Project Finance for Indian Capex: Bankability, DSRA & Drawdown

A project finance term loan is structurally different from a working capital line or a corporate-purpose term loan. The bank is not lending against the existing balance sheet — it is lending againstfuture cash flows of a specific project. The security is the project’s asset; the repayment is the project’s revenue; the risk assessment is the project’s bankability.

For Indian promoters raising ₹50 Cr–₹2,000 Cr for a greenfield manufacturing plant, a hotel, a logistics park or a renewable energy project, the process is fundamentally the same — and there are four mechanics that decide whether the project gets built or stalls at 60% completion. This is the practitioner’s walkthrough.

The bankability study — what the lender actually wants

Before any sanction, the lender (or the lead arranger in a consortium) commissions or accepts a bankability study. This is not the same as a feasibility study, even though founders often confuse the two. A feasibility study asks “will this project work?” A bankability study asks “will the cash flows from this project comfortably service the proposed debt under reasonable stress scenarios?”

The bankability study covers: (a) market demand and offtake assumptions, (b) capex breakdown and contingency, (c) construction timeline and milestone risk, (d) operating cost model, (e) revenue model with sensitivity ranges, (f) DSCR projections across the loan tenor, (g) sensitivity to key variables (offtake price, raw material cost, capacity utilisation, interest rate), (h) security package and recovery analysis.

For most sectors, lenders accept studies from Big-4 or top-tier domestic firms (CRISIL, ICRA, SBI Caps). Sectoral specialists are preferred for technical projects — Mott MacDonald for civil, Bridge to India for solar, AERA-empanelled consultants for aviation. The study is paid for by the borrower but addressed to the lender, and the borrower’s ability to negotiate the consultant matters less than the lender expects.

The DSCR threshold — what good looks like

Debt Service Coverage Ratio (DSCR) = Cash available for debt service ÷ Debt service obligations (principal + interest) for the year. Lenders have sector-specific minimums:

Renewable energy (solar, wind) — minimum DSCR 1.30x average, 1.15x minimum in any year. Hotels — 1.40x average, 1.20x minimum. Manufacturing (steel, cement, chemicals) — 1.50x average, 1.25x minimum. Real estate (commercial) — 1.50x average, 1.30x minimum. Roads (annuity model) — 1.25x average. The minimum-in-any-year number is the constraint that bites — a single weak year forces the structure to deleverage even if the average looks comfortable.

The DSCR is calculated on the base-case projection. Lenders then stress-test — typically a 10% revenue reduction or a 10% cost increase — and check that the stressed DSCR doesn’t fall below 1.0x. If it does, the lender will require either a smaller loan, a longer tenor, a larger DSRA, or additional sponsor support.

The DSRA — Debt Service Reserve Account

The DSRA is a segregated cash account, funded from the loan or from sponsor equity, that holds an amount equal to the next 3, 6 or 12 months of debt service. It sits in a fixed deposit or liquid investment with the lender bank and can only be tapped to pay principal and interest when cash flows are insufficient.

Three-month DSRA is the lighter standard; six-month is most common for greenfield projects; twelve-month is reserved for high-risk sectors or weak sponsors. The DSRA size and funding mechanic are negotiated at sanction — sponsor-funded (out of equity) versus loan-funded (reduces effective drawdown) is the key choice. Most sponsors prefer loan-funding the DSRA because the equity is deployed in productive capex; lenders prefer sponsor-funded DSRA because it shows skin in the game.

The DSRA gets topped up from operating cash flows if it is drawn down. If the topping-up requirement competes with debt service in a weak year, the lender will dictate the priority waterfall (DSCR is usually preserved by depleting the DSRA, with top-up deferred to the next stronger year).

IDC and the construction-period interest problem

During the construction period, the project has no revenue, but the lender still charges interest on the drawn portion of the loan. Interest During Construction (IDC) is capitalised to the project cost — under Ind-AS 23, borrowing costs directly attributable to a qualifying asset are added to the asset’s carrying amount. IDC becomes part of the total project cost and is included in the loan amount.

The mechanic: lender sanctions ₹500 Cr project cost; ₹400 Cr is hard capex; ₹100 Cr is IDC over an 18-month construction period at a 10% interest rate. The borrower draws down ₹400 Cr in tranches; the lender accrues interest on each tranche from drawdown date; the accrued interest is added to the loan principal and itself starts accruing interest. Year-one moratorium on principal is standard, but interest is usually serviced from a separately-tagged tranche of the loan itself (effectively pre-funded).

