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Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

CONTENTS

 

SECTION – I

Executive Summary

4-7

Industrial Profile

9 -12

SECTION – II

Company Profile

13-21

SECTION – III

Theoretical Background for the project work

22- 49

  • - Introduction to project financing

  • - Project financing risks

  • - Project Financial Appraisal

Project in Brief- SL flow controls

50- 53

SECTION – IV

Financial Analysis

54-74

75

Measures taken by SBI when the repayment is not possible

SECTION – V

Analysis

76

Findings

77 -78

Recommendations

Limitations

Conclusions

Bibliography

79

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Executive Summary

Title of the project “Financial Appraisal Of the Project Financed By SBI ”

As a part of curriculum, every student studying MBA has to undertake a project on a particular subject assigned to him/her. Accordingly I have been assigned the project work on the study of project financing in Banking Sector.

As it is rightly said that finance is the life blood of every business so every business need funds for smooth running of its activities and bank is the one of the source through which the business get funds, before financing the bank appraise the projects and if the projects meet the requirement of the bank rules than only they will finance.

Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants.

The core area of this project focuses on the financial appraisal of SL flow controls, who has started Manufacturing of industrial valves which is financed by SBI . This project has been undertaken at State Bank of India, Hubli branch which is one of the largest bank in India having vast domestic network of over 9000 branches. SBI deals with all financial activities which involves all types of deposits, advances including project financing, mutual funds etc

Financial appraisal which mainly leads to the feasibility study consisting of ratio analysis and capital budgeting calculations.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Main Objective Financial appraisal of project”

Sub Objectives -

  • 1. To know the projects financed by SBI.

  • 2. To know the policies of SBI towards the project financing.

  • 3. To know the risks involved in projects financing.

  • 4. To appraise the projects using financial tools.

  • 5. To know the measures taken by bank when the clients fail to repay the amount.

Methodology –

Data collection method: The report will be prepared mainly using secondary data viz,

Secondary data

www.sbi.com. Company manuals. Commercial Banks Book.

The techniques, which would be used for the study:

  • 1. Discussions with Bank guide and customers.

  • 2. By studying projects reports

.

  • 3. Using Project Techniques:

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Analysis:-

This analysis part is related to the financial viability of the project SL Flow

Controls:-

Through ratio analysis I analyzed that the liquidity position of the firm is

good and it is maintaining the standard ratio .. Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its

liability portion by paying the loan year on year so the financial risk less. Profitability ratios related to sales and capital employed are in increasing

trend, it shows that the sales are increasing and the firm using its resources efficiently. Debt Service Coverage Ratio is also in increasing trend, it shows that the

firms ability to make the loan repayments on time over the debt life of the project. The payback period is within the debt life of the project.

The net present value of the project is positive, The positive net present value

will result only if the project generates cash inflows at a rate higher than the opportunity cost of capital . Since the Net Present Value of the above project is positive, the proposal can be accepted. The internal rate of the return is higher than what accepted so the project is accepted.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Findings

:- These are related to bank in general

State bank of India is strictly following the guidelines of RBI on Project

Financing Sanctioning for the projects is approved by RASMECC (Retailed Assets

Small And Medium Enterprises Credit Cell). The bank finances the projects only through term loans.

Interest rates are fixed depending upon the projects which is known as State

Bank advance rate. When the clients fail to pay the interest, 3 months from the due date the term

loan granted will be treated as Non Performing Assets. If the interest is due further 3 more months then it will be treated as doubtful

assets and interest rates becomes zero. Again for further 3 months it goes as loss assets and the bank write off the

account. Every firm starting up a new project should make an insurance policy with the same bank itself.

Recommendations:-

Bank check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost benefit analysis of the project so bank should consider this because these are also important from the point of view of risk and economy growth. Bank should be caution about the availability of security and ensure honesty of both borrower and guarantor so as to avoid the account becoming the loss assets.

Limitation of the study:-

Some of the information are confidential in nature that could not divulged for study.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Rationale behind choosing this topic:

Project financing is a comparatively new field for Indian banks,at present scenario India is becoming developed country so because of that many projects are going on that may be infrastructure, power generation, mining etc. considering all these the projects must need finance, to fulfill these objectives the project undertaken companies raise the funds through capital market, debt market and through banks.

Whenever bank wants to finance these type of projects it must study the feasibility of the project and then it will go for financing that project

Because of this it is very necessary to study the process of project financed by the bank so I choose this topic to study how SBI study the projects and the method of financing the projects.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Industrial Profile

HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.

For the past three decades India’s banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons for India’s growth. The government’s regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks.

Nationalization of Indian Banks and up to 1991 prior to Indian.

Banking sector Reforms.

New phase of Indian Banking System with the advent of Indian.

Financial & Banking Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly European shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking System.

During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and state government all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19 th July 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

were nationalized.Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

  • 1. 1949: Enactment of Banking Regulation Act.

  • 2. 1955: Nationalisation of State Bank of India.

  • 3. 1959: Nationalisation of SBI subsidiaries.

  • 4. 1961: Insurance cover extended to deposits.

  • 5. 1969: Nationalisation of 14 major banks.

  • 6. 1971: Creation of credit guarantee corporation.

  • 7. 1975: Creation of regional rural banks.

  • 8. 1980: Nationalisation of seven banks with deposits over 200 crores.

After the nationalization of banks, the branches of the public sector bank India raised to approximately 800% in deposits and advances took a huge jump by 11000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name, which worked for the Liberalization of Banking Practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Banking in India originated in the first decade of 18 th century with The General Bank Of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank Of India being established as “ The Bank Of Calcutta” in Calcutta in June 1806. Couple of Decades later, foreign Banks like HSBC and Credit Lyonnais Started their Calcutta operations in 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of British Empire and due to which banking actively took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank set up in

1865.

By 1900, the market expanded with the establishment of banks like Punjab National Bank in 1895 in Lahore; Bank of India in 1906 in Mumbai-both of which were founded under private ownership. Indian Banking Sector was formally regulated by Reserve Bank Of India from 1935. After India’s independence in 1947, the Reserve Bank was nationalised and given broader powers.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

SBI Group

The Bank of Bengal, which later became the State Bank of India. State Bank of India with its seven associate banks commands the largest banking resources in India.

Nationalization

The next significant milestone in Indian Banking happened in late 1960s when the then Indira Gandhi government nationalized on 19 th July 1949, 14 major commercial Indian banks followed by nationalisation of 6 more commercial Indian banks in 1980.

The stated reason for the nationalisation was more control of credit delivery. After this, until 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu growth of the Indian economy.

