Risk Management in Project Finance and Its Role in Improving Banks Asset Structure Management

Abstract

The objective of this research is to analyze the risks involved in funding public private partnership (PPP) projects with project finance in Iran. PPP structures in Iran cannot achieve the desired objectives such as optimal risk sharing and mitigation due to the lack of suitable instruments to mitigate legal, regulatory, political, and credit risks. Thus, expected cash flows for loans repayment do not build up and this leads to a decrease in asset quality of banks. In this paper, in order to better manage the project finance loans, the challenges and characteristics of this type of finance are considered; the risks are identified; and finally the risk sharing methods are proposed. The results of this paper show that first, considering the benefits of project finance, it is better to fund projects by project finance. Second, it is recommended that commercial and development banks calculate the probability of default of projects by using the method proposed in this research. Moreover, according to the results of this study in order to prevent bankruptcy and default of companies, it is suggested that in feasibility studies, risk assessment and risk management should be carried out to share or to cover risks.

Keywords

• Bank Asset Management
• Project Finance
• Risk Management
• Feasibility study