21042504 union-bank-credit-appraisal-project-report
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21042504 union-bank-credit-appraisal-project-report 21042504 union-bank-credit-appraisal-project-report Document Transcript

  • Downloaded from a2zmba.blogspot.comChap 1: IntroductionProject financing is an innovative and timely financing technique that has been used onmany high-profile corporate projects, including Euro Disneyland and the Eurotunnel.Employing a carefully engineered financing mix, it has long been used to fund large-scalenatural resource projects, from pipelines and refineries to electric-generating facilitiesand hydro-electric projects. Increasingly, project financing is emerging as the preferredalternative to conventional methods of financing infrastructure and other large-scaleprojects worldwide.Project Financing discipline includes understanding the rationale for project financing,how to prepare the financial plan, assess the risks, design the financing mix, and raise thefunds. In addition, one must understand the cogent analyses of why some projectfinancing plans have succeeded while others have failed. A knowledge-base is requiredregarding the design of contractual arrangements to support project financing; issues forthe host government legislative provisions, public/private infrastructure partnerships,public/private financing structures; credit requirements of lenders, and how to determinethe projects borrowing capacity; how to analyze cash flow projections and use them tomeasure expected rates of return; tax and accounting considerations; and analyticaltechniques to validate the projects feasibilityProject finance is different from traditional forms of finance because the credit riskassociated with the borrower is not as important as in an ordinary loan transaction; whatis most important is the identification, analysis, allocation and management of every riskassociated with the project.The purpose of this project is to explain, in a brief and general way, the manner in whichrisks are approached by financiers in a project finance transaction. Such riskminimization lies at the heart of project finance.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 1
  • Downloaded from a2zmba.blogspot.comproject fails, the financiers are likely to lose a substantial amount of money. The assetsthat 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 thatfinanciers, and their advisers, go to substantial efforts to ensure that the risks associatedwith the project are reduced or eliminated as far as possible. It is also not surprising thatbecause of the risks involved, the cost of such finance is generally higher and it is moretime consuming for such finance to be provided.Project finance is the financing of long-term infrastaructure and industrial projects basedupon a complex financial structure where project debt and equity are used to finance theproject. Usually, a project financing scheme involves a number of equity investors,known as sponsors, as well as a syndicate of banks which provide loans to the operation.The loans are most commonly non-recourse loans, which are secured by the project itselfand paid entirely from its cash flow, rather than from the general assets orcreditworthiness of the project sponsors. The financing is typically secured by all of theproject assets, including the revenue-producing contracts. Project lenders are given a lienon all of these assets, and are able to assume control of a project if the project companyhas difficulties complying with the loan terms.Generally, a special purpose entity is created for each project, thereby shielding otherassets owned by a project sponsor from the detrimental effects of a project failure. As aspecial purpose entity, the project company has no assets other than the project. Capitalcontribution commitments by the owners of the project company are sometimesnecessary to ensure that the project is financially sound. Project finance is often morecomplicated than alternative financing methods. It is most commonly used in the mining,transportation, telecommunication and public utility industries.Risk identification and allocation is a key component of project finance. A project may besubject to a number of technical, environmental, economic and political risks, particularlyin developing countries and emerging markets. Financial institutions and project sponsorsmay conclude that the risks inherent in project development and operation areunacceptable (unfinanceable). To cope with these risks, project sponsors in these 2
  • Downloaded from a2zmba.blogspot.comindustries (such as power plants or railway lines) are generally completed by a number ofspecialist companies operating in a contractual network with each other that allocates riskin a way that allows financing to take place. The various patterns of implementation aresometimes referred to as "project delivery methods." The financing of these projects mustalso be distributed among multiple parties, so as to distribute the risk associated with theproject while simultaneously ensuring profits for each party involved. 3
  • Downloaded from a2zmba.blogspot.comChap 2: AN OVERVIEW2.1 Banking SectorThere have been major structural changes in the financial sector since banking sectorreforms were introduced in India in 1992. Since then Banks have been lendingaggressively providing funds towards infrastructure sector. Major policy measuresinclude phased reductions in statutory pre-emption like cash reserve and statutoryliquidity requirements and deregulation of interest rates on deposits and lending, exceptfor a select segment. The diversification of ownership of banking institutions is yetanother feature which has enabled private shareholding in the public sector banks,through listing on the stock exchanges, arising from dilution of the Governmentownership. Foreign direct investment in the private sector banks is now allowed up to 74per cent.The co-existence of the public sector, private sector and the foreign banks has generatedcompetition in the banking sector leading to a significant improvement in efficiency andcustomer service. The share of private and foreign banks in total assets increased to 31.5per cent at end-March 2007 from 27.6 per cent at end-March 2006 and less than 10.0 percent at the inception of reforms. • The nationalized banks have more branches than any other types of banks in India. Now there are about 33,627 Branches in India, as on March 2005. • Investments of scheduled commercial banks (SCBs) also saw an increase from Rs 8,04,199 crore in March 2005 to Rs 8,43,081 crore in the same month of 2006. • Indias retail-banking assets are expected to grow at the rate of 18% a year over the next four years (2006-2010). • Retail loan to drive the growth of retail banking in future. Housing loan account for major chunk of retail loan. 4
  • Downloaded from a2zmba.blogspot.com2.2 An Overview on Union Bank Of IndiaUnion Bank of India was inaugurated by the father of the nation – MohandasKaramchand Gandhi. It commenced operations in the year 1920.Union Bank has offered vast and varied services to its entire valuable clientele takingcare of their needs. Today, with its efficient customer service, consistent profitability &growth, adoption of new technologies and value added services, Union Bank truly livesup to the image of, “Good People to bank with”. Anticipative banking is an integralingredient of value-based services. This ability to gauge the customers needs long beforehe realizes, best reduces the gap between expectance and deliveranceManpower is the key factor for the success of any organization. Union Bank has adedicated family of about 26,000 qualified / skilled employees who will and always willbe delighted to extend their services to the customers with heartfelt effortsThe Bank is a Public Sector Unit with 55.43% Share Capital held by the Government ofIndia. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 andFollow on Public Offer in February 2006. Presently 44.57 % of Share Capital is presentlyheld by Institutions, Individuals and Others.The Bank has over the years earned the reputation of being a techno-savvy Bank and isone of the front runners amongst public sector bank in the field of technology. It is one ofthe pioneer public sector banks, which launched Core Banking Solution in 2002. As ofSeptember 2005, more than 719 branches/extension counters of Bank are networkedunder Core Banking Solution, powered with the centralized technology platform, theBank has launched multiple Electronic Delivery Channels and has installed nearly 469networked ATMs. Online Tele banking facility is available to all its Core Bankingcustomers. The multi facility versatile Internet Banking Solution provides extensiveinformation in addition to the on line transaction facility to both individuals and corporate 5