After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19 nationalized banks in India.

Liberalization-

In the early 1990’s the then Narasimha rao government embarked a policy of liberalization and gave licences to a small number of private banks, which came to be known as New generation tech-savvy banks, which included banks like ICICI and HDFC. This move along with the rapid growth of the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the sectors of banks, namely Government banks, Private Banks and Foreign banks. However there had been a few hiccups for these new banks with many either being taken over like Global Trust Bank while others like Centurion Bank have found the going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in Banks may be

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

CURRENT SCENARIO

Currently (2007), overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time- especially in its services sector, the demand for banking services-especially retail banking, mortgages and investment services are expected to be strong. M&As, takeovers, asset sales and much more action (as it is unraveling in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Banking in India

 
  • 1 Central Bank

Reserve Bank of India

 
   

State Bank

of India, Allahabad

Bank, Andhra Bank,

Bank of Baroda,

Bank

of

India,

Bank

of

Maharastra,Canara Bank, Central Bank of India,

  • 2 Nationalised

Corporation

Bank, Dena Bank, Indian Bank, Indian

Banks

overseas Bank,Oriental Bank of Commerce, Punjab and Sind Bank, Punjab National Bank, Syndicate Bank, Union Bank of India, United Bank of India, UCO Bank,and Vijaya Bank.

 
  • 3 Private Banks

Bank of Rajastan, Bharath overseas Bank, Catholic Syrian Bank, Centurion Bank of Punjab, City Union Bank, Development Credit Bank, Dhanalaxmi Bank, Federal Bank, Ganesh Bank of Kurundwad, HDFC Bank, ICICI Bank, IDBI, IndusInd Bank, ING Vysya Bank, Jammu and Kashmir Bank, Karnataka Bank Limited, Karur Vysya Bank, Kotek Mahindra Bank, Lakshmivilas Bank, Lord Krishna Bank, Nainitak Bank, Ratnakar Bank,Sangli Bank, SBI Commercial and International Bank, South Indian Bank, Tamil Nadu Merchantile Bank Ltd., United Western Bank, UTI Bank, YES Bank.

Project Financing.

Project Financing . STATE BANK OF INDIA Structure of Indian Banking Reserve Bank of India is

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA Structure of Indian Banking Reserve Bank of India is

Structure of Indian Banking

Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a mixture of Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are further spilt into old banks and new banks.

Reserve Bank of India

Scheduled Banks Scheduled Commercial Banks Scheduled Co-operative Banks
Scheduled Banks
Scheduled Commercial
Banks
Scheduled Co-operative
Banks
Public Sector Private Sector Foreign Regional Banks Banks Banks Rural Banks Nationalized SBI & its Banks
Public
Sector
Private Sector
Foreign
Regional
Banks
Banks
Banks
Rural Banks
Nationalized
SBI
&
its
Banks
Associates
Scheduled Urban
cooperative
Scheduled State co-
operative Banks
Old private sector
Banks
New private sector
Banks
Project Financing . STATE BANK OF INDIA Structure of Indian Banking Reserve Bank of India is

BABASAB PATIL

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Bank Overview

STATE BANK OF INDIA

Not only many financial institution in the world today can claim the antiquity and majesty of the State Bank Of India founded nearly two centuries ago with primarily intent of imparting stability to the money market, the bank from its inception mobilized funds for supporting both the public credit of the companies governments in the three presidencies of British India and the private credit of the European and India merchants from about 1860s when the Indian economy book a significant leap forward under the impulse of quickened world communications and ingenious method of industrial and agricultural production the Bank became intimately in valued in the financing of practically and mining activity of the Sub- Continent Although large European and Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the post depression exe. For instance – when business opportunities become extremely restricted, rules laid down in the book of instructions were relined to ensure that good business did not go post. Yet seldom did the bank contravenes its value as depart from sound banking principles to retain as expand its business. An innovative array of office, unknown to the world then, was devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and out students to exploit the opportunities of an expanding economy. New business strategy was also evaded way back in 1937 to render the best banking service through prompt and courteous attention to customers.

A highly efficient and experienced management functioning in a well defined organizational structure did not take long to place the bank an executed pedestal in the areas of business, profitability, internal discipline and above all credibility A impeccable

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

financial status consistent maintenance of the lofty traditions if banking an observation of a high standard of integrity in its operations helped the bank gain a pre- eminent status. No wonders the administration for the bank was universal as key functionaries of India successive finance minister of independent India Resource Bank of governors and representatives of chamber of commercial showered economics on it.

Modern day management techniques were also very much evident in the good old days years before corporate governance had become a puzzled the banks bound functioned with a high degree of responsibility and concerns for the shareholders. An unbroken records of profits and a fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction, prudential management and asset liability management not only protected the interests of the Bank but also ensured that the obligations to customers were not met.

The traditions of the past continued to be upheld even to this day as the State Bank years itself to meet the emerging challenges of the millennium.

ABOUT LOGO

Project Financing . STATE BANK OF INDIA financial status consistent maintenance of the lofty traditions if

THE PLACE TO SHARE THE NEWS SHARE THE VIEWS ……

...

……

Togetherness is the theme of this corporate loge of SBI where the world of banking services meet the ever changing customers needs and establishes a link that is like a

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

circle, it indicates complete services towards customers. The logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers.

The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promising direction. The key hole indicates safety and security.

MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service Group, with world class standards and significant global committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in expanding and diversifying financial service sectors while containing emphasis on its development banking rule.

VISION STATEMENT:

Premier Indian Financial Service Group with prospective world-class

Standards

of efficiency and professionalism and institutional values Retain its position in the country as pioneers in Development banking.

Maximize the shareholders value through high-sustained earnings per Share.

An institution with cultural mutual care and commitment, satisfying and

Good work environment and continues learning opportunities.

VALUES

Excellence in customer service

Profit orientation

Belonging commitment to Bank

Fairness in all dealings and relations

Risk taking and innovative

Team playing

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Learning and renewal

Integrity

Transparency and Discipline in policies and systems.

Organization Structure

MANAGING DIRECTOR

CHIEF GENERAL MANAGER

Project Financing . STATE BANK OF INDIA ∑ Learning and renewal ∑ Integrity ∑ Transparency and
Project Financing . STATE BANK OF INDIA ∑ Learning and renewal ∑ Integrity ∑ Transparency and

G. M

G.M

G. M

G.M

G.M

(Operations)

(C&B)

(F&S)

(I) & CVO

(P&D)

   
G. M G.M G. M G.M G.M (Operations) (C&B) (F&S) (I) & CVO (P&D) Zonal off

Zonal off

Functional Heads

Functional Heads

G. M G.M G. M G.M G.M (Operations) (C&B) (F&S) (I) & CVO (P&D) Zonal off

Regional officers

Theoretical Background for the project work

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Project Financing

INTRODUCTION-

Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Euro tunnel. Employing a carefully engineered financing mix, it has long been used to fund large- scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydroelectric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large- scale projects worldwide.

