Financial appraisal of project @ sbi project report mba finance


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Financial appraisal of project @ sbi project report mba finance

  1. 1. STATE BANK OF INDIAProject Financing . 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 • Measures taken by SBI when the repayment is not possible 75 SECTION – V • Analysis 76 • Findings 77 -78 • Recommendations • Limitations • Conclusions • Bibliography 79 BABASAB PATIL 1
  2. 2. STATE BANK OF INDIAProject Financing .Executive SummaryTitle 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 aparticular subject assigned to him/her. Accordingly I have been assigned the projectwork 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 businessneed funds for smooth running of its activities and bank is the one of the source throughwhich the business get funds, before financing the bank appraise the projects and if theprojects meet the requirement of the bank rules than only they will finance.Project financing is commonly used as a financing method in capital-intensiveindustries for projects requiring large investments of funds, such as the construction ofpower plants, pipelines, transportation systems, mining facilities, industrial facilitiesand heavy manufacturing plants.The core area of this project focuses on the financial appraisal of SL flow controls, whohas 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 ofthe largest bank in India having vast domestic network of over 9000 branches. SBIdeals with all financial activities which involves all types of deposits, advancesincluding project financing, mutual funds etcFinancial appraisal which mainly leads to the feasibility study consisting of ratioanalysis and capital budgeting calculations. BABASAB PATIL 2
  3. 3. STATE BANK OF INDIAProject Financing .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 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: BABASAB PATIL 3
  4. 4. STATE BANK OF INDIAProject Financing .Analysis:-This analysis part is related to the financial viability of the project SL FlowControls:- • 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. BABASAB PATIL 4
  5. 5. STATE BANK OF INDIAProject Financing .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. BABASAB PATIL 5
  6. 6. STATE BANK OF INDIAProject Financing . • Rationale behind choosing this topic:Project financing is a comparatively new field for Indian banks,at present scenarioIndia is becoming developed country so because of that many projects are going on thatmay be infrastructure, power generation, mining etc. considering all these the projectsmust need finance, to fulfill these objectives the project undertaken companies raisethe funds through capital market, debt market and through banks.Whenever bank wants to finance these type of projects it must study the feasibility ofthe project and then it will go for financing that projectBecause of this it is very necessary to study the process of project financed by the bankso I choose this topic to study how SBI study the projects and the method of financingthe projects. BABASAB PATIL 6
  7. 7. STATE BANK OF INDIAProject Financing .Industrial ProfileHISTORY OF BANKING IN INDIA Without a sound and effective banking system in India it cannot have a healthyeconomy. The banking system of India should not only be hassle free but it should beable to meet new challenges posed by the technology and any other external andinternal factors. For the past three decades India’s banking system has several outstandingachievements to its credit. The most striking is its extensive reach. It is no longerconfined to only metropolitans or cosmopolitans in India. In fact, Indian bankingsystem has reached even to the remote corners of the country. This is one of the mainreasons for India’s growth. The government’s regular policy for Indian bank since 1969has 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 tilltoday, the journey of Indian Banking System can be segregated into three distinctphases. 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 IThe General Bank of India was set up in the year 1786. Next came Bank of Hindustanand Bengal Bank. The East India Company established Bank of Bengal (1809), Bank ofBombay (1840) and Bank of Madras (1843) as independent units and called it BABASAB PATIL 7
  8. 8. STATE BANK OF INDIAProject Financing .Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank ofIndia was established which started as private shareholders banks, mostly Europeanshareholders.In 1865 Allahabad Bank was established and first time exclusively by Indians, PunjabNational Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, IndianBank, 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 periodicfailures between 1913 and 1948. There were approximately 1100 banks, mostly small.To streamline the functioning and activities of banks, mostly small. To streamline thefunctioning and activities of commercial banks, the Government of India came up withThe Banking Companies Act, 1949 which was later changed to Banking RegulationAct 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of Indiawas vested with extensive powers for the supervision of banking in India as the CentralBanking System.During those days public has lesser confidence in the banks. As an aftermath depositmobilisation was slow. Abreast of it the savings bank facility provided by the Postaldepartment was comparatively safer. Moreover, funds were largely given to traders.Phase IIGovernment took major steps in this Indian Banking Sector Reform after independence.In 1955, it nationalised Imperial Bank of India with extensive banking facilities on alarge scale specially in rural and semi-urban areas. It formed State Bank of India to actas the principal agent of RBI and to handle banking transactions of the Union and stategovernment all over the country.Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19thJuly 1969, major process of nationalisation was carried out. It was the effort of the then BABASAB PATIL 8
