This document appears to be a student project report submitted for a post-graduate diploma program. It discusses credit appraisal for term loans and working capital financing, with a focus on consortium banking. The report includes an acknowledgements section, table of contents, and 14 main sections discussing topics like the banking industry, Punjab National Bank, types of lending, methodology, case studies, and recommendations. The case study analyzes a term loan provided to an energy company and discusses India's power sector scenario.

1. Credit Appraisal for Term Loan and Working Capital Financing
with special reference to Consortium Banking
SIP project report submitted in partial fulfillment of the requirements for the PGDM
Program
By
Saket Rathi
2010197
Under the Guidance of:
Mr. P.C.Bansal, Chief Manager – CD (O), PNB, New Delhi
Dr. Gajavelli V S / Prof Anant Ram, IMT - Nagpur
Institute of Management Technology, Nagpur
2010 – 2012

2. Acknowledgement
I express my sincere gratitude to Mr. P.C. Bansal, Chief Manager, CD (O), Punjab National Bank,
for guiding me through this project, sharing his knowledge and experience and correcting my
mistakes. Without his guidance and valuable insights, this project would not have seen the light of
day.
I also am very thankful to Mr Somshekharan Nair, Assistant General Manager, CD (O), Punjab
National Bank, for providing valuable insights on the Top – Bottom approach and Bottom – Top
approach of fund disbursement.
I would also like to express my sincere thanks to the library staff for extending their support and
resources for completion of this project.
A special thanks to my faculty guide, Prof. Dr. Gajavelli V.S. and Prof. Anant Ram who has been
the chief facilitator of this project and helped me enhance my knowledge in the field of banking
sector.
Regards
Saket Rathi
2010197
IMT - Nagpur
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3. Certificate of Completion
It is to certify that Mr. Saket Rathi (2010197) has successfully completed Summer Project Study
titled ―Credit Appraisal for Term Loan and Working Capital Financing with special
reference to Consortium Banking” under my guidance. It is his original work, and is fit for
evaluation in partial fulfillment for the requirement of the Two Year Post Graduate Diploma in
Management (Full-time).
P.C.Bansal
Chief Manager, CD (O)
Punjab National Bank
7, Bhikaji Cama Place, New Delhi.
Date: June 04, 2011
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4. 1 Table of Contents
1 Executive Summary ......................................................................................................................... 6
2 Abbreviations .................................................................................................................................. 8
3 Introduction .................................................................................................................................. 10
4 Objectives of the study ................................................................................................................. 11
5 About Banking industry................................................................................................................. 12
6 About Punjab National Bank ......................................................................................................... 13
6.1 Organizational Structure ....................................................................................................... 14
6.2 Delivery Channels in PNB: ..................................................................................................... 15
6.3 Working of the Credit Administration Department (CD) at PNB .......................................... 15
7 Bank Lending – An Overview ........................................................................................................ 16
8 Methodology................................................................................................................................. 20
9 Types of Lending ........................................................................................................................... 21
10 Term Loan ................................................................................................................................. 23
10.1 Features of Term Loan .......................................................................................................... 23
10.2 Term Loan Sanction Procedure ............................................................................................. 24
10.3 Pre-Sanction Inspection ........................................................................................................ 24
11 Working Capital......................................................................................................................... 26
11.1 Data required for assessment of working capital requirement ............................................ 27
11.1.1 Assessment of Fund Based Working Capital ................................................................. 28
11.1.2 Assessment of Non-Fund Based Working Capital Facility............................................. 30
12 Types of Financing..................................................................................................................... 39
13 Case Study: Term Loan - XYZ Energy Pvt. Ltd. ........................................................................... 41
13.1. POWER SECTOR SCENARIO IN INDIA: A PERSPECTIVE ...................................................... 41
13.1.1. Power Supply ................................................................................................................ 41
13.1.2. Peak Demand & Deficit Position ................................................................................... 41
13.2. FUTURE OUTLOOK ............................................................................................................ 44
13.3. POWER SCENARIO – REGION WISE ................................................................................... 50
13.4. POWER SCENARIO IN UTTARAKHAND .............................................................................. 54
13.5. POWER TRADING IN INDIA................................................................................................ 54
14 Conclusion and Recommendations........................................................................................... 94
15 Limitations of the study ............................................................................................................ 96
16 Scope for future improvements ................................................................................................ 97
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5. 17 Glossary ................................................................................................................................... 100
18 References .............................................................................................................................. 103
List of Figures
Figure 1: Operating Cycle ...................................................................................................................... 26
Figure 2: Issuing of Credit ..................................................................................................................... 31
Figure 3: Process of Negotiation ........................................................................................................... 32
Figure 4: Process of Settlement under L/C ........................................................................................... 32
Figure 6: Tier System of Approval of Loans at PNB............................................................................... 99
List of Tables
Table 1: Exposure norms for Commercial Banks in India ...................................................................... 19
Table 2: Operating Cycle ........................................................................................................................ 27
Table 3: Assessment of Limit of Letter of Credit .................................................................................... 33
Table 4: Assessment of Limit of Letter of Guarantee ............................................................................ 34
Table 5: The rating and score matrix ..................................................................................................... 37
Table 5-1: Region-wise power situation........................................................................................... 42
Table 5-2: Existing Installed Capacity (MW) as on 31st March, 2010 .......................................... 44
Table 5-3: Long-term Projected Energy Requirement ................................................................... 45
Table 5-4: Total Energy & Peak Load Availability Vs Installed Capacity ..................................... 47
Table 5-5: Projected Demand & Supply Position at the end of XI Five Year Plan ..................... 48
Table 5-6: Projected Demand & Supply Position at the end of XI Five Year Plan ..................... 48
Table 5-7: State-wise Demand-Supply Position for the Period 2009-10 ..................................... 52
Table 5-8: State-wise Demand Forecast for Northern India ......................................................... 52
Table 5-9: Likely capacity Addition During the XI Plan.................................................................. 53
Table 5-10: Demand-Supply Forecast for the Northern Region in 2011-12 ............................... 53
Table 5-11: Installed Capacity as on 31st March, 2010 ................................................................. 54
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6. 1 Executive Summary
Banks play a critical role in the economic development of an economy. They are important not
only for economic growth but also financial stability. In an economy banks has three major roles
to play i.e. first, they fulfill the financing needs of the corporate sector. Second, they cater to the
needs of the vast number of household savers, providing assured returns on their surplus funds
while maintaining liquidity and safeguarding them from financial risks. Third, they act as a
support for development of financial markets and its participants.
This project titled ―Credit Appraisal for Term Loan and Working Capital Financing with special
reference to Consortium Banking‖ studies the credit appraisal methodology at Punjab National
Bank for a proposal received either for term loan or working capital financing or both for Rs. 35
crore or more and where the borrower wants to avail the facility from a consortium of banks.
Credit appraisal is the process of evaluating a proposal‘s worthiness of being provided with the
type of credit facility the borrower has asked for. This includes the evaluation of current financial
status, appraisal of projected cash flows, fund flows, P&L and Balance sheets, purpose for which
the facility is availed, technical and financial feasibility of the project, credit history, managerial
competence and past experience, etc. in case for a term loan.
As part of the appraisal process, credit rating is done for the proposal and is conducted either by
the bank itself or is get done by approves external agencies.
The purpose of this project is to explain, in a brief and general way, the manner in which risks are
approached by financiers in a project finance transaction. Such risk minimization lies at the heart
of project finance. Efficient management of credit portfolio is of utmost importance as it has a
tremendous impact on the Banks‘ assets quality & profitability. The ongoing financial reforms
have no doubt provided unparallel opportunities to banks for growth, but have simultaneously
exposed them to various risks, which need to be effectively managed.
The concept of Credit Management is undergoing radical changes. Credit Risk in all exposures
calls for precise measuring and monitoring for taking considered credit decisions with suitable
risk mitigants, risk premium, etc. Credit portfolio should be well diversified in various promising
sectors with a cautious approach to be adopted in risky segments.
Also, lending continues to be a primary function in banking. In the liberalized Indian economy,
clientele have a wide choice. External Commercial Borrowings and the domestic capital markets
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7. compete with banks. In another dimension, retail lending- both personal advances and SME
advances- competes with corporate lending for funds and for human resources. But lending by
nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be
competitive without compromising on the basic integrity of lending. The quality of the Bank‘s
credit portfolio has a direct and deep impact on the Bank‘s profitability.
The study has been conducted with the purpose of getting in-depth knowledge about the credit
appraisal and credit risk management procedure in the organization for the above said first two
purposes.
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8. 2 Abbreviations
AGM Assistant General Manager
BG Bank Guarantee
CC Cash Credit
CMD Chairman and Managing Director
CO Circle Office
CRMD Circle Risk Management Department
CCA Core Current Assets
CD Credit Administration Department
CARD Credit Audit Review Division
CASA Current Account/Savings Account
CRMC Credit Risk Management Committee
DSCR Debt Service Coverage Ratio
DER Debt-Equity Ratio
DTL Deferred Tax Liability
DPG Deferred Payment Guarantee
DTA Deferred Tax Liability
BD Discount of Bills
ED Executive Director
FACR Fixed Asset Coverage Ratio
FB Fund Based
GM General Manager
HO Head Office
IRMD Integrated Risk Management Division
LCB Large Corporate Branch
LC Letter of Credit
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9. LOC Letter of Credit
MC Management Committee
MPBF Maximum permissible Bank Finance
MCB Mid Corporate Branch
NWC Net Working Capital
NFB Non Fund Based
PMS Preventive Monitoring System
PF Provident Fund
PNB Punjab National Bank
RBI Reserve Bank of India
RMC Risk Management Committee
RMD Risk Management Division
TEV Techno-Economic Valuation
TL Term Loan
WC Working Capital
CO Circle Office
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10. 3 Introduction
Banks are an important cog in the wheel of economic development. One of their main functions is
to make available funds, to enterprises / persons which are short of funds, at reasonable cost. The
major source of income for banks is interest earned on loans and advances disbursed. To disburse
these loans and advances, funds are mobilized by bank through various sources like small savings
from numerous account holders, capital contribution etc. (stake holders) and credit creation.
Banks stand in a very delicate situation where it has to maximize returns on these funds but at the
same time maintain quality of their advances. A bank is approached by many for funds for various
uses and it may approach many for availing funds from it. The bank ascertains credit worthiness
of project and borrower in order to find eligible borrowers to whom it would like to disburse
funds.
To ascertain credit worthiness of project and borrower a comprehensive evaluation is done on
various parameters for example: past financials, techno – economic viability of the project,
management competence, future cash and fund flows, actual requirements, etc. This evaluation
process is known as credit appraisal. Credit appraisal is one of the steps through which banks
safeguard interest of its stake holders.
Funds are required for various purposes, at various intervals and thus there are different ways of
disbursing funds. The broad objective of credit appraisal is to ascertain the worthiness of the
borrower but various methodologies are used for appraising different methods of fund
disbursement.
The current project is divided in three parts. First part explains about the credit appraisal process
for term loan requirements for setting up a project. Second part deals with the credit requirements
arising after completion of the project (working capital requirements). The third part deals in
different banking arrangements under which a borrower can avail credit facilities and a
comparative analysis of the same is done.
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11. 4 Objectives of the study
The primary objective of this study is to ascertain in depth, the process used by PNB for appraisal
of Term Loan and / or of Working capital requirements of the borrowers and various criteria‘s on
which such appraisal is done before sanctioning of loans. The study intends to look into the
intricacies of term loan including risk mitigation for different inherent risks in extending working
capital advances to diversified industries.
The study involves understanding of usage of various projections and financial techniques for
term loan like fund flow / cash flow, profitability schedules, DSCR, sensitivity analysis, Break –
Even Analysis, rate of return on the basis of various calculation techniques, etc., in arriving at a
decision.
The study also looks into various ways of ascertaining Working Capital Requirements of a
borrower and various ways of disbursing it.
Another objective of this project is to study different arrangements under which a borrower can
avail funds from PNB and present a comparative analysis of the same.
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12. 5 About Banking industry
The roots of the modern banking industry can be traced from the fourteenth century in medieval
Europe. Banking in India originated in the last deCDes of the 18th century.
Banks act as payment agents by conducting checking or current accounts for customers, paying
cheques drawn by customers on the bank, and collecting cheques deposited to customers' current
accounts. Banks also enable customer payments via other payment methods such as telegraphic
transfer, EFT, POS, and automated teller machine (ATM).
Banks borrow money by accepting funds deposited on current accounts, by accepting term
deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by
making advances to customers on current accounts, by making installment loans, and by investing
in marketable debt securities and other forms of money lending.
A bank can generate revenue in a variety of different ways including interest, transaction fees and
financial advice. The main method is via charging interest on the capital it lends out to customers.
The bank profits from the differential between the level of interest it pays for deposits and other
sources of funds, and the level of interest it charges in its lending activities. Profitability from
lending activities has been cyclical and dependent on the needs and strengths of loan customers
and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue
stream and banks have therefore placed more emphasis on these revenue lines to smooth their
financial performance. Banks have expanded the use of risk-based pricing from business lending
to consumer lending, which means charging higher interest rates to those customers that are
considered to be a higher credit risk and thus increased chance of default on loans. This helps to
offset the losses from bad loans, lowers the price of loans to those who have better credit histories,
and offers credit products to high risk customers who would otherwise be denied credit.
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13. 6 About Punjab National Bank
The idea of a swadeshi bank with Indian capital and Indian management representing all sections
of the Indian community gave birth to Punjab National Bank on May 23, 1894. It was formed with
an authorized capital of Rs 2 Lac and started its commercial operations with working capital of Rs
20 thousand on April 12, 1895 in Lahore, Punjab province, now in Pakistan.
The bank withstood turbulent economic times of 1913, when 78 other banks failed. Due to its
good governance it sailed through various economic crisis during 1926 to 1936 and partition of
India and Pakistan.
The registered office of the bank was transferred from Lahore to Delhi on June 20, 1947. During
partition The Bank was forced to close 92 offices in West Pakistan constituting 33 percent of the
total number and having 40% of the total deposits. The Bank, however, continued to maintain a
few caretaker branches.
The Bank then embarked on its task of rehabilitating the displaced account holders. The migrants
from Pakistan were repaid their deposits based upon whatever evidence they could produce. Such
gestures cemented their trusts in the bank and PNB became a symbol of Trust and a name you can
bank upon. It is ranked as one of India's top service brands. PNB has remained fully committed to
its guiding principles of sound and prudent banking. Apart from offering banking products, the
bank has also entered the credit card, debit card; bullion business; life and non-life insurance;
Gold coins & asset management business, etc.
Financial Performance (2010-2011)
Total business of the bank crossed Rs.5.55 lakh crore.Net Interest Income (NII) increased by
39.3% while Net Interest Margin (NIM) improved to 3.96%. Net Profit increased by 13.5% to
reach Rs.4433 crore. Operating Profit was Rs.9056 crore, 23.6% up from last year. PNB continues
to be among leading banks amongst nationalized banks in net profit, operating margins, total
business, deposits, advances, CASA deposits and customer base.
PNB has always looked at technology as a key facilitator to provide better customer service and
ensured that its ‗IT strategy‘ follows the ‗Business strategy‘ so as to arrive at ―Best Fit‖. The Bank
has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution
(CBS) since Dec‘08, thus covering 100% of its business and providing ‗Anytime Anywhere‘
banking facility to all customers including customers of more than 3000 rural & semi urban
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14. branches. Towards developing a cost effective alternative channels of delivery, the Bank with
more than 3700 ATMs has the largest ATM network amongst Nationalized Banks. Bank
continues its selective foray in international markets with presence in 9 countries, with 2 branches
at Hongkong, 1 each at Kabul and Dubai; representative offices at Almaty, Dubai, Shanghai and
Oslo; a wholly owned subsidiary in UK; a joint venture with Everest Bank Ltd. Nepal and a JV
banking subsidiary ―DRUK PNB Bank Ltd.‖ in Bhutan. Bank is pursuing upgradation of its
representative offices in China & Norway and is in the process of setting up a representative
office in Sydney, Australia and taking controlling stake in JSC Dana Bank in Kazakhastan.
6.1 Organizational Structure
The bank has its corporate office at New Delhi and 58 circle office and 4267 branches. The
delegation of power is decentralized up to the branch level for quick decision making. The top-
down approach at PNB can be classified as follows:-
Board of
directors
CMD
ED
GM ( NPA GM GM
GM GM GM GM
(Credit)
& Weak (Retail & (Treasury
(IRMD) (Deposits) (Audit) .......
Account) lending) )
DGM DGM DGM ......
AGM AGM AGM ......
Funtional
Head
Figure 1 Organizational Structure at PNB
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15. Delivery Channels in PNB:
Corporate
Office (HO)
Circle Office Circle Office Circle office
(CO) (CO) (CO)
Large Mid Specialized
Branch
Corporate Corporate Retail Hub branches e.g.
Office (BO) Agriculture
Branches Branches
Figure 2 Delivery channels in PNB
6.2 Working of the Credit Division (CD) at PNB
CD looks after all proposals for all types of loans which fall within the purview of GMs-
HO/ED/CMD/MC/Board. A credit appraisal goes through different level of sanctioning to enforce
internal controls and other practices to ensure that exceptions to policies, procedures and limits are
reported in a timely manner to the appropriate level of management for action.
The bank has introduced ―committee‖ system in credit sanction process where in every loan
proposal falling within vested power is discussed in credit sanction committee. Such committees
have been formed both at head office and Zonal levels.
The CD is assisted by the Risk Management Department (RMD), Technical Department and the
Industry desk for risk analysis and technical feasibility of credit proposals.
Credit Risk Management structure at PNB involves:
 Risk Management division
 Zonal Risk Management department (ZRMD)
 Regional Risk Management Department (RRMD)