MEANING-

Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor.

RATIONALE-

Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants. The sponsors of such projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to take the risks and assume the debt obligations associated with traditional financings. Project financing permits the risks associated with such projects to be allocated among a number of parties at levels acceptable to each party.

PRINCIPLE ADVANTAGE AND OBJECTIVES-

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

NON RECOURSE

The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor has no obligation to make payments on the project loan if revenues generated by the project are insufficient to cover the principal and interest payments on the loan. In order to minimize the risks associated with a non-recourse loan, a lender typically will require indirect credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and other third parties involved with the project

MAXIMIZE LEVERAGE

In a project financing, the sponsor typically seeks to finance the costs of development and construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances, also may permit reductions in the cost of capital by substituting lower-cost, tax- deductible interest for higher-cost, taxable returns on equity.

OFF-BALANCESHEET TREATMENT

Depending upon the structure of a project financing, the project sponsor may not be required to report any of the project debt on its balance sheet because such debt is non- recourse or of limited recourse to the sponsor. Off-balance-sheet treatment can have the added practical benefit of helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to which the sponsor is a party.

MAXIMIZE TAX-BENEFITS

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Project financings should be structured to maximize tax benefits and to assure that all available tax benefits are used by the sponsor or transferred, to the extent permissible, to another party through a partnership, lease or other vehicle.

DISADVANTAGES-

Project financings are extremely complex. It may take a much longer period of time to structure, negotiate and document a project financing than a traditional financing, and the legal fees and related costs associated with a project financing can be very high. Because the risks assumed by lenders may be greater in a non-recourse project financing than in a more traditional financing, the cost of capital may be greater than with a traditional financing.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

PROCESS OF PROJECT

FINANCING

Feasibility Study

As one of the first steps in a project financing is hiring of a technical consultant and he will prepare a feasibility study showing the financial viability of the project. Frequently, a prospective lender will hire its own independent consultants to prepare an independent feasibility study before the lender will commit to lend funds for the project.

Contents

The feasibility study should analyze every technical, financial and other aspect of the project, including the time-frame for completion of the various phases of the project development, and should clearly set forth all of the financial and other assumptions upon which the conclusions of the study are based, Among the more important items contained in a feasibility study are:

  • 1. Description of project

  • 2. Description of sponsor(s).

  • 3. Sponsors' Agreements.

  • 4. Project site.

  • 5. Governmental arrangements.

  • 6. Source of funds.

  • 7. Feedstock Agreements.

  • 8. Off take Agreements.

  • 9. Construction Contract.

    • 10. Management of project.

    • 11. Capital costs.

    • 12. Working capital.

    • 13. Equity sourcing.

    • 14. Debt sourcing.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA
  • 15. Financial projections.

  • 16. Market study.

  • 17. Assumptions.

THE PROJECT COMPANY

Legal Form

Sponsors of projects adopt many different legal forms for the ownership of the project. The specific form adopted for any particular project will depend upon many factors, including:

The amount of equity required for the project The concern with management of the project The availability of tax benefits associated with the project The need to allocate tax benefits in a specific manner among the project company investors.

The three basic forms for ownership of a project are:

  • 1. Corporations-

This is the simplest form for ownership of a project. A special purpose corporation may be formed under the laws of the jurisdiction in which the project is located, or it may be formed in some other jurisdiction and be qualified to do business in the jurisdiction of the project.

  • 2. General Partnerships-

The sponsors may form a general partnership. In most jurisdictions, a partnership is recognized as a separate legal entity and can own, operate and enter into financing arrangements for a project in its own name. A partnership

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

is not a separate taxable entity, and although a partnership is required to file tax returns for reporting purposes, items of income, gain, losses, deductions and credits are allocated among the partners, which include their allocated share in computing their own individual taxes. Consequently, a partnership frequently will be used when the tax benefits associated with the project are significant. Because the general partners of a partnership are severally liable for all of the debts and liabilities of the partnership, a sponsor frequently will form a wholly owned, single-purpose subsidiary to act as its general partner in a partnership.

  • 3. Limited Partnerships-

A limited partnership has similar characteristics to a general partnership except that the limited partners have limited control over the business of the partnership and are liable only for the debts and liabilities of the partnership to the extent of their capital contributions in the partnership. A limited partnership may be useful for a project financing when the sponsors do not have substantial capital and the project requires large amounts of outside equity.

Limited Liability Companies-

They are a cross between a corporation and a limited partnership.

Project Company Agreements

Depending on the form of project company chosen for a particular project financing, the sponsors and other equity investors will enter into a stockholder agreement, general or limited partnership agreement or other agreement that sets forth the terms under which they will develop, own and operate the project. At a minimum, such an agreement should cover the following matters:

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Ownership interests. Capitalization and capital calls. Allocation of profits and losses. Distributions. Accounting. Governing body and voting. Day-to-day management. Budgets. Transfer of ownership interests. Admission of new participants. Default. Termination and dissolution.

Principal Agreements in a Project Financing-

  • 1. Construction Contract-

Some of the more important terms of the construction contracts are-

Project Description- The construction contract should set forth a detailed description of all the Work necessary to complete the project

Price:- Most project financing construction contracts are fixed- price contracts although some projects may be built on a cost- plus basis. If the contract is not fixed-price, additional debt or equity contributions may be necessary to complete the project, and the project agreements should clearly indicate the party or parties responsible for such contributions.

Payment-

Payments

typically

are

made on

a "milestone" or

"completed

work"

basis,

with

a

retain

age. This payment

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

procedure provides an incentive for the contractor to keep on

schedule and useful monitoring

points for the owner and the

lender. Completion Date- The construction completion date, together with any time extensions resulting from an event of force majeure, must be consistent with the parties' obligations under the other project documents. If construction is not finished by the completion date, the contractor typically is required to pay liquidated damages to cover debt service for each day until the project is completed. If construction is completed early, the contractor frequently is entitled to an early completion bonus. Performance Guarantees- The contractor typically will guarantee that the project will be able to meet certain performance standards when completed. Such standards must be set at levels to assure that the project will generate sufficient revenues for debt service, operating costs and a return on equity. Such guarantees are measured by performance tests conducted by the contractor at the end of construction. If the project does not meet the guaranteed levels of performance, the contractor typically is required to make liquidated damages payments to the sponsor. If project performance exceeds the guaranteed minimum levels, the contractor may be entitled to bonus payments.