  • Downloaded from a2zmba.blogspot.combanking with the Core Banking branches of the Bank. In addition to regular bankingfacilities, today customer can also avail variety of value added services like cashmanagement service, insurance, mutual funds, Demat from the bank. Today there aremore than 26,000 employees in Union Bank of India.UBI has been ranked at 5th position among the nationalized bank in India.Overview on banks deposits and advancesItems 2003-04 2004-05 2005-06 2006-07 2007-08DepositsInvestmentsAdvances2.2.1 Rationale for the studyOffering credit is an operation fraught with risk. Before offering credit to an organization,its financial health must be analyzed. Credit should be disbursed only after ascertainingsatisfactory financial performance. Based on the financial health of an organization,banks assign credit ratings. These credit ratings are used to fix the interest rate andquantum of installment.This study aims to analyze the credit health of organizations that approach Union Bank ofIndia for foreign exchange credit facilities. After analyzing credit health, the credit ratingis determined. On the basis of credit rating, the interest rate guidelines circular isconsulted to fix a price for the credit facilities i.e. determine the interest rate.2.2.2 Credit disbursement at Union Bank of IndiaThis project was undertaken at the Industrial Finance Branch of Union Bank of India, atthe Credit Department. Financial requirements for Project Finance and Working Capitalpurposes are taken care of at the Credit Department. Companies that intend to seek creditfacilities approach the bank. Primarily, credit is required for following purposes:- 1. Working capital finance 6
  • Downloaded from a2zmba.blogspot.com 2. Term loan for mega projects 3. non fund based Limits Like Letter of Guarantee, Letter of CreditCompanies present audited balance sheets of the current and previous years. These areused to determine the financial health, turnover trends and rise and fall of profitability.Then credit rating is done.The financial health and credit rating are theoretical methods for determining the rightinterest rate. However, in practice, banks consider other factors such as history withclient, market reputation and future benefits with clients. Thus, a difference existsbetween theory and practice.2.2.3 Objectives of the project  To assess the financial health of organizations that approach Union Bank of India for credit for import export purposes. This would entail undertaking of the following procedures:  Analysis of past and present financial statements  Analysis of Balance Sheet  Analysis of Cash Flow Statements  Examination of Profitability statements  Examination of projected financial statements  Examination of CMA data  To assess the suitability of the company for disbursement of credit. This would involve the following actions:  Use of credit rating charts  Evaluation of management risk  Evaluation of financial risk  Evaluation of market-industry risk  Evaluation of the facility  Evaluation of compliance of sanction terms 7
  • Downloaded from a2zmba.blogspot.com  Calculation of credit rating  Determination of interest rate: This would entail the following sequence of actions.  Collect data regarding financial health evaluation  Noting down of credit rating  Referencing the banks’ interest rate guidelines circular  Choosing the interest rate from the circular on the basis of financial health and credit rating 8
  • Downloaded from a2zmba.blogspot.comChap 3 : Term Loan Assesment3.1 Steps in term loan processing Submission of Project Report along with the Request Letter . Carrying out due diligence Preparing Credit Report Determining Interest Rate Preparing and submission of Term Sheet If not approved if approved Preparation of proposal Submission of Proposal to designated authority If No queries raised If queries raised Sanction of proposal on various Project Rejected Terms & Condition Solve the queries Communication of Sanction Terms & Condition Acknowledgement of Sanction Terms & Condition Application to comply with Sanction Terms & Condition & execution of Loan Documents Disbursement 9
  • Downloaded from a2zmba.blogspot.com3.1 CONDUCTING FEASIBILITY STUDYThe success of a feasibility study is based on the careful identification and assessment ofall of the important issues for business success. A detailed Project Report is submitted byan enterpreneur , prepared by a approved agency or a consultancy organisation. Suchreport provides indepth details of the project requesting finance. It includes the technicalaspects, Managerial Aspect, the Market Condition and Projected performance of thecompany. It is neccessay for the appraising officer to cross check the informationprovided in the report for dtermining the worhiness of the project.Project Details:Definition of the project and alternative scenarios and models. • List the type and quality of product(s) or service(s) to be marketed. • Outline the general business model (ie. how the business will make money). • Include the technical processes, size, location, kind of inputs • Specify the time horizon from the time the project is initiated until it is up and running at capacity.Relationship to the surrounding geographical area. • Identifies economic and social impact on local communities. • Identifies environmental impact on the surrounding area.MARKET FEASIBILITYIndustry description. • Describes the size and scope of the industry, market and/or market segment(s). • Estimates the future direction of the industry, market and/or market segment(s). 10
  • Downloaded from a2zmba.blogspot.com • Describes the nature of the industry, market and/or market segment(s) (stable or going through rapid change and restructuring). • Identifies the life-cycle of the industry, market and/or market segment(s) (emerging, mature)Industry Competitiveness. • Investigates industry concentration (few large producers or many small producers). • Analyzes major competitors. • Explores barriers/ease of entry of competitors into the market or industry. • Determines concentration and competitiveness of input suppliers and product/service buyers. • Identifies price competitiveness of product/service.Market Potential. • Will the product be sold into a commodity or differentiated product/service market? • Identifies the demand and usage trends of the market or market segment in which the proposed product or service will participate. • Examines the potential for emerging, niche or segmented market opportunities. • Explores the opportunity and potential for a "branded product". • Assesses estimated market usage and potential share of the market or market segment.Sales Projection. • Estimates sales or usage. • Identifies and assess the accuracy of the underlying assumptions in the sales projection. • Projects sales under various assumptions (ie. selling prices, services provided). 11