 Risk Management committee (RMC)
 Credit risk management committee (CRMC)
 Credit Audit Review Division (CARD)
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16. 7 Bank Lending – An Overview
Banks have different ways of extending credit to different types of borrowers for a wide variety of
purposes. Lending can be for long term or short term. Long term
Principles of Lending and Loan Policy
Principles of Lending
Banks lend from the funds mobilized as deposits from public. A bank acts in the capacity of a
custodian of these funds and is responsible for its safety, security but at the same time is also
required to deliver justified and assured returns over these borrowings. A bank looks into
following aspects before lending:
Safety: the first rule of lending is to ascertain the safety of the advances made. This means
assessment of the repaying capacity of the borrower and purpose of borrowing. It also includes
assessment of contingencies and a fallback plan for the same. This is ensured by taking adequate
security (readily marketable and free of encumbrances) by way of guarantee, collateral, charges
on property, etc.
Liquidity: The second rule of lending is to ascertain how and when the repayment of the
advances made would happen and that the repayment is timely. This is to ascertain availability of
funds in future and make sure that the funds are not locked up for a long period. This helps in
maintaining balance between deposits and advances and to meet depositor‘s obligation.
Profitability: The third rule of lending is to lend at higher rate of interest than borrowing rate.
This is called as interest spread / margin. One has to strike a balance between profitability and
safety of funds. Interest rates must be charged competitively but at the same time spread should be
adequate.
Risk diversion: An old saying says ―never put all your eggs in one basket‖. A lender must lend to
a diversified customer base. Diversification must be made in terms of geographical locations,
borrowers, industry, sector etc. It is done so as to mitigate adverse financial effects of a business
cycle, catastrophe, chain effect etc.
Loan Policy
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17. Banks are basically a lending institution. Its major chunk of revenue is earned from interest on
advances. Each bank has its own credit policy, based on the principles of lending, which outlines
lending guidelines and establishes operating procedures in all aspects of credit management. The
policy is drafted by the Credit Policy Committee and is approved by the bank‘s board of directors.
The credit policy sets standards for presentation of credit proposals, financial covenants, rating
standards and benchmarks, delegation of credit approving powers, prudential limits on large credit
exposures, asset concentrations, portfolio management, loan review mechanism, risk monitoring
and evaluation, pricing of loans, provisioning for bad debts, regulatory/ legal compliance etc. The
lending guidelines reflect the specific bank's lending strategy (both at the macro level and
individual borrower level) and have to be in conformity with RBI guidelines. The loan policy
typically lays down lending guidelines in the following areas:
Credit-deposit ratio: Banks are under an obligation to maintain certain statutory reserves like
cash reserve ratio (CRR – to be kept as cash or cash equivalents), statutory liquidity ratio (SLR –
to be kept in cash or cash equivalents and prescribed securities), etc. These reserves are
maintained for asset – liability management (ALM) and are calculated on the basis of demand and
time liabilities (DTL). Banks may further invest in non – prescribed securities for the matter of
risk diversion. Funds left after providing for these reserves are available for lending. The CPC
decides upon the quantum of credit that can be granted by the bank as a percentage of deposits.
Targeted portfolio mix: CPC has to strike balance between risk and return. It sets the guiding
principles in choosing preferred areas of lending and sectors to avoid. It also takes into account
government policies of lending to preferred / avoidable sectors. The bank assesses sectors for
future growth and profitability and accordingly decides its exposure limits.
Hurdle ratings: A borrower is assessed on various risk aspects to find out its suitability for
extending credit to it. Banks uses a comprehensive risk rating system on which each borrower gets
a score depending upon its strength and weaknesses. This acts as a single point reference and uses
a standardized approach for variety of borrowers. Ratings reveal the overall risk of lending. For
new borrowers, a bank usually lays down guidelines regarding minimum rating to be achieved by
the borrower to become eligible for the loan. This is also known as the 'hurdle rating' criterion to
be achieved by a new borrower.
Loan pricing: Risk-return trade-off is a fundamental aspect of risk management. Borrowers with
weak financial position and, hence, placed in higher risk category are provided credit facilities at a
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18. higher price (that is, at higher interest). The higher the credit risk of a borrower the higher would
be his cost of borrowing. To price credit risks, bank devises appropriate systems, which usually
allow flexibility for revising the price (risk premium) due to changes in rating. In other words, if
the risk rating of a borrower deteriorates, his cost of borrowing should rise and vice versa.
At the macro level, loan pricing for a bank is dependent upon a number of its cost factors such as
cost of raising resources, cost of administration and overheads, cost of reserve assets like CRR
and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan pricing is also dependent
upon competition.
Collateral security: As part of a prudent lending policy, bank usually advances loans against
some security. The loan policy provides guidelines for this. In the case of term loans and working
capital assets, bank takes as 'primary security' the property or goods against which loans are
granted. In addition to this, banks often ask for additional security or 'collateral security' in the
form of both physical and financial assets to further bind the borrower. This reduces the risk for
the bank. Sometimes, loans are extended as 'clean loans' for which only personal guarantee of the
borrower is taken
Role of RBI
The credit policy of a bank should be conformant with RBI guidelines; some of the important
guidelines of the RBI relating to bank credit are discussed below.
Directed credit stipulations
The RBI lays down guidelines regarding minimum advances to be made for priority sector
advances, export credit finance, etc. These guidelines need to be kept in mind while formulating
credit policies for the Bank.
Capital adequacy
If a bank creates assets-loans or investment-they are required to be backed up by bank capital; the
amount of capital they have to be backed up by depends on the risk of individual assets that the
bank acquires. The riskier the asset, the larger would be the capital it has to be backed up by. This
is so, because bank capital provides a cushion against unexpected losses of banks and riskier
assets would require larger amounts of capital to act as cushion.
Credit Exposure Limits
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19. As a prudential measure aimed at better risk management and avoidance of concentration of credit
risks, the Reserve Bank has fixed limits on bank exposure to the capital market as well as to
individual and group borrowers with reference to a bank's capital. Limits on inter-bank exposures
have also been placed. Banks are further encouraged to place internal caps on their sectoral
exposures, their exposure to commercial real estate and to unsecured exposures.
Table 1: Exposure norms for Commercial Banks in India
Exposure to Limit
1. Single Borrower 15% of capital fund (Additional 5% on infrastructure
exposure)
2. Group Borrower 40% of capital fund (Additional 10% on infrastructure
exposure)
3. NBFC 10% of capital fund
4. NBFC – AFC 15% of capital fund
5. Indian Joint Venture/ Wholly owned 20% of capital fund
subsidiaries abroad/ Overseas step down
subsidiaries of Indian corporate
6. Capital Market Exposure
(a) Bank‘s holding of shares in any company The lesser of 30% of paid-up share capital of the
company or 30% of the paid-up capital of the banks
(b) Bank‘s aggregate exposure to capital market 40% of its net worth
(solo basis)
(c) Bank‘s aggregate exposure to capital market 40% of its consolidated net worth
(group basis)
(d) Bank‘s direct exposure to capital market (solo 20% of its net worth
basis)
(e) Bank‘s direct exposure to capital market (group 20% of its consolidated net worth
basis)
7. Gross holding of capital among banks/ FIs 10% of capital fund
Source: Financial Stability Report, RBI, March 2010
Review of Operations
RBI has a policy of reviewing operations of the bank. It conducts inspection every 3 years in
Branch Offices and every year at Head office of a Bank.
Credit control
RBI through its various mechanisms like policy rates, etc. controls the availability of credit in the
economy. It intervenes in the market by changing key policy rates when it finds that there is shortage /
excess credit availability.
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20. 8 Methodology
In order to learn and observe the practical applicability and feasibility of various theories and
concepts, the following sources are being used:
 Discussions with the project guide and staff members.
 Research papers and documents prepared by the bank and its related officials.
 Banks Credit policy and related circulars and guidelines issued by the bank.
 Study of proposals and manuals.
 Website of Punjab national bank and other net sources.
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21. 9 Types of Lending
Lending is broadly classified into two broad categories: fund based lending and non-fund based
lending.
 Fund Based Lending: This is a direct form of lending in which a loan with an actual cash
outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary
and/or collateral security. The loan can be to provide for financing capital goods and/or
working capital requirements.
 Non-fund Based Lending: In this type of facility, the Bank makes no funds outlay. However,
such arrangements may be converted to fund-based advances if the client fails to fulfill the
terms of his contract with the counterparty. Such facilities are known as contingent liabilities
of the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of non-
fund based credit.
Let us explain with an example how guarantees work. A company takes a term loan from
Bank A and obtains a guarantee from Bank B for its loan from Bank A, for which he pays a
fee. By issuing a bank guarantee, the guarantor bank (Bank B) undertakes to repay Bank A, if
the company fails to meet its primary responsibility of repaying Bank A.
Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are
established in accordance with the process approved by the board of directors. The limits on
working capital facilities are primarily secured by inventories and receivables (chargeable current
assets).
Working capital finance consists mainly of cash credit facilities, short term loan and bill
discounting. Under the cash credit facility, a line of credit is provided up to a pre-established
amount based on the borrower's projected level of sales inventories, receivables and cash deficits.
Up to this pre-established amount, disbursements are made based on the actual level of inventories
and receivables. Here the borrower is expected to buy inventory on payments and, thereafter, seek
reimbursement from the Bank. In reality, this may not happen. The facility is generally given for a
period of up to 12 months and is extended after a review of the credit limit. For clients facing
difficulties, the review may be made after a shorter period.
One problem faced by banks while extending cash credit facilities, is that customers can draw up
to a maximum level or the approved credit limit, but may decide not to. Because of this, liquidity
management becomes difficult for a bank in the case of cash credit facility. RBI has been trying to
mitigate this problem by encouraging the Indian corporate sector to avail of working capital
finance in two ways: a short-term loan component and a cash credit component. The loan
component would be fully drawn, while the cash credit component would vary depending upon
the borrower's requirements.
According to RBI guidelines, in the case of borrowers enjoying working capital credit limits of
Rs. 10 crores and above from the banking system, the loan component should normally be 80%
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22. and cash credit component 20 %. Banks, however, have the freedom to change the composition of
working capital finance by increasing the cash credit component beyond 20% or reducing it below
20 %, as the case may be, if they so desire.
Bill discounting facility involves the financing of short-term trade receivables through negotiable
instruments. These negotiable instruments can then be discounted with other banks, if required,
providing financing banks with liquidity.
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23. 10 Term Loan
Term loans also referred as term finance; represent a source of debt finance which is utilized for
establishing or expanding a manufacturing unit by the acquisition of fixed assets. These are
generally repayable in more than one year but less than 10 years. Such loans are raised for
expansion, diversification and modernization of the enterprise. The primary sources of such loans
are financial institutions. These are repayable in fixed monthly, quarterly or half yearly
installments and secured by term loan agreements between the borrower and the bank.
Term loans are generally granted to finance capital expenditure, i.e. acquisition of land, building
and plant & machinery, required for setting up a new industrial undertaking or expansion/
diversification of an existing one and also for acquisition of movable fixed assets. Term loans are
also given for modernization, renovation etc. to improve the product quality or increase the
productivity and profitability.
Term loans are normally granted for periods varying from 3-7 years and in exceptional cases
beyond 7 years. The exact period for which particular loan is sanctioned depends on the
circumstances of the case.
The basic difference between short term facilities and tem loans is that short term facilities are
granted to meet the gap in the working capital and are intended to be liquidated by realization of
assets, whereas term loans are given for acquisition of fixed assets and have to be liquidated from
the surplus cash generated out of earning. There are not intended to be paid out of the sale of the
fixed assets given as security for the loan. This makes it necessary to adopt a different approach in
examining the application of the borrowers for term credit.
10.1 Features of Term Loan
Following are the different features of term loans:
 Currency: Financial institutions give rupee term loans as well as foreign currency term loans.
 Security: All loans provided by financial institutions, along with interest, liquidated damages,
commitment charges, expenses etc. are secured by way of:
(a) First equitable mortgage of all immovable properties of the borrower, both present and
future; and
(b) Hypothecation of all movable properties of the borrower , both present and future,
subject to prior charges in favor of commercial banks for obtaining working capital
advance in the normal course of business
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24.  Interest payment and principal repayment: These are definite obligations which are
payable irrespective of the financial situation of the firm.
 Restrictive Covenants: FIs impose restrictive conditions on the borrowers depending upon
the nature of the project and financial situation of the borrower.
10.2 Term Loan Sanction Procedure
The procedure associated with a term loan sanction involves the following steps:
 Submission of loan application: The borrower submits an application form which seeks
comprehensive information about the project such as:
(a) Promoters‘ background
(b) Particulars of industrial concern
(c) Cost of project
(d) Means of financing
(e) Marketing and selling arrangements
(f) Economic considerations
 Initial processing of loan application: The loan application is reviewed to ascertain whether
it is complete for processing, if it is incomplete then it is sent back to the borrower for
resubmission with all relevant information.
 Appraisal of the proposed project: The detailed appraisal of the project covers the
marketing, technical, managerial, and economic aspects.
 Issue of letter of sanction: If the project is accepted, a financial letter of sanction is approved
to the borrower.
 Acceptance of terms and conditions by the borrowing unit: On receiving the letter of
sanction the borrowing unit convenes its board meeting at which the terms and conditions
associated with the letter of sanction are accepted and appropriate resolution is passed to the
effect.
 Execution of loan Agreement: After receiving the letter of acceptance from the borrowers.
The FI sends the draft of the agreement to the borrower to be executed by the authorized
person
 Creation of Security: The term loans and the DPG assistance provided by the financial
institutions are secured through the first mortgage, by way of deposit of title deeds, of
immovable properties and hypothecation of movable properties.
 Disbursement of loan: Periodically, the borrower is required to submit the information on
the physical progress of the projects, financial status of the projects, arrangements made for
financing the projects, contribution made by the promoters, projected fund flow statement,
compliance with various statutory requirements and fulfillment of disbursement conditions.
 Monitoring: Monitoring of the project is done at the implementation stage as well at the
operational stage.
10.3 Pre-Sanction Inspection
 Once the incumbent is satisfied with the information furnished by the borrower that the
proposal for the term loan is worth consideration, he should inspect the factory or place of
business to check the authenticity of the information supplied. Inspection can bring into
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25. light certain factors which are not revealed by mere study of financial statements. Even in
case of new unit, inspection of factory site is necessary.
 The assets of the concern which are proposed to be charged should be verified physically
and the title of the borrowers on the same should be examined.
 The books of the accounts and other relevant papers should be verified to see if all
liabilities, claims, contingencies, disputes have been admitted by the concern.
 Such an inspection can focus on the unfavorable aspects or weaknesses of the unit and can
help to a large extent in making an assessment of the proposal.
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26. 11 Working Capital
Working capital is defined as the total amount of funds required for day to day operation of a
unit. It can also be referred as the current asset holding of an enterprise. It is often classified as
gross working capital (GWC) and net working capital (NWC). Working capital finance is utilized
for operating purposes, resulting in creation of current assets (such as inventories and receivables).
This is in contrast to term loans which are utilized for establishing or expanding a manufacturing
unit by the acquisition of fixed assets.
Gross Working Capital refers to the fund required for financing total current assets of a business
unit. Net working capital no other hand is the difference between current assets and current
liabilities (including bank borrowings) that is nothing but the surplus of long term sources over
long term uses as such it is known as the liquid surplus available in a unit that can be either
positive or negative. A positive NWC is always desirable because of the fact that it provides not
only margin for the working capital requirement but also improves ability of the borrower to meet
its short term liabilities.
Operating Cycle Method
Every business unit has an operating cycle which indicates that a unit procures ‗raw material‘
from its funds, convert into ‗stock in process‘ which again is converted into ‗finished goods‘
which can be sold for cash and thus transformed into ‗fund‘. Alternatively it can be sold on credit
and on realization thereof gets converted into fund.
Thus every rupee invested in current assets at the beginning of the cycle comes back to the
promoter with the profit element added, after the lapse of a specific period of time. This length of
time is known as operating cycle or working capital cycle.
Figure 3: Operating Cycle
AR
converted Cash
to cash
Cash
Account Sales
Recievabl Order
e
Cash
Goods and Services converted
converted to Account Deliver Produce to Prepaid
Receivables Goods Goods Expenses
or or nd
Service Service
Inventory
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27. In order to keep the operating cycle going on, certain level of current assets are always required,
the total of which gives the amount of total working capital required. Thus total working capital
can be obtained by assessing the level of various components of current assets.
The operating cycle is therefore measured in terms of days of average inventory held for every
major category of working capital components.
Table 2: Operating Cycle
Stages Time Value
I Raw Material Holding Period Value of RM
consumed during the
period
II Stock in Process Time taken in RM + Manufacturing
converting RM into expenses during the
FG period (cost of
production)
III Finished Goods Holding period of FG RM + mfg. exp. +
before being sold adm. Overheads for
the period (cost of
sales)
IV Receivables Credit allowed to RM + mfg. exp .+
buyer adm. Exp. + profit for
the period (Sales)
11.1 Data required for assessment of working capital requirement
For assessing the working capital needs of an organization, bank follows CMA (Credit
Monitoring Arrangement). It is required by banks and other financial institutions, to introspect or
study the minutes of balance sheet and other financial statements of a body corporate for financing
their projects. In other words it is the detailed explanation of the balance sheet and other financial
ratios of the firm or any other corporate.
The CMA includes analysis of following six documents:
i) Existing and proposed banking arrangements
ii) Operating statement
iii) Analysis of Balance Sheet
iv) Buildup of current assets and current liabilities
v) Calculation of MPBF (Maximum Permissible Bank Finance)
vi) Fund Flow Statement
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28. 11.1.1 Assessment of Fund Based Working Capital
While public sector banks in India are nominally independent entities they are subject to intense
regulation by the Reserve Bank of India (RBI). This includes rules about how much the bank
should lend to individual borrowers—the so-called ―maximum permissible bank finance‖. There
are multiple methods as suggested by different committees from time to time. We have discussed
following recommendations by three committees:
1. Simplified Turnover Method (Nayak Committee)
This method of assessing working capital requirement of a firm is given by “Nayak Committee”.
The committee headed by Mr. P.R. Nayak examined the adequacy of institutional credit to SSI
sector and gave its recommendations which are as under:
a. Under this method, bank credit for working capital purposes for borrowers requiring
fund based limits up to Rs. 5 crore for SSI borrowers and Rs. 2 crore in case of other
borrowers, may be assessed at minimum of 25% of the projected annual turnover of
which should be provided by the borrower (i.e. minimum margin of 5% of the annual
turnover to be provided by the borrower) and balance 4/5th (i.e. 20% of the annual
turnover) can be extended by way of working capital finance.
b. The projected turnover or output value may be interpreted as projected gross sales
which will include excise duty also.
c. Since the bank finance is only intended to support the need based requirement of a
borrower, if the available NWC (net long term surplus funds) is more than 5%of the
turnover the former should be reckoned for assessing the extent of bank finance.