  9. 9. STATE BANK OF INDIAProject Financing .Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the countrywere nationalized.Second phase of nationalisation Indian Banking Sector Reform wascarried out in 1980 with seven more banks. This step brought 80% of the bankingsegment in India under Government ownership.The following are the steps taken by the Government of India to Regulate BankingInstitutions 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 toapproximately 800% in deposits and advances took a huge jump by 11000%. Bankingin the sunshine of Government ownership gave the public implicit faith and immenseconfidence about the sustainability of these institutions.Phase IIIThis phase has introduced many more products and facilities in the banking sector inits reforms measure. In 1991, under the chairmanship of M Narasimham, a committeewas 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 beingput to give a satisfactory service to customers. Phone banking and net banking isintroduced. The entire system became more convenient and swift. Time is given moreimportance than money. BABASAB PATIL 9
  10. 10. STATE BANK OF INDIAProject Financing . The financial system of India has shown a great deal of resilience. It is sheltered fromany crisis triggered by any external macroeconomics shock as other East AsianCountries suffered. This is all due to a flexible exchange rate regime, the foreignreserves are high, the capital account is not yet fully convertible, and banks and theircustomers have limited foreign exchange exposure.Banking in India originated in the first decade of 18 th century with The General BankOf India coming into existence in 1786. This was followed by Bank of Hindustan. Boththese banks are now defunct. The oldest bank in existence in India is the State Bank OfIndia being established as “ The Bank Of Calcutta” in Calcutta in June 1806. Couple ofDecades later, foreign Banks like HSBC and Credit Lyonnais Started their Calcuttaoperations 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 rootsthere and prospered. The first fully Indian owned bank was the Allahabad Bank set upin 1865.By 1900, the market expanded with the establishment of banks like Punjab NationalBank in 1895 in Lahore; Bank of India in 1906 in Mumbai-both of which were foundedunder private ownership. Indian Banking Sector was formally regulated by ReserveBank Of India from 1935. After India’s independence in 1947, the Reserve Bank wasnationalised and given broader powers. BABASAB PATIL 10
  11. 11. STATE BANK OF INDIAProject Financing .SBI GroupThe Bank of Bengal, which later became the State Bank of India. State Bank of Indiawith its seven associate banks commands the largest banking resources in India.NationalizationThe next significant milestone in Indian Banking happened in late 1960s when the thenIndira Gandhi government nationalized on 19th July 1949, 14 major commercial Indianbanks 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 asthe Hindu growth of the Indian economy.After the amalgamation of New Bank of India with Punjab National Bank, currentlythere are 19 nationalized banks in India.Liberalization- In the early 1990’s the then Narasimha rao government embarked a policy ofliberalization and gave licences to a small number of private banks, which came to beknown as New generation tech-savvy banks, which included banks like ICICI andHDFC. This move along with the rapid growth of the economy of India, kick startedthe banking sector in India, which has seen rapid growth with strong contribution fromall 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 beingtaken over like Global Trust Bank while others like Centurion Bank have found thegoing tough. The next stage for the Indian Banking has been set up with the proposedrelaxation in the norms for Foreign Direct Investment, where all Foreign Investors in BABASAB PATIL 11
  12. 12. STATE BANK OF INDIAProject Financing .Banks may be given voting rights which could exceed the present cap of 10%, atpresent it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till thistime, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) offunctioning. The new wave ushered in a modern outlook and tech-savvy methods ofworking for traditional banks. All this led to the retail boom in India. People not justdemanded more from their banks but also received more.CURRENT SCENARIO Currently (2007), overall, banking in India is considered as fairly mature in termsof supply, product range and reach-even though reach in rural India still remains achallenge for the private sector and foreign banks. Even in terms of quality of assetsand capital adequacy, Indian banks are considered to have clean, strong and transparentbalance sheets-as compared to other banks in comparable economies in its region. TheReserve Bank of India is an autonomous body, with minimal pressure from thegovernment. 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 retailbanking, 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 happenon this front in India.In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stakein Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time aninvestor has been allowed to hold more than 5% in a private sector bank since the RBIannounced norms in 2005 that any stake exceeding 5% in the private sector bankswould need to be vetted by them. BABASAB PATIL 12