  • Downloaded from a2zmba.blogspot.comAccess to Market Outlets. • Identifies the potential buyers of the product/service and the associated marketing costs.Investigates the product/service distribution system and the costs involved.ORGANIZATIONAL/MANAGERIAL FEASIBILITYBusiness structure. • Outline alternative business model(s) (how the business will make money). • Identify the proposed legal structure of the business. • Identify any potential joint venture partners, alliances or other important stakeholders. • Identify availability of skilled and experienced business managers. • Identify availability of consultants and service providers with the skills needed to realize the project, including legal, accounting, industry experts, etc. • Outline the governance, lines of authority and decision making structure.Managerial PersonnelManagerial Personnel play a key role in directing the working of the company. It isimportant for an organisation to have a pool of eficient personnel who bear the capacityto bail the company out from crisis situation and work towards optimum utlisation oforganisational resources. Such capacity of the personnel can be determined by havingcomplete details on following key aspects: Market reputation on the promoter / management of the company Hands on experience of the management personnel in the industry / Business managed by qualified personnel 12
  • Downloaded from a2zmba.blogspot.com Ability of the promoters / management to bail out the company in case of crisis (for example, this could be derived from a strong group company) Decision making – Is it concentrated ? Organisation structure / Succession planning / Labour relations Is any group company in default / Any Directors on RBI’s negative list / Borrower’s track-record in honouring financial commitment Length of relationship with the bankTECHNICAL FEASIBILITYTechnology plays an important role in maintaining a competitive position in this highlycompetitive market conditions. Investing in the proper technology is the key to success itirrespective of size of business thus for achieving its projected performance, it isimportant for it to have sound technological background. Such technical competence ofthe project can be determined by having detailed study done on following key aspects:Determining Facility Needs. • Estimates the size and type of production facilities. • Investigates the need for related buildings, equipment, rolling-stockSuitability of Production Technology. • Investigates and compare technology providers. • Determines reliability and competitiveness of technology (proven or unproven, state-of-the-art). • Identifies limitations or constraints of technology.Availability and Suitability of Location. • Access to markets. • Access to raw materials. • Access to transportation. 13
  • Downloaded from a2zmba.blogspot.com • Access to a qualified labor pool. • Access to production inputs (electricity, natural gas, water, etc.). • Investigate emissions potential. • Analyze environmental impact. • Identifies regulatory requirements. • Explores economic development incentives. • Explores community receptiveness to having the business located there.Raw materials. • Estimates the amount of raw materials needed. • Investigates the current and future availability and access to raw materials. • Assesses the quality and cost of raw materials and markets of easily substituted inputs.Other inputs. • Investigates the availability of labor including wage rates, skill level, etc. • Assesses the potential to access and attract qualified management personnel.FINANCIAL FEASIBILITYEstimate the total capital requirements. • Assesses the capital needs of the business project and how these needs will be met. • Estimates capital requirements for facilities, equipment and inventories. • Determines replacement capital requirements and timing for facilities and equipment. • Estimates working capital needs. • Estimates start-up capital needs until revenues are realized at full capacity. 14
  • Downloaded from a2zmba.blogspot.com • Estimates contingency capital needs (construction delays, technology malfunction, market access delays, etc. • Estimates other capital needs. • Estimated equity and credit needs. • Identifies alternative equity sources and capital availability -- producers, local investors, angel investors, venture capitalists, etc. • Identifies and assess alternative credit sources -- banks, government (ie. direct loans or loan guarantees), grants, local and state economic development incentives. • Assesses expected financing needs and alternative sources -- interest rates, terms, conditions, covenants, liens, etc. • Establishes debt-to-equity levels.Budgets expected costs and returns of various alternatives. • Estimates expected costs and revenue. • Estimates the profit margin and expected net profit. • Estimates the sales or usage needed to break-even. • Estimates the returns under various production, price and sales levels. This may involve identifying "best case", "typical", and "worst case" scenarios or more sophisticated analysis like a Monte Carlo simulation. • Assesses the reliability of the underlying assumptions of the financial analysis (prices, production, efficiencies, market access, market penetration, etc.) • Creates a benchmark against industry averages and/or competitors (cost, margin, profits, ROI, etc.). • Identifies limitations or constraints of the economic analysis. • Determines project expected cash flow during the start-up period. • Identifies project an expected income statement, balance sheet, etc. when reaching full operation. 15
  • Downloaded from a2zmba.blogspot.com Study ConclusionsThe study conclusions contain the information you will use for deciding whether toproceed business. The major categories this section should include are: • Identify and describe alternative business scenarios and models. • Compare and contrast the alternatives based on their business viability. • Compare and contrast the alternatives based on the goals of the producer group. • Outline criteria for decision making among alternatives.Next StepAfter the feasibility study has been completed and presented, a carefully study andanalysis the conclusions and underlying assumptions. Next, you will be faced withdeciding which course of action to pursue.Potential courses of action include: • Choosing the most viable business model, for investment • Identifying additional scenarios for further study. • Deciding that a viable business opportunity is not available and moving to end the business assessment process. 16
  • Downloaded from a2zmba.blogspot.com3.2 CREDIT REPORT AND CREDIT RATINGThe credit report is an important determinant of an individuals financial credibility. Theyare used by lenders to judge a persons creditworthiness. They also help the personconcerned to narrow down on the financial problem areas.Credit report is a document, which comprises detailed information about the creditpayment history of an applicant. It is mostly used by the lenders to determine the creditworthiness of an applicant. The business credit reports provide information on thebackground of a company. This assists one to take crucial business related decisions.People can also assess the amount of business risk associated with a company and thendecide whether they would be comfortable in providing them with credit facilities. Thedegree of interest that would be shown by investors in their company can also be gaugedfrom the business credit reports as they can get an idea of the conception of theircustomers regarding themselves. Since these records are updated at regular intervals oftime they enable people to identify the risk levels associated with a business as well as itsfuture. These reports also allow businesses to get detailed information about the financialstatus of business partners and suppliers.What Is A Corporate Credit Rating?Ratings can be assigned to short-term and long-term debt obligations as well as securities,loans, preferred stock and insurance companies. Long-term credit ratings tend to be moreindicative of a countrys investment surroundings and/or a companys ability to honor itsdebt responsibilities. . The ratings therefore assess an entitys ability to pay debts.There are various organization who perform credit rating for various businessorganization.Union Bank of India follows a finely defined Credit Rating Model for assessing thecreditworthiness of the applicant. The credit rating model asses various aspects of theprojects and assigns scores against them thereby determining the risk level involved withthe project.It is divided in Four Sections: 17
