Project appraisal is the structured process of assessing the viability of a project or proposal.
It involves calculating the feasibility of the project before committing resources to it. It is a
tool that companys use for choosing the best project that would help them to attain their
goal. Project appraisal often involves making comparison between various options and this
done by making use of any decision technique or economic appraisal technique.
Project appraisal is a tool which is also used by companies to review the projects completed
by it. This is done to know the effect of each project on the company. This means that the
project appraisal is done to know, how much the company has invested on the project and in
return how much it is gaining from it.
Project appraisal is the assessment of the project by the concerned appraising authority in
terms of its technical, economic, financial and social viability. Every lending financial
institution before lending any assistance in the form of finance would like to make an
objective assessment of the various propositions of the project. And only when it is
completely satisfied of the fact that the project is economically viable and socially
acceptable, it will lend finance to the project.
An indicative list of issues which need to be looked into, while appraising a project is given
below:
MARKETING
1) Reasonable demand projections keeping in view the size of the market, consumption
level, supply position, export potential, import substitute, etc.
2) Competitors' status and their level of operation with regard to production and sales.
3) Technology advancement/Foreign Collaborator's Status/Buy-back arrangements etc.
4) Marketing policies in practice, for promotion of product(s) and distribution channels being
used. Expenses on marketing are done so as to popularize the product.
5) Local/foreign consumer preferences, practices adopted, attitudes, requirements etc.
6) Influence of Govt. policies, imports and exports in terms of quantity and value.
7) Marketing professionals employed, their competence, knowledge and experience.
TECHNICAL
MANAGERIAL
ECONOMIC
1) Impact on increase in level of savings and income distribution in society and standard of
living.
2) Project contribution towards creation and rate of increase of employment opportunity,
achieving self sufficiency etc.
3) Project contribution to the development of the region, its impact on environment and
pollution control.
- Business Risks: operating efficiency, competition faced from the units engaged in similar
products, demand and supply position, cost of labour, cost of raw material and other
inputs like water and electricity, pricing of product, surplus available, marketing, etc.
- Financial Risks:
The financial risk can be analysed with the help of following important financial ratios
which is related to the business:-
Financial Ratios :
While analysing the financial aspects of project, it would be advisable to analyse the
important financial ratios over a period of time as it may tell us a lot about a unit's
liquidity position, managements' stake in the business, capacity to service the debts
etc. The financial ratios which are considered important are discussed as under:
i) The Debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the
relative proportion of entity's equity and debt used to finance an entity's assets
ii)The Debt service coverage ratio is used to measure the cash producing ability of a
business entity to cover its debt payments. A higher debt service coverage ratio makes it
easier to obtain a loan.
The DSCR ratio of 1.5 to 2 is considered Acceptable. A very high ratio may indicate the need
for lower moratorium period/repayment of loan in a shorter schedule
iii) Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to
use its quick assets (cash and cash equivalents, marketable securities and accounts
receivable) to pay its current liabilities
If quick ratio is higher, company may keep too much cash on hand or have a problem
collecting its accounts receivable. Higher quick ratio is needed when the company has
difficulty borrowing on short-term notes
A quick ratio lower may indicate that the company relies too much on inventory or other
assets to pay its short-term liabilities
iv) Acid Test Ratio is an indicator of company's short-term liquidity. It measures the ability
to use its immediate assets (cash, cash equivalents and marketable securities) to pay its
current liabilities.
v) Cash Ratio is an indicator of company's short-term liquidity. It measures the ability to use
its cash and cash equivalents to pay its current financial obligations
Cash Cash equivalent
Formula = ---------------------------------------
Current liability
Cash ratio measures the immediate amount of cash available to satisfy short-term
liabilities.
Acceptable cash ratio is 0.5:1 or higher.
vi) Current Ratio is a liquidity ratio that measures company's ability to pay its debt over the
next 12 months or its business cycle
Current asset
Formula= ---------------------------------------
Current liability
Current ratio gives an idea of company's operating efficiency. A high ratio indicates "safe"
liquidity, but also it can be a signal that the company has problems getting paid on its
receivable or have long inventory turnover, both symptoms that the company may not be
efficiently using its current assets
THE NORMAL FLOW CHART FOR CREDIT APPRAISAL
PROCESS IS AS FOLLOWS.
Credit appraisal is done to assess the technical, economical and financial viability of the project. Loan
policy of Bank contains various norms for sanction of different types of loans under SME segment and all these
norms do not necessarily apply to each & every case. The credit risk assessment models adopted by the bank
take into account all possible factors which go into appraising the risk associated with a loan. These have been
categorized broadly into financial, business, industrial, and management risks. Rating of the account is being
worked out under three dimensions such as Obligor, Facility and Composite rating to determine investment
grade and also to charge rate of interest. The assessment of financial risk includes appraisal of the financial
strength of the customer based on performance & financial indicators. Non financial parameters are also being
considered in person appraisal and credit scores of the credit information bureau / companies are also given
due weight age in appraisal of credit business. Credit risk arising from lending business in banks is therefore,
two sides of a coin and bankers should never deter from financing. Banks need to strengthen their credit risk
assessment mechanism and appraisal process for qualitative growth in credit and also to mitigate risks
effectively