A hospital project funded 70% debt and 30% equity overruns its Rs 800 crore budget by 20%. What is the funding gap, who covers it if the sponsor signed completion support, and what should the lender have asked for at the start?

The gap is Rs 160 crore, and with completion support the sponsor funds all of it, so the loan stays at Rs 560 crore. Debt falls from 70% to 58.3% of cost, which helps the lender. Without support, a 70:30 top-up would add Rs 112 crore of debt. The undertaking is only as good as the sponsor's ability to pay, so the lender should also have asked for a funded contingency, a fixed-price construction contract and equity spent before debt.

Twenty per cent of Rs 800 crore is Rs 160 crore, taking the cost to Rs 960 crore. A half-built hospital earns nothing and sells for far less than its cost, like a house with walls and no roof. Until the hospital is finished, the lender's security is an unfinished building, so whoever funds the overrun decides whether the loan is repaid at all. That is construction riskThe chance that a project costs more or takes longer to build than planned, before it earns any revenue to repay debt., and in project finance it is allocated by contract, not by hope.

With completion support the sponsor funds the full Rs 160 crore. The loan stays at Rs 560 crore, the sponsor's equity rises to Rs 400 crore, and debt falls to 58.3% of the project's cost. Without it, the usual fallback is to keep the 70:30 ratio, so the bank lends Rs 112 crore more against a project that has just shown it can overrun. Or nobody funds it, and the bank owns a building site.

A promise from a sponsor with several projects is a claim on a balance sheet that may be stretched when this one overruns. A lender protects itself with money and contracts in place before the first rupee is drawn, not only with an undertaking. The usual set: a contingency of about 10%, here Rs 80 crore, funded in the budget; a fixed-price, date-certain construction contract with penalties for delay; sponsor equity spent before the loan is drawn; an independent engineer certifying each drawdown; and a check that the sponsor's own cash and borrowing capacity can cover its undertakings on all projects at once.

Then say what you would do now. Call on the undertaking in writing, ask for the sponsor's funding plan and timetable, and hold further loan drawdowns until the overrun is funded. If the sponsor hesitates, the undertaking was the lender's main protection and it is failing, which is the moment to involve the rest of the lending group, not the moment to lend more quietly.