  • Downloaded from a2zmba.blogspot.com 1. Rating of the Borrower  Financial Risk  Management Risk 2. Market Condition/ Demand Situation 3. Rating of the Facility 4. Business Consideration 5. Cash Flow related parameters1) Rating of the Borrower: This part of credit rating model deals with assessing thefinancial and managerial ability of the borrower. The financial ability of the firm isderived by calculating ratios that determine the short term and long term financialposition of the firmShort term ratios include Current Ratio, determines the liquidity position of thecompany over a period of one year. The current ratio is an indication of a firms marketliquidity and ability to meet creditors demands. It is excess of current assets over currentliability. If current liabilities exceed current assets (the current ratio is below 1), then thecompany may have problems meeting its short-term obligations. If the current ratio is toohigh, then the company may not be efficiently using its current assets.According to the guidelines given to UBI the ideal level is at 1.33:1 however theacceptable level is at 1.17:1.However at times current ratio may not be a true indicator, the current ratio for roadprojects is very high but this does not indicate that the company is not using its assetswell but the ratio is high because the activity involves more in dealing with current assets.Hence it is important for the evaluator to understand the nature of the industry.Long term ratio include Debt Equity Ratio is a financial ratio indicating the relativeproportion of equity and debt used to finance a companys assets. This ratio is also knownas Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor asthe company already has aquired high amount of funds from market thereby reducing theinvestor share over the securities available, inreasing the risk. 18
  • Downloaded from a2zmba.blogspot.comIt is aslo important for the lender bank to assess the firms debt paying capacity over aperiod. Such capacity is derived by calculating ratio like Debt Serice Coverage Ratiominimum acceptable level is 1.50.It also necessary for the lender to determine the ability of the firm to achieve theprojected growth by evaluating the projected sales with actuals.However such parameterremains non applicable if the business is new.Finacial risk evaluation is oly one of the parameter and not thje only parameter fordetermining the risk level. It is important to evaluate the Management Risk also whileevaluating the risk relaing to borrower.It is the management of the company that acts as guiding force for the firm. The keymanagerial personnel should bear the capacity to bail out the company frm crisissituation. Inorder to remain competitive it is essential to take initiatives. Such skills aredeveloped over years of experience, thus for better performance it is required to have ateam of well qualified and expirienced personnel.2) Market potential / Demand SituationA Company does not operate in isolation there are various market forces that acts ineither favourable or unfavraouble manner towards its performance. Thus the rating wouldnot give true picture if does take market or demand situation in consideration.The demand supply situation / market Potential plays an important role in determiningthe growth level of the company likei) Level of competition : monolpoly , favourable , unfavourableii) seasonality in demand : affected by short term seasonality, long term seasonality ormay not be affected by seasonality in demand.iii)Raw Material Availablity:iv)Locational Issues like proximity to market, inputs, infratstructure: Favourable,neutral, unfavourable.v)Technology ie, proven Technology- not to be changed in immeditate future,technology undergo change, outdated technolgy.vi)Capacity utilisation 19
  • Downloaded from a2zmba.blogspot.com3)Rating of the Facility:The company can start functioning only after completing statutary obligations laid downby the governing authority. Such statutary obligation involves obtaining licenses, permitsfor ensuring smooth operations. Perparation and Submission of Finacial Statements,Stock statements in the standard format within the given time schedule.4)Business Consideration:The length of relationship with the bank enables the lender to assess the previousperformance of the account holder. A good track record acts in the favour of theapplicant, however a under perfomance make the lender more vigiliant.The income value to the bank also given due consideration.Thus Credit Rating of the Business takes into consideration various aspects that directlyor indiretly bears an effects the performance of the business.After evaluating the risk level involved the lender bank decided on lending Interest Rate.In UBI they are catagorised in 9 segements 1. lowest Risk CR-1 2. Low Risk CR-2 3. Medium Risk CR- 3 4. Moderate/ Satisfatory Risk CR- 4 5. Fair Risk CR- 5 6. High Risk CR- 6 7. Higher Risk CR- 7 8. highest risk CR- 8 9. NPA CR- 9In UBI, a business receiving Credit Rating above level 6 are not considered good frompoint of investment and thus are avoided. 20
  • Downloaded from a2zmba.blogspot.com3.3 DETERMINATION OF INTEREST RATE The interest rate is determined from the interest rate guidelines circular. This circular is regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on BPLR and the foreign exchange loans are based on LIBOR. The guidelines define how much interest rate is to be assigned for a particular credit rating and credit duration. However, credit rating and its use in determining interest rate is a theoretical concept and the bank may allow a reduction in interest rate under the following conditions:  Good Client The organization is a long term client and brings good business to the bank. The organization’s actions show that it intends to become a long term customer of the bank  Banking Consortium The organization is seeking credit from a consortium of banks. In some cases like this, the lead bank might decide the interest rate and all the member banks of the consortium follow this interest rate. 3.4 TERM SHEETFollowing a favrouable feasibility check, credit rating the next step is preparing termsheet . A Term Sheet is breif document that provides details on aspects like: • Account Details • Financial highlights for immediate previous two audited years and projection for proceeding year • Nature of Project • Cost of Project • Means of finace 1. Nature of Facility 2. Purpose 21
  • Downloaded from a2zmba.blogspot.com 3. Tennure of Term Loan 4. Interest rate Reset 5. Margin 6. Interest Rate, Commission  Door to Door Tenor ie.the period within which the entire amount I sto be disbursed. o Repayment Terms o Prime Security o Collateral Security o Upfront fees ie the charges levied by the bank for processing the documents.3.5 PROPOSALAn approved term sheet leads to preparation proposal. A proposal is prepared in standardformat, this enables the bank to keep a proper track record and also facilitates propercomparision. A proposal a full fledged document providing details on project submittedand requesting finance from bank. A proposal contains information on following aspects:* Details of Account: It includes name of the Account Holder, Date of incorporation,Line of Activity, Internal Credit Rating level, Address of the Registered Office, Name ofDirectors, Share Holding Pattern, Asset Classification, Purpose of the Loan.* Securities:Lenders often feel more confident about a loan if they are given a securityinterest in the assets of a business. Then, if the borrower does not repay the loan aspromised, the lender can take the property the borrower pledged, sell it and use theproceeds to repay (or partially repay) the borrowed amount.it provides detailedinformation on nature of securities given in lieu of the Loan.they are of two types Primesecurities, Collateral Secuties 22