  • 2. Feedstock Supply Agreements.

The project company will enter into one or more feedstock supply agreements for the supply of raw materials, energy or other resources over the life of the project. Frequently, feedstock supply agreements are structured on a "put-or- pay" basis, which means that the supplier must either supply the feedstock or pay the project company the difference in costs incurred in obtaining the feedstock from another source. The price provisions of feedstock supply

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

agreements must assure that the cost of the feedstock is fixed within an acceptable range and consistent with the financial projections of the project.

  • 3. Product off take Agreements.

In a project financing, the product off take agreements represent the source of revenue for the project .Such agreements must be structured in a manner to provide the project company with sufficient revenue to pay its project debt obligations and all other costs of operating, maintaining and owning the project .Frequently,offtake agreements are structured on a "take- or-pay" basis, which means that the offtaker is obligated to pay for product on a regular basis whether or not the offtaker actually takes the product unless the product is unavailable due to a default by the project company. Like feedstock supply arrangements, offtake agreements frequently are on a fixed or scheduled price basis during the term of the project debt financing.

  • 4. Operations and Maintenance Agreement -

The project company typically will enter into a long-term agreement for the day-to-day operation and maintenance of the project facilities with a company having the technical and financial expertise to operate the project in accordance with the cost and production specifications for the project. The operator may be an independent company, or it may be one of the sponsors . The operator typically will be paid a fixed compensation and may be entitled to bonus payments for extraordinary project performance and be required to pay liquidated damages for project performance below specified levels.

5. Loan and Security Agreement.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

The borrower in a project financing typically is the project company formed by the sponsor(s) to own the project. The loan agreement will set forth the basic terms of the loan and will contain general provisions relating to maturity, interest rate and fees. The typical project financing loan agreement also will contain yhr provisions such as-

  • 1. Disbursement Controls. These frequently take the form of conditions precedent to each drawdown, requiring the borrower to present invoices, builders’ certificates or other evidence as to the need for and use of the funds.

  • 2. Progress Reports.:- The lender may require periodic reports certified by an independent consultant on the status of construction progress.

  • 3. Covenants Not to Amend:- The borrower will covenant not to amend or waive any of its rights under the construction, feedstock, off take, operations and maintenance, or other principal agreements without the consent of the lender.

  • 4. Completion Covenants:-These require the borrower to complete the project in accordance with project plans and specifications and prohibit the borrower from materially altering the project plans without the consent of the lender.

  • 5. Dividend Restrictions. These covenants place restrictions on the payment of dividends or other distributions by the borrower until debt service obligations are satisfied.

  • 6. Debt and Guarantee Restrictions. The borrower may be prohibited from incurring additional debt or from guaranteeing other obligations

  • 7. Financial Covenants. Such covenants require the maintenance of working capital and liquidity ratios, debt service coverage ratios, debt service reserves and other financial ratios to protect the credit of the borrower.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA
  • 8. Subordination. Lenders typically require other participants in the project to enter into a subordination agreement under which certain payments to such participants from the borrower under project agreements are restricted (either absolutely or partially) and made subordinate to the payment of debt service.

  • 9. Security. The project loan typically will be secured by multiple forms of collateral, including:---- Mortgage on the project facilities and real property. Assignment of operating revenues. Pledge of bank deposits Assignment of any letters of credit or performance or completion bonds relating to the project. project under which borrower is the beneficiary.

Liens on the borrower's personal property

Assignment of insurance proceeds. Assignment of all project agreements Pledge of stock in project company or assignment of partnership interests. Assignment of any patents, trademarks or other intellectual property owned by the borrower.

6 Site Lease Agreement. The project company typically enters into long- term lease for the life of the project relating to the real property on which the project is to be located. Rental payments may be set in advance at a fixed rate or may be tied to project performance.

7.Insurance. The general categories of insurance available in connection

with project financings are:

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA
  • 1. Standard Insurance- The following types of insurance typically are obtained for all project financings and cover the most common types of losses that a project may suffer.

Property Damage, including transportation, fire and extended casualty.

Boiler and Machinery.

Comprehensive General Liability.

Worker's Compensation.

Automobile Liability and Physical Damage.

Excess Liability.

2. Optional Insurance. The following types of insurance often are obtained in connection with a project financing. Coverages such as these are more expensive than standard insurance and require more tailoring to meet the specific needs of the project

Business Interruption.

Performance Bonds.

Cost Overrun/Delayed Opening.

Design Errors and Omissions

System Performance (Efficiency). Pollution Liability.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Project Risks

Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.

The following details shows the manner in which risks are approached by financiers in a project finance transaction. Such risk minimization lies at the heart of project finance.

Project Financing . STATE BANK OF INDIA Project Risks Project finance is finance for a particular

In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialized and possibly in a remote location. If saleable, they may have little value outside the project. Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Risk minimization process

Financiers are concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in:

1)

The project not being completed on time, on budget, or at all;

2)

The project not operating at its full capacity;

3)

The project failing to generate sufficient revenue to service the debt; or

4)

The project prematurely coming to an end.

The minimization of such risks involves a three step process.

1)

The first step requires the identification and analysis of all the risks that may bear

2)

upon the project. The second step is the allocation of those risks among the parties.

3)

The last step involves the creation of mechanisms to manage the risks.

If a risk to the financiers cannot be minimized, the financiers will need to build it into the interest rate margin for the loan.

Step 1- Risk identification and analysis-

The project sponsors will usually prepare a feasibility study, e.g. as to the construction and operation of a mine or pipeline. The financiers will carefully review the study and may engage independent expert consultants to supplement it. The matters of particular focus will be whether the costs of the project have been properly assessed and whether the cash-flow streams from the project are properly calculated. Some risks are analysed using financial models to determine the project's cash-flow and hence the ability of the project to meet repayment schedules. Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

inputs and output of the project. Various classes of risk that may be identified in a project financing will be discussed below.

Step2- Risk allocation-

Once the risks are identified and analyzed, they are allocated by the parties through negotiation of the contractual framework. Ideally a risk should be allocated to the party who is the most appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks widely and to ensure that each party has an interest in fixing such risks. Generally, commercial risks are sought to be allocated to the private sector and political risks to the state sector.