  13. 13. STATE BANK OF INDIAProject Financing . Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sectorbanks (that is with the Government of India holding a stake), 29 private banks (these donot 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 and17,000 ATMs. According to a report by ICRA Limited, a rating agency, the publicsector banks hold over 75 percent of total assets of the banking industry, with theprivate and foreign banks holding 18.2% and 6.5% respectively. BABASAB PATIL 13
  14. 14. STATE BANK OF INDIAProject Financing . 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, Corporation Bank, Dena Bank, Indian Bank, Indian 2 Nationalised overseas Bank,Oriental Bank of Commerce, Punjab and Banks Sind Bank, Punjab National Bank, Syndicate Bank, Union Bank of India, United Bank of India, UCO Bank,and Vijaya Bank. 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, 3 Private Banks 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. BABASAB PATIL 14
  15. 15. STATE BANK OF INDIA Project Financing . 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 Scheduled Co-operative Banks Banks Public Sector Private Sector Foreign Regional Banks Banks Banks Rural BanksNationalized SBI & its Scheduled Urban Scheduled State co-Banks Associates cooperative Bank operative Banks Old private sector New private sector Banks Banks BABASAB PATIL 15
  16. 16. STATE BANK OF INDIAProject Financing .Bank OverviewSTATE BANK OF INDIANot only many financial institution in the world today can claim the antiquity andmajesty of the State Bank Of India founded nearly two centuries ago with primarilyintent of imparting stability to the money market, the bank from its inception mobilizedfunds for supporting both the public credit of the companies governments in the threepresidencies of British India and the private credit of the European and India merchantsfrom about 1860s when the Indian economy book a significant leap forward under theimpulse of quickened world communications and ingenious method of industrial andagricultural production the Bank became intimately in valued in the financing ofpractically and mining activity of the Sub- Continent Although large European andIndian merchants and manufacturers were undoubtedly thee principal beneficiaries, thesmall man never ignored loans as low as Rs.100 were disbursed in agricultural districtsagainst glad ornaments. Added to these the bank till the creation of the Reserve Bank in1935 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 becomeextremely restricted, rules laid down in the book of instructions were relined to ensurethat good business did not go post. Yet seldom did the bank contravenes its value asdepart from sound banking principles to retain as expand its business. An innovativearray of office, unknown to the world then, was devised in the form of branches, subbranches, treasury pay office, pay office, sub pay office and out students to exploit theopportunities of an expanding economy. New business strategy was also evaded wayback in 1937 to render the best banking service through prompt and courteous attentionto customers. A highly efficient and experienced management functioning in a well definedorganizational structure did not take long to place the bank an executed pedestal in the BABASAB PATIL 16
  17. 17. STATE BANK OF INDIAProject Financing .areas of business, profitability, internal discipline and above all credibility Aimpeccable financial status consistent maintenance of the lofty traditions if banking anobservation 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 keyfunctionaries of India successive finance minister of independent India Resource Bankof governors and representatives of chamber of commercial showered economics on it.Modern day management techniques were also very much evident in the good old daysyears before corporate governance had become a puzzled the banks bound functionedwith a high degree of responsibility and concerns for the shareholders. An unbrokenrecords of profits and a fairly high rate of profit and fairly high rate of dividend allthrough ensured satisfaction, prudential management and asset liability managementnot only protected the interests of the Bank but also ensured that the obligations tocustomers were not met.The traditions of the past continued to be upheld even to this day as the State Bankyears itself to meet the emerging challenges of the millennium. ABOUT LOGO THE PLACE TO SHARE THE NEWS ...…… SHARE THE VIEWS …… BABASAB PATIL 17
  18. 18. STATE BANK OF INDIAProject Financing .Togetherness is the theme of this corporate loge of SBI where the world of bankingservices meet the ever changing customers needs and establishes a link that is like acircle, it indicates complete services towards customers. The logo also denotes a bankthat 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 thegrowth and newer, more challenging, more promising direction. The key hole indicatessafety and security.MISSION STATEMENT:To retain the Bank’s position as premiere Indian Financial Service Group, with worldclass standards and significant global committed to excellence in customer, shareholderand employee satisfaction and to play a leading role in expanding and diversifyingfinancial 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 BABASAB PATIL 18
