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Project loan in India – All you need to know

  • 10-May-2022
Project loan in India – All you need to know

A project loan is also known as project financing which is a long-term funding. Individuals who plan to start a project be it an infrastructure, public services, or industrial project require funds for the same so, they can avail a project loan. 

 

It provides an opportunity for the growth process of the firm and also shares its profit. Project loans are offered by several banks, financial bodies, or NBFCs that support you financially. 

 

The rate of interest on project financing is affordable, which starts from 5.50% onwards along with a maximum repayment period of 10 years. 

 

It is provided to the medium and large enterprises that have a turnover of more than Rs. 500 Crores or a project cost of Rs. 500 Crores or a minimum exposure (Funded + Non funded) of Rs. 25 crores. 

 

Key features of project loan 

Risk allocation: - Under the financial plan, certain risk associated with the business project is transferred with the banks. Therefore, in applicant perspective availing such loans helps them to mitigate the risk while on the other hand banks gets better margin for project financing. 

 

Involvement of Multiple parties: - As project financing usually requires large-scale projects, it is possible to allocate Multiple parties in the same project to manage various aspects. Doing so, helps in smooth operation throughout the process. 

 

Limited Financing Solution: - Since the applicant does not have control over the project until its completion and on the same time banks do not have to waste resources or time in analysing the credibility and assets of the applicant. Therefore, lenders can concentrate on the feasibility of the project. 

 

Better tax treatment: - When project financing is implemented, the better tax treatment will help the project and other sponsors. Therefore, this financing solution is favoured by sponsors to get funds for long-term projects. 
 

Types of a project loan 

There are three types of project loan as given below: 

  • Special purpose entity - The Special Purpose Entity is a company specially formed to fulfil a specific purpose and to recognize the financial risk.

 

  • Non-Resource loan- non-Resource loan is a type of loan where an applicant has to pledge their assets as collateral to develop trust. If the applicant could not repay the borrowed amount, then it will be availed by investors and equity to equalize provided capital.

 

  • Limited Resource loan: - Limited Resource loan is a loan in which some kind of loan agreements initiated for creditors at a specific percentage in the loan amount, and the risk level is less as compared to others.

 

Interest rate and processing fee charges for project financing 

Rate of interest  @5.50% onwards 
Loan amount  Up to 85% of the project cost 
Repayment tenure  Up to 10 years 
Processing fee 1% of the loan amount  
Foreclosure charges  2% 

 

 

Project loan interest & processing fees rate by Top banks 

Bank name  Interest rate  Processing fee 
Bank of Baroda  7.50% 1% 
Bank of Maharashtra 8.00% 1% 
Canara bank  8.75% 1% 
Bank of India 8.00% 1% 
Punjab National Bank  8.00% 1% 
Punjab & Sind Bank 9.00% 1% 
Indian Bank  7.50% 1% 
Indian Overseas Bank 9.00% 1% 
Karnataka Bank Ltd. 9.00% 1% 
Central Bank of India  7.50% 1% 
UCO Bank  10.00% 1% 
Union Bank of India 9.00% 1% 
United Bank of India 9.00% 1% 
Small Industries and Development Bank of India (SIDBI) 5.50% 1% 
South Bank of India 9.00% 1% 
State Bank of India 7.50% 1% 

 

 

Different stages of project loan 

 

# Pre-Financing stage 

  • Identification of the project plan

The identification of the project depends on the basis of industry trends and requirement of the business. 

 

  • Recognizing risks

While investing, the bank has right to verify if the project has sufficient resources to avoid the risk in the future. 

 

  • Checking project Feasibility

Before the lenders decide to invest, it is important to investigate the feasibility of the project, both financially and technically by considering all the associated factors. 

 

# Financial Stage 

  • Arrangement of Finances

To finance the project, an individual needs to obtain a loan from the bank or financial institutions whose objectives are set up to the project. 

 

  • Loan Negotiation

The applicant and lender negotiate the amount of a loan & come to a uniform decision for the project. 

 

  • Documentation and Verification

In order to analyse the project potential, applicant are required to submit certain documents to the lenders. Thereafter, lenders cross-examine the documentation and verify the same. 

  • Payment 

Once the documents are approved by the lender, the applicant receive the funds to execute the operations of the project.  

 

# Post-Financing Stage 

  • Timely Project Monitoring

Monitoring the project & milestones at regular intervals. 

 

  • Project closure

It indicates the deadline of the project. 

 

  • Loan repayment

Repayment of loan by the cash flow caused from the project. 

 

                                                  @contentImg

 

Types of sponsors in Project loan 

To determine the aim and risks related to the project, it is crucial to know the sponsors that are associated with the project. 

Listed below are the sponsors that are categorized into four types: -  

  • Industrial sponsor 

Those sponsors who spot the initiative as upstream or downstream, or linked to their core business. 

 

  • Public sponsor 

The public sponsor includes public service and is associated with government or cooperative societies. 

 

  • Financial sponsor

These sponsors are often participating in project financing & invest in deals with high returns. 

 

  • Contractual sponsor

Contractual sponsors are involved in the development of a project, its operations, and maintenance.  

 

What are the risks involved in a project loan? 

When it comes to a business many ups and downs are aligned with it. Usually, risks faced in the project involves many factors such as cost of the project, time, performance, currency exchange, etc.  

 

Political risks: - Projects related to the government have a great political risk that is included as a change in politics and party that can impact feasibility, funding, and project requirements. 