2. Maximum Permissible Banking Finance Method (Tandon Committee )
A committee headed by Mr. P.L. Tandon, ex-chairman of PNB, was constituted with view to
suggest improvement in the existing ash credit system. It submitted its report on guidelines for
follow up of credit in August 1974, suggesting three methods of lending. These are as follows:
 1st Method of Lending: 75% of the working capital gap (WCG = Total current assets –
Total current liabilities other than bank borrowings) is financed by the bank and the
balance 25% of the WCG considered as margin is to come out of long term source i.e.
owned funds and term borrowings. This will give rise to a minimum current ratio of
1.17:1. The difference of 0.17 (= 1.17 – 1) represents the borrower‘s margin which is
known as Net Working Capital (NWC).
 2nd Method of Lending: Bank will finance maximum up to 75% of total current assets
(TCA) and borrower has to provide a minimum of 25% of total current assets as the
margin out of long term sources. This will give a minimum current ratio of 1.33:1.
 3rd Method of Lending: This is same as 2nd method of lending, but excluding core current
assets from total assets and the core current assets are financed out of long term funds of
the company. The term ‗core current assets‘ refers to the absolute minimum level of
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29. investment in current assets, which is required at all times to carry out minimum level of
business activity. The current ratio is further improved to 1.79:1.
Examples:
Current Liabilities Current Assets
Creditors for purchase 100 Raw material 200
Other current liability 50 Stock in process 20
Bank Borrowings 200 Finished Goods 90
Receivables 50
Other current assets 10
350 370
1st Method 2nd Method 3rd Method
Total CA 370 Total CA 370 Total CA 370
Less Total CL - Less Core CA from long
Bank Borrowing 150 Less 25% of CA 92 term sources 95
WCG 220 278 275
25% of WCG from Less Total CL - Less 25% from long
long term sources 55 Bank Borrowings 150 term sources 69
Less Total CL - Bank
Borrowings 150
MPBF 165 MPBF 128 MPBF 56
Current Ratio 1.17:1 Current Ratio 1.33:1 Current Ratio 1.79:1
3. Chore Committee
The R.B.I constituted, in April 1979, a working group under the chairmanship of Sri K.B Chore,
to review the system of cash credit with the particular reference to the gap between sanctioned
limit and the extent of their utilization. It was also asked to suggest alternative type of credit
facilities which would ensure greater credit discipline and enable the banks to relate the credit
limits to increase in output or other productive activities.
The committee recommended assessment of working capital requirements have to be mandatorily
assessed based on 2nd method of lending suggested by Tandon Committee except for sick/Units
under rehabilitation.
As such, the banks are presently assessing need based WC financing under 2nd Method of lending.
4. CASH BUDGET SYSTEM
In case of tea, sugar, construction companies, film industries and service sector requirement of
finance may be at the peak during certain months while the sale proceeds may be realised
throughout the year to repay the outstanding in the account. Therefore, credit limits are fixed on
the basis of projected monthly cash budgets to be received before beginning of the season.
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30. Branches should follow the procedure/guidelines issued from time to time through various
Circulars for financing tea, sugar, construction companies, film industries and service sector.
11.1.2 Assessment of Non-Fund Based Working Capital Facility
The credit facilities given by the banks where actual bank funds are not involved are termed as
'non-fund based facilities'. These facilities are divided in three broad categories as under:
 Letters of credit
 Guarantees
 Co-acceptance of-bills/deferred payment guarantees.
Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other
fund based credit limits.
Facilities for co-acceptance of bills/deferred payment guarantees are generally required for
acquiring plant and machinery and may, technically be taken as a substitute for term loan which
would require detailed appraisal of the borrower's needs and financial position in the same manner
as in case of any other term loan proposal.
 Letter of Credit: Letter of credit (LC) is a method of settlement of payment of a trade
transaction and is widely used to finance purchase of raw material, machinery etc. It contains
a written undertaking by the bank on behalf of the purchaser to the seller to make payment of
a stated amount on presentation of stipulated documents and fulfillment of all the terms and
conditions incorporated therein. Letters of credit thus offers both parties to a trade transaction
a degree of security. The seller can look forward to the issuing bank for payment instead of
relying on the ability and willingness of the buyer to pay.
Parties to a Letter of Credit
1. Applicant/Opener: It is generally the buyer of the goods who gets the letter of credit issued
by his banker in favour of the seller. The person on whose behalf and under whose
instructions the letter of credit is issued is known as applicant/ opener of the credit.
2. Opening bank/issuing bank: The bank issuing the letter of credit.
3. Beneficiary: The seller of goods in whose favour the letter of credit is issued.
4. Advising Bank: Notification regarding issuing of letter of credit may be directly sent to the
beneficiary by the opening bank. It is, however, customary to advise the letter of credit
through sane other bank operating at the place/country of seller. The bank which advises
the letter of credit to the beneficiary is known as advising bank.
5. Confirming Bank: A letter of credit substitutes the credit worthiness of the buyer with that
of the issuing bank. It may sometimes happen especially in import trade that the issuing
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31. bank itself is not widely known in the exporter's country and exporter is not prepared to
rely on the L/C opened by that bank. In such cases the opening bank may request other
bank usually in the country of exporter to add its confirmation which amounts to an
additional undertaking being given by that bank to the beneficiary. The bank adding its
confirmation is known as confirming bank. The confirming bank has the same liabilities
towards the beneficiary as that of opening bank.
6. Negotiating Bank: The bank that negotiates the documents drawn under letter of credit and
makes payment to beneficiary.
The function of advising bank, confirming bank and negotiating bank may be undertaken by a
single bank only.
Letter of Credit Mechanism
Any business/industrial venture will involve purchase transactions relating to machine/other
capital goods and raw material etc., and also sale transactions relating to its products. The
customer may be an applicant for a letter of credit for his purchases while be the beneficiary
under other letter of credit for his sale transaction.
The complete mechanism of a letter of credit may be divided in three parts as under:
1. Issuing of Credit: Letter of credit is always issued by the buyer's bank (issuing bank) at
the request and on behalf and in accordance with the instructions of the applicant. The
letter of credit may either be advised directly or through some other bank. The advising
bank is responsible for transmission of credit and verifying the authenticity of signature of
issuing bank and is under no commitment to pay the seller. The advising bank may also be
required to add confirmation and in that case will assume all the liabilities of issuing bank
in relation to the beneficiary as stated already. Refer to diagram given below for complete
process of issuance of credit.
Figure 4: Issuing of Credit
Buyer Seller Sales Contract
Applicant Beneficiary
(1)
(2) (4)
Buyer‘s Advising
Issuance of Letter of
Bank Bank
Credit
Issuing Confirming
(3)
Bank Bank
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32. 2. Negotiation of Documents by beneficiary: On receipt of letter of credit, the beneficiary
shall arrange to supply the goods as per the terms of L/C and draw necessary documents
as required under L/C. The documents will then be presented to the negotiating bank for
payment/acceptance as the case may be. The negotiating bank will make the payment to
the beneficiary and obtain reimbursement from the opening bank in terms of credit. The
entire process of negotiation is diagrammatically represented as under:
Buyer Supply of Goods (5) Seller
Applicant Beneficiary
Payment to Beneficiary (7) Documents for Negotiation (6)
Buyer‘s Documents (8) Advising/
Confirming
Bank Bank
Issuing Reimbursement (9) Negotiating
Bank Bank
Payment to
Beneficiary (7)
Figure 5: Process of Negotiation
3. Settlement of Bills Drawn under Letter of Credit by the opener: The last step involved in letter
of credit mechanism is retirement of documents received under L/C by the opener. On receipt of
documents drawn under L/C, the opening bank is required to closely examine the documents to
ensure compliance of the terms and conditions of credit and present the same to the opener for his
scrutiny. The opener should then make payment to the opening bank and take delivery of
documents so that delivery of goods can be obtained by him. This aspect of L/C transaction is
represented as under:
Figure 6: Process of Settlement under L/C
Buyer
Delivery of Goods (12)
Applicant
Payment (11) Documents (10)
Buyer‘s
Bank
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33. Issuing
Bank
Types of Letter of Credit: Letter of credit may be divided in two broad categories as under:
(i) Revocable letter of credit. This may be amended or cancelled without prior warning
or notification to the beneficiary. Such letter of credit will not offer any protection and
should not be accepted as beneficiary of credit.
(ii) Irrevocable letter of credit. This cannot be amended or cancelled without the
agreement of all parties thereto. This type of letter of credit is mainly in use and offers
complete protection to the seller against subsequent development against his interest.
Letter of credit may provide drawing of documents on following two bases:
(i) Delivery against payment (DP) – Sight: In this case documents are delivered against
payment. The beneficiary is paid as soon as the paying bank or borrower‘s bank has
determined that all necessary documents are in order.
(ii) Delivery against acceptance (DA) – Usance (time): In this case documents are
delivered against acceptance. The borrower pays after certain due date of payment
specified.
Assessment of Limit of Letter of Credit:
Table 3: Assessment of Limit of Letter of Credit
Assessment of Limit of Letter of Credit
Annual Raw Material Consumption A
Annual Raw Material Procurement through ILC/ FLC B
Monthly Consumption C
Usance D
Lead Time E
Total Time F=D+E
LC Time Required G=F*C
 Bank Guarantee
A contract of guarantee can be defined as a contract to perform the promise, or discharge the
liability of a third person in case of his default. The contract of guarantee has three principal
parties as under:
o Principal debtor: The person who has to perform or discharge the liability and for
whose default the guarantee is given.
o Principal creditor: The person to whom the guarantee for due fulfilment of contract by
principal debtor. Principal creditor is also sometimes referred to as beneficiary.
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34. o Guarantor or Surety: The person who gives the guarantee.
Bank provides guarantee facilities to its customers who may require these facilities for various
purposes. The guarantees may broadly be divided in two categories as under:
o Financial guarantees: Guarantees to discharge financial obligations to the customers.
o Performance guarantees: Guarantees for due performance of a contract by customers.
Table 4: Assessment of Limit of Letter of Guarantee
Assessment of Limit of Letter of Guarantee
Outstanding Bank Guarantee as per audited balance sheet A
Add bank guarantee required during the period B
Less estimated maturity or cancellation of bank guarantee C
during the period
Requirement of bank guarantee D=A+B-C
 Bills Co-Acceptance: It is same as letter of credit. The difference is that the letter of credit
is accepted by buyer as well by co-accepting bank.
 Deferred Payment Guarantee (DPG): A deferred payment guarantee is a contract under
which a bank promises to pay the supplier the price of machinery supplied by him on
deferred terms, in agreed installments with stipulated interest in the respective due dates,
in case of default in payment thereof by the buyer. As far as the buyer of the plant and
machinery is concerned, it serves the same purpose as term loan. The advantage to the
buyer is that he is benefited to the extent of savings in interest charges accruing on account
of opting equipment financing under installment payment system less the guarantee.
Risk Management
Risk management is the identification, assessment and prioritization of risks followed by
co-ordinate and economical application of resources to minimize, monitor and control the
probability or impact of unfortunate events.
The risk that a borrower might fail to meet its obligations towards the bank in accordance with the
agreed terms and conditions, is the credit risk contracted during sanctioning of loan. It is the risk
of default of on the part of borrower, which could be due to either inability or unwillingness to
repay his debts.
Factors determining credit risk:
 State of Economy
 Wide swing in commodity prices
 Trade restrictions
 Fluctuations in foreign exchange rates and interest rates
 Economic sanctions
 Government policies
Some company specific factors are:
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35.  Management Expertise
 Company Policies
 Labour Relations
The internal factors within the bank, influencing credit risk for a bank are:
 Deficiencies in loan policies/ administration
 Absence of prudential concentration limits
 Inadequate defined lending limits for loan officers or credit committees
 Deficiencies and appraisal of borrower‘s financial position
 Excessive dependence on collateral without ascertaining its quality/ reliability
 Absence of loan review mechanism
The risk management philosophy & policy of the Bank is an embodiment of the Bank‘s approach
to understand measure and manage risk and aims at ensuring sustained growth of healthy asset
portfolio. This would entail in reducing exposure in high risk areas, emphasizing more on the
promising industries, optimizing the return by striking a balance between the risk and the return
on assets and striving towards improving market share to maximize shareholders‘ value.
Following procedure is followed at PNB, HO for risk rating:
 The head office of the bank at Bhikaiji Cama place receives the proposals of various
organizations demanding loans.
 They receive a copy of the company‘s financial results. The branches also send their rating
after some initial screening to the head office for vetting.
 These branches obtain the data from the proposal and the discussions with other banks in
the consortium. They can also contact the company for further clarifications
 The auditor‘s report and notes to accounts serve as a useful guide. The past records of
company‘s transactions with the bank (if any) are also considered.
 The officials at the HO study and check the financials and the subjective parameters. Then
the final rating is done after making suitable amendments.
The credit risk rating tool has been developed with a view to provide a standard system for
assigning a credit risk rating to the borrowers of the bank according to their risk profile. This
rating tool is applicable to all large corporate borrower accounts availing total limits (fund based
and non-fund based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100
crore.
The Bank has robust credit risk framework and has already placed credit risk rating models on
central server based system ‗PNB TRAC‘, which provides a scientific method for assessing credit
risk rating of a client. Taking a step further during the year, the Bank has developed and placed
on central server score based rating models in respect of retail banking. These processes have
helped the Bank to achieve fast & accurate delivery of credit; bring uniformity in the system and
facilitate storage of data & analysis thereof. The analysis also involves analyzing the projections
for the future years.
This credit risk rating captures risk factors under four areas:
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36. 1. Financial evaluation (40%)
2. Business or industry evaluation (30%)
3. Management evaluation (20%)
4. Conduct of account (10%)
 Financial evaluation
Under this, various parameters are taken and based on the financial data scores are assigned
during the risk rating process.
The financial evaluation involves past financials classified based on industry comparison and
absolute comparison.
Following are some of the parameters, which have been explained in detail:
A. Liquidity Parameter
a. Current Ratio
b. Debt Service Coverage Ratio
B. Profitability Parameter
a. Return on Investment
C. Operating Efficiency Parameter
D. Other Parameters
a. Future risk expectations
b. Cash flow adequacy
c. Transparency in financial statements of the company
d. Quality of the inventory
e. Reliability of the debtors
f. Quality of investment / loans and advances to other companies
g. Trends in the financial performance over the past few years
 Business evaluation
It involves the evaluation of the operating efficiency of the concerned company under which
various factors are considered which is extremely important for risk rating purposes. These
could be raw material/ cost of production or it could be credit period availed and allowed. All
these factors help in judging the efficiency in operating the business.
 Market Position
Evaluating the market position for the purpose of risk rating is extremely important to judge
the competitive position of the company and analyzing the input related risk, product related
risk, price competitiveness and other market factors and then giving scores for the purpose of
calculating the aggregate market position.
 Management evaluation
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37. It is done by comparing the targets set with the targets achieved by the management during the
year. Subjective assessment is also done based on the factors risk like track record or sincerity
of the management.
 Conduct of Account Evaluation
This evaluation involves PMS rating. PMS is a macro level monitoring tool. In other words, it
is a close actions oriented follow up of the health of borrower. It aims to minimize the loan
losses by capturing early warning signals of deterioration and taking preventive action. It has a
memory of one year and reporting frequently is linked to credit rating.
How to rate
The ratios of the company are compared with the benchmark ratios and rating is given to the
company up to 2 decimal points based on its position within the benchmark values.
Procedure for evaluation at PNB is as follows:
1. Each industry has its own risk and depending on it, a suitable risk factor is chosen and
industry risk is adjusted into the score of rating.
2. These areas cover different parameters based on which the past and the future performance
of the company are evaluated.
3. The combined scores of these areas are calculated.
4. Then based on the weight age assigned (given in brackets above) the overall score is
calculated.
5. This overall score is used to determine the ratings as illustrated in following table:
Table 5: The rating and score matrix
Rating Category Description Score obtained Grade
AAA Minimum risk Above 80.00 AAA
Between 77.50 - 80.00 AA+
AA Marginal risk Between 72.50 – 77.50 AA
Between 70.00 – 72.50 AA-
Between 67.50 – 70.00 A+
A Modest risk Between 62.50 – 67.50 A
Between 60.00 – 62.50 A-
Between 57.50 – 60.00 BB+
BB Average risk Between 52.50 – 57.50 BB
Between 50.00 – 52.50 BB-
Between 47.50 – 50.00 B+
Marginally
B Between 42.50 – 47.50 B
acceptable risk
Between 40.00 – 42.50 B-
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38. C High risk Between 30.00 – 40.00 C
D Caution risk Below 30.00 D
Based on the above table rating is done. Once the rating is done, the rate of interest at which the
bank will be lending the money is determined. Normally, a company with higher rating is given
loan at a lower interest as compared to company with lower ratings. This is because the risk
involved with higher rated company is lower.
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39. 12 Types of Financing
Consortium Financing
Where the entire credit needs of the borrower is financed by a group of banks by forming a
consortium. It promotes collective application of banking resources.
Merits: To bank:
1. A single bank carries a disproportionate credit risk when it finances single handedly a
huge sum to a large borrower. Consortium financing helps to spread this risk among a
number of banks who are members of the consortium.
2. Consortium financing leads to a better credit appraisal in as much as the expertise of all
the member banks can be contributed for appraising the proposal.
3. Smaller banks which cannot alone finance huge limits to the large borrowers can still join
in financing by becoming the member of consortium. Financing large borrowers being a
profitable proposition helps in increasing their profitability.
4. It stops unhealthy practices of snatching good large borrowal accounts by one bank from
other by offering unwanted counter offers with respect to interest and service charges.
5. All banks lend on same terms and conditions regarding the security, rate on interest,
margin, etc. i.ee no one has superior rights or more favorable propositions.
To borrower:
1. A borrower availing credit from a consortium does not suffer from scarcity of credit due to
credit squeeze of its sole banker.
2. Internal competition among the participating banks to have larger share in the consortia
enables a borrower having good fundamentals to enjoy lower interest and service charges
3. Borrower enjoys same interest and service charges from all the banks normally set at a
level below prevailing rates.
Demerits: To Bank
1. Bank is under an obligation to share information with other lending institutions.
2. Bank does not have superior rights in case of a default.
3. Bank has to fall in line w.r.t. terms and conditions set out by the lead bank although
adequate propositions are made for its reservations.
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40. 4. Bank cannot move out of consortia within first 2 years without approval of other members
of the consortia and existing/new member is willing to take its share.
5. In case of a dispute Lead Bank or the bank having 2nd highest share in the consortium will
be the final authorities in cases of differences of opinion and their views will prevail in all
cases of disputes among the members relating to terms and conditions.
To Borrower
1. Borrower cannot negotiate terms and conditions with individual banks depending upon the
size of business it is providing to them.
2. All members of the consortium have superior rights than other lenders which affects it
borrowing capacity in the open market.
Multiple Banking
Where the credit requirements of a borrower are met by more than one bank and each bank lends
independently on its own terms and conditions, regarding the security, rate of interest, margin etc.,
this system of financing is called Multiple Banking Arrangements.
Advantages: To bank:
1. Bank lends under its own terms and conditions regarding the security, rate of interest,
margin, etc. and may ask for superior rights.
2. The bank is independent of other lending institution.
3. The bank is under no obligation to share proprietary data with other lending institution.
To Borrower
1. Borrower can decide the level of business it wants to give to a particular bank depending
upon the services provided.
2. Borrower has the possibility of getting surplus credit facility from the banks collectively.
3. Borrower can negotiate for terms and condition.
Demerits: To Bank
1. There is a possibility of over financing to the borrower.
2. More vigilant and robust monitoring mechanism has to be in place to have better control
over excessive financing cases.
3. Bank is unknown to the conduct of the borrower with other lending banks and thus not in
the position to take preventive steps.
40 | P a g e

