( Banks v/s NBFC )
Considering the growing use of project finance, we undertook this project with an objective of understanding the salient features of project finance. It 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.
As project financing is adopted by a majority of companies at least once in their lifetime, we decided to study this concept in detail. Banks as well as non-banking financial companies provide project financing.
Banks enjoy a major market share among the borrowers and the NBFC firms are lagging far behind and will slowly loose their market share if adequate steps are not taken. Banks are usually preferred over NBFC firms due to the security aspect and brand name. also the documentation process is one such aspect which the borrowers find lengthy and tiresome in both the banks and NBFC.
Awareness regarding the nationalized banks providing project finance is more than the NBFC firms providing the same. Also a borrower chooses a project finance provider mainly due reference and time frame within which the loan would be approved.
The NBFC firms need to take adequate steps to improve their position in the minds of the borrowers so as to stay in the market. The NBFC firms should try to inculcate in the minds of the borrowers that NBFC is as safe as any bank and should try and develop a feeling of security among borrowers with regard to NBFC.
Table of Contents
Introduction to project finance.
Origins of project finance
Project financing is generally sought for infrastructure related projects. Its linkages to the economy are mutiple and complex, because it affects production and consumption directly, creates negative and positive externalities, and involves large flow of expenditure.
Prior to World War I, private entrepreneurs built major infrastructure projects all over the world. During the 19th century ambitious projects such as the suez canal and the Trans-Siberian Railway were constructed, financed and owned by private companies. However the private sector entrepreneur disappeared after world War I and as colonial powers lost control, new governments financed infrastructure projects through public sector borrowing. The state and the public utility organizations became the main clients in the commissioning of public works, which were then paid for out of general taxation. After World War II, most infrastructure projects in industrialized countries were built under the supervision of the state and were funded from the respective budgetary resources of sovereign borrowings.
This traditional approach of government in identifying needs, setting policy and procuring infrastructure was by and large followed by developing countries, with the public finance being supported by bond instruments or direct sovereign loans by such organizations as the world Bank, the Asian Development Bank and the International Monetary Fund.
Development In the early 1980s
➢ The convergence of a number of factors by the early 1980s led to the search for alternative ways to develop and finance infrastructure projects around the world. These factors include:
➢ Continued population and economic growth meant that the need for additional infrastructure- roads, power plants, and water-treatment plants-continued to grow.
➢ The debt crisis meant that many countries had less borrowing capacity and fewer budgetary resources to finance badly needed projects; compelling them to look to the private sector for investors for projects which in the past would have been constructed and operated in the public sector
➢ Major international contracting firms, which in the mid-1970s had been kept busy, particularly in the oil rich Middle...