Founders frequently underestimate IDC. A 24-month construction at 10.5% interest on a ₹300 Cr drawn-down profile easily produces ₹35-45 Cr of IDC, which must be sized into the loan upfront. Forgetting this is the most common single reason projects need mid-construction rescue funding.

Drawdown milestones and the engineer’s certificate

The loan is not disbursed as a lump sum. It is disbursed in tranches against verified construction progress. Typical milestones for an industrial plant:

(a) 10% on land acquisition + statutory approvals (PCB, fire, factory licence); (b) 15% on civil foundation completion; (c) 20% on building shell completion; (d) 25% on plant and machinery delivery at site; (e) 20% on installation and commissioning; (f) 10% on commercial operations date (COD) certification.

Each drawdown requires a lender’s engineercertificate — an independent engineer empanelled with the lender who visits the site, verifies progress, and signs off on the tranche release. The engineer’s observations include quality of construction, adherence to drawings, expenditure incurred to date, and projected timeline to next milestone. Any deviation triggers a sponsor explanation and, often, an accelerated lender review.

The security package — what gets pledged

Standard project finance security comprises: (a) first charge on all movable and immovable assets of the project, present and future; (b) first charge on all bank accounts, receivables and insurance proceeds; (c) pledge of 100% of project SPV shares held by sponsors (creation often deferred to COD); (d) assignment of all project agreements (EPC, O&M, offtake, fuel/raw material supply); (e) corporate guarantee from sponsors during construction period; (f) DSRA charge.

The pledge of SPV shares is critical — it gives the lender the ability to step in and replace sponsors if the project deteriorates. Sponsors often resist a 100% share pledge from sanction date; a common compromise is 51% from sanction, with the additional 49% released back to sponsors at COD if all sanction conditions are met.

Sponsor support — undertakings that matter

Lenders require sponsor undertakings that go beyond the pure debt obligation. The most common: (a) cost overrun undertaking — sponsors will fund any capex overrun up to a defined cap (often 10-20% of original cost) without taking equity dilution from the lender; (b) shortfall undertaking— sponsors will fund any debt service shortfall during construction and the first 2-3 years post-COD; (c) non-disposal undertaking — sponsors will not sell their stake in the SPV below a defined floor without lender consent.

These undertakings convert what looks like non-recourse project finance into limited recourse finance — the sponsor balance sheet is still on the hook for defined contingencies. The breadth of recourse is the most heavily negotiated piece of the term sheet.

Consortium financing — when one bank isn’t enough

Above ₹500 Cr, single-bank financing is rare. The lender invites other banks into a consortium with a defined lead bank, an appointed agent for security, and a common documentation pack (the “CDP” — Common Documentation for Project Finance, used by SBI and most major Indian lenders). Each consortium member takes a share, with the lead bank underwriting the residual until syndication completes.

For the sponsor, the consortium structure standardises terms but slows decisions. Any waiver or amendment post-sanction requires super-majority lender consent (typically 67% by share). Build in waiver-cushion at sanction — if a covenant is going to be tight in year three, negotiate the covenant level at sanction, not later through a consent process.

The 60% stall — what actually causes it

Projects rarely fail at sanction or at COD. They fail in the middle — typically when 50-65% of capex is incurred and the project runs out of drawdown headroom because of cost overruns, permit delays, or scope creep. At that point, the sponsor must either inject fresh equity (often impossible if the original equity is exhausted), invoke the cost-overrun undertaking (painful if the cap is breached), or restructure the loan with additional sanctioned amount (slow and expensive).

Three disciplines that prevent the 60% stall: (a) build a 15-20% capex contingency into the original sanction, not 5-10%; (b) sequence the equity-contribution schedule to be back-loaded — sponsors put in equity throughout construction, not all upfront, so there is dry powder for overruns; (c) maintain a project monthly MIS that compares actuals to plan and escalates variances beyond a defined threshold to the steering committee, not just the project manager.

Bottom line

Project finance is a structured negotiation around four mechanics — bankability (does the cash flow support the debt?), DSCR (with what coverage?), DSRA (with what cushion?), and the drawdown schedule (against what milestones?). Every term in the sanction letter ultimately flows from one of these four. Get the construction-period IDC right, build a real contingency, and negotiate the sponsor-support package narrowly enough that the recourse stays defined — and the project gets built on time and on budget.