  19. 19. STATE BANK OF INDIAProject Financing . • Team playing • Learning and renewal • Integrity • Transparency and Discipline in policies and systems.Organization Structure MANAGING DIRECTOR CHIEF GENERAL MANAGERG. M G.M G. M G.M G.M(Operations) (C&B) (F&S) (I) & CVO (P&D)Zonal off Functional HeadsRegional officers BABASAB PATIL 19
  20. 20. STATE BANK OF INDIAProject Financing .Theoretical Background for the project workProject FinancingINTRODUCTION-Project financing is an innovative and timely financing technique that has been used onmany 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-generatingfacilities and hydroelectric projects. Increasingly, project financing is emerging as thepreferred alternative to conventional methods of financing infrastructure and otherlarge-scale projects worldwide.MEANING-Project financing involves non-recourse financing of the development and constructionof a particular project in which the lender looks principally to the revenues expected tobe generated by the project for the repayment of its loan and to the assets of the projectas 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-intensiveindustries for projects requiring large investments of funds, such as the construction ofpower plants, pipelines, transportation systems, mining facilities, industrial facilitiesand heavy manufacturing plants. The sponsors of such projects frequently are notsufficiently creditworthy to obtain traditional financing or are unwilling to take therisks and assume the debt obligations associated with traditional financings. Projectfinancing permits the risks associated with such projects to be allocated among anumber of parties at levels acceptable to each party. BABASAB PATIL 20
  21. 21. STATE BANK OF INDIAProject Financing .PRINCIPLE ADVANTAGE AND OBJECTIVES-NON RECOURSE The typical project financing involves a loan to enable the sponsor to construct aproject where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor hasno obligation to make payments on the project loan if revenues generated by the projectare insufficient to cover the principal and interest payments on the loan. In order tominimize the risks associated with a non-recourse loan, a lender typically will requireindirect credit supports in the form of guarantees, warranties and other covenants fromthe sponsor, its affiliates and other third parties involved with the projectMAXIMIZE LEVERAGE In a project financing, the sponsor typically seeks to finance the costs ofdevelopment 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-recourseproject financing permits a sponsor to put less in funds at risk, permits a sponsor tofinance the project without diluting its equity investment in the project and, in certaincircumstances, 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 notbe required to report any of the project debt on its balance sheet because such debt isnon-recourse or of limited recourse to the sponsor. Off-balance-sheet treatment canhave the added practical benefit of helping the sponsor comply with covenants andrestrictions relating to borrowing funds contained in other indentures and creditagreements to which the sponsor is a party.MAXIMIZE TAX-BENEFITS BABASAB PATIL 21
  22. 22. STATE BANK OF INDIAProject Financing .Project financings should be structured to maximize tax benefits and to assure that allavailable 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 tostructure, negotiate and document a project financing than a traditional financing, andthe 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 projectfinancing than in a more traditional financing, the cost of capital may be greater thanwith a traditional financing. BABASAB PATIL 22
  23. 23. STATE BANK OF INDIAProject Financing .PROCESS OF PROJECT FINANCINGFeasibility StudyAs one of the first steps in a project financing is hiring of a technical consultant and hewill prepare a feasibility study showing the financial viability of the project.Frequently, a prospective lender will hire its own independent consultants to prepare anindependent feasibility study before the lender will commit to lend funds for theproject.ContentsThe feasibility study should analyze every technical, financial and other aspect of theproject, including the time-frame for completion of the various phases of the projectdevelopment, and should clearly set forth all of the financial and other assumptionsupon which the conclusions of the study are based, Among the more important itemscontained 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. BABASAB PATIL 23
  24. 24. STATE BANK OF INDIAProject Financing . 14. Debt sourcing. 15. Financial projections. 16. Market study. 17. Assumptions.THE PROJECT COMPANYLegal Form Sponsors of projects adopt many different legal forms for the ownership of theproject. The specific form adopted for any particular project will depend upon manyfactors, 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 BABASAB PATIL 24
  25. 25. STATE BANK OF INDIAProject Financing . partnership 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 projectfinancing, the sponsors and other equity investors will enter into a stockholderagreement, general or limited partnership agreement or other agreement that sets forththe terms under which they will develop, own and operate the project. At a minimum,such an agreement should cover the following matters: BABASAB PATIL 25
  26. 26. STATE BANK OF INDIAProject Financing .  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 procedure provides an incentive for the contractor to keep on BABASAB PATIL 26