  • Downloaded from a2zmba.blogspot.comPrime Securities: Pari Passu is a term used in banking transactions which means that thecharge to be created is in continuation of an earlier charge which might be held by thesame institution or by an other institution.Collateral Securities: In lending agreements, collateral is a borrowers asset that isforfeited to the lender if the borrower is insolvent --- that is, unable to pay back theprincipal and interest on the loan. When insolvent, the borrower is said to default on theloan, in which case the lender becomes the owner of the collateral. It includes details on  Nature / Description of collateral security indicating area & location of property  Value in Rupees.  Date of valuation along with name of Valuer  Insurance Amount & Date of Expiry Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor, Value of Guarantee.* Financial Highlights:It povides details of important financial elements over a period of years. It includesDetails on Paid capital, Tangible Networth, Net working Cpaital,Current Assets, CurrentLiabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Asstes, Long TermLiailities, Fixed Assets, Investments, Non current Assets like guarantees , Cash Accruals,Capital employed.It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratioand so.The interpretation of the financial data presented provides information on the perfomancetrend of the company also of the Projections made. Such financial highlight play animportant role in assesing the financial strenghts and weakness of the business. 23
  • Downloaded from a2zmba.blogspot.com* Status of the project:A brief of ProjectIn this part of proposal a brief about the project is explained, it includes information onnature, type of project, purpose of the project, commencement details, the promoters andrelated details of the project. If it is a on-goin project it also gives details on progress andstatus of progress* Evaluation of Industry :This Section gives brief details on the 1. Scope of the industry 2. Growth level and overall performance of the industry 3. Recent Developments and Trend Evaluation* Conduct of the Account:This section provides details on :Regularity in Submission of—  Stock Statements / Book Debt Statement  QPR Statements / Half Yearly Statement  Financial Statements  CMA Data* Compliance to Terms of SanctionIt furnishes information on following aspect:  Completion of Mortgage formalities  Registration of Charges with RoC  Whether documents valid and in force  Compliance of RBI guidelines  Whether consortium meetings held at prescribed periodic intervals where the Bank is the leader. 24
  • Downloaded from a2zmba.blogspot.com* Exposure details from banking system (existing) (Incl. Our Bank)The sharing pattern of the banks is mentioned in this section of proposal. It includes  Name of the bank  Percentage of share for the fund based and non Fund based Limits  Amount in Rs.Non Fund based credit are in form of gaurantees like Letter of Credit (L/c), Letter ofgaurantee (L/g)Letter of CreditA ‘Letter of credit’ also known as documentary credit is the most commonly acceptedinstrument of settling international trade payments. A letter of credit is an arrangementwhereby a bank, acting at the request of a customer, undertakes to pay a third party by agiven date, on documents being presented in compliance with the conditions laid down.Letter of GuaranteeA letter from a bank stating that a customer owns a particular security and that the bankwill guarantee delivery of the security. A letter of guarantee is used by an investor who iswriting call options when the underlying stock is not in his or her brokerage account. ACall Option is an agreement that gives an investor the right (but not the obligation) to buya stock, bond, commodity, or other instrument at a specified price within a specific timeperiod.Financial Guarantee:A non-cancelable indemnity bond guaranteeing the timely payment of principal andinterest due on securities by the maturity date. If the issuer defaults, the insurer willpay a fixed sum of money to holders of the securities. Financial guarantees aresimilar to a Standby Letter of Credit, but are issued by an insurance company. AStandby Letter of Credit is a form of insurance on an underlying agreement orobligation (contract), insuring all parties to the contract against failure to perform orpay on the part of one or another party to the contract. Standbys are issued by banks. 25
  • Downloaded from a2zmba.blogspot.comAssessment of Non Fund Based Limit 1. Non Fund Based Limits are normally to be sanctioned for exixting customer only who already enjoy fund based limits 2. If new borrower full processing as applicable to Fund Based Limits to be carried. 3. Borrower’s background and experience of meeting commitments to be examined in details. 4. L/c limit to be considered as per terms of Purchase or contract, lead period and minimum econmical quantity of supply of stocks 5. Non Fundabsed Limits are to be supported by necessary fund based limits. 6. Past experience of payment of billsunder L/c to be verified before considering new request. 7. While Assessing the L/g Limit contract or agreement which is the base for L/g, should be examined in details for any ambigious clauses. 8. Any request for financial Guarantee to be critically examined before takin decision.* Details of Sister/ Allied Concerns:This section provides information about the Sister/ Allied Concerns aspects like theperformance, promoters, share holding pattern, operation exposure and experience fromvarious banks.* Terms and Condition:It is important both for the bankand the applicant to safegaurd its interest, this could beachieved by settling at mutually acceptable terms and condition inorder to ensure thatboth the parties the lender and borrower perform their part of obligation thereby notputting other party at loss. All loans are subject to regulations and conditions. The legalinformation relating to these regulations and conditions can be viewed in this section. It isadvisable for both the parties to read this information carefully before approval. 26
  • Downloaded from a2zmba.blogspot.com3.6 DISBURSEMENT:After submission Proposal to Designated/ Sanctioning Authortiy for sanctioning the TermLoan. the authorities may raise querries, if any relating to projects and thereby convey itto the processing officer the processing officer inturn addresses them to the borrower fornecessary step to be taken, such querries are required to be solved to the earliest by theapplicant for further proceesing of the proposal.If the authoritiees are satisfied and have no further querries with respect to proposal,theLoan gets sanctioned and the disbursement would be released in as per the termsdecided.3.7 FOLLOW-UP:This is most cruicial stage in process of term loan assesment. Since amount of creditrequired is usually high, such amounts are disbursed in one installment, they are paid ininstallments.this helps the lender bank to understand and assess the utilisation of fundsdisbursed by the lender Bank. Such evualtion is done by obtaining Lender’s EngineerReport, it is report that provides complete details of the status of the project. It is preparedon monthly basis. It also provides CA Report, it verifies the Finacial details furnished tobank for further disbursement.this is known as renewal of account. 27