Step3- Risk management-

Risks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its consequences if it does occur. Financiers need to ensure that the greater the risks that they bear, the more informed they are and the greater their control over the project. Since they take security over the entire project and must be prepared to step in and take it over if the borrower defaults. This requires the financiers to be involved in and monitor the project closely. Such risk management is facilitated by imposing reporting obligations on the borrower and controls over project accounts. Such measures may lead to tension between the flexibility desired by borrower and risk management mechanisms required by the financier.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Types of Risks

Basically different types of projects are posed to different risks. Similarly mentioned below are related to this particular project.

the risks

1) Completion Risk-

Completion risk allocation is a vital part of the risk allocation of any project. This phase carries the greatest risk for the financier. Construction carries the danger that the project will not be completed on time, on budget or at all because of technical, labour, and other construction difficulties. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. They may also jeopardize contracts for the sale of the project's output and supply contacts for raw materials.

Commonly employed mechanisms for minimizing completion risk before lending takes place include:

(a) Obtaining completion guarantees requiring the sponsors to pay all debts and liquidated damages if completion does not occur by the required date;

(b) Ensuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject equity into the project;

(c) Requiring the project to be developed under fixed-price, fixed-time turnkey contracts by reputable and financially sound contractors whose performance is secured by performance bonds or guaranteed by third parties; and

(d) Obtaining independent experts' reports on the design and construction of the project. Completion risk is managed during the loan period by methods such as making pre- completion phase draw downs of further funds conditional on certificates being issued by independent experts to confirm that the construction is progressing as planned.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

2) Operating Risk-

These are general risks that may affect the cash-flow of the project by increasing the operating costs or affecting the project's capacity to continue to generate the quantity and quality of the planned output over the life of the project. Operating risks include, for example, the level of experience and resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour. The usual way for minimising operating risks before lending takes place is to require the project to be operated by a reputable and financially sound operator whose performance is secured by performance bonds. Operating risks are managed during the loan period by requiring the provision of detailed reports on the operations of the project and by controlling cash-flows by requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved operating costs only.

3) Market Risk-

Obviously, the loan can only be repaid if the product that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The best mechanism for minimising market risk before lending takes place is an acceptable forward sales contact entered into with a financially sound purchaser.

4) Credit Risk-

These are the risks associated with the sponsors or the borrowers themselves. The question is whether they have sufficient resources to manage the construction and operation of the project and to efficiently resolve any problems which may arise. Of course, credit risk is also important for the sponsors' completion guarantees. To minimise these risks, the financiers need to satisfy themselves that the participants in the project have the necessary human resources, experience in past projects of this nature and are financially strong (e.g. so that they can inject funds into an ailing project to save it).

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

5) Technical Risk-

This is the risk of technical difficulties in the construction and operation of the project's plant and equipment, including latent defects. Financiers usually minimise this risk by preferring tried and tested technologies to new unproven technologies. Technical risk is also minimized before lending takes place by obtaining experts reports as to the proposed technology. Technical risks are managed during the loan period by requiring a maintenance retention account to be maintained to receive a proportion of cash-flows to cover future maintenance expenditure.

6) Regulatory or Approval Risk-

These are risks that government licenses and approvals required to construct or operate the project will not be issued (or will only be issued subject to onerous conditions), or that the project will be subject to excessive taxation, royalty payments, or rigid requirements as to local supply or distribution. Such risks may be reduced by obtaining legal opinions confirming compliance with applicable laws and ensuring that any necessary approvals are a condition precedent to the draw down of funds.

.

Appraisal

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Project Financing-

The SBI has formed a dedicated Project Finance Strategic Business Unit to assess credit proposals from and extend term loans for large industrial and infrastructure projects. Apart from this, project term loans for medium sized projects and smaller clients are delivered through the CAG and the NBG.

In general, project finance covers Greenfield industrial projects, capacity expansion at existing manufacturing units, construction ventures or other infrastructure projects. Capital intensive business expansion and diversification as well as replacement of equipment may be financed through the project term loans.

Project finance is quite often channeled through special purpose vehicles and arranged against the future cash streams to emerge from the project.The loans are approved on the basis of strong in-house appraisal of the cost and viability of the ventures as well as the credit standing of promoters.

Project finance strategic business unit-

A

one-stop-shop

of

financial

services

for

new

projects

as

well

as

expansion,

diversification

and

modernization

of

existing

projects

in

infrastructure

and

non-

infrastructure sector.

 

Expertise

Being India's largest bank and with the rich experience gained over generation, SBI

brings considerable expertise in engineering financial packages that address complex financial requirements. Project Finance SBU is well equipped to provide a bouquet of structured financial solutions with the support of the largest Treasury in India (i.e. SBI's), International Division of SBI and SBI Capital Markets Limited.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

The global presence as also the well spread domestic branch network of SBI ensures

that the delivery of your project specific financial needs are totally taken care of. Lead role in many projects

Allied roles such as security agent, monitoring/TRA agent etc.

Synergy with SBI caps (exchange of leads, joint attempt in bidding for projects, joint syndication etc.). In a way, the two institutions are complimentary to each other. We have in house expertise (in appraising projects) in infrastructure sector as well as non- infrastructure sector. Some of the areas are as follows: Infrastructure sector:

Infrastructure sector-

Road & urban infrastructure

Power and utilities

Oil & gas, other natural resources

Ports and airports

Telecommunications

Non-Infrastructure sector-

Manufacturing: Cement, steel, mining, engineering, auto components, textiles, Pulp

& papers, chemical & pharmaceuticals … Services: Tourism & hospitality, educational Institutions, health industry …

Expertise

Rupee term loan

Foreign currency term loan/convertible bonds/GDR/ADR

Debt advisory service

Loan syndication

Loan underwriting

Deferred payment guarantee

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Other customized products i.e. receivables securitization, etc.

Why project finance SBU?

Since its inception in 1995 the Project Finance SBU has built-up a strong reputation for it's in-depth understanding of the infrastructure sector as well as non-infrastructure sector in India and we have the ability to provide tailor made financial solutions to meet the growing & diversified requirement for different levels of the project. The recent transactions undertaken by PF-SBU include a wide range of projects undertaken by the Indian corporate.

Eligibility-

The infrastructure wing of PF SBU deals with projects wherein:

the project cost is more than Rs 100 Crores. The proposed share of SBI in the term loan is more than Rs.50 crores. In case of projects in Road sector alone, the cut off will be project cost of Rs.50 crores and SBI Term Loan Rs. 25 crores, respectively.

The commercial

wing

of

PF

SBU

deals

with

projects

wherein:

The minimum project cost is Rs. 200 crores (Rs. 100 crores in respect of Services sector).

The minimum proposed term commitment is of Rs. 50 crores from SBI.