41. 13 Case Study: Term Loan - XYZ Energy Pvt. Ltd.
13.1. POWER SECTOR SCENARIO IN INDIA: A PERSPECTIVE
13.1.1. Power Supply
Despite significant growth in electricity generation over the years, the shortage of power
continues to exist primarily on account of growth in demand for power outstripping the
capacity additions in generation. The problem is further exacerbated during peak hours
leading to heavy load shedding by utilities. The power supply position is characterized by
acute shortages both in terms of the demand met during peak time and overall energy
supply.
13.1.2. Peak Demand & Deficit Position
The historic demand-supply scenario for Peak Capacity in India is as follows:
Graph 13-1: Peak Supply & Deficit Position as of March 31, 2010
140000
(15747)
120000 (18073) (13124)
(13897)
100000 (11463)
(9508) (10254)
(9252) (9945)
80000
MW
60000
40000
20000
0
9TH PLAN 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
END
Peak Supply Peak Deficit
(Source: CEA)
41 | P a g e

42. 13.1.3. Total Energy Requirement & Deficit Position
The historic total Energy requirement and the growing deficit therein is as follows:
Graph 13-2: Total Energy Availability & Deficit Position as of March 31, 2010
900000 (83807)
(85303)
800000 (73338)
(66092)
700000 (52938)
(43258)
600000 (48093) (39866)
(39187)
500000
(MU)
400000
300000
200000
100000
0
9TH PLAN 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
END
Energy Availability Energy Deficit
(Source: CEA)
The energy shortage has increased from 7.5 % in 2001-02 to 10.1 % during 2009-10;
the peaking shortage has grown from 11.8 % in 2001-02 to 13.3 % in 2009-10 mainly
due to increase in industrial and commercial demand and shortage of coal and natural
gas for power generation.
13.1.4. Region wise Peak Demand and Energy Requirement & Shortages
The region wise power situation for the five regions in India is given below:
Table 13-1: Region-wise power situation
Peak Energy
Gap Shortage Shortage
Demand Requirement Gap (MU)
(MW) (%) (%)
(MW) (MU)
Northern 37159 -5720 -15.4% 253803 -29356 -11.6%
Western 39609 -7023 -17.7% 258551 -35398 -13.7%
Southern 32082 -3029 -9.4% 220557 -14032 -6.4%
Eastern 13963 -1078 -7.7% 88040 -3986 -4.5%
N Eastern 1760 -315 -17.9% 9349 -1034 -11.1%
(Source: CEA)
42 | P a g e

43. Major shortage in terms of energy and peak power is observed in Western Region and
Nothern Regions.
13.1.5. Installed Capacity
The Indian power sector has grown significantly since 1947 and the power generating
capacity has increased from 1,362 MW in 1947 to about 1,56,000 MW as on March 31,
2010.
13.1.6. Region wise installed capacity (MW)
Existing region wise installed capacity (MW) as on 31st March, 2010 is depicted below:
Graph 13-3: Existing Installed Capacity (MW) as on March 31, 2010: Region-wise
2288.90 MW 75.27 MW
21319.46 MW 42189.33 MW
Northern
Western
Southern
Eastern
N.Eastern
43300.50 MW Islands
50225.03 MW
Source: CEA
The Western, Southern and Northern regions have the major concentration of the
electrical loads and hence the highest generating capacities.
13.1.7. Fuel wise installed capacity (MW)
The fuel wise installed capacity (MW) as on 31st March, 2010 is depicted below:
43 | P a g e

44. Graph 13-4: Existing Installed Capacity (MW) as on 31st March, 2010: Fuel-wise
Hydro Nuclear R.E.S. Gas Diesel Coal
R.E.S., 10%
Nuclear, 3%
Coal, 53%
Thermal, 64%
Diesel, 1% Gas, 10%
Hydro, 23%
Coal based thermal power still continues to be the backbone of the power supply in
India. GoI is contemplating to increase capacity addition in gas, hydro, nuclear power
and other Renewable energy sources by 2030 so as to reduce carbon emission and to
reduce dependability on coal as the reserve would be depleting.
13.1.8. Region wise and Fuel wise installed capacity (MW)
The region wise and fuel wise installed capacity is given below:
Table 13-2: Existing Installed Capacity (MW) as on 31st March, 2010
Thermal
Region Nuclear Hydro R.E.S. Total
Coal Gas DSL Total
Northern 21275.00 3563.26 12.99 24851.25 1620.00 13310.75 2407.33 42189.33
Western 28145.50 8143.81 17.48 36306.79 1840.00 7447.50 4630.74 50225.03
Southern 17822.50 4392.78 939.32 23154.60 1100.00 11107.03 7938.87 43300.50
Eastern 16895.38 190.00 17.20 17102.58 0.00 3882.12 334.76 21319.46
N.East 60.00 766.00 142.74 968.74 0.00 1116.00 204.16 2288.90
Islands 0.00 0.00 70.02 70.02 0.00 0.00 5.25 75.27
(Source: CEA)
The Northern region is largely dependent on coal based Thermal power and Hydro
Power to meet its electricity demand.
13.2. FUTURE OUTLOOK
13.2.1. Capacity Addition Program
Historically, India has achieved about 50% of the capacity addition envisaged through its
various Five Year Plans.
44 | P a g e

