Commercial Bank Project Finance Loan Risk Management

Project finance is a very important way of financing in domestic financial markets, especially for infrastructure built. Project finance is different from ordinary corporation loan. Bank gets its money back from the cash flow generated by the project. So risk management of project loan must be more complicated than ordinary corporation loan. This paper tells about risk management of project loans for commercial banks, including risk identification, risk evaluation and risk split and control.First finding the disadvantages of presently used rating system. Then explaining that, risk management of project finance should stress the evaluation of project cash flows and risk factors which influence those cash flows out of the project. Although the New Basle Capital Accord gives banks a choice of whether to adopt simpler standard capital requirements or to develop internal rating models for project finance loans, no quantitative models to measure and quantify the risk associated with a project loan for banks have been developed yet. The paper proposes how the integration of Monte Carlo simulations and financial model may be used to derive a probability analysis of risk indicator and find the probability of acceptable risk indicator, by which banks could tell the how much the risk is. Considering risk control of project finance loans, the paper suggests banks put their eyes on those risk factors which influence project cash flows to predict the possible crisis. And banks also should transfer and scatter the risk to other participators as possible as they can.In shot, this paper explains the risk management of project finance loans by identifying and evaluating risk for project finance loan approval and tracking and controlling risk.