backs like the failure of financial institutions in this sector have been combated and resisted and this will surely also result into the overall growth of the economy with the positive multiplier effect of these projects.
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