  27. 27. STATE BANK OF INDIAProject Financing . 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 BABASAB PATIL 27
  28. 28. STATE BANK OF INDIAProject Financing . provisions of feedstock supply 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. BABASAB PATIL 28
  29. 29. STATE BANK OF INDIAProject Financing . 5. Loan and Security Agreement. 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. BABASAB PATIL 29
  30. 30. STATE BANK OF INDIAProject Financing . 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 borrowers 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: BABASAB PATIL 30
  31. 31. STATE BANK OF INDIAProject Financing . 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.  Workers 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. BABASAB PATIL 31
  32. 32. STATE BANK OF INDIAProject Financing .Project RisksProject 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 ofthat project. Project finance is different from traditional forms of finance because thefinancier principally looks to the assets and revenue of the project in order to secureand service the loan. In contrast to an ordinary borrowing situation, in a projectfinancing the financier usually has little or no recourse to the non-project assets of theborrower or the sponsors of the project. In this situation, the credit risk associated withthe borrower is not as important as in an ordinary loan transaction; what is mostimportant is the identification, analysis, allocation and management of every riskassociated with the project.The following details shows the manner in which risks are approached byfinanciers in a project finance transaction. Such risk minimization lies at the heartof project finance. In a no recourse or limited recourse project financing, the risks for a financier aregreat. Since the loan can only be repaid when the project is operational, if a major partof the project fails, the financiers are likely to lose a substantial amount of money. Theassets that remain are usually highly specialized and possibly in a remote location. Ifsaleable, they may have little value outside the project. Therefore, it is not surprisingthat financiers, and their advisers, go to substantial efforts to ensure that the risksassociated with the project are reduced or eliminated as far as possible. It is also notsurprising that because of the risks involved, the cost of such finance is generallyhigher and it is more time consuming for such finance to be provided. BABASAB PATIL 32
  33. 33. STATE BANK OF INDIAProject Financing .Risk minimization processFinanciers are concerned with minimizing the dangers of any events which could havea negative impact on the financial performance of the project, in particular, eventswhich 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 upon the project. 2) 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 intothe 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 constructionand operation of a mine or pipeline. The financiers will carefully review the study andmay engage independent expert consultants to supplement it. The matters of particularfocus will be whether the costs of the project have been properly assessed and whetherthe cash-flow streams from the project are properly calculated. Some risks are analysedusing financial models to determine the projects cash-flow and hence the ability of theproject to meet repayment schedules. Different scenarios will be examined by adjustingeconomic variables such as inflation, interest rates, exchange rates and prices for the BABASAB PATIL 33
  34. 34. STATE BANK OF INDIAProject Financing .inputs and output of the project. Various classes of risk that may be identified in aproject financing will be discussed below.Step2- Risk allocation-Once the risks are identified and analyzed, they are allocated by the parties throughnegotiation of the contractual framework. Ideally a risk should be allocated to the partywho is the most appropriate to bear it (i.e. who is in the best position to manage, controland insure against it) and who has the financial capacity to bear it. It has been observedthat financiers attempt to allocate uncontrollable risks widely and to ensure that eachparty has an interest in fixing such risks. Generally, commercial risks are sought to beallocated 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 eventoccurring and to minimise its consequences if it does occur. Financiers need to ensurethat the greater the risks that they bear, the more informed they are and the greater theircontrol over the project. Since they take security over the entire project and must beprepared to step in and take it over if the borrower defaults. This requires the financiersto be involved in and monitor the project closely. Such risk management is facilitatedby imposing reporting obligations on the borrower and controls over project accounts.Such measures may lead to tension between the flexibility desired by borrower and riskmanagement mechanisms required by the financier. BABASAB PATIL 34
