Project Financing: Bank Requirements
In Russia Vnesheconombank, Sberbank and VTB are most active in project financing. If for the former the important criteria of financial participation are social importance of the project and inclusion in the number of industries of the bank’s priorities (by the middle of 2014 the number of projects in the development bank portfolio amounted to about three hundred, and a half of them are infrastructure projects), Sberbank and VTB can also finance projects, for example, in the sphere of real estate construction.
Unlike investment crediting, which is usually intended for operating companies, and the credit repayment sources include, first of all, current profit, project financing is intended for new business, and its scale is comparable with modern activity of initiator companies. Thus, in project financing a creditor can hardly count on repayment through the borrower’s operating business, which makes the project extremely complicated at the planning stage.
In June of 2014 the Central Bank (CB) decided to grant inexpensive public loans to banks for 1–3 years for financing of private business investment projects. At the same time the government started to develop a mechanism for providing CB means intended for project financing with preliminary limit of 50 billion rubles. In the middle term CB forecasts inflation on the level of 4 %, due to which “long” money institutions can be formed.
In addition to economic feasibility of new business creation, work experience in the field and implementation of investment projects by the initiator, an important term during the bank’s decision-making about participation in project financing is the borrower’s business reputation. Should there be any problems about it, even a project free of risks as regards other indicators can be rejected.
Another important condition, according to KPI analysts, is the volume of risks business accepts. For large investment projects to be successful their initiators have to put at stake their own money, not only borrowed one. And while by documents Vnesheconombank can start crediting with 10% initiator’s participation, in practice such projects rarely continue longer than business planning stage (without investing considerable sums of one’s own money, the initiator is rarely motivated to carefully think over every project detail). Besides, financial organizations with great enthusiasm participate in projects which will ultimately be implemented even without their direct participation or with a smaller share, simply during a longer period of time and with great damage for the initiator’s current assets.
Mechanisms of obtaining “long” money are the most required by business, especially if money is needed for organization of a new independent enterprise.
However, the greatest impeding factor in implementation of new projects and obtaining financial resources for them is the level of their development. In VEB less than a half of submitted applications meet bank standards (by the volume of investment, industry, structure of the business plan and financial model and other) and undergo first-hand inspection, although these requirements are openly available. And if a large business is “lazy” even to submit the documents in the form required by the financial organization, what quality of large-scale project implementation can the bank count on?