At the time of
financing projects banks generally adopt one of the following
methodologies as far as determining the level of promoters' equity
is concerned.
1) Promoters
bring their entire contribution upfront before the bank starts
disbursing its commitment.
2) Promoters bring certain percentage of their equity (40% - 50%)
upfront and balance is brought in stages.
3) Promoters agree, ab initio, that they will bring in equity
funds proportionately as the banks finance the debt portion.
While it is
appreciated that such decisions are to be taken by the boards of
the respective banks, it has been observed that the last method
has greater equity-funding risk.
2. To contain
this risk, banks are advised in their own interest to have a clear
policy regarding the Debt Equity Ratio (DER) and to ensure that
the infusion of equity/fund by promoters should be such that the
stipulated level of DER is maintained at all times. Further they
may adopt funding sequences so that possibility of equity funding
by banks is obviated.
