Bankability

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21 Aug, 2024

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Bankability refers to the ability of an asset, project, or entity to generate enough cash flow to attract financing or investment. When a project is found capable enough of making significant money, it guarantees quality products and performance, thereby helping businesses attract funds for new projects, obtain finances for existing businesses, seek suitable loans, and improve their credit ratings.

It depends on market demand or product or services or financial viability plus the project's feasibility, profitability, and risk. It holds significance in large-scale industrial endeavors, renewable energy, real estate, and infrastructure. Lenders and financiers use risk matrices and financial models to assess bankability. It influences investment decisions throughout diverse industries.

Bankability Meaning

Bankability signifies the capacity of an asset, project, or entity to produce sufficient cash flow, making it appealing for securing financial backing or investments.
It aids in drawing funds for new ventures, obtaining funding for established businesses, pursuing suitable loans, and enhancing creditworthiness.
Various factors affect it, including city-level administrative strength, economic foundations, political backing, major national-level factors like exchange rate risk, etc.
Its importance lies in ensuring financing, risk management, viability, investor confidence, and scalability for projects, aiding access to funds, mitigating risks, and attracting investors.

Bankability Explained

Bankability means an investment or project has the power to attract funding from investors, financial institutions, or governments. It acts as a metric of potential returns and perceived risk associated with a project or investment. It can be assessed using various elements like legal and regulatory requirements, track record, and financial strength of a project business or a person.

It works by considering factors like market demand, technical feasibility, risk assessment, and financial projections of a project. By assessing these factors, investors determine if the business or the project is bankable. It also tells them that the project can generate returns, manage risks effectively, and repay the lenders' loans. Consequently, businesses or projects can secure finance for their operations, growth, and success in their completion.

It has implications in terms of financing of projects. If a project or business gets deemed bankable, then they are able to get sufficient funding, offering a managed cash flow and flexibility. Secondly, it leads to getting better terms such as low-interest rates, higher amounts, and extended repayment periods of financing from lenders and financiers by projects or businesses.

Thirdly, if the project remains non-bankable, then investors may not invest in the project, making it easier to operationalize or succeed. Lastly, a bankable project or business indicates good management, a good chance of success, and good potential for returns to investors and financiers. It is helpful in new and significant projects related to finance, renewable energy, infrastructure, energy, real estate, and technology.

Expanding into new markets or launching projects requires bankability. Bankable projects foster economic growth, job creation, and new industries, support startups, and drive innovation, ensuring sustainability.

Factors

Bankability and sustainability are essential for a successful project. However, it is dependent on the following factors:

City level factors include administrative strength, economic foundations, and political backing present in the project area.
National level factors include exchange rate risk, federal arrangement, and budget allocations make up the factors.
Businesses and project teams' financial strength is gauged from their cash flow, return on investment, and profitability.
Record of accomplishment of the individual or businesses or the team behind a project.
Demand for the products and services in the market.
Legal and regulatory framework
Risks associated with the project
Use of innovative technology and sustainable business practices

Examples

Let us use a few examples to understand the topic.

Example #1

Bankability is vital in PPP projects to lure investors and get favorable terms. For that, the below data highlights its importance:

Local finance options reduce the cost of funding
Private partners will receive timely reimbursement for government non-compliance thanks to contingent liability funds.

In reality, the World Bank Group supported a contingent liability fund for a highway project in Ghana to increase bankability. This protected private partners against lags and PPP contract non-compliance, including concerns with payment and land availability. The plan reduced finance costs, attracted investors, and reduced project risk. Therefore, bankability is crucial for PPPs and de-risking instruments like contingent liability funds.

Moreover, it also attracts investors and improves financing terms. As a result, it also promotes public-private cooperation and infrastructure development.

Example #2

Contractor David bids on a $100,000 road construction project commissioned by the USA Road Department. David partners with Bank ABC to secure funding. The bank assesses the project's bankability, reviewing its feasibility and risk mitigation strategies. It also analyses the USA Road Department's commitment and a well-structured proposal proffered by David.

After it finds that the project is bankable, it gets convinced that it can fund the project. As a result, the bank offers the required financing. Therefore, the collaboration guarantees the project's bankability, allowing it to draw the necessary resources for a successful execution.

Importance

Bankability is a crucial factor for prospective lenders and investors because it enables them to evaluate the risk involved with a project and, in addition, decide whether or not to provide financial support. Hence, let us understand its importance:

Access to financing: It assures financiers that their financial investment will get repaid. Hence, projects and businesses get easy access to sufficient funds for their operations.
Risk mitigation: Different factors like regulatory compliance, market demand, technical feasibility, and revenue potential help lenders identify and reduce risks associated with projects. As a result, risk management is done effectively.
Project viability: The assessments carried out by banks and others concerning the project's market potential, technical feasibility, and financial viability to ensure efficient resource allocation.
Investor confidence: It attracts investors by gesturing a project's thorough evaluation and financial viability, reducing perceived risk and increasing the likelihood of returns.
Project scalability: It evaluates a project's potential for expansion and replication, attracting investors seeking long-term growth and boosting economic development.

Moreover, a report in 2022 provides valuable insights into the solar bankability of various photovoltaic module brands. This in-depth study evaluates the bankability of these brands and their modules, shedding light on their performance and reliability.

Frequently Asked Questions (FAQs)

What does non bankability mean?

Non bankability means when a project or venture is regarded undesirable or dangerous by financial institutions, which makes it challenging to obtain finance or assistance from conventional banking sources. Non-bankable projects frequently fall short of the criteria set out by lenders in terms of financial soundness, collateral, or creditworthiness.

What role does government commitment play in the bankability of a project?

Government commitment is essential for bankability, especially in public-private partnership (PPP) projects. It assures investors and lenders regarding the stability of the regulatory environment and the government's support for the project.

Is bankability related to actual banking institutions?

No, it is not directly related to traditional banking institutions. Instead, it pertains to the financial viability and attractiveness of projects or investments to potential funders, investors, or lenders. It focuses on factors such as feasibility, risk management, and revenue potential rather than the operations of banking institutions.