  35. 35. STATE BANK OF INDIAProject Financing .Types of RisksBasically different types of projects are posed to different risks. Similarly the risksmentioned below are related to this particular project.1) Completion Risk-Completion risk allocation is a vital part of the risk allocation of any project. This phasecarries the greatest risk for the financier. Construction carries the danger that the projectwill not be completed on time, on budget or at all because of technical, labour, andother construction difficulties. Such delays or cost increases may delay loan repaymentsand cause interest and debt to accumulate. They may also jeopardize contracts for thesale of the projects output and supply contacts for raw materials.Commonly employed mechanisms for minimizing completion risk before lending takesplace include: (a) Obtaining completion guarantees requiring the sponsors to pay all debts andliquidated damages if completion does not occur by the required date;(b) Ensuring that sponsors have a significant financial interest in the success of theproject so that they remain committed to it by insisting that sponsors inject equity intothe project;(c) Requiring the project to be developed under fixed-price, fixed-time turnkeycontracts by reputable and financially sound contractors whose performance is securedby 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 issuedby independent experts to confirm that the construction is progressing as planned. BABASAB PATIL 35
  36. 36. STATE BANK OF INDIAProject Financing .2) Operating Risk-These are general risks that may affect the cash-flow of the project by increasing theoperating costs or affecting the projects capacity to continue to generate the quantityand 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 inoperations or shortages in the supply of skilled labour. The usual way for minimisingoperating risks before lending takes place is to require the project to be operated by areputable and financially sound operator whose performance is secured by performancebonds. Operating risks are managed during the loan period by requiring the provision ofdetailed reports on the operations of the project and by controlling cash-flows byrequiring the proceeds of the sale of product to be paid into a tightly regulated proceedsaccount 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 turnedinto cash. Market risk is the risk that a buyer cannot be found for the product at a pricesufficient to provide adequate cash-flow to service the debt. The best mechanism forminimising market risk before lending takes place is an acceptable forward salescontact entered into with a financially sound purchaser.4) Credit Risk- These are the risks associated with the sponsors or the borrowers themselves. Thequestion is whether they have sufficient resources to manage the construction andoperation of the project and to efficiently resolve any problems which may arise. Ofcourse, credit risk is also important for the sponsors completion guarantees. Tominimise these risks, the financiers need to satisfy themselves that the participants inthe project have the necessary human resources, experience in past projects of thisnature and are financially strong (e.g. so that they can inject funds into an ailing projectto save it). BABASAB PATIL 36
  37. 37. STATE BANK OF INDIAProject Financing .5) Technical Risk-This is the risk of technical difficulties in the construction and operation of the projectsplant and equipment, including latent defects. Financiers usually minimise this risk bypreferring tried and tested technologies to new unproven technologies. Technical risk isalso minimized before lending takes place by obtaining experts reports as to theproposed technology. Technical risks are managed during the loan period by requiringa maintenance retention account to be maintained to receive a proportion of cash-flowsto cover future maintenance expenditure.6) Regulatory or Approval Risk-These are risks that government licenses and approvals required to construct or operatethe project will not be issued (or will only be issued subject to onerous conditions), orthat the project will be subject to excessive taxation, royalty payments, or rigidrequirements as to local supply or distribution. Such risks may be reduced by obtaininglegal opinions confirming compliance with applicable laws and ensuring that anynecessary approvals are a condition precedent to the draw down of funds.. • Appraisal BABASAB PATIL 37
  38. 38. STATE BANK OF INDIAProject Financing .Project Financing-The SBI has formed a dedicated Project Finance Strategic Business Unit to assesscredit proposals from and extend term loans for large industrial and infrastructureprojects. Apart from this, project term loans for medium sized projects and smallerclients are delivered through the CAG and the NBG.In general, project finance covers Greenfield industrial projects, capacity expansion atexisting manufacturing units, construction ventures or other infrastructure projects.Capital intensive business expansion and diversification as well as replacement ofequipment may be financed through the project term loans.Project finance is quite often channeled through special purpose vehicles and arrangedagainst the future cash streams to emerge from the project.The loans are approved onthe basis of strong in-house appraisal of the cost and viability of the ventures as well asthe 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 Indias 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. SBIs), International Division of SBI and SBI Capital Markets Limited. BABASAB PATIL 38
  39. 39. STATE BANK OF INDIAProject Financing . 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 TelecommunicationsNon-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 BABASAB PATIL 39