Process of sanctioning -

1) Proposal- The bank usually asks the firm to give the following details Nature of the proposal The purpose for which the term loan is required ( whether for expansion, modernization, diversification etc ) ..

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

2) Brief History- In case of an existing company essential particulars about its promoters, its incorporation, subsequent corporate growth to date, major developments or changes in management. 3) Past Performance- A summary of past performance in terms of

4)

licensed/installed or operating capacities, sales, operating capacities, and sales and net profit for the three years should be analyzed. The figures relating to sales and profitability should be analyzed to ascertain the trend during the 3 years. In sum, the company’s past performance has to be assessed to study if there has been a steady improvement and growth record has been satisfactory. Present financial position- The Company’s audited balance sheets and profit and loss account have to be analyzed. If the latest audited balance sheet has more than 6 months old, a pro-forma balance sheet as on a recent date should be obtained and analysed.

5) Project- Here the technical feasibility and the financial feasibility of the project is studied. 6) Project implementation schedule- Examine the project implementation schedule with reference to Bar Chart or PERT/CPM chart(if proposed to be used by the company for monitoring the implementation of the project) and in the light of actual implementation schedules of similar project

Pre sanction process-

Appraisal –

  • 1. Preliminary appraisal-

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

The following aspects have to be examined if the proposal is to Financing a project-

Whether the project cost is prima facie acceptable. Debt and equity gearing proposed and whether acceptable Promoter’s ability to access capital market for debt/ equity support Whether critical aspects of project- demand, cost of production, profitability etc.are prima facie in order.

After undertaking the preliminary examination of the proposal, the branch will arrive at a decision whether to support the request or not. If the branch finds the proposal acceptable, it will call for from the applicants, a comprehensive application in the prescribed pro-forma, along with a copy of project report, covering specific credit requirements of the company and other essential data/ information. The information among other things should include-

Organization setup with a list of board of directors and indicating the

Qualifications, experience and competence of the key

personnel

in

Charge of the main functional areas e.g

Production , purchase

.. ,Marketing and finance in other word brief on the managerial resource and whether these are compatible with the size and the scope of the proposed activity .

Demand and supply projections based on the overall market prospects

ogether

with

a

copy

of

market

research

report .

The report may

comment on the geographic spread of the market where the unit

proposes to operate, demand and

supply gap

, the

competitor’s

share,

competitive advantage

of

the

applicant

,

proposed

marketing

arrangement. Current practices for the particular product or service especially relating to terms of credit sales, probability of bad debts. Estimates of sales cost of production and profitability.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Projected profit and loss account and Balance Sheet for the operating

years

during currency r of the bank assistance. Branch should also obtain additionally

Appraisal report from any other bank/financial institution in case appraisal has been done by them,

NO Objection Certificate’ from term lenders if already financed by them and

Report from Merchant bankers in case the company plans to access capital market, wherever necessary.

In respect of existing concerns, in addition to the above particulars regarding the history of the concern, its past performance, present financial position, etc. Should also be called for. This data should be supplemented by supporting statements such as:

Audited profit and loss account and balance sheet for the past three years Details of existing borrowing arrangements, if any, Credit information reports from the existing bankers on the applicant company

Financial

statements

companies.

and

borrowing

relationship

of

associate

firms/group

2. Detailed Appraisal-

The viability of a project is examined to ascertain that the company would have the ability to service its loan and interest obligations out of cash accruals from the business. While appraising a project all the data/ information furnished by the borrower is counter checked and wherever possible, inter-firm and inter-industry comparisons should be made to establish their veracity.

The appraisal of the new project could be broadly divided into the following sub

heads-

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Promoters track record;

Types of fixed assets to be acquired;

Technical feasibility

Marketability

Production process

Management

Time schedule

Cost of project

Sources of finance

Commercial Profitability;

Security and Margin

Repayment period and debt service coverage;

Funds Flows statement ;and

Rates of return.

If the proposal involves financing of a new project, the commercial, economic and financial viability and other aspects are to be examined as indicated below-

Statutory clearance from various government depts/agencies License/ clearance /permits as applicable Details of sources of energy requirements, power, fuel etc .. Pollution control clearance Cost of project and source of finance Buildup of fixed assets. Arrangements proposed for raising debt and equity Capital structure Feasibility of arrangements to access capital market Feasibility of the projections/estimates of sales cost of production and profit covering the period of repayment.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Break-even point in

terms of sales

value and

percentage

of installed capacity

under a normal production year. Cash flows and fund flows Whether profitability is adequate to

meet stipulated

repayments with reference

to Debt Service Coverage Ratio, Return on Investment.

Industry profile and prospectus

Critical factors of

industry and whether

the assessment of these and

management plans in this regard are acceptable Technical feasibility with reference to report of technical consultants, if available

Management quality, competence, track record Company’s structure and systems.

Also examine and comment on the status of approvals from other term lenders, project implementation schedule. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units.

3. Present relationship with the Bank:

The banks also take into consideration the relationship of the firm or the customer with the banks. It takes into account the following aspects-

Credit Facilities now granted.

Conduct of the existing accounts.

Utilization of limits- FB & NFB.

Occurrence of irregularities, if any.

Frequency of irregularity i.e.; the number of times and the total number of days

the account was irregular during the last twelve months. Repayment of term commitments.

Compliance

with

requirements

regarding

submission

of

stock

statements,

Financial Follow-up Reports, renewal data, etc…

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Stock turnover, realization of book debts.

Value of accounts with breakup of income earned. Pro-rata share of

non-fund and foreign exchange business.

Concessions extended and value thereof.

Compliance with other terms and conditions.

Action taken on comments /observations contained in

RBI inspection Reports.

CO inspection and audit reports.

Verification Audit Reports.

Concurrent audit reports.

Stock Audit Reports

Spot Audit Reports.

Long Form Audit Report (statutory Report).

  • 4. Credit risk Rating-

Draw up rating for Working Capital and Term Finance.

  • 5. Opinion Reports- Compile opinion Reports on the company, partners/ promoters and

the proposed guarantors.

  • 6. Existing charges on assets of the unit-If the company, report on search of charges

with proposed guarantors.

  • 7. Structure of facilities and Terms of Sanction-Fix terms and conditions for exposures

proposed facility wise and overall:

Limit for each facility- sub limits.

Security- Primary & collateral, Guarantee.

Margins- for each facility as applicable.

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Rate of interest.

Rate of commission/exchange/other fees.

Concessional facilities and value thereof.

Repayment terms, where applicable.

Other standard covenants.

  • 8. Review of the proposal-Review of the proposal should be done covering Strengths

and weaknesses of the exposure proposed Risk factors and steps proposed to mitigate themDeviations if any, proposed from usual norms of the bank and the reasons thereof.