  • Downloaded from a2zmba.blogspot.comChap 4: Analysis of Credit proposals4.1 Prposal of JKL Ltd.4.1.1 BACKGROUND:The company was incorporated on January 5, 2001, however later the name was changedand the current name is effective from March 23, 2006 with the objective of generation ofpower based on coal. The proposed manufacturing facilities are located at Angul district,Orissa.. The group is already engaged in the business of manufacturing Photographicgoods, Polyester film, BOPP films, Metallized films, Cold rolled steel strips andGalvanized sheets. The details of associate concerns are as under :-JPL - Photographic films & equipment.JPFL - Polyester chips, Polyester film, PVDC film, BOPP film & Metallized film.The company’s manufacturing plant at Nasik, Maharashtra is one of the world’s largestsingle location plant for the manufacture of BOPET and BOPP films.JIL - Steel pipes, cold rolled strips & GP/GC sheets.Established in 1952, ranks among the major manufacturers of ERW / HFIW andgalvanized steel pipes and tubes in the country. The company commenced businessoperations through establishment of a manufacturing facility in Howrah, West Bengal formanufacture of pipe fittings, bends and sockets. At present, the company has amanufacturing capacity of 160,000 TPA of steel pipes & tubes, 300,000 TPA of GP/GCsheets and 350,000 TPA of CR coil / sheets.Promoter Shareholding (%)JPL 26 %JPFL 4% 28
  • Downloaded from a2zmba.blogspot.comGroup Investment Companies include: 45%Consolidated Photo & Finvest LtdRishi Trading Co. Ltd.Soyuz Trading Co. Ltd.Non-Group Companies 25%Budhiya Marketing Pvt. Ltd. (BMPL)Edward Supply Pvt. Ltd. (ESPL)TOTAL 100%EVALUATION OF MANAGEMENT1) Market reputation on the promoter / management of the company:Satisfactory2) Hands on experience of the management personnel in the industry / Businessmanaged by qualified personnel:The qualified professionals & experienced persons are proposed to be appointed formanaging the overall operation of the company. details of key management personnel ofJKL Pvt. Ltd. Are as under:Mr Punit GuptaMr. Punit Gupta, aged about 41 years, is a B.Sc. and M.B.A. He has work experience ofabout 18 years in the field of Project Management and Marketing with the group. He ispresently heading the Project team for setting up of the proposed power project and isinvolved in budgeting, costing, financial analysis, sensitivity analysis, project planning,tendering, bid evaluation, award of contracts, post award activities, coordination withcontractors, finalisation of MOUs, JV Agreements, and various types of studies requiredfor Power Projects etc.Mr Umesh Chand JainMr. Umesh Chand Jain is a graduate with work experience of about 33 years in the areasof Trading, Liaisoning, Business management and implementation of new Projects. He 29
  • Downloaded from a2zmba.blogspot.comhas been working with the Group for the last seven years. He is on the Board of variousgroup companies including Consolidated Finvest & Holdings Limited.Mr S. R. YadavMr. S.R.Yadav is an ex-Executive Director, NCR region, NTPC. He is also a Director onthe board for NTPC-SAIL Power Company (P) Ltd. He will be heading the Engineeringteam in JKL Pvt. Ltd. He is a Mechanical engineer from RIT, Jamshedpur and has workexperience of over 35 years in the areas of project planning, erection, commissioning,operation and maintenance. He has been involved in many green field projects of NTPCand was posted in Korba, Bokaro, Singrauli etc.Mr A. K. SehdevMr AK Sehdev is an engineering graduate from Delhi College of Engineering. He hasover 36 years of experience of Navaratna Companies like IOC and NTPC. He is involvedin preparation of action plan, project formulation, project scheduling, FRs and DPRs, costestimation and cost control, financial analysis, tariff calculations, budget preparation,project engineering and finalization of technical specifications of various packages.Mr P. K. PatnaikMr Patnaik has many years of experience in IPP (Industrial Power Projects) He had alsoworked in two UK based company as an advisor. He was VP and country Manager withKennedy & Donkin Ltd and Head Business Development with Merz & McLellan Ltd. Heworked in Lanco Kondapalli also. Prior to joining JITPL as Sr VP (Corporate affairs), hewas Head (Corporate Affairs) at Egateway, New Delhi.Mr A C SarkarMr Sarkar is Executive Director (Eastern Region-1), Power Grid Corporation of India Ltd(PGCIL) and has work experience of about 35 years of experience in Power transmission.He is an Electrical engineer from Sibpur Engg College. He has been involved in theestablishment of the national transmission grid and has experience in the areas of 30
  • Downloaded from a2zmba.blogspot.complanning, coordination, project management, technical and commercial considerations.He is joining JITPL as Vice-President (Transmission).Mr J. Ramesh ChandraMr Chandra is Master in Applied physics & Instrumentation. He has work experience ofaround 33 years in various companies including Desein and BHEL. He has joined JKLPvt. Ltd as GM (Control and Instrumentation). He has experience of instrumentationprocess for BTG (boiler, turbine & generator) and BOP (balance of plant), projectengineering, design and commissioning.Mr L. P. SoniMr Soni is a Chartered Accountant and Company Secretary with over 25 yearsexperience in various companies. Mr. Soni’s areas of expertise include project financing,working capital management, fund raising through capital market, foreign exchangemanagement, Company law matters. Mr. Soni has been earlier associated with variouscompanies including Surya Roshni Ltd., Maharaja Shree Umaid Mills Ltd. in seniorpositions prior to joining the group as VP (Finance).Mr Ashok Kr KucheriaMr Kucheria is M Com and Chartered Accountant and has work experience of over 24years. He was head of Finance of Jamlal Drilling and Industries Ltd for around 14 yearsand rose to the post of CFO of the Company. His strengths points are auditing, MIS,Taxation, project financing, working capital management, fund raising, capital market,foreign exchange management etc. Presently he is GM (Finance) for power project andhe is involved in resource management and financial closure for the project.Mr P. GirishMr P Girish is Vice President, (Corporate affairs) in charge of govt liaisoning for Delhi.He has 21 years of experience in corporate affairs, administration in various Companies.Mr. Girish has started his career with Rolls Royce Industrial Power Ltd in theCommercial department. He has been associated with the Malaxmi Infra Ventures Pvt 31
  • Downloaded from a2zmba.blogspot.comLtd as General Manager with the major responsibilities of Navabharat Power Pvt Ltd. andSimhapuri Energy Pvt Ltd Nellore based on Imported Coal. He has also worked forLanco Power Pvt Ltd as a Manager Administration.Mr Naveen GoelMr Naveen Goel is Head (State Liaisoning), Orissa. He is B .Com from Delhi Universityand inter in CA and ICWA. He started his career with Jindal Photo Limited since 1995.Mr. B L DuaMr Dua is General Manager Project Development and Construction. He has over 38years of experience on civil construction, especially power plants. He has experience ofconstruction engineering and has completed a Diploma in civil engineering. He has beenassociated with various public sector companies including Central Board of Water,Central Electricity Authority and NTPC etc.3) Ability of the promoters / management to bail out the company in case of crisis(for example, this could be derived from a strong group company)The experienced directors bear the capacity to bail out the company in case of crisis.4) Decision making – Is it concentrated?A committee of directors comprising of qualified & experienced personnel willprofessionally manage the company.5) Organisation structure / Succession planning / Labour relationsThe company will be a professionally managed company hence, any threat of successionplanning is not perceived.6)Is any group company in default / Any Directors on RBI’s negative list /Borrower’s track-record in honouring financial commitment? 32
