Repayment that starts when the project does

What project finance is

A new project finance loan from a government bank is a specialised loan provided to finance large-scale projects, particularly in infrastructure, manufacturing, energy and other capital-intensive industries. These loans are structured to support the development and execution of new projects, covering costs from initiation right through to completion.

Key features

Purpose

• To fund new projects — infrastructure development such as roads, bridges and airports, manufacturing plants, power generation units and other large-scale projects.
• For setting up new industrial units, expansion of existing units, or large-scale construction projects.

Loan structure

• Term loans — provided for a longer duration, aligned with the project’s cash flow and completion timeline.
• Working capital loans — to cover operational expenses during the project execution phase.

Loan amount

The amount depends on total project cost, typically covering 60% to 70%. The remaining portion is expected to come from equity contributions by the project sponsors or promoters.

Interest rates

Rates are usually linked to the bank’s base rate or MCLR, with a spread added based on the project’s risk profile. Depending on the project’s nature, its risk and the borrower’s creditworthiness, rates typically range from 8% to 12% per annum.

Repayment tenure

Long-term, from 5 to 20 years, with the possibility of a moratorium during the construction phase. Repayment schedules are structured to match revenue generation, often including balloon or bullet repayments.

Collateral and security

• The primary collateral is usually the project assets themselves — land, buildings, machinery and other tangible assets.
• Additional security may include personal or corporate guarantees, pledges of shares and the assignment of project cash flows.
• In some cases banks require a Debt Service Reserve Account (DSRA) to cover debt obligations for a defined period.

Disbursement

Funds are disbursed in phases, linked to project progress milestones. Banks conduct regular project monitoring and audits before releasing further tranches.

Eligibility criteria

Promoter’s background

The experience and financial strength of the project promoters or sponsors are critical. Banks prefer promoters with a proven track record in executing similar projects.

Project viability

A Detailed Project Report (DPR) covering technical feasibility, market analysis, financial projections and risk assessment is mandatory. The project must demonstrate strong revenue potential and the ability to generate cash flows sufficient to service the debt.

Equity contribution

Promoters are generally required to contribute a significant portion of project cost as equity. The equity-debt ratio is a crucial factor, typically maintained at 1:2 or 1:3.

Creditworthiness

The credit history of the promoters and the borrowing entity plays a vital role. A credit score of 700 and above is preferred.

Regulatory approvals

All necessary regulatory approvals, environmental clearances and permits must be obtained before the loan is sanctioned.

Documentation requirements

Government schemes for project finance

Several government programmes can be layered into a project finance structure, reducing the collateral burden or the effective cost:

• CGTMSE — provides collateral-free loans to micro and small enterprises, including for project finance, with guarantee cover.
• Pradhan Mantri Mudra Yojana — offers project finance to small enterprises in manufacturing and services under the Shishu, Kishore and Tarun categories.
• Stand-Up India — loans for greenfield enterprises set up by SC/ST and women entrepreneurs, up to ₹1 crore.
• SIDBI project finance schemes — various schemes for MSMEs with flexible repayment terms and lower interest rates.
• Industrial Infrastructure Upgradation Scheme (IIUS) — supports large-scale infrastructure projects with government financial assistance aimed at upgrading industrial infrastructure.

Benefits of project finance

• Large loan amounts — access to substantial funding for large-scale projects, often running into hundreds of crores.
• Longer tenures — extended repayment periods aligned to project cash flow, so debt servicing does not strain the project’s finances.
• Structured financing — tailored repayment schedules and phased disbursement reduce the financial burden during construction.
• Risk sharing — banks take a participatory approach to monitoring, sharing both the risks and the rewards with promoters.
• Specialised support — government banks offer advisory services, helping promoters navigate regulatory challenges, optimise execution and manage risk.

The application process