Project Financing Challenges for Non & Sovereign Lending

Project Financing Challenges for Non & Sovereign Lending

June 2, 2020

Finastra Senior Managers Arvind Vairavan and Chandra Mohan MJ outline how to remain compliant when structuring credit agreements in an ever-changing regulatory environment.

By Arvind Vairavan and Chandra Mohan MJ

Project financing is a loan structure that relies on the project’s cash flow for repayment, with the project’s assets, rights, and interests held as potential secondary collateral. Project financing occurs with the sovereign (public sector) and non-sovereign lending business (private sector).

Multilateral Development Banks (MDBs) provide financial assistance to developing countries to promote economic and social development, through sovereign lending. On the sovereign lending business, there are mandated responsibilities of borrowers and lenders. MDBs primarily fund large infrastructure and other development projects, providing loans tied to policy reforms by the government.

Acting as catalytic agents, they promote balanced development and thereby aid in economic growth, funding new and upcoming business and projects.

Despite progress in Asia, reducing poverty, creating sustainable energy, green climatization, improved infrastructure, health and education also remains an unfinished mission whereby the private sector is key to completing this mission.

Project finance has been attractive to the non-sovereign or commercial banks (private sector) because it can fund major projects off-balance sheet.

Monitoring of timelines

Time is the essential indicator for monitoring a projects’ progress.

MDBs require dashboard capabilities to monitor and track the progress of the project at various phases in sync with the pre-defined uses and sources.

MDBs also need to inspect the project at various predefined stages especially on sovereign projects.

Reports need to be submitted as part of the regulatory monitoring and as supporting data for decisions on future release of funds.

Inspections

Sovereign and non-sovereign projects are typically long term involving multiple contractors working round the clock to meet the quality standards and pre-defined timelines.

This brings to question whether the defined standards are being met. MDBs are required to physically inspect the projects at various stages ensuring the disbursements are utilized to achieve the predefined phases. The physical inspection needs to be documented and linked to the projects phase for easy reference and monitoring.

Disbursement notifications and invoices are another key element to let the receiving parties know the funds have been disbursed to their account for the various invoices/ services provided, which involves the need to automatically template and forward them to the preferred contacts using the preferred notification methods.

MDBs also have a major challenge with the process of disbursement as part of compliance. The loan officers need to comply with a checklist ensuring all the mandated requirements have been complied by all the parties receiving the funds. This checklist eases the process of 4-eye approval check process to disburse the funds safely without any breaches to the parties involved.

Supplier contracts and documents

Documentation is a requisition for sovereign and non-sovereign projects and they are mandatory from pre-initiation to hand-over.

This is a challenge for project finance due to the nature of business which requires various covenant compliance across parties involved. There are innumerable documentation categories and types which need to be reviewed, approved and more importantly linked to transactions for audit and compliance.

Disbursements

Loan disbursements for sovereign and non-sovereign are processed in sync with the defined uses and sources.

The disbursements are a single transaction which can involve funding for various uses.

These could be a combination of advances or re-imbursements with a check that there is no breach of the defined uses limit.

One of the major challenges for the release of funds is the pre-check of the invoice through the legal and procurement team, the invoices need to be linked with each disbursement for audit compliance and further reference.

Leading to the next challenge of disbursement, which is the distribution of funds. On a typical loan disbursement, cashflows need to be split to be sent directly to the various parties involved such as consultants, vendors, contractors, sub-contractors. MDBs need to ensure there is a check in place to allow only valid approved parties and accounts to be allowed for fund disbursement.

The documentation process is not a one-time activity as they expire based on the nature of categorization, needing to be collected and reverified both internally and externally on a predefined frequency.

MDBs are required to constantly track due dates on the documents and send out notifications to all the parties to comply requirements for loan disbursement.

Based on the current requirements, the complexities and nuances for more informative decisioning for MDBs, suitable solutions to cater to these needs will be required in the foreseen future.

Regulatory impacts such as the IBOR changes coming up will further impact banks to be able to keep you with the ever-changing environments and structuring of these credit agreements and be compliant with the regulatory impacts across the different countries.

(Ed. Authors, Finastra Senior Manager Solution Consulting Arvind Vairavan heads the lending solutions team for APAC and is a subject matter expert on Corporate Banking, Commercial, Syndications, Sovereign Lending and Risk. He says he has a Master’s Degree in Business Administration from the Rutgers University USA and double majors in Finance and MIS from SUNY USA. He is also a member of the APLMA. Senior Solutions Consultant Chandra Mohan MJ specializes in Commercial Lending, Loan Syndications & MDB – Project Finance. He says he has a Bachelor’s Degree in Commerce from Sri Sathya Sai Institute of Learning, Puttaparthi, Andhra Pradesh, India. To obtain a copy of Finastra’s latest report, Open Banking and collaboration: State of the nation survey 2020, click here.)

Facebooktwitterredditlinkedin

Leave a Reply

Your email address will not be published. Required fields are marked *