Financial Analytics: Science and Experience

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Project finance issues in Russia: The specifics of provisions for possible losses of stakeholder banks

Vol. 12, Iss. 3, SEPTEMBER 2019

Received: 22 January 2019

Received in revised form: 14 February 2019

Accepted: 3 March 2019

Available online: 30 August 2019


JEL Classification: G21, G24, G28

Pages: 352–368

Ezangina I.A. Volgograd State Technical University (VSTU), Volgograd, Russian Federation

ORCID id: not available

Zakharova N.D. Volgograd State Technical University (VSTU), Volgograd, Russian Federation

ORCID id: not available

Subject Project finance is a promising tool for generating business and national resources, incrementing the income of financial institutions. It is especially difficult for banking institutions that offer investment products to make provisions for project finance deals.
Objectives The study updates the definition of provisions for losses in terms of project finance. We also analyze the specifics and issues of its formation, search for promising aspects that the State and business should focus on in their activities in order to create an effective mechanism for making provisions for possible losses.
Methods The study is based on the systemic and functional approach, general methods of abstraction, analysis and synthesis.
Results The article demonstrates that investors (banks) are exposed to higher and special credit risks associated with project finance deals because the future cash flow will work as the collateral value and a new SPV has no credit history. We describe the mechanism for making provisions for possible credit losses and respective debts as part of project finance. We analyze portfolios of project finance deals and provisions with respect to some banks. The article shows what impedes further improvements in the procedure for making provisions for project finance deals.
Conclusions and Relevance It is advisable to depart from the traditional regulatory practice and legislative approval of the technique for making credit risk provisions as part of project finance. The technique should accommodate for three basic components, i.e. financial sustainability of an SPV, the State's stake, private (banking) co-finance mechanism. The findings can be relevant to the regulatory practice of the State for controlling and mitigating costs that credit institutions incur to make reserves.

Keywords: loss provision, project finance, financial position, project finance factory, investment (credit) risk


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