45. 13.2.1.1. Actual capacity addition vis-a-vis the target in last 5 year plans
The actual capacity addition vis-a-vis the target in last four 5 year plans is as under:
Graph 13-5: Actual Capacity Addition Vs Target Capacity Addition
1,00,000 70.00%
60.00%
80,000
50.00%
60,000 40.00%
40,000 30.00%
20.00%
20,000
10.00%
0 0.00%
8th Plan 9th Plan 10th Plan 11th Plan (underway)
Target (MW) Achievement (MW) Percentage Achievement
(Source: CEA)
A number of Eleventh Plan projects are already behind schedule; CEA has revised the
capacity addition in Eleventh Plan to 62,488 MW as against the Planning Commission
target of 78,700 MW.
13.2.2. Demand Forecast (All India – 17th EPS)
CEA in its 17th EPS has given detailed estimates of the growth in power demand, region-
wise and for the country as a whole. The summary is given below:
Table 13-3: Long-term Projected Energy Requirement
Peak Load ( MW ) Energy Requirement ( MU )
Region
2011-12 2016-17 2021-22 2011-12 2016-17 2021-22
Northern 48,137 66,583 89,913 2,94,841 4,11,513 5,56,768
Western 47,108 64,349 84,778 2,94,860 4,09,805 5,50,022
Southern 40,367 60,433 80,485 2,53,443 3,80,068 5,11,659
Eastern 19,088 28,401 42,712 1,11,802 1,68,942 2,58,216
North Eastern 2,537 3,760 6,180 13,329 21,143 36,997
All India 1,52,746 2,18,209 2,98,253 9,68,659 13,92,066 19,14,508
(Source: 17th EPS)
According to the 17th EPS, India's peak demand will reach 152,746 MW with an energy
requirement of 968 billion units (BUs) by the year 2012. By the year 2016-17, the peak
demand will reach 218,209 MW and energy requirement will touch nearly 1,392 BUs.
45 | P a g e

46. 13.2.3. Supply Forecast for All India at the end of the XI Plan
To cater to this demand, huge capacity addition is being planned. As of now, nearly
78,700 MW of new power plants are under various stages of implementation /
conceptualisation.
13.2.3.1. Planned capacity additions during the XI plan period (2007-12)
The planned capacity additions during the XI plan period (2007-12) is given below:
Graph 13-6: Likely capacity additions during the XI plan - Fuel wise
RES
0% Hydro
Nuclear, 3,380 , 4%
Coal, Nuclear
52,850 ,
Hydro, 67% RES
Thermal
15,627 , Coal
59,693
20%
76% Diesel, - , 0% Gas
Diesel
Gas, 6,843 , 9%
(Source: CEA)
13.2.3.2. Region-wise, Fuel-wise capacity addition in the XI Plan
The Region-wise, Fuel-wise capacity addition in the XI Plan is as follows:
Graph 13-7: Likely capacity additions during the XI plan - Region wise
25,000
20,210
20,000
14,060
15,000 13,000 Hydro
10,886
Thermal
10,000 7,488
Nuclear
5,000 2,940 3,151 2,724
1,170 1,094 1,537
440 0 0 0
-
Northern Western Southern Eastern North Eastern
(Source: CEA)
In case all of the above planned capacity additions come up as per the envisaged
schedule, the total installed capacity of the country will nearly reach 2,11,029 MW at the
end of XI plan.
46 | P a g e

47. 13.2.3.3. Growth rates in installed capacity (MW)
Growth rates in installed capacity are depicted in the following graph:
Graph 13-8: Historical Growth in Installed Capacity
180000.00 9.00%
160000.00 8.00%
140000.00 7.00%
120000.00 6.00%
CAGR (%)
(MW)
100000.00 5.00%
80000.00 4.00%
60000.00 3.00%
40000.00 2.00%
20000.00 1.00%
0.00 0.00%
Installed Capacity CAGR
From the above graph, it is observed that in the recent, past generating capacity has
been growing at a pace much below the required levels. However, during the last 2-3
years due to some focused efforts in the power sector, there have been some
improvements in the growth rates and the sector is expecting major initiatives in terms
of capacity additions.
Historically, India has met about 50% of the targets envisaged by the five year plans. As
shown above, the capacity additions have picked up in recent years and based on
implementation on the ground as on date, experts predict India achieving 60% of the
target during the XI Plan.
Based on the above, it is expected that the total capacity addition during the XI five year
plan would be 47,220 MW. Accordingly, the total available capacity at the end of FY 2012
would be 179,549 MW.
13.2.3.4. Capacity Utilization of existing Installed Capacity
Total available Energy and available Peak Load against installed capacity for the period
Apr’09 to Mar’10 has been tabulated below:
Table 13-4: Total Energy & Peak Load Availability Vs Installed Capacity
Installed
Energy PLF Peak Load Peak Load
Month Capacity
Availability (MU) (Thermal) Availability (MW) Availability
(MW)
Mar ‘10 1,59,398 70,099 81.41% 1,02,097 64.56%
47 | P a g e

48. Feb ‘10 1,57,229 61,207 81.54% 1,01,287 64.42%
Jan ‘10 1,56,784 64,854 80.06% 99,636 63.55%
Dec ‘09 1,56,092 63,417 78.91% 98,166 62.89%
Nov ‘09 1,55,859 59,416 75.47% 1,00,856 64.71%
Oct ‘09 1,53,694 64,815 74.88% 1,00,255 65.23%
Sep '09 1,52,360 62,201 71.71% 1,01,852 66.85%
Aug '09 1,52,148 65,287 71.74% 99,277 65.25%
July '09 1,51,073 62,685 71.83% 96,282 63.73%
June '09 1,50,323 62,126 77.17% 96,871 64.44%
May '09 1,49,392 62,477 79.19% 95,033 63.61%
Apr '09 1,48,265 60,377 82.53% 97,355 65.66%
(Source: CEA)
Based on above data, it is evident that the total available Energy and total available Peak
Power is 64.57% and 64.58% of the installed capacity. However, considering GoI
impetus on improving operation and maintenance, reduction in Transmission and
Distribution loss and encouragement to Private players in Power sector, available Energy
and available Peak Power considered for arriving at supply position by the end of XI plan
is 60% and 70% of the installed capacity respectively.
13.2.3.5. Projected demand and supply at the end of XI five year plan (2012)
Taking into consideration the above, the projected demand and supply position at the
end of eleventh five year plan (2011-12) after factoring available Energy and available
Peak Power at 60% and 70% of the installed capacity respectively is given below:
Table 13-5: Projected Demand & Supply Position at the end of XI Five Year Plan
(in MW) (in MU)
Region Peak Peak % Energy Energy %
Deficit Deficit
Demand Supply Demand Supply
All India 1,52,746 1,25,684 -27,062 -17.72% 9,68,659 9,43,709 -24,949 -2.64%
(Source: CEA)
The country shall face a peak power deficit of 27,000 MW and 72,536 million units in
terms of energy supply at the end of XI five year plan.
13.2.3.6. Region-wise demand and supply at the end of the XI five year plan
The region-wise demand and supply position at the end of the XI five year plan:
Table 13-6: Projected Demand & Supply Position at the end of XI Five Year Plan
(in MW) (in MU)
Region Peak Peak % Energy Energy %
Deficit Deficit
Demand Supply Demand Supply
48 | P a g e

49. All India 1,52,746 1,25,684 -27,062 -17.72% 9,68,659 9,43,709 -24,949 -2.64%
-
Northern 48,137 34,357 -13,780 -28.63% 2,94,841 2,57,974 -36,867
14.29%
Western 47,108 36,312 -10,796 -22.92% 2,94,860 2,72,649 -22,210 -8.15%
Southern 40,367 32,419 -7,948 -16.69% 2,53,443 2,43,421 -10,021 -4.12%
*Data for Eastern & North-eastern states not depicted.
(Source: CEA)
The northern region together with the western region would have deficit of
approximately 24,000 MW and 88,000 million units by the end of XI Plan. While the total
energy shortage is acute in the northern region at 14.29%, the peak shortage at 28.63%
is staggering. Gas power plants, with their flexible operations are fully capable of
fulfilling such peaking load requirements.
49 | P a g e

50. 13.3. POWER SCENARIO – REGION WISE
13.3.1. Power Scenario in Northern India
13.3.1.1. Installed capacity-Sector Wise
The total installed capacity in the northern region as on 31st March, 2010 is 42,189 MW.
Details of the installed capacity in Northern region are given below:
Graph 13-9: Installed Capacity as on 31st March, 2010: Sector-wise
CENTRAL, 17459.26
MW, 41% STATE,21984.52
MW, 52%
PRIVATE, 2745.55
MW, 7%
Source: CEA
Most of the generating capacity is in the State Sector tied up under long term supply of
electricity and the Private sector comprises only 7% of the total installed capacity. There
is hence limited availability of merchant power for short term purposes in northern
region.
13.3.1.2. Installed capacity- Fuel Wise
Graph 13-10: Installed Capacity as on 31st March, 2010: Fuel-wise
R.E.S. 5.71%
Nuclear, 3.84%
Coal,
50.43%
Thermal,
Hydro, 58.90%
31.55%
Diesel, 0.03% Gas, 8.45%
Source: CEA
50 | P a g e

51. Most of the generating capacity in the northern region is based on Thermal Power
Plants, which comprises 50% of coal and gas comprises 9%, followed by Hydro (33%).
13.3.1.3. Demand-supply position of peak power
The demand-supply position of peak power in Northern India over the last nine years is
given below:
Graph 13-11: Historical Demand-Supply of Peak Power
40000 (5720)
35000 (4872) (2967) (3530)
30000 (2709) (2954)
25000 (1854) (2203) (1546)
20000
15000
10000
5000
0
9TH PLAN 2003 2004 2005 2006 2007 2008 2009 2010
END
Peak Supply Peak Deficit
(MW) (MW)
The peak power requirement in March, 2010 was 37,159 MW and the deficit was 5,720
MW representing a 15.4% gap in peaking capacities.
13.3.1.4. Demand-supply position of peak power
The demand-supply position of total energy in Northern India over the last nine years is
given below:
Graph 13-12: Historical Demand-Supply of Total Energy
300000
(29356)
250000 (24290)
(23650)
200000 (20183) (22139)
(8852) (16140)
(7973) (12392)
150000
100000
50000
0
9TH PLAN 2003 2004 2005 2006 2007 2008 2009 2010
END
Energy Supply Energy Deficit
(MU) (MU)
51 | P a g e

52. The energy requirement in 2009-10 was 253803 MU and the deficit was 29356 MU
13.3.1.5. State-wise demand-supply position in Northern Region
The state-wise demand-supply position in Northern Region is shown below:
Table 13-7: State-wise Demand-Supply Position for the Period 2009-10
Peak Peak Peak Energy
Gap
Demand Gap Gap Requirement Gap (MU)
(%)
(MW) (MW) (%) (MU)
Chandigarh 308 0 0.0% 1570 -49 -3.1%
Delhi 4502 -8 -0.2% 24271 -183 -0.8%
Haryana 6133 -455 -7.4% 33520 -1514 -4.5%
Himachal Pradesh 1118 40 3.6% 7009 -247 -3.5%
Jammu and Kashmir 2247 -726 -32.3% 12907 -2978 -23.1%
Punjab 5795 -708 -12.2% 3496 -391 -11.2%
Rajasthan 6859 0 0.0% 44031 -1048 -2.4%
Uttar Pradesh 10856 -2293 -21.1% 75822 -16432 -21.7%
Uttarakhand 1247 -250 -20.0% 749 -86 -11.5%
(Source: CEA)
The northern region is facing peak power deficit of 2293 MW while the peak energy
shortage was 75822 MU. The States where the shortfall is occurring are Haryana, J&K,
Punjab, Uttarakhand and Uttar Pradesh. The reason is due to industrialization and
extensive use of power in agriculture. In addition there is a demand for peaking power
especially in the off-season when the hydro generation is minimal.
13.3.1.6. The demand forecast for Nothern Region as per 17th EPS
As per 17th EPS, in 2011-12 Northern Region will have a peak demand of 48,137 MW
while the energy requirement is expected to touch 2,94,892 MU. The State-wise demand
forecast for Northern India is given below:
Table 13-8: State-wise Demand Forecast for Northern India
Peak Load (MW) Energy Requirement (MU)
2011-12 2016-17 2011-12 2016-17
Delhi 6,092 8,729 36,293 52,762
Haryana 6,839 9,375 38,417 54,305
Himachal Pradesh 1,611 2,194 9,504 13,136
Jammu & Kashmir 2,063 2,790 11,202 15,272
Punjab 11,000 14,441 60,489 82,572
Rajasthan 8,482 11,404 48,916 67,767
Uttar Pradesh 13,947 19,623 79,268 1,10,665
52 | P a g e

53. Peak Load (MW) Energy Requirement (MU)
2011-12 2016-17 2011-12 2016-17
Uttarankhand 1,533 2,085 8,445 11,668
Chandigarh 420 602 2,308 3,367
Total 48,137 66,583 2,94,842 4,11,514
(Source: 17th EPS)
The State of Uttar Pradesh, Punjab and Haryana would be the demand centres for peak
power as well as energy.
13.3.1.7. Capacity Addition during the XI five year plan:
Likely capacity addition sector-wise and state-wise in the northern region during the XI
five year plan is given below:
Table 13-9: Likely capacity Addition During the XI Plan
Thermal
Hydro Nuclear Wind Total
Coal Gas Diesel Total
State 964 5,870 1,720 0 7,590 0 0 8,554
Private 1,792 2,680 225 0 2,905 0 0 4,697
Central 4,732 2,730 0 0 2,730 440 0 7,902
Total 7,488 11,280 1,945 0 13,225 440 0 21,153
(Source: CEA)
The likely capacity addition during XI Plan in Northern Region would be mainly in hydro
and coal and the most of the additions would be in the State and Central Sector.
Demand supply forecast is based on a 60% success rate of the envisaged capacity
addition in XI Plan as explained in the foregoing section.
13.3.1.8. Demand-supply forecast for the Northern Region in 2011-12
The demand-supply forecast for the Northern Region in 2011-12 is depicted below:
Table 13-10: Demand-Supply Forecast for the Northern Region in 2011-12
Peak Peak Energy Energy
Region Demand Supply Deficit % Need Supply Deficit %
(MW) (MW) (MU) (MU)
Northern 48,137 34,357 -13,780 -28.63% 2,94,841 2,57,974 -36,867 -14.29%
(Source: CEA)
It may be observed from table above that Northern Region will have deficit in peak
power as well as energy requirements at the end of eleventh five year plan (2012) to the
tune of 28.87% and 17.16% respectively.
53 | P a g e