  • 9. Proposal for sanction- Prepare a draft in prescribed format with required back-up

details and with recommendations for sanction.

SBI has presently financed the following Projects-

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

SL.NO

Name Of The Project

Amt(in crores)

1

Hescom

82.00

2

Manoj Jewellers

6.00

3

Mahaveer developers.

93.00

4

JTK Arihant appliances

2.25

5

Shreyalaxmi properties

5.95

6

Shri laxmi trading co.

5.8

7

SL flow controls

1.25

8

Hubli Cigarette center

1.10

9

Mahindrakar Agencies

35

10

Shri gopal industries

2.40

11

Atul agencies

2.02

12

Kashyap j. Majethia

4.40

13

Shree meenaxi pharma

2.5

14

Shree meenaxi medical agency

4.0

15

Fine lab

5.0

16

Shree engineers and process

5.8

17

Swastik winding works

4.5

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

The further part has been dealt with respect to the project of SL flow controls.

Project in Brief

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

Name

M/S SL Flow Control

Address

98/A, 2A1, Sri Laxmi Business house near

Nature of Business Status Name of the promoter Cost of the project Employment potential

Airport road Gokul road Hubli. Manufacturing of industrial valves. Proprietary Concern. Sri Verendra.B.Koujalagi. Rs 221.41 lakhs 30 employees

Debt Service coverage ratio 2.08

Cost of the project

Cost of the project

Amount(Lakhs)

 

25.00

Building land

22.00

Machinery

83.38

Electrification

6.50

 

5.00

Electricity Deposit Preliminary Expenses

 
  • - Technical know how

5.00

 
  • - Personnel training

2.00

 

Project Financing.

Project Financing . STATE BANK OF INDIA

STATE BANK OF INDIA

Project Financing . STATE BANK OF INDIA

-Patterns

5.00

12.00

 

67.53

Net Working Captial Total

221.41

Means of finance

 

Amounts in lakhs

 

Term loan

102.50

 

50.00

Working Captial loan Own Contribution

51.38

 

17.53

Margin Money for working Capital Total

221.41

Financial analysis Ratio Analysis:-

An integral aspect of financial appraisal is financial analysis, which takes into account the financial features of a project, especially source of finance. Financial analysis helps to determine smooth operation of the project over its entire life cycle.

The two major aspects of financial analysis are liquidity analysis and capital structure. For this purpose ratios are employed which reveal existing strengths and weakness of the project.

1) Liquidity ratios- Liquidity ratio or solvency ratio’s measure a project’s ability to meet its current or short-term obligations when they become due. Liquidity is

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the pre-requisite for the very survival of a firm. A proper balance between the liquidity and profitability is required for efficient financial management. It reflects the short-term financial strength or solvency of the firm. Two ratios are calculated to measure liquidity, the current ratio and quick ratio.

  • a) Current ratio-

The current ratio is defined as the ratio of total current assets to total current liabilities. It is computed by,

Current assets

Current ratio

Current liabilities

 

Particulars

2004

2005

2006

2007

2008

Current assets

91.47

101.72

112.76

128.7

145.25

Current liabilities

144.32

127.66

121.59

96.05

80.09

Current ratio

0.634

0.767

0.927

1.339

1.8134

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0.63 Current Ratio 5 4 3 2 1 0 0.2 0.4 0.6 0.76 2 0.8 0.92
0.63
Current Ratio
5
4
3
2
1
0
0.2
0.4
0.6
0.76
2
0.8
0.92
1
1.2
1.33
1.4
1.6
1.813
1.8
Current ra

Year

Interpretation-

It is an indicator of the extent to which short term creditors are covered by assets that are expected to be converted to cash in a period corresponding to the maturity of claims. The ideal current ratio is 2:1. The firm current ratio indicate that the firm is in a position to meet its short term obligation because the ratio is in increasing trend , by observing the above table we can say that though the firm does not maintain ideal current ratio, it is still in a position to meet its current obligations. After clearing all the dues the firm is still in a position to maintain liquidity.

  • b) Acid test or quick ratio-

It is a measure of liquidity calculated dividing current assets minus inventory and prepaid expenses by current liabilities. Since inventories among current assets are not quite liquid (means not quickly converted into cash), the quick ratio excludes it. The quick ratio includes only assets, which can be readily converted into cash

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and constitutes a better test of liquidity. It is often called as quick quick ratio because it is a measurement of a firms ability to convert its assets quickly into cash in order to meet its current liabilities.

Particulars

2004

2005

2006

2007

2008

Quick assets

60.47

67.65

75.28

87.47

99.9

Current liabilities

144.32

127.66

121.59

96.05

80.09

Current ratio

0.534

0.53

0.62

0.911

1.247

5 Quick Ratio 0.2 0.4 0.6 0.8 0 1.2 1.4 1 Quick rati 4 3 2
5
Quick Ratio
0.2
0.4
0.6
0.8
0
1.2
1.4
1
Quick rati
4
3
2
1
0.62
0.53
0.534
0.911
1.247

Years

Interpretation-

Acid test ratio is a rigorous measure of firm’s ability to service short term liabilities. The usefulness of the ratio lies in the fact that it is widely accepted as the best available test of liquidity position of a firm. Generally an acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all its current claims. In the case of the above firm the quick ratio

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is in increasing trend by year on. So it shows that firm is capable of paying its quick short term obligations

2. Capital structure ratio’

The long-term lenders/creditors would judge the soundness of a firm on the basis of the long term financial strength measured in terms of its ability to pay the interest regularly as well as repay the installment of the principal on due dates or in one lump sum at the time of maturity. The long term solvency of firm can be examined by using leverage or capital structure ratios. The leverage or capital structure ratio’s may be defined as financial ratios which throw light on the long term solvency of a firm as reflected in its ability to assure the long term lenders with regard to (i) periodic payment of interest during the period of the loan and (ii) repayment of the principal on maturity or in predetermined installments at due dates.

a)

Debt equity ratio- This ratio measures the long term or total debt to shareholders equity. This ratio reflects claims of creditors and shareholders against the assets of the firm. Debt Equity Ratio is given by:

Long term debt

Debt Equity Ratio

=

Shareholders equity

Particulars

2004

2005

2006

2007

2008

Debt

82.00

61.50

  • 41.00 20.05

 

0.00

 

56.38

54.07

  • 56.88 68.94

 

84.49

Equity(Promoter contribution) Debt equity ratio

1.454

1.14

  • 0.721 0.291

 

0.00

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Debt equity rat

0.8 1 5 2 4 3 Debt/Equity 0.2 0.4 0.6 1.2 0 0 1.6 0.291 0.721
0.8
1
5
2
4
3
Debt/Equity
0.2
0.4
0.6
1.2
0
0
1.6
0.291
0.721
1.454
1.4
1.14
1

Years

Interpretation-

The debt equity ratio is an important tool of financial analysis to appraise the financial structure of the firm. The ratio reflects the relative contribution of creditors and owners of the business in its financing. A high ratio shows a large share of financing by the creditors of the firm; a low ratio implies the a smaller claim of the creditors. Debt – Equity ratio indicates the margin of safety to the creditors. The debt-equity ratio is in decreasing and in 2008 it become nil, which implies that the owners are putting up relatively more money of their own.