  • Downloaded from a2zmba.blogspot.comThe company has confirmed that none of the Directors of JKL Pvt. Ltd are on RBI’sdefaulters’ list in respect of JKL Pvt. Ltd. or any other company in which they are aDirector.7) Length of relationship with the bankThe Group is new to us.EVALUATION OF INDUSTRYThermal power stations constituting over 66% of the aggregate installed generationcapacity and despite being relatively less environment-friendly as compared to hydro-electric projects (HEPs), thermal power plants offer certain advantages over HEPs asmentioned below:Lesser implementation time-frame: 2.5-3.5 years as compared to 5-6 years for HEPs;Ability to function as base load power plants as compared to HEPs which serve as peak-load power plants;Standardized generation technology: independent of project site;Absence of seasonal variations in power generation;Location flexibility: Can be located either close to load-centre or at fuel pit-head whileHEPs are site-specific and often located in challenging geographical terrain.Demand-Supply ScenarioPower supply position in the country has worsened over the last few years with growth inpower demand outstripping new capacity addition with peak power deficit being worsthaving peak deficit of 13.5% in 2006-07. The energy deficit at the national level hasincreased from 7.5% in 2003-04 to 9.9% in 2006-07 • Projected Power Requirement beyond 2011-12 till 2021-22With rapid growth of the economy, power requirement is projected to increasesignificantly over the next decade with per capita power consumption expected toincrease from ~612 kWh at present to about 1000 kWh by 2012 (GoI’s target for 100%electrification). 33
  • Downloaded from a2zmba.blogspot.com • Given the prevalent demand supply deficit scenario and projected growth in power requirement, huge addition in generation capacity is required in the country over the coming decade. Consequently, there exists an attractive business and market opportunity for establishment of power generation plants in the country, especially in the northern & western regions of the country.Target States for Power SaleIn view of the adverse power deficit scenario in western and northern region asmentioned in the previous sections, both these regions have been identified as targetmarkets for ultimate sale of JKL Pvt. Ltd power.AnalysisProjected Balance Sheet Rs. in Crores Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- As On Mar-09 10 11 12 13 14 15 16 17 18 19 20 Assets Gross Block 33 33 33 2818 2818 2818 2818 2818 2818 2818 2818 2818 CWP 316 816 2188 0 0 0 0 0 0 0 0 0 Less:Accum ulated Depreciation 0 0 0 49 196 343 490 637 784 931 1078 1225 Closing Block 349 849 2221 2769 2622 2475 2328 2181 2034 1887 1740 1593 Net Current Assets 0 0 0 187 188 189 190 190 178 179 180 181 Cash & Bank Balances 0 0 0 54 106 252 441 639 783 934 1092 1259 DSRA 0 0 0 65 209 229 216 203 190 177 164 151 TOTAL ASSETS 349 849 2221 3075 3125 3145 3174 3213 3186 3176 3176 3184 Liabilities Shareholders Equity 201 201 444 573 573 573 573 573 573 573 573 573 Reserves & Surplus 0 0 0 70 276 492 718 954 1132 1319 1515 1719 Net Worth 201 201 444 643 849 1065 1291 1526 1705 1892 2088 2291 Rupee Term Loan 139 608 1666 2148 1987 1772 1558 1343 1128 913 698 483 Sub-Debt 9 41 111 143 140 125 111 97 82 68 54 39 Working Capital Loan 0 0 0 140 141 142 142 143 134 135 135 136 Deferred AAD 0 0 0 0 8 40 72 104 137 169 201 233 34
  • Downloaded from a2zmba.blogspot.com Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- As On Mar-09 10 11 12 13 14 15 16 17 18 19 20 TOTAL LIABILITI ES 349 849 2221 3075 3125 3145 3174 3213 3186 3176 3176 3184Projected Profit and Loss Account Rs. in Crores Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- FY Ending` 12 13 14 15 16 17 18 19 20 Revenues Primary energy sale to GoO 60 188 209 206 202 198 195 192 189 Powe sale PTC 253 758 758 758 758 683 683 683 683 Less AAD 0 8 32 32 32 32 32 32 32 Gross Revenues 313 938 935 932 928 849 845 842 839 Operating Expense O& M exp. 24 74 77 80 83 86 90 94 97 Travel and Fuel Exp. 55 171 178 185 192 200 208 217 225 Secondary Fuel Exp. 8 24 25 26 28 29 30 31 32 Environment Cess 6 18 18 18 18 18 18 18 18 Total Operating Exp. 92 287 298 309 321 333 345 359 372 PBDIT 221 651 638 623 607 516 500 484 467 Depreciation 49 147 147 147 147 147 147 147 147 PBIT 172 504 491 476 460 369 353 337 320 Int. on RTL 80 235 211 187 163 139 115 91 66 Int. Sub. Debt 6 19 18 16 14 12 10 8 6 Int. on WC Loan 6 18 18 18 18 17 17 17 17 PBT 79 233 244 255 265 201 211 221 230 Tax 9 26 28 29 30 23 24 25 26 PAT 70 206 216 226 235 178 187 196 204Sensitivity Analysis Scenario Avg. DSCR Min. DSCR Project IRR* Base Case 1.60 1.38 15.6 % Increase in Project Cost by 5% 1.54 1.34 14.9 % Decrease in Power Sale Tariff 1.56 1.33 14.9 % through PTC by 5% during Year 1-5 Increase in Primary Fuel price by 1.58 1.37 15.3 % 5% Decrease in PLF by 5% 1.49 1.29 14.2 % 35
  • Downloaded from a2zmba.blogspot.com Scenario Avg. DSCR Min. DSCR Project IRR* Increase in Interest rate by 1% for 1.54 1.34 15.6 % both Senior debt & Subordinated debtInterpretationProject is able to withstand the operations at a lower tariff and its debt servicing capacity(Average DSCR: 1.56, Min DSCR: 1.33) is satisfactory.Increase in Primary Fuel price by 5%Sensitivity has also been carried out for increase in the fuel prices by 5% over the basecase numbers. The Project is able to sustain the increased fuel cost and its debt servicingcapacity remains satisfactory with an average DSCR of 1.58 and minimum DSCR of1.37. The impact of any fuel price escalation on the projected financials is partlymitigated on account of the pass-through effect in the power sale tariff applicable toGridco. It may however be noted that since most of the coal requirement for the Projectwill be met from the captive coal block allotted to the company, the company will be ableto have a better control over the coal price thereby reducing it exposure to any escalationsin coal price.Decrease in Plant PLF by 5%Under the base case projections, the operations of the project have been projected at aPLF of 80%. Sensitivity has been carried out for the scenario of the Project running at alower PLF i.e. 75%. It has been observed that the Project is able to withstand theoperations at a lower PLF and its debt servicing capacity (Average DSCR: 1.49, MinDSCR: 1.29) is satisfactory. Considering the better operational performance of existingIPPs in the country vis a vis state sector projects, the situation of a PLF lower than 80%seems unlikely.Increase in RTL Interest Rate by 1%Sensitivity has also been carried out for increase in the RTL interest rate by 1% over thebase case interest rate of 11.5% for Senior debt and 13.5% for Subordinated Debt. It is 36