 

Performance: - Even if the project is completed on time, it should fulfil the expectation to make expected cash flow. 

 

Cost of project: - At the time of financial and technical analysis, one needs to assume the capital cost involved in purchasing raw materials. Suppose the expenditure exceeds the assumption it will be hard to repay the capital. 

 

Timeliness: - A penalty would be imposed if applicant failed to meet the deadline related to the project. 

 

Currency exchange: - If the banks are not local, then there is a risk of capital exchange as the interest payable on the amount increases. 

 

Eligibility criteria  

Eligibility criteria of project loans depend on many factors such as sales turnover, age limit of an individual, total work experience, repayment history, and creditworthiness, etc. 

For self-employed individuals: -  

  • The age limit of the self-employed individuals ranges from 21 years to 65 years of age.

 

  • Business continuation for a minimum of 3 years.

 

  • The business should be in profit in the last audited financial year.

 

  • Both Public and Private sector companies are eligible for project financing.

 

Factors affecting eligibility criteria of project loan 

Listed below are the factors that usually affect the eligibility criteria for project loans: -  

  • Avoid applying for various credit cards and loans

While planning for a project loan, the borrower should avoid applying for various loans and credit cards because it affects their credit score and lowers the eligibility level.  

 

  • Shortage of work experience

Lenders will verify the work experience of the borrower to check their ability to pay back the monthly EMI with the principal amount. 

 

  • Applicant’s age

If the age of the applicant ranges from 25 years to 30 years of age, then they have enough time to pay back the loan because their working days are longer but if the age of the applicant is nearest to the retirement age, then he has lower eligibility and less working days to repay the loan amount . 

 

  • Less income

The income of the individual represents their potential for repayment. If an individual has any running loan, then the liability of ratio for income will be assessed by the lender to identify whether an individual is able to pay back any new loan. 

 

  • Low CIBIL Score

CIBIL Score plays a vital role in justifying the past financial creditworthiness, the credit score ranging from 600 or below comes in the bad category, and if the credit score ranges from 750 or above comes in the good category. A score that is below 700 indicates that individuals do not pay bills and EMIs on time. 

 

Documents required for a project loan 

Given below are the documents required for a project financing: - 

  • Duly filled application form with passport-sized photographs.

Identity Proof (Anyone) - 

  • Aadhar Card
  • Voter ID
  • PAN Card
  • Driving License
  • Passport

Address Proof (Anyone) - 

  • Electricity Bill
  • Water Bill
  • Ration Card
  • Lease Agreement

Income Proof- 

  • Manage profile and Company profile.
  • Bank statement of the previous two years – Salary account.
  • Income Tax Return (ITR) with computation balance sheet for previous 3 years form –16.
  • Profit & Loss statement
  • Audited Financial by Chartered Accountant
  • Appointment letter and salary slip for the previous 3 months.

 

Other mandatory documents -  

  • A cheque in favor of the bank for processing fee.
  • Projected financial
  • CMA Data
  • Building construction estimate
  • Machine Quotation
  • Pollution certificate
  • MSME Certificate and ISO Certificate
  • Project feasibility report
  • Property documents with Chain ATS and MAP
  • Sanction letter and loan scheduled (if running)

 

How to apply for project financing? 

Before applying for a project loan, the borrower must choose and compare the banks that offer the best deals. 

Step by step to apply online: -  

Step 1: - Visit the official website of preferred lender and check your eligibility. 

 

Step 2: - With the help of using the EMI calculator, you can evaluate your monthly payable EMI. 

 

Step 3: - After evaluating your EMI, fill in the application form. 

 

Step 4: - Enter all the necessary information and choose the required loan amount and repayment tenure.  

 

Step 5: - After filling out the application form, click on the ‘submit’ button. 

 

Step 6: - After reviewing your application form, the bank representative will contact you for further formalities. 

 

Step by step to apply offline: -  

 Step 1: - Visit the nearest bank of your preferred lender. 

 

 Step 2: - Ask for an application form for a loan and fill it with all the necessary details. 

 

Step 3: - Submit all the required documents such as income proof, address, age proof, identity proof, etc. 

 

Step 4: - The bank representative will analyze all the documents and verify the eligibility of the individual. 

 

Step 5: - After that, the amount of a loan will be transferred to the respective bank account of the individual. 

 

Planning to avail a project loan at attractive interest rates? 

Visit financeseva for all your financial needs. Apply for a project loan using a digital platform to get an affordable rate of interest.  

Moreover, you can create a project report for bank loan which is an essential document required for project loan 

FAQs 

What is a project loan? 

A project loan is a loan that is offered to corporate borrowers for the purpose of capital expenditure such as infrastructure, industrial projects, construction, public services, and innovation, etc. 

Is project report required for a bank loan? 

Yes, a project report is required for bank loans, as it is a business plan that represents the idea of the whole business and can be easily acknowledged by the reader. 

Which parties are involved in project financing? 

  • Off takers host government
  • Sponsors
  • Suppliers and contractors
  • Banks or Financial institutions

What are the benefits of project financing? 

Given below are some benefits of a project financing: -  

  • Economies of Scale
  • Risk Management
  • Effective Debt Allocation
  • Flexible loan repayment

What are the charges applicable on a project loan? 

The charges that are applicable on loans are legal services, appraisal, commitment, competitive processing fee, non-utilization, etc. 

What are the types of project loans? 

  1. Non-resource loan
  2. Special purpose entity
  3. Limited resource loan

 Also read: - Project Report for Bank Loan to Boost Your New Business

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