3. Profitability ratio’s related to sales-

These ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If adequate profits are not earned on sales, there will be difficulty in meeting the operating expenses and no returns will be available to the owners.

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  • A. Net profit margin-

It is also known as net margin. This measures the relationship between the net profits and sales of a firm. Depending on the concept of net profit employed. , this ratio can be computed as follows-

Earnings after tax

Net Profit ratio

=

100

 

Net sales

 

Particulars

2004

2005

2006

2007

2008

 

10.68

17.82

27.05

35.56

43.75

Earnings after tax Net sales

265.49

292.04

321.24

353.36

388.7

Net profit margin

4.023%

6.102%

8.420%

10.06%

11.25%

Interpretation

The net profit margin is indicative of management’s ability to operate the business with sufficient success not only to recover from revenues of the period, the cost of services, the operating expenses and the cost of borrowed funds, but also to leave a margin of reasonable compensation to the owners for providing their capital at risk. A high profit margin would ensure the adequate return to the owners as well as enable the firm to withstand adverse economic conditions. A low net profit margin has the opposite implications. With respect to the above firm the net profit margin is increasing trend so it

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will show that the company is in good condition and the demand for the product is increasing.

4 . Profitability ratios related to Investments-

Return on Investments-

Return on investments measures the overall effectiveness of management in generating profits with its available assets. There are three different concepts of investments in financial literature: assets, capital employed and shareholder’s equity. Based on each of them, there are three broad categories of ROIs. They are

  • I. Return on assets, Return on total capital employed.

II.

Return on assets-

The profitability ratio is measured in terms of relationship between net profits and assets. The ROA may also be called profit-to-asset ratio. It can be computed as follows-

Net profit after tax

Return on Assets

=

Average total assets

 

100

 

Particulars

2004

2005

2006

2007

2008

Earnings after tax

10.68

17.82

27.05

35.56

43.75

 

208.39

199.54

195.9

200.54

208.34

Average total assets ROA

5.125%

8.93%

13.81%

17.73%

20.99%

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ROA

5.13% 20.99% 13.81% 8.93%
5.13%
20.99%
13.81%
8.93%

17.73%

Interpretation-

Return on assets employed is favorable. That means the firm is in a position to employ its assets in an efficient manner.

Return on Capital Employed-

It is similar to ROI except in one respect. Here the profits are related to the total capital employed. The term capital employed refers to long term funds supplied by the lenders and owners of the firm. It is given by the formula-

EBIT

Return on Capital employed =

100

Average total capital employed

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Particulars

2004

2005

2006

2007

2008

EBIT

34.82

42.24

52.66

62.04

70.99

 

203.39

199.54

195.90

200.54

208.34

total capital employed ROCE

17.2%

21.16%

28.92%

30.9%

34.07%

ROCE 35.00% 34.07% 30.00% 28.92% 30.90% 25.00% 21.16% 20.00% 17.20% Returns 15.00% 10.00% 5.00% 0.00% 1
ROCE
35.00%
34.07%
30.00%
28.92% 30.90%
25.00%
21.16%
20.00%
17.20%
Returns
15.00%
10.00%
5.00%
0.00%
1
ROCE
2
3
4
5
Years

Interpretation:-

The capital employed basis provides a test of profitability related to the source of long term funds. The higher the ratio, the more efficient is the use of capital employed. From the above table we can say that the ROCE is quite high. Compared to previous years ratio. It is good for the company.

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Repayment Period and debt service coverage A) Projections of performance and profitability

 

particulars

2004

2005

2006

2007

2008

A)

Sales

300.00

330.00

363.00

399.30

439.23

Less: Excise

 

34.51

37.96

41.76

45.94

50.53

Net sales

   
  • 265.49 388.70

  • 292.04 353.36

321.24

   

B)

cost of Production

           

1.Raw material consumed

 
  • 185.84 272.09

  • 204.42 247.35

224.87

   

2.Power & Fuel

 

6.00

6.60

7.26

7.99

8.78

   

12.24

13.46

14.81

16.29

17.92

3.Direct labor & wages 4.consumable stores

   
  • 0.60 0.73

0.66

 

0.80

0.88

5.Repair & Maintenance

   
  • 1.20 1.65

1.32

 

2.48

3.47

6.Othermanufacturingexpences

 
  • 0.72 1.11

0.79

 

1.55

2.17

7.Depreciation

 

24.97

19.10

14.66

11.30

8.75

8.Preliminary expenses w/off

2.40

2.40

2.40

2.40

2.40

Total Cost of Production

233.47

248.76

267.49

290.16

316.46

   

0.00

  • 4.50 4.78

 
  • 5.14 5.58

 

Add: Opening stock Less: Closing Stock

 

4.50

  • 4.78 5.14

 
  • 5.58 6.09

 

D)Cost of goods sold

 

229.47

248.78

267.13

289.72

315.96

E)

Gross Profit (B-D)

 

36.02

43.56

54.11

63.64

72.74

F)

Interest on

         
 

1) Term Loan

 

12.80

10.03

7.26

4.50

1.73

   

6.75

6.75

6.75

6.75

6.75

 

2) Working Captial Total

 

19.55

16.78

14.01

11.25

8.48

G)

Selling, administration Exp

1.20

1.32

1.45

1.60

1.76

H)Profit

Before

Taxation(E-

15.27

25.45

38.65

  • 50.80 62.51

 

(F+G))

 

I)

Provision for Taxation

 

4.58

7.64

11.59

  • 15.24 18.75

 

J)

Profit after tax (H-I)

10.69

17.82

27.05

  • 35.56 43.75

 

K)

Depreciation

 

24.97

19.10

14.66

  • 11.30 8.75

 

L)

Net Cash accruals( J+K)

35.66

36.92

41.72

  • 46.86 52.5

 

B) Projected Cash Flow Statement

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