Impact of demonetisation on project financing

Project financing is an accepted mode of finance provided for large projects such as large power plants, industrial projects, infrastructure projects, and so on, which require an uninterrupted flow of funds for the project completion. Project financing is the method in which the capital paid by the lending company is paid back to the company using the revenues generated by the project. Due to the higher level of risk involved, project financing, in general, provides a higher margin of returns for the lender, as compared to regular lending.

In India, project financing is a major source of funding for long-term infrastructural and industrial projects. Project financing is provided from a variety of sources including share capital, bank loans, and debt. The recent demonetization of Indian currency notes has had a negative impact on project financing in the short term, although in the long run, financial experts state that demonetization can be a positive change for the industry.

Discussed below are ways in which demonetization has impacted key players in the project financing space:

  • Commercial banks

In the short term, banks have benefitted from the low-cost deposits, which has improved margins and reduced the cost factor. High liquidity can improve the treasury gains of the banks, along with increase in the balance sheets. A negative aspect of demonetization for banks has been lower loan disbursements and credit growth. In the long run, commercial banks stand to gain from higher savings and electronic forms of payments.

  • Share capital

Depending on the nature of business, the demonetization drive will either have a positive or negative impact on the company’s equity and share capital. The stock price of real estate companies, housing finance companies, and players in the high value luxury segments will be adversely impacted due to low liquidity. On the other hand, export-oriented and organized retail companies stand to benefit from demonetization.

  • Debt

Reduced inflation and likely interest rate cuts, due to demonetization, is likely to benefit investors in the debt market.

  • Impact on infrastructure funding

Infrastructure and construction companies face an adverse impact due to companies, because of cash flow problems and inadequate funds for labour wage payments. However, in the long run, demonetization is likely to have a positive impact due to reduced cash dependency and higher transparency.

In conclusion, demonetization is a positive change, despite its short-term inconveniences, as the Indian economy strives to become cash-free.

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