  40. 40. STATE BANK OF INDIAProject Financing .  Deferred payment guaranteeOther 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 forits in-depth understanding of the infrastructure sector as well as non-infrastructuresector in India and we have the ability to provide tailor made financial solutions to meetthe growing & diversified requirement for different levels of the project. The recenttransactions undertaken by PF-SBU include a wide range of projects undertaken by theIndian 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 loanis more than Rs.50 crores. In case of projects in Road sector alone, the cut off will beproject 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 Servicessector). The minimum proposed term commitment is of Rs. 50 crores from SBI.Process of sanctioning- BABASAB PATIL 40
  41. 41. STATE BANK OF INDIAProject Financing . 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..) 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 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. 4) 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 projectPre sanction process- BABASAB PATIL 41
  42. 42. STATE BANK OF INDIAProject Financing .Appraisal – 1. Preliminary appraisal- The following aspects have to be examined if the proposal is to Financing aproject-  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 ata decision whether to support the request or not. If the branch finds the proposalacceptable, it will call for from the applicants, a comprehensive application in theprescribed pro-forma, along with a copy of project report, covering specific creditrequirements of the company and other essential data/ information. The informationamong 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. BABASAB PATIL 42
  43. 43. STATE BANK OF INDIAProject Financing .  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.  Projected profit and loss account and Balance Sheet for the operating years during currency r of the bank assistance.  Branch should also obtain additionallyAppraisal report from any other bank/financial institution in case appraisal has beendone by them,‘NO Objection Certificate’ from term lenders if already financed by them andReport 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 historyof the concern, its past performance, present financial position, etc. Should also becalled 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 and borrowing relationship of associate firms/group companies.2. Detailed Appraisal- The viability of a project is examined to ascertain that thecompany would have the ability to service its loan and interest obligations out of cashaccruals from the business. While appraising a project all the data/ informationfurnished by the borrower is counter checked and wherever possible, inter-firm andinter-industry comparisons should be made to establish their veracity. BABASAB PATIL 43
  44. 44. STATE BANK OF INDIAProject Financing .The appraisal of the new project could be broadly divided into the following subheads- • 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 andfinancial 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 BABASAB PATIL 44
  45. 45. STATE BANK OF INDIA Project Financing .  Feasibility of the projections/estimates of sales cost of production and profit covering the period of repayment.  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 thebanks. 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. BABASAB PATIL 45
  46. 46. STATE BANK OF INDIAProject Financing .  Compliance with requirements regarding submission of stock statements, Financial Follow-up Reports, renewal data, etc…  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/ promotersand the proposed guarantors.6. Existing charges on assets of the unit-If the company, report on search of chargeswith proposed guarantors.7. Structure of facilities and Terms of Sanction-Fix terms and conditions forexposures proposed facility wise and overall:  Limit for each facility- sub limits.  Security- Primary & collateral, Guarantee.  Margins- for each facility as applicable. BABASAB PATIL 46
  47. 47. STATE BANK OF INDIAProject Financing .  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 Strengthsand weaknesses of the exposure proposed Risk factors and steps proposed to mitigatethemDeviations 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-updetails and with recommendations for sanction.SBI has presently financed the following Projects- BABASAB PATIL 47
  48. 48. STATE BANK OF INDIAProject Financing . 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 BABASAB PATIL 48
  49. 49. STATE BANK OF INDIAProject Financing .The further part has been dealt with respect to the project ofSL flow controls. • Project in Brief BABASAB PATIL 49
  50. 50. STATE BANK OF INDIAProject Financing .Name M/S SL Flow ControlAddress 98/A, 2A1, Sri Laxmi Business house near Airport road Gokul road Hubli.Nature of Business Manufacturing of industrial valves.Status Proprietary Concern.Name of the promoter Sri Verendra.B.Koujalagi.Cost of the project Rs 221.41 lakhsEmployment potential 30 employeesDebt Service coverage ratio 2.08Cost of the projectCost of the project Amount(Lakhs)Building 25.00land 22.00Machinery 83.38Electrification 6.50Electricity Deposit 5.00Preliminary Expenses- Technical know how 5.00- Personnel training 2.00-Patterns 5.00 12.00 BABASAB PATIL 50
  51. 51. STATE BANK OF INDIAProject Financing .Net Working Captial 67.53Total 221.41Means of finance Amounts in lakhsTerm loan 102.50Working Captial loan 50.00Own Contribution 51.38Margin Money for working Capital 17.53Total 221.41Financial analysis • Ratio Analysis:-An integral aspect of financial appraisal is financial analysis, which takes into accountthe financial features of a project, especially source of finance. Financial analysis helpsto determine smooth operation of the project over its entire life cycle.The two major aspects of financial analysis are liquidity analysis and capitalstructure. For this purpose ratios are employed which reveal existing strengths andweakness 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 the pre-requisite for the very survival of a firm. A proper balance BABASAB PATIL 51
