Abstract
The objective of the research article is to critically analyse the risks involved in funding of Public Private Partnership (PPP) projects by project finance bank debt in economies like India. The article establishes that PPP structures in India cannot achieve the desired objective of optimal risk sharing and mitigation in the light of lack of suitably priced instruments to mitigate political, regulatory and legal risks. Thus, expected cash flows for repayment do not build up. This results in a problem of over-leverage and subsequent decline in the asset quality of the banking book. In the light of Basel II recommendations, project finance loans will carry a higher capital charge for projects in sub-investment grades. This will increase systemic risk to the banking system as infrastructure portfolios may start giving negative returns, if the loan quality of infrastructure projects declines.
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