54. 13.4. POWER SCENARIO IN UTTARAKHAND
13.4.1. The installed capacity in Uttarakhand
The installed capacity in Uttarakhand was 2404.99 MW as on 31 st March, 2010. The
break-up of the same is given below:
Table 13-11: Installed Capacity as on 31st March, 2010
Thermal
Sector Hydro Nuclear R.E.S. Total
Coal Gas Diesel
State 1252.15 0.00 0.00 0.00 0.00 132.92 1385.07
Private 400.00 0.00 0.00 0.00 0.00 0.00 400.00
Central 267.03 261.26 69.35 0.00 22.28 0.00 619.92
Total 1919.18 261.26 69.35 0.00 22.28 132.92 2404.99
(Source: CEA)
Uttarakhand has a installed capacity of 2404.99 MW majority of which is in the State and
Central Sector as of now and number of projects are being developed by private sector
players which is likely to be commissioned in XI Plan. As can be seen, the majority of the
capacity is hydro electric which is seasonal in nature.Hence the power generation trend
in the State indicates that Uttarakhand is a net exporter from April – October and net
importer during November - March on account of low generation of hydro in winter and
increase in demand of power for heating during winter.
13.5. POWER TRADING IN INDIA
The power requirement of a region can be gauged from the power transactions done
through bilateral trading, energy exchange and unscheduled interchange. The power
transactions done by the various regions are depicted below:
(million units)
Graph 13-13: Actual Net Power Position in North - Export (-) / Import (+)
54 | P a g e

55. 1500
MUs Exported (-), Imported (+)
1000
500
0
-500
-1000
Punjab Haryana Rajasthan Delhi UP
Uttarakhand Hp J&K Chandigarh
(Source: CERC)
From the graph above it emerges that Uttarakhand imports power during the winter and
is exporting during the summers.
The northern states are mostly power deficient and hence there is a market for any
power plant installed in the north.
13.5.1. Sale of Power
The power generated from the project is proposed to be sold as merchant power, i.e.
through short-term PPA. The power trading done under short term PPA is through
Bilateral trade (3.78%), Unscheduled Interchanges (3.05%) and through newly
established Power Exchanges (0.59%). The graphical representation of power traded
through various options available under short term agreements for the period Aug ’08 to
June ‘09 is depicted below:
Graph 13-14: Power traded through various options under short-term agreements
55 | P a g e

56. Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%
% of Generation
UI Exchange Bilateral
The average weighted price for power traded through short term agreements works out
to Rs. 5.71 per unit. The average weighted price for transaction through Bilateral Trade,
Energy Exchanges and UI works out to Rs.6.41, Rs.5.73 and Rs. 4.99 respectively. The
average prices for various forms of short term transactions executed from 2007 to 2009
are shown below
Graph 13-15: Power traded through various options under short-term agreements
8 7.04 7.57 6.89
6.41
5.73
6 4.99
4.16
4
2
0
2007 2008 2009
Price of Electricity Transacted Through Bilateral Trade (Rs/kWh)
Price of Electricity Transacted Through Power Exchanges (Rs./kWh)
Price of Electricity Transacted Through UI (Rs./kWh)
Graph 6-23:
The detailed graphical presentation for the per-unit rate for short-term transactions for
the year 2009 is depicted below:
Graph 13-16: Per-unit rate for short-term transactions
56 | P a g e

57. 12.00
10.00
8.00
6.00
4.00
2.00
0.00
Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10
Price of Bilateral Transactions (Rs./kWh)
Price of Exchange Transactions (Rs./kWh)
Price of UI transactions New Grid (Rs./kWh)
Price of UI transactions SR Grid (Rs./kWh)
It is evident from the graph above that the weighted average price is in the range of Rs.
5.00 to Rs. 9.00 per unit. Thus, considering the energy deficit market of India,
particularly the Northern, Western Regions and Southern Region the power generated
from the project can be easily traded at a minimum weighted price of Rs. 5.00 per unit.
1. Name of the Borrower: M/s XYZ Energy Private Ltd.
Branch Office: MCB, New Delhi
Controlling Office: Circle Office (South Delhi)
(Rs. in crores)
GIST OF THE PROPOSAL
1. For sanction of fresh Term Loan of Rs.75.00 crore
Purpose To part finance setting up of Combined Cycle
Gas based Thermal Power Plant for power
generation
Cost of Project Rs.845.00 crore
Total Debt Rs.633.75 crore
Promoter’s contribution Rs.211.25 crore
Proposed TL (our Rs.75.00 crore
share)
DER 3:1
57 | P a g e

58. Repayment Period 34 equal quarterly instalments
Door to door tenor 10.25 years
2. Approval of ROI/ Service charges as under:-
Facility Existing Proposed Applicable rate
Rate of TL NA BR+3.50+TP i.e. B.R+5.00+TP i.e.
interest 13.00% 14.50%
Upfront Fee NA 0.25% +ST 1.25%+ST
Other NA As Applicable As Applicable
charges, if
any
3. Approval of other Issues, if any: Nil
Whether fresh/renewal/ Fresh
enhancement
Asset Classification as on NA – fresh account
31.10.2010 and last PMS
score
Credit Risk Rating by Rating Date of Score ABS Reasons for
Bank is ‘BB-’ under New Rating degradation
Project Rating Model.
Present BB- 27.12.10 50.35 July’10 NA
Prev B Sept’09 48.06 Aug’09
In terms of RMD note, the earlier rating was assessed when
the Co. approached our bank in Sept 2009 for sanction of
Specific Letter of Guarantee for the project (165 MW CCPP),
which was not availed. Current rating has been conducted
for a 225 MW combined cycle power plant and revised COP
& projections. As such, the two ratings are not strictly
comparable.
Rating from External Facility Rating Date of Rating Remarks
Agency (The external
58 | P a g e

59. rating should be mapped rated rating Agency
to the internal rating)
Not done. Project is under implementation.
A stipulation is made that it should be got done within 6
months after completion of the project.
Whether Agriculture/ Large (Power Sector)
Retail/ SME/ Others
a)Whether Sensitive No
Sector Real Estate/
Capital Market
b) Applicable Risk weight 100%
Consortium/Multiple Consortium banking
Banking
Lead Bank/Lender Will be decided at the time of documentation
PNB’s Share % Will be decided at the time of documentation
Date of application 27.09.2010
Date of receipt of
proposal at BO/ CO/HO
21.12.2010
Date of clarifications, if
any, received at CO/HO
04.01.2010
Date of last sanction & NBG in principle approval dated 05.10.2010
authority/ In Principle
Consent
Customer ID No. New
Activity code (as per New
ladder)
PART – I
2. Borrower’s Profile
59 | P a g e

60. 1. Group Name XYZ PL
2. Address of Regd./Corporate Office
13.1.1.1.1.1 Confedential
b. Works/Factory Near Kashipur, Uddham Singh Nagar
District, Uttarakhand
c. Constitution Private Limited Company
Constitution code as per ladder New Account
d. Date of incorporation/Establishment 06.04.2009
e. Dealing with PNB since New account – fresh dealing
f. Industry/Sector Power Sector
g. Business Activity (Product)/Installed
Capacity. 13.1.1.1.1.2 Power Generation
225MW
3. Directors (S/Shri)
Name and Designation Address/Mobile No/e-mail address of Whether Promoter/
Main Directors/Guarantor Professional/
Directors/Key persons Nominee
Mr. ABC Confedential Chairman
Mr. DEF Confedential Director
Mrs. GHI Confedential Director
1. If any of them, in the list of Caution Advices circulated by the No
Bank from time to time/RBI's/Wilful defaulters' list/Caution List
of ECGC
2. If any one of them connected in the past with any NPA/OTS/ No
Compromise/unscrupulous defaulters
3. If any of them, related to Directors/Senior Officers of PNB: No
4. i) Management Change since last sanction, if any Not applicable
5. i) Report on due diligence carried out in terms of L&A Yes
Circular No. 170 dated 25.10.2008 and comments on
adverse features, if any
ii) Confirmation that CRs have been compiled/reviewed as
per extant guidelines Yes
iii) Confirmation that CRs have been drawn from CIBIL Yes and no adverse
60 | P a g e

61. Database and comments on adverse features, if any: feature is observed.
f) Proposed Share Holding Pattern:
Name of the Promoters/Major Share Amt. in Rs. Crores. % Holding
holders
Promoters Holding 156.32 74%
FIs/ Mutual Funds/UTI/Banks/FIIs-IFCI 54.93 26%
NRI’s/OCBs 0.00 ----
Public 0.00 ----
Total 211.25 100%
g) Whether Shares pledged to any Bank/FI/others No
h) Brief history:
XYZ Energy Private Ltd (XYZ EPL) is a Special Purpose Vehicle (SPV) established by
the XYZ Group to implement a 225 MW combined cycle gas based power plant (CCPP).
The ‘XYZ Group’ is an emerging player in the Power Sector promoted by Mr. ABC, a first
generation entrepreneur with more than 22 years of experience in the power sector. Mr.
ABC is former Joint Managing Director of the Lanco Group and has been instrumental in
building up the power portfolio of more than 12,000 MW for the Lanco Group. Except that
he was former JMD of Lanco group, Lanco has no roll in this company and therefore it is
not forming part of the Lanco group
The XYZ Group is conceptualized as an integrated power developer and operator with
capabilities across feasibility studies, implementation and operation of power projects.
The group has a separate entity for undertaking independent Engineering, Procurement
and Construction (EPC) activities for Power projects. Currently the group is actively
engaged in development of several power projects through separate SPVs
 Hydro Power projects of various sizes ranging from 5 MW to 25 MW with an
aggregate capacity of 105 MW in Himachal Pradesh and Uttarakhand
 100 MW wind farm in Ratlam in the state of Madhya Pradesh
 225 MW of Gas based power project under development
XYZ Group (through its SPV CDE private Ltd.) has implemented a 100% export oriented
10,000 tonne per annum (tpa) capacity Fruit/Pulp processing plant in Chittoor District,
61 | P a g e

62. Andhra Pradesh with a capital outlay of Rs.16 Cr and with an annual turnover of Rs.40
Cr. CDE plans to expand its activities by forward and backward integrations over the next
2 to 3 years. The group also has plans to venture into the business of power trading,
power transmission and distribution of gas.
4.A Facilities Recommended :
(Rs. in Crore)
Nature Existing Proposed Secured/Unsecured
along with the basis
Fund Based thereof
Fund Based Ceiling NA --
Non Fund Based
Non Fund Based Ceiling NA --
Term Loan NA 75.00 Secured
TOTAL COMMITMENT NA 75.00
4.B Our Commitment and Maximum Permissible Exposure Norms
Existing Proposed %age of Bank’s Capital Exposure
Funds as on 31.03.2010 Norms in %age
Company Nil 75.00 0.28% 15%
Group Nil 75.00 0.28% 15%
4. C Short Term Loans sanctioned by PNB in last 12 months, if any Nil (New
Account)
4.D Details of facilities provided outside consortium including exposure on
account
of derivatives, if any – Not applicable
5. A Facilities from PNB Subsidiaries/Exposure by way of investment in Equity/
Debentures/Derivatives/Foreign Exchange etc. : Nil
5.B Term Loans from other Banks/Financial Institutions/Other Institutions –
(including Lease, ICDs, Corporate Loans, Debentures etc.)
62 | P a g e

63. (Rs. In Crore)
Name of the Bank/FI Facility Balance Overdue Rate of
Sanctioned O/s , Interest
Axis Bank – Sanctioned 300* 0.00 NA 12%
State Bank of Patiala – Sanctioned 100 0.00 NA 12%
State Bank of Mysore – Sanctioned 50 0.00 NA 12%
IFCI - Sanctioned 175* 0.00 NA 12%
* IFCI & Axis bank have underwritten as well as are syndicating the debt requirement
for Rs.333.75 cr and Rs.300 crore respectively with the right to hold on Minimum
Rs.100.00 cr each. Axis bank has sanctioned TL Rs.300 crore including TL share of
Canara Bank. Similarly IFCI has sanctioned TL of Rs.175.00 crore including our
(PNB) proposed share of TL i.e. Rs.75.00 crore with proposal to down sell part share
to CB and PNB as above.
5. C Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of
such rating. –
No risk rating has been done by external agency as project is under implementation.
5. D Details of Working Capital Limits from the Consortium/Multiple Banking – NA.
6. Details of Group /Allied/Associate firms and the facilities sanctioned to them
along with conduct of these accounts with our Bank/ other Banks and comments
on adverse indicators, if any:
As per Appendix – II
7.A(i) Financial Position of the Company as on close of financial year for last three
years and estimated for last year and projected for the next year
(Rs. in Crore)
As at As at Previous year (31.3.10) Projections
31.03.08 31.03.09 for the
current year
Audited Audited Estimated Audited
63 | P a g e

64. (31.03.11)
Gross Sales - -
- Domestic - -
- Export - -
% growth - -
Net sales (net of - -
excise duty etc.)
Other Income - -
Operating Profit/Loss - -
Profit before tax - -
Profit after tax - -
Depreciation/ - -
Amortization of
expenses
Cash profit/ (Loss) - -
EBIDTA/PBIDTA - -
Paid up capital 0.01 163.00
Reserves and - -
Surplus excluding
revaluation reserves
Misc. expenditure not 0.47 -
written off
Accumulated losses - -
Deferred Tax Liability/ - -
Asset
a) Tangible Net Worth 32.09* 163.00
b) Investment in allied
concerns & amount of
cross holdings
64 | P a g e

65. c) Net owned funds/ 0.00 0.00
Adjusted TNW
32.09 163.00
Share application 32.55 0.00
money
Total Borrowings - 475.00
Secured - 475.00
Unsecured - -
Investments - -
Total Assets 32.56 638.00
Out of which net fixed 4.53 638.00
assets
Net Working Capital 28.03
Current Ratio -
Debt Equity Ratio - -
Term liability/ - -
Adjusted TNW
TOL/Adjusted TNW - -
Operating Profit/Sales - -
Long Term Sources 32.56 638.00
Long Term Uses 4.53 638.00
Surplus/ Deficit 28.03 0.00
Short Term Sources 0.00 0.00
Short Term Uses 28.03 0.00
Surplus/ Deficit ** (28.03) 0.00
*Including share application money.
65 | P a g e

66. 7A (ii) Key Financials upto last quarter
The company is not a listed company.
7B. Brief discussion on Financial Indicators
The company is in the initial stage of implementing the project and therefore no
worthwhile analysis of past financial can be done. Present financials are discussed
elsewhere.
7.C Capital Market Perception – The company is not listed on any stock exchange.
7.D Details of investment in Shares, Debentures, Units or investment of funds
outside the business etc. (Along with comments in case of increase): None
7.E Details of Liabilities not accounted for/Contingent liabilities: None
Details of derivatives transactions – None so far.
7.F Position of assessment of income tax/sales tax/wealth tax of the borrowing
concern/partners/proprietor/promoter directors/guarantors:
The ITR’s of Co. XYZ EPL and Promoters/guarantors- Mr. ABC, Mrs. GHI and XYZ
IPL have been filed for A.Y. 2010-11
7.G Information on litigation initiated by other banks/FIs against the borrower as per
latest Audited Balance Sheet, if any: Nil
7.H Overall likely impact of (7.C to 7.G) on the financial position of the borrowing
unit –
The company is presently implementing the project and in view of nil information, no
impact is envisaged.
8. SECURITY
A. Primary
1. For working capital limits: NA
2. For Term Loan:
The Senior Rupee Debt together with interest, costs, expenses and all other monies
whatsoever shall be secured on first pari passu basis with other lenders by:
66 | P a g e