  • Downloaded from a2zmba.blogspot.comobserved that the Project is able to sustain the increased interest costs comfortably and itsdebt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory.As can be seen above, the debt serviceability of the project is comfortable adversesensitivities considered. Hence, it can be concluded that the proposed power project willbe able to withstand adverse circumstances and the debt serviceability is satisfactory,even under adverse circumstances.Decrease in Power Sale Tariff through PTC by 5% during Year 1-5Under the base case projections, tariff for power sale to PTC has been maintained at Rs.2.60 per kWh for Year 1-5 and Rs 2.34 per kWh for subsequent years. Sensitivity hasbeen carried out for the scenario of the power being sold at 5% lower than the base casetariff i.e. Rs. 2.47 per kWh. As seen above, the Project is able to withstand the operationsat a lower tariff and its debt servicing capacity (Average DSCR: 1.56, Min DSCR: 1.33)is satisfactory.Increase in Project cost by 5%A sensitivity has been carried out for 5% increase in the works cost which have estimatedat Rs. 2294 crore in the base case. The Project is able to sustain a 5% escalation in capitalcost comfortably and its debt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34)remains satisfactory.KEY POINTS: 1. Sensitivity analysis was done. The results of which are as follows:-  When the power sale tariff to “PTC” ( PTC India Ltd) are decreased by 5% the Average DSCR: 1.56, Min DSCR: 1.33 . This is above the benchmark level.  When project cost is increased by 5% Average DSCR: 1.54, Min DSCR: 1.34. This is above benchmark levels and is considered favourable.  In case of increase in RTL Interest Rate by 1% the Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory 37
  • Downloaded from a2zmba.blogspot.com  When the primary fuel prices increase by 5% the Average DSCR of 1.58 and Minimum DSCR of 1.37 remains satisfactory.As can be seen above, the debt serviceability of the project is comfortable when adversesensitivities considered. Hence, it can be concluded that the proposed power project willbe able to withstand adverse circumstances. 2. The profitability estimates are sensitive to fluctuation in sales. 3. The projected Debt Equity ratio and Current Ratio are at satisfactory level. As the project implementation is yet to commence, offering any comments on financial indicators would not be relevant at this juncture as the same would go on changing. 4. According to internal credit rating, the company has been rated as CR-3. 5. Primary fuel requirements for the Project will be met with from the Coal linkage from Mahanadi Coalfields Ltd (MCL) and Captive Mandakini coal block in Talcher coalfields, Orissa .JKL Pvt. Ltd. will enter into separate long-term Fuel Supply Agreements with the Mining JVC and MCL for supply of coal from the captive block and coal linkage respectively, taken together would be adequate for requirement of proposed 600 MW for its entire project life. 6. The company has already into Power Purchase Agreements (PPA) with Gridco for sale of 25% of the power.Company has also entered into HOA(Heads of Agreement) with PTC for sale of balance75% power at reasonably attractive tariff. 7. Both Gridco and PTC would open LC in favor of JKL Pvt. Ltd for timely payment of invoices. 8. Even with an increase of 1% in the interest rate, average & minimum DSCR are comfortable. 29. Recommendations 38
  • Downloaded from a2zmba.blogspot.com JKL Pvt. Ltd. is being promoted by BCJ Group, implementing a 600 MW pit-head coal-based power project in Angul district of Orissa. The project capacity is proposed to be enhanced to 1200 MW through implementation of a second unit of 600 MW at a later stage. Salient features of the proposed project, are as under: 1. Proven track record of promoters [JPL along with other group / investment companies of BCJ group] - in running profitable business operations and adequate financial strength to meet the equity requirements for the project; 2. Assured fuel at reasonable cost – fuel from allocated captive coal block adjacent to project site along with additional long-term coal linkage from MCL.Captive coal source will protect JKL Pvt.Ltd from fuel price fluctuations and make thepower cost competitive; 3. Significant progress in project development activities as under.State support for land acquisition, water allocation and other developmental aspects ofthe project secured through MoU; Section (4) notification for acquisition of land issued; In-principle allocation of water sufficient to meet project requirements; Grant of various project clearances / approvals, including TOR for EIA study from MoEF, GoI; 4. Power off-take arrangement- Execution of PPA with Gridco for sale of 25% project capacity and execution of HOA for sale of balance power through PTC.Analysis of the project development structure and projected financial performance of theProject, based on the information pertaining to the project cost, financing plan, andprevalent market conditions while a sensitivity analysis has also been carried out to testthe robustness of project financial in respect of key business and performance parameters.The projected financials of the project are reasonably comfortable under differentsensitivity scenarios as required to service the project debt over proposed tenor. 5. Based on the projected financials, sensitivity analysis and risks factors, SBI Capital Markets has viewed the proposed project of JITPL, as financially viable. 39
  • Downloaded from a2zmba.blogspot.com SBICAP has further stated that keeping in view the proven credentials of the project promoters, progress achieved in project development and projected financial performance of the project, the project appears to be bankable and accordingly, the proposal may be considered favorably for final sanction of RTL and Subordinated debt.In view of the above mentioned observations, recommended the following. (Rs. in Crores) Nature of Limit Amount Existing Proposed Margin Term loan Nil 300.00 25%Interest shall be 11.50% p.a. floating for senior debt and 13.50% p.a for subordinate debtpayable monthly. 40
  • Downloaded from a2zmba.blogspot.com ConclusionCredit Appraisal is a process of appraising the credit worthiness of loan applicants. Thefunds of depositor’s i.e general public are mobilized by means of such advance /investment. Thus it extremely important for the lender bank to assess the risk associatedwith credit, thereby ensure the security for the funds deposited by the depositors.In UBI the credit appraisal is done by thorough study of the project which involvesFollowing. 1) Evaluation of Management: A detailed study about the promoters is carried out in order to ensure promoters are experienced in the line of business and are capable to implement and run the project 2) Technical Feasibility: A detailed study about the technical aspects is done to determine the technical soundness of the project 3) Financial Viability: A detailed study relating to financial viability of the project is done; thereby ensuring that project will generate sufficient surplus to repay the lan installment and interest 4) Risk analysis: it determines the risk associated with the project this is done by performing a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the projects capacity to service debts under worsened conditions is determined. Credit rating, provides rating for various parameters like management, financial, market and so, thereby determine the credit worthiness of the borrower 5) It is on the basis of the credit risk level, collateral securities to be given by the borrower are determined.This shows Union Bank of India has sound system for credit appraisal. 41
  • Downloaded from a2zmba.blogspot.comAnnexure 1: Format of Term Sheet Union Bank OF India Industrial Finance Branch, MumbaiAPPROVAL OF BROAD TERMS OF THE PROPOSALIFB:ADV:: Dated Name of the accountAccount withGroupExisting connectionor new connectionCredit RatingBackground ofpromoters (Rs. In Crores)Brief Financials Year (Aud.) Year (Aud.) Year (Prov.) Net Sales PAT(Loss) TNW* Current Ratio TOL/TNW RATIO (Rs. In Crores)Nature of ProjectCost of Project tal % ofMEANS OF FINANCENature of Facility 42
  • Downloaded from a2zmba.blogspot.com Amount Rs. Crores Margin Interest/Commission Interest reset Purpose Period of the facility Moratorium Door To Door Tenor Repayment terms Security – Prime Collateral security Upfront feesPrepayment termsWhether conforms to LoanPolicyCustomer profitability, (in caseof existing accounts)1. Commission earned on bills purchased/discounted.2. Processing charges3. Commission on LC/LG4. Credit balances in a. SB b. CD5. Term deposits a. Through own sources b. Through third party 43