  52. 52. STATE BANK OF INDIAProject Financing . 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 91.47 101.7 112.7 128. 145.25 2 6 7 Current liabilities 144.3 127.6 121.5 96.0 80.09 2 6 9 5 Current ratio 0.634 0.767 0.927 1.33 1.8134 9 BABASAB PATIL 52
  53. 53. STATE BANK OF INDIAProject Financing . Current ratio 2 1.8134 1.8 1.6 1.339 1.4 1.2 Current Ratio 0.927 1 0.767 0.8 0.634 0.6 0.4 0.2 0 1 2 3 4 5 YearsInterpretation- It is an indicator of the extent to which short term creditors are coveredby assets that are expected to be converted to cash in a period corresponding to thematurity of claims. The ideal current ratio is 2:1. The firm current ratio indicate thatthe firm is in a position to meet its short term obligation because the ratio is inincreasing trend , by observing the above table we can say that though the firm does notmaintain ideal current ratio, it is still in a position to meet its current obligations. Afterclearing 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 minusinventory and prepaid expenses by current liabilities. Since inventories among currentassets are not quite liquid (means not quickly converted into cash), the quick ratioexcludes it. The quick ratio includes only assets, which can be readily converted into BABASAB PATIL 53
  54. 54. STATE BANK OF INDIAProject Financing .cash and constitutes a better test of liquidity. It is often called as quick quick ratiobecause it is a measurement of a firms ability to convert its assets quickly into cash inorder to meet its current liabilities. Particulars 2004 2005 2006 2007 2008 Quick assets 60.47 67.65 75.28 87.4 99.9 7 Current liabilities 144.3 127.6 121.5 96.0 80.09 2 6 9 5 Current ratio 0.534 0.53 0.62 0.91 1.247 1 Quick ratio 1.4 1.247 1.2 1 0.911 Quick Ratio 0.8 0.62 0.6 0.534 0.53 0.4 0.2 0 1 2 3 4 5 Years BABASAB PATIL 54
  55. 55. STATE BANK OF INDIAProject Financing .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 availabletest of liquidity position of a firm. Generally an acid test ratio of 1:1 is consideredsatisfactory as a firm can easily meet all its current claims. In the case of the above firmthe quick ratio is in increasing trend by year on. So it shows that firm is capable ofpaying its quick short term obligations2. Capital structure ratio’The long-term lenders/creditors would judge the soundness of a firm on the basis of thelong term financial strength measured in terms of its ability to pay the interest regularlyas well as repay the installment of the principal on due dates or in one lump sum at thetime of maturity. The long term solvency of firm can be examined by using leverage orcapital structure ratios. The leverage or capital structure ratio’s may be defined asfinancial ratios which throw light on the long term solvency of a firm as reflected in itsability to assure the long term lenders with regard to (i) periodic payment of interestduring the period of the loan and (ii) repayment of the principal on maturity or inpredetermined 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 BABASAB PATIL 55
  56. 56. STATE BANK OF INDIAProject Financing . Particulars 2004 2005 2006 2007 2008 Debt 82.0 61.5 41.0 20.0 0.00 0 0 0 5 Equity(Promoter contribution) 56.3 54.0 56.8 68.9 84.49 8 7 8 4 Debt equity ratio 1.45 1.14 0.72 0.29 0.00 4 1 1 Debt equity ratio 1.6 1.4 1.454 1.2 1.14 1 Debt/Equity 0.8 0.721 0.6 0.4 0.291 0.2 0 0 1 2 3 4 5 YearsInterpretation-The debt equity ratio is an important tool of financial analysis to appraise the financialstructure of the firm. The ratio reflects the relative contribution of creditors and ownersof the business in its financing. A high ratio shows a large share of financing by thecreditors of the firm; a low ratio implies the a smaller claim of the creditors. Debt – BABASAB PATIL 56
  57. 57. STATE BANK OF INDIAProject Financing .Equity ratio indicates the margin of safety to the creditors. The debt-equity ratio is indecreasing and in 2008 it become nil, which implies that the owners are putting uprelatively 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 eachrupee of sales. If adequate profits are not earned on sales, there will be difficulty inmeeting the operating expenses and no returns will be available to the owners. 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 Earnings after 10.68 17.82 27.05 35.56 43.75 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% % % % % BABASAB PATIL 57
  58. 58. STATE BANK OF INDIAProject Financing .InterpretationThe net profit margin is indicative of management’s ability to operate the business withsufficient 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 ofreasonable compensation to the owners for providing their capital at risk. A high profitmargin would ensure the adequate return to the owners as well as enable the firm towithstand adverse economic conditions. A low net profit margin has the oppositeimplications. With respect to the above firm the net profit margin is increasing trend soit will show that the company is in good condition and the demand for the product isincreasing.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, II. Return on total capital employed.Return on assets-The profitability ratio is measured in terms of relationship between net profits andassets. The ROA may also be called profit-to-asset ratio. It can be computed as follows- BABASAB PATIL 58