67. a) A first mortgage and charge in favour of the Lenders in a form satisfactory to the
Lenders of all the Company's immovable properties (including the immovable
properties pertaining to the Project), present and future;
b) A first charge by way of hypothecation in favour of the Lenders of all the Company's
movables, including movable plant and machinery, machinery spares, tools and
accessories, furniture, fixtures, vehicles and all other movable assets, present and
future;
c) A first charge on Company’s book debts, operating cash flows, receivables,
commissions, revenues of whatsoever nature and wherever arising, present and
future,
d) A first charge on Company’s all intangibles including but not limited to goodwill,
uncalled capital, present and future;
e) A first charge by way of assignment or creation of charge in favour of the Lenders of (i)
all the right, title, interest, benefits, claims and demands whatsoever of the Company
in the Project Documents, duly acknowledged and consented to by the relevant
counter-parties to such Project Documents, all as amended, varied or supplemented
from time to time; (ii) all the rights, title, interest, benefits, claims and demands
whatsoever of the Company in the Clearances; (iii) all the right title, interest, benefits,
claims and demands whatsoever of the Company in any letter of credit, guarantee,
performance bond provided by any party to the Project Documents, (iv) all Insurance
Contracts/Insurance Proceeds; and (v) any Payment Security Mechanism provided
under the sale arrangements / PPA;
f) A first charge on the Trust and Retention Account, Debt Service Reserve Account and
other reserves and any other bank accounts of the Company, wherever maintained.
g) Pledge of shares representing 51% of the total paid up equity share capital of the
company held by the Sponsors subject to Banking Regulation Act. The shares to be
pledged shall be free from any restrictive covenants/lien or other encumbrance under
any contract/arrangement including shareholder agreement/joint venture agreement/
financing arrangement with regard to pledge/transfer of the shares including transfer
upon enforcement of the pledge.
h) Security Interest set out above from (a) to (g) shall rank pari-passu amongst all the
senior lenders of the Project. As relevant, Security Interest set out from (c) to (d)
above shall rank pari passu with the security interest created in favour of working
capital lenders.
B. Collateral (Information in respect of mortgage of IP to be given only in the
following format: Nil
i) Hypothecation/ Mortgage of Block Assets Immovable Properties
ii) First/Second/Third charge/Pari passu charge
iii) Personal Guarantee
(Rs. In crores)
S Name of Relationsh Net Worth Immovable Date of CR
. Guarantor ip with property
N
67 | P a g e

68. o borrower Pre Present Prev Present Prev Present
v . .
As at As at
31.07.10 31.07.10
1 Promoter NA 14.39 NA 6.88 NA 22.11.10
Sh. ABC
.
2 Promoter NA 2.87 NA 2.76 NA 22.11.10
Smt. GHI
.
Corporate Guarantee (Rs. In crores)
S Name of Relationship Net Worth Immovable Date of CR
No Guarantor with property
borrower
Prev. Present Prev. Present Prev. Present
As at As at
31.03.10 31.03.10
1. XYZ IPL Promoter NA 0.80 NA Nil NA 22.11.10
iv) Comments on changes, if any: NA
v) Status of creation of charge: Not applicable
8. C Security Margin (Fixed Asset Coverage Ratio – for term loans)
Existing Proposed
Nature Book value FACR Book Value FACR on project
completion
Primary NA 731.34 1.17
(hard cost)
Collateral NA
Total 731.34 1.17
9. Position of Account: New Account
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69. 10. A Conduct of the Account including details of terms & conditions not
complied with: New Account
10.B i) Value of the Account – New Account
10.B ii) Deposits including Escrow/TRA account with details – Nil
10.C Review of the Account and Summary of serious irregularities pointed out by
Bank’s Inspectors, Concurrent Auditors, Credit Audit & Review Division (CA&RD),
RBI Inspectors, Statutory Auditors, observations of Stock Audit Report, Comment
on Preventive Monitoring Score Trends, (and status of rectification of these
irregularities)
None – new account
10.D(i) CONFIRMATION
1. Compliance of last sanctioned terms NA
2. Security documents are valid/duly vetted/enforceable NA
3. Proper charge on securities created NA
4. Confirm that company/directors are not under bank/RBI/ECGC/CIBIL Yes
defaulters/caution list
5. Confirm that payment of statutory liabilities is not in arrears Yes
6. Confirm that no litigation against/by the company is pending Yes
7. Corporate governance practices are being followed as per Auditor’s NA
report
8. Confirm that no deviations are made from usual norms/policy guidelines Yes
9. Confirm that Exposure is within bank’s internal ceilings/RBI prudential Yes
norms
10. D (ii) AUDIT/INSPECTION/MEETINGS – NA as it is a new relationship
10. E In case of audit conducted by RBI – Whether commented/special mentioned
account – NA as it is a new relationship
PART – II
69 | P a g e

70. 11.A (i) Industry Rating as per RMD – Marginally Favourable as per RMD L & A Cir No.
133/10 dated 11.12.2010.
A.(ii) Detailed Industry Scenario and Comments on management, production and
marketing as well as Borrowers' diversification, expansion, modernisation
programme
As per Appendix IV
12. Present Proposal:
This proposal is for sanction of term loan of Rs.75.00 crores to part finance 225 MW gas
based Combined Cycle thermal Power Project (CCPP) near Kaikhera village, Kashipur,
Uddhamsingh District in the State of Uttarakhand. The project is being implemented at a
cost of Rs.845.00 crore, to be funded term debt [75%] of Rs.633.75 crore and equity of
Rs.211.25 crore [25%].
In a combined cycle power plant (CCPP) a gas turbine generator generates electricity
and the waste heat is used to make steam to generate additional electricity via a steam
turbine; this last step enhances the efficiency of electricity generation. By combining both
gas and steam cycles, high input temperatures and low output temperatures can be
achieved.
The NBG in its meeting held on 05.10.2010 had given in principle approval for term loan
of Rs.75 crore to the company @ BR+3.50%+TP presently 13.00% and upfront fee of
0.25%
The promoters have already infused their share of the equity besides commitment from
IFCI Ltd for the remaining balance. Sh. ABC, the promoter director and his team of
professionals sourced from Lanco Group have sufficient experience in setting up and
running of thermal power station with their past experience of having worked with Lanco
Group in similar functions and capacities. Keeping in view the above present proposal is
for consideration of term loan facility of Rs.75 crore.
a) Justification for working capital sanction – Not applicable
1. Justification for Fund based working capital limits proposed: NA
b) Justification for Non Fund based limits: NA
c) Justification for term loan/DPG
70 | P a g e

71. (i) Purpose: To Finance setting up of Combined Cycle Gas based Thermal
Power Plant for power generation
1. A. Appraising agency: The DPR of the project is prepared by
TATA Consultancy Engineers Limited.
B. Whether vetted by any Technical Officer/ Other Official of Bank
IFCI has vetted the project financials and other technical aspects and has
prepared Information Memorandum (IM) found the project technically
feasible and and financially viable.
As the IFCI has vetted the project financials and technical aspects and IFCI
is recognised as appraising agency, no seprate vetting is done by our bank.
Besides that DPR is prepared by Tata’s & loan is approved by Axis bank.
1. Summary of cost of project and means of finance
PROJECT COST
The total project cost has been estimated at Rs.845 crore. The break-up of
the project cost is given below:
(Rs. crore)
Sr Particulars Amount % of
A Land and Site Development 10.00 Total 1.2%
Cost
B EPC Works 678.00 80.2%
C Non EPC Works 20.00 2.4%
D Pre-operative Expenses 23.74 2.8%
Sub-total (Hard Cost) 731.74 88.9%
E Physical Contingency (2.7% of Hard 19.65 2.3%
F Cost)
Financing Expenses (1.2% of Hard 10.14 1.2%
Cost)
Sub-total (Overheads) 29.79 3.5%
Sub-total (Hard Cost + Overheads) 761.53 90.1%
G IDC 72.65 8.6%
H Margin Money for Working Capital 10.82 1.3%
TOTAL PROJECT COST 845.00 100.00%
(A+B+C+D+E+F+G+H)
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72. MEANS OF FINANCE
(Rs in Crores)
Source Amount %age
Equity/Promoters
contribution 211.25 25%
Term Debt 633.75 75%
Total 845.00 100%
It is stipulated that entire equity is tied up before disbursement.
2. Sources of Promoters’ Contribution and the time schedule as to when
the funds will be brought.
The promoters have already infused funds aggregating Rs.118.31 (as on
31st July 2010) (sponsor equity contribution) on the project. As already
mentioned balance equity of Rs. 92.94 crores is to be tied up as under:
(Rs. In Crores)
Name Amount Amount to Total
Already be bought
bought in
Pvt. Promoters 118.31 38.01 156.32
IFCI -- 54.93* 54.93*
Total 118.31 92.94 211.25
*of which Rs.40.00 crore was inducted in Aug’2010.
3. Status of tie-up of loans:
Total requirement of term loan for the project is Rs. 633.75 crores. IFCI &
Axis bank have underwritten as well as are syndicating the debt
requirement for Rs.333.75 cr and Rs.300 crore respectively with the right to
hold on Minimum Rs.100.00 cr each. The company has got sanction from
Axis Bank for Rs.300 crore, State Bank of Patiala for Rs.100 crore, State
Bank of Mysore for Rs.50 crore, IFCI Limited for Rs.100 crore. After
receiving sanction from our bank, financial closure is expected to be
72 | P a g e

73. achieved.
4. Brief explanation for each major individual item of cost of Project with
present status along with comments on the reasonableness/
competitiveness
Land and Site Development
SEPL has obtained the Government approval for the acquisition of 46.75
acres of land in village Kaikhera near Kashipur town and has completed the
acquisition of about 36.92 acres of land, sufficient for installation of 225 MW
CCPP and has spent a total of Rs.8.13 crore towards land and site
development as on 31st July 2010. Notification for industrial use of land:
Issued vide notification dated 04 November 2009 by Industrial
Development Department, Govt. of Uttarakhand.
EPC Works
The cost estimate for EPC Works is Rs.678.00 crore as per contracts
executed with the EPC contractor, XYZ Infrastructure Private Limited
(SIPL).. A detailed breakup of the major packages executed with SIPL viz.
Civil and Construction Works, Offshore and Onshore Supply and Services
is given in annexure. SIPL has further sub-contracted the work to various
reputed vendors such as ABB India Ltd., GEI India Ltd., T&R India Ltd., and
Areva, France, who are well experienced in executing similar projects.
Non EPC Works
Non EPC works include infrastructure works as well as administrative
building, workshop, store, canteen, compound wall etc. The breakup of cost
of Non EPC works is given in annexure:
Pre-operative Expenses
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74. Pre-operative expenses of Rs.23.74 crore comprise energy and fuel
charges for trial runs, insurance, etc. during commissioning of the station
and various overheads viz. salaries & wages, travel, bank charges, legal
costs, etc. A breakup of Pre-operative expenses is given in annexure:
Contingency
Provision for contingencies has been considered equivalent to 2.7% of
Hard Costs which include cost of land and site development, EPC works,
Non EPC works and pre-operative expenses.
Interest during Construction
Interest during Construction for the implementation period of 18 months has
been computed based on the proposed phasing as per company’s
estimates of expenditure & debt drawdown schedule at interest rate of 12%
p.a.
Margin Money for Working Capital
Working capital margin requirement of the Project has been estimated
during the first year of operation. The margin money requirement
represents 25% of the total working capital requirement for the Project
GTG(Gas Turbine Generator) Contract
A brief summary of EPC Contract for GTG signed with GE Energy, France
is as given below:
Zero Date 08-Mar-10
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75. Supply of two (2) new model PG 6111 FA
Scope of work
Turbines with its associated Generators
Plant &
Gas Turbine Generator (2 nos.)
Equipment
Value of
Euro 34,200,000
Contract
Guaranteed Performance Liquidated
Parameters
Level Damages
76.111 MW 410 EURO per each KW below the
Output
per GTG guaranteed output
10066 20,000 EURO per each KJ/Kwh
Heat Rate
KJ/Kwh above the guaranteed heat Rate
Exhaust Euro 1,03,000 per each Deg C
596.6
Temperature below the exhaust temperature
Euro 80,000 per each GJ/ hr
Exhaust Energy 468.1GJ/ hr below the guaranteed exhaust
energy
STG(Steam Turbine Generator) Contract
A brief summary of EPC Contract for STG signed with HTC, China is as
given below:
Contract Date 19-May-2010
Name Hangzhou Steam Turbine Co. Ltd
357, Shi Qiao Road, Hangzhou, People Republic
Address
of China
Design, Manufacture, Test, Deliver 1X 75MW
Scope
Steam Turbine Generator (STG)
Value US 5,100,000
Effective Date 8-May-2010
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76. Taxes & Duties Purchaser's Account
Delivery 14 months
Guaranteed Performance Liquidated
Parameters
Level Damages
USD 2600 for every 1 KW shortfall
Steam Turbine
72 MW in power output from the guaranteed
Output
value
(HRSG) Heat Recovery Steam Generator Contract
A brief summary of EPC Contract for HRSG signed with M/s Greens Power
Equipment (China) Co. Ltd is as given below.
Contract Date 25-May-2010
Name Greens Power Equipment (China) Co. Ltd
17F, Shanghai Overseas Chinese Mansion, No.
Address 129, Yan An Road (West), Shangai - 200 040,
China
Design, Manufacture, Test, Deliver two numbers
Unfired Dual pressure type Natural Circulation
Scope
Horizontal Gas Flow Heat Recovery Steam
Generator (HRSG)
Value USD 7,400,000
Guaranteed Performance Liquidated
Parameters
Level Damages
Steam output 296 USD for every kg subject to
HP/ LP max 10% of contract value
All these contacts to be got vetted by Local Legal Council(LLC), who should
confirm in writing that they are in order & binding on the suppliers adequately.
1. Comments on all major technical aspects like locational advantage,
Technology/manufacturing process, power, man power, utilities,
76 | P a g e

