In early 60’s foreign exchange was a rare commodity, commerce and support services were in infancy; and project financing was considered a cumbersome and complex exercise.

Due to the unfledged regularity framework and various policy restrictions on the manufacturing sector a few could afford to walk into a financial institution, complete the bureaucratic formalities, face the challenging queries of the lenders and get a final approval.

With the growth in banking, the increased local and export demand of goods, the development of the related infrastructure, availability of a wide range of support services like the stock exchange, trade bodies, commercial forums, etc., the entrepreneurs today have been encouraged to take up industrial activity more enthusiastically than ever before.

Industrial financing was primarily considered as a function of the development financial institutions (DFIs),of which more than half a dozen had been set up by end-1970s.During the ensuing decade commercial banks entered into industrial financing. The Asian Development Bank (ADB) and the World Bank credit lines were now shared by the commercial banks along with DFIs. This led the DFIs to enter into commercial banking through deposit mobilization schemes.

The loan application form, in the past, was a complex and tiring exercise requiring exhaustive information about the proposal and the borrower, besides requiring a supporting feasibility in most of the cases. This process would take normally 4-8 weeks in case of the established technologies like the spinning, weaving, sugar, cement, etc., and may stretch over 2-3 months in case of newer technologies or in cases of projects where data would not be available or was non-existent. Some times it would take 2-3 years from the date of initial application to start production. May be due to scarce resources and a wide variety of proposals requiring allocation of funds, swift decision somehow could not be made. Some times, slow approval of the project was due to scanty infrastructure facilities like power connection, telephone, gas, sewerage, etc.

The project-financing model, however, has taken a new shape in recent years. It has now become more speedy and less complex. Preliminary questionnaires have been done away with by many of the lenders. Similarly, finer details like a pre-feasibility study, soil testing, etc., or even filling up a comprehensive and detailed loan application form has been greatly facilitated with short, and up-to-the-point details. The State Bank has also introduced a Borrowers Basic Fact Sheet requiring pertinent details in a uniform manner.

Long term project financing has now turned itself into a borrowers’ market forcing the lender to become efficient and client-friendly. The rules have changed. The past phenomenon of having a fewer lenders of the industrial loans with large number of industrial borrowers has changed, substantially. A fewer number of very demanding industrial borrowers and a large number of willing rather enthusiastic lenders has forced many lenders into launching marketing campaigns for term-financing on the pattern of consumer finance.

With liberalization of the foreign exchange policies and the prevailing high liquidity, borrowers are now comfortable with opening the letters of credit (L/Cs) through commercial banks for the import of machinery like any other import without any prior project financing arrangement with a bank. Keeping in view the size of cash requirements, the importer of machinery can either get the import financed through internal resources or has the option to create a demand finance with the bank in case of low internal liquidity. The exchange rate fluctuation is taken care of through the exchange risk booking in case of sensitive currencies but this, too, is only for the period of transit or up to the delivery of machinery. Once the machinery has been imported, no exchange fluctuation would jeopardize the loan obligation subsequently against the borrower’s obligation.

In the past, there was a big hurdle in project-financing model, as the foreign exchange fluctuations in case of the foreign currency borrowing would keep affecting the outstanding loans during the maturity period which would range from 7-10 years. Since 80’s there exist a foreign exchange commission fee to protect the borrower against these fluctuations. Many projects collapsed as the original borrowing could never be repaid due to the fluctuations in the currency. Moreover, in the case of the suppliers credit offered by the foreign machinery supplier, the liabilities soared heavily in the books of the borrower or the local guaranteeing bank due to the adverse exchange fluctuation over the period of the supplier’s credit of 5-7 years.

Another positive dimension of the project financing today is the confidentiality. The proposal is now processed within a bank extensively without the knowledge of the competitors of both the bank and the borrower. Previously when a bank would approach the other bank for credit enquiry, it would normally indicate the purpose of the enquiry thus disclosing the nature of the proposal to others, specially the competitors. Today the bank has the credit inquiry board (CIB) which can be approached without sharing the purpose of the type of facility applied for, in a bank. Moreover, banks being more conscious of the borrower’s preferences and demand normally don’t share or expose the number and nature of proposals being processed. Thus secrets of price and technology are well kept. Now, borrowers can safely and secretly get their proposal financed and maintain an edge over their competitors.

Project financing has become extremely challenging for lenders of today. The borrowers have the edge specially the AAA clients who are the top players in the market. These successful companies with strong borrowing capacity and good credit standing have adopted a quick and deliverable model, which logically by-passes the preliminary project analysis by the lender. After ascertaining the viability through in-house project scrutiny, the letters of credit are established for the import of machinery against the available margins depending upon the credit standing of the borrower. Once import documents are received, credit can be created with the bank for short-term to be adjusted against the available liquidity in near future, otherwise the term-financing is arranged through the available fixed-assets including, the imported machinery items. The bank in real terms is more secured due to the physical existence of the quality assets put to the project site rather creating a charge over the future assets as was in the past.

Projects going for balancing modernization and replacement (BM&R) especially by the profitable companies are quite workable under this arrangement, whereas lenders are normally reluctant in case of the Greenfield projects which are to follow the traditional project financing model of the pre-sanction processing and scrutiny. Interestingly the turning point of project financing is the growing phenomenon of early repayment of the outstanding debts by the liquid companies and even debt swap in case of some. The debt swap is a financial arrangement.