Current Affairs · Banking and Project Finance
A Scheduled Commercial Bank is analyzing a loan proposal for a consortium to build a large Hydropower Dam Project in a sensitive geological zone under a Non-Recourse Project Finance model. The bank identifies Hydrological Risk, Environmental and Social Risk, and Force Majeure Risk. Which of the following is the most robust combination of mitigation measures that the bank should mandate before approving the project loan?
- 1Ensuring the project is fully covered by the Viability Gap Funding (VGF) scheme, making the dam construction an EPC contract with a fixed price, and requiring a State Government Sovereign Guarantee for the full debt amount.
- 2Financing the project entirely through long-term infrastructure bonds listed on the InvIT platform, thereby shifting the risks to the capital market investors, and securing a Letter of Comfort from the State Government.
- 3Mandating the project to secure a fixed-price, take-or-pay PPA with a highly rated Central PSU (like NTPC), requiring comprehensive insurance coverage for hydrological/natural risks, and ensuring all environmental clearances are secured.✓
- 4Requiring a Corporate Guarantee from the parent company, coupled with mandatory political risk insurance coverage from a government-owned insurer like the Export Credit Guarantee Corporation (ECGC).
Correct answer
Mandating the project to secure a fixed-price, take-or-pay PPA with a highly rated Central PSU (like NTPC), requiring comprehensive insurance coverage for hydrological/natural risks, and ensuring all environmental clearances are secured.
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