77. transportation, etc.
Locational advantage:
The project site is located about 6 km from Kashipur town at Udham Singh
Nagar District in Uttarakhand state. The nearest Highway is NH-74 which is
about 6 km from project site. The nearest railway station is at Kashipur.
The proposed site has been selected being suitable on following counts:
1. Availability of adequate habitation-free land. No forest land is
involved.
2. Land being almost flat would entail lower land development work.
3. Adequate availability of ground water to run the proposed power
plant.
4. As the location of the selected site is close the alignment of GAIL’s
gas supply route, gas transmission charges are minimised.
11.1.1.1 FUEL (Gas Supply) ARRANGEMENT
EGoM in its meeting on January 8, 2009 has decided that firm allocation should be made
to power projects in the pipeline as and when they are ready to commence production.
Priority is also given to projects in advanced state of execution located in power deficit
states which do not have access to other sources of fossil fuels.
The project is in the priority list of Ministry of Petroleum and Natural Gas (MPNG) for
allocation of gas from D6 field of KG Basin for power projects to be commissioned in the
XI Plan. SEPL is the only gas power project that has reached an advanced stage of
execution and is expected to be commissioned in the XI Plan. Considering the above, it is
SEPL will be allocated requisite gas from KG D6 gas field.
As an alternative arrangement and keeping in view potential for future expansion, SEPL
has signed a term sheet with GAIL India Ltd. for supplying gas for 225 MW CCPP. The
Gas Supply Agreement and Gas Transportation Agreement are expected to be executed
with GAIL India Ltd for a period of 8 years.
Key provisions of the Gas Supply Term sheet between GAIL and SEPL are as follows:
GAIL Term Sheet
Particulars Terms & Conditions
Tenor of contract 8 years
77 | P a g e

78. US $ 5.5/MMBTU on NCV basis till 01.08.2010. The price in US
$/MMBTU shall be converted to India Rupees per 1000 SCM at
Gas Price
NCV of 10,000 kcal/SCM by multiplying with the average
exchange rate and the constant "39.68254".
Rs. 1069/1000 SCM linked to 8600 kcal (NCV). The
Transmission Charges
transmission charges shall be escalated by 3% annually.
Rs. 8.82/MMBTU. The marketing margin shall be escalated @
Marketing Margin
5% per annum
The Daily Contracted Quantity of gas during the Term will be
0.6 MMSCMD. Provided further Seller agrees to supply an
Quantity
additional quantity of 0.3 MMSCMD on Reasonable Endeavour
basis subject to mutually agreed terms and conditions.
The gas is available from Vasai East field of ONGC and shall be
Source and Delivery
transported and delivered at Kashipur.
11.1.1.2 GAS TRANSMISSION ARRANGEMENTS
GAIL India Ltd is laying a 12” NB x 105 km pipeline from Karanpur to Kashipur IGL Tap-
off point via Moradabad in Phase-I for transporting of 2.5mmscmd Natural Gas/R-LNG
for various consumers in Moradabad, Kashipur and other locations along the pipeline.
This shall be an extension to the existing HBJ gas pipeline network.
The proposed gas pipeline of GAIL is planned from Karanpur to Rudrapur via Moradabad
and Kashipur. Laying and Construction of the proposed pipeline shall be completed in 2
phases. Details of Construction activity shall be as follows:-
Phase 1: Karanpur-Moradabad-Kashipur (105km of pipeline)
Phase 2: Kashipur-Rudrapur
GAIL has floated the tender for the work of Phase 1 of the pipeline through the Open
International Competitive Bidding in the month of February 2010 with a plan to complete
the pipeline within 7-8 months which is well before the commissioning of the Project.
SEPL intends to sign a GTA with GAIL.
We are stipulating that before disbursement of our loan, Gas supply and transmission
agreement as proposed above be got executed and got vetted from LLC.
11.1 POWER EVACUATION
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79. SEPL has approached Power Transmission Corporation of Uttarakhand Ltd. (PTCUL) for
granting open access and evacuation of power. Power generated from the proposed
power plant will be stepped up to 220 kV and will be linked to PTCUL’s proposed 220 kV
line of Mahuakheda ganj and Kashipur through Loop in Loop Out (LILO) and same will
be fed to PGCIL grid at Bareilly. PTCUL has already commenced work on the above
proposed transmission line and the same is expected to be on stream by December
2010.
The company also proposes to apply to Power Grid Corporation of India Ltd. (PGCIL) for
long term open access.
11.2 OFF-TAKE AGREEMENT
a) Tata Power Trading Company Limited: SEPL has entered into MoU with Tata Power Trading
Company Limited (TPTCL) for sale of 100 MW of power for a period of 5 years. The Company is in the
process of finalising a PPA with a tariff of Rs 5.50 per kWh. The salient features of the MoU are as stated
below:
MoU between TPTCL and SEPL
Particulars Terms & Conditions
Tenor of contract 5 years from the COD of the plant
Annual Average Rs. 5.50 per kWh realization to SEPL at the Delivery point which shall
Base Tariff be 220 KV metering point of power plant switchyard
(AABT)
 2% of the sale price, if realisation to SEPL is less than Rs. 5.50
per kWh. However if the AABT is <= Rs. 3.00/unit, the trading
Trading Margin margin shall be 4 paisa/unit.
 3% of sale price, if the realisation to SEPL is >=Rs. 5.50/unit
 TPTCL shall be entitled to share the upside (>Rs. 5.50/unit +
margin)
Adverse Market During AMS, TPTCL shall consult SEPL and sell power in market/power
Situation (AMS) exchanges only after obtaining written consent from SEPL.
The upside shall be shared in the ratio of 90:10 i.e. 90 per cent to
Upside
SEPL and 10 per cent to TPTCL
TPTCL and SEPL have agreed that there shall be no liabilities on either
Liability
side on account of deficit in supply or deficit off-take of power
Merchant Power: The balance 125 MW of power is proposed to be sold as merchant power on short
term /or medium term basis.
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80. We are stipulating that before disbursement of our loan, MoU/PPA with TPTCL, as
proposed above, be got executed and got vetted from LLC.
Site Conditions:
Topography
The terrain of the proposed plant site is generally flat at an elevation of 221 m above Moderate
Sea Level. The land is suitable to locate major heavy structures and buildings. There are no
settlements/habitation in the proposed plant area.
Seismology
The power plant is located in seismic zone – IV as per IS: 1893-2002. The structures are
designed to take care of seismicity condition of the area.
Geotechnical Specifications
Geotechnical investigation at the proposed plant site has been carried out by M/s. CENGRS
Geotechnica Pvt. Ltd, New Delhi. Expected load bearing capacity of the soil is about 15 tons/m2
Power Generation Process
In a combined cycle power plant (CCPP) a gas turbine generator generates electricity and the
waste heat is used to make steam to generate additional electricity via a steam turbine; this last
step enhances the efficiency of electricity generation. By combining both gas and steam cycles,
high input temperatures and low output temperatures can be achieved. The efficiency of the cycles
add, because they are powered by the same fuel source
Human Resources:
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81. The proposed organization set up required for Operation and Maintenance of the plant has been
estimated at 52 persons. Adequate experienced manpower to monitor the activities during the
construction of the project is available.
2. Summary of profitability, Break-Even, DSCR and IRR with comments
thereon including Assumptions underlying profitability projections:
Projected Profitability Statement (Rs. In crores)
Particulars 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Energy sale to 114 273 273 273 273 279 284 290 296 302 308 314 320 327 333
trader
Merchant Power 133 320 320 320 320 327 333 340 347 354 361 368 375 383 390
sale
Total Revenue 247 594 594 594 594 605 618 630 643 655 668 682 695 709 724
Primary Fuel 131 324 334 344 355 366 377 388 400 412 425 438 451 465 479
Cost
O&M Expenses 16 39 42 44 47 50 53 56 59 63 67 71 75 79 84
Total Expenses 147 364 376 389 402 416 430 444 459 475 492 509 526 544 563
PBDIT 101 230 218 205 192 190 188 186 183 180 177 173 169 165 160
EBITDA margin% 40.7 38.7 36.7 34.5 32.3 31.4 30.4 29.5 28.5 27.5 26.5 25.4 24.3 23.3 22.1
Depreciation 21 42 42 42 42 42 42 42 42 42 42 42 42 42 42
Interest on TL 19 74 66 57 48 39 30 21 12 3 0 0 0 0 0
Interest on WCL 2 5 5 5 5 6 6 6 6 6 6 6 7 7 7
Profit before tax 59 108 104 101 96 103 110 117 123 129 129 125 121 116 111
Current Tax 12 22 21 20 19 21 22 23 24 26 26 25 24 23 22
Profit after tax 47 87 84 81 77 83 88 93 98 103 103 100 97 93 89
PAT margin % 19.0 14.6 14.1 13.6 13.0 13.7 14.3 14.8 15.3 15.7 15.4 14.7 13.9 13.1 12.3
Projected Balance Sheet
(Rs. In crores)
Particulars 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Equity Share 211 211 211 211 211 211 211 211 211 211 211 211 211 211 211
Capital
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82. Reserves & Surplus 47 134 217 298 375 458 546 640 738 841 944 1,044 1,141 1,234 1,323
Tangible Net Worth 258 345 428 509 586 669 757 851 949 1,052 1,155 1,255 1,352 1,445 1,534
Secured Loans 634 578 503 429 354 280 205 130 56 -0 -0 -0 -0 -0 -0
WC Loans 32 44 44 44 45 46 47 48 50 51 53 54 56 57 59
Total liabilities 924 966 976 982 985 995 1,010 1,030 1,055 1,103 1,208 1,309 1,408 1,502 1,593
Land 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Net Fixed Assets 803 761 719 678 636 594 552 510 468 426 385 343 301 259 217
Working Capital 43 58 59 59 60 61 63 65 66 68 70 72 74 76 79
Cash & Bank 25 68 121 173 222 276 336 400 470 599 743 885 1,023 1,157 1,288
Balance
DSRA 43 69 67 62 58 53 49 45 40 0 0 0 0 0 0
Total assets 924 966 976 982 985 995 1,010 1,030 1,055 1,103 1,208 1,309 1,408 1,502 1,593
Projected Cash Flow Statement
(Rs. In crores)
Particulars 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Profit after tax 47 87 84 81 77 83 88 93 98 103 103 100 97 93 89
Add: Interest
21 80 71 62 53 45 36 27 18 9 6 6 7 7 7
Expense
Add: Depreciation 21 42 42 42 42 42 42 42 42 42 42 42 42 42 42
Less: Changes in
-32 -15 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2
WC
Cash from
Operating 57 193 196 184 172 168 164 161 157 153 149 146 143 140 136
Activities
Increase in Capital
-156 - - - - - - - - - - - - - -
Expenditure
Cash from
Investing -156 - - - - - - - - - - - - - -
Activities
Increase in Share
48 - - - - - - - - - - - - - -
Capital
Interest Expense -72 -80 -71 -62 -53 -45 -36 -27 -18 -9 -6 -6 -7 -7 -7
Change in DSRA -43 -26 2 4 4 4 4 4 4 40 0 0 0 0 0
Add/(Repay)
158 -56 -75 -75 -75 -75 -75 -75 -75 -56 0 0 0 0 0
Secured Loans
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83. Add/(Repay) Wkg.
32 11 0 0 0 1 1 1 1 1 1 1 2 2 2
Capital Loans
Cash from
Financing 124 -151 -143 -132 -123 -114 -105 -96 -87 -24 -5 -5 -5 -5 -5
Activities
Net Cash
25 43 53 52 49 54 60 65 70 129 144 141 138 134 130
Generation
Opening Balance 0 25 68 121 173 222 276 336 400 470 599 743 885 1,023 1,157
Addition 25 43 53 52 49 54 60 65 70 129 144 141 138 134 130
Closing Balance 25 68 121 173 222 276 336 400 470 599 743 885 1,023 1,157 1,288
DSCR
Particulars Projections
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Principal
0.0 55.9 74.6 74.6 74.6 74.6 74.6 74.6 74.6 55.9
Repayment
Interest on TL 19.2 74.4 66.0 57.0 48.1 39.1 30.2 21.2 12.3 3.4
Total Debt
19.2 130.3 140.5 131.6 122.6 113.7 104.8 95.8 86.9 59.3
Servicing
PBDIT 100.7 229.8 217.6 204.9 191.7 190.0 187.9 185.6 183.0 180.1
Less: WC
1.9 5.2 5.3 5.3 5.4 5.5 5.7 5.8 6.0 6.1
Interest
Less: Taxation 11.7 21.6 20.8 20.1 19.2 20.6 22.0 23.3 24.5 25.7
Net cash 87.1 203.0 191.5 179.5 167.1 163.8 160.3 156.6 152.6 148.3
DSCR 4.52 1.56 1.36 1.36 1.36 1.44 1.53 1.63 1.76 2.50
Average DSCR 1.60
Brief of the financials are as under:-
Company as a whole
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84. Debt-Equity Ratio 75 : 25
Average DSCR 1.60
Minimum DSCR 1.36
Internal Rate of Return (Pre Tax) 19.78%
Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix
VII
Comments on Revenue Assumptions:
The major assumptions are tabulated below:
Project Installed Capacity 225 MW
Plant Load Factor 80%
Station Heat Rate 1660.5 kcal/kWh
Gross Generation 1577 MU
Auxiliary Energy Consumption 2.5%
Net Generation 1537 MU
Capital Debt 75%
Structure
Equity 25%
Interest Rate Interest rate on Long Term Debt 12%
Interest rate on Working Capital Loan 12%
Operations Landed Fuel cost 12.02 Rs./SCM
Annual Escalation (6th year onwards) 3%
Off-take TPTCL 100 MW
Selling Price Rs. 4.00 /unit
Annual Escalation (6th year onwards) 2%
Merchant Power 125 MW
Selling Price Rs. 3.75 /unit
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85. Annual Escalation (6th year onwards) 2%
Sales:
The revenue for SEPL has been estimated considering sale of energy generated to two
different categories of buyers viz.
1. Tata Power Trading Company Ltd.: Under MoU with TPTCL a tariff of Rs.
5.5/kWh has been indicated for 100 MW. Taking a conservative view on tariffs
based on the long term power demand-supply scenario, a tariff of Rs. 4.0/kWh
(after adjusting for trading margins) has been assumed for the first five years
during the length of the contract with TPTCL. Thereafter, an annual escalation of
2% is built in the tariff.
2. Merchant Power Sale: The balance 125 MW is proposed to be sold under
Merchant sale at a tariff of Rs. 3.75/kWh for the first five years of operation.
Thereafter, an annual escalation of 2% is built in the tariff.
Company should tie up total sale of power on long term basis within six months of
release of TL.
Fuel Cost:
The project is in the priority list of Ministry of Petroleum and Natural Gas (MPNG) for
allocation of gas from D6 field of KG Basin for power projects to be commissioned in the
XI Plan. SEPL is the only gas power project that has reached an advanced stage of
execution and is expected to be commissioned in the XI Plan. Considering the above, it
is SEPL will be allocated requisite gas from KG D6 gas field. The company is executing
gas supply and transmission agreement with GAIL as mentioned in the Gas Supply
arrangement above.
Based on these, SEPL has made the assumption that fuel i.e. gas will reach their site at
the cost: Rs.12.02 /SCM.
ix) Detailed Sensitivity Analysis:
The sensitivity analysis has been carried out for various vital parameters of
the project such as tariff, PLF and long term interest rate to ascertain the
average DSCR and minimum DSCR.
Sensitivity DSCR Project IRR
Average Minimum
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86. Base Case 1.60 1.36 19.78%
Change in Tariff
Tariffs increase by Rs0.25/unit 1.90 1.58 23.64%
Tariffs drop by Rs 0.25/unit 1.31 1.11 15.46%
Change in PLF
PLF at 90% 1.83 1.54 22.79%
PLF at 70% 1.37 1.17 16.60%
Change in Interest Rate
Interest rate >50 bps 1.58 1.34 19.93%
Interest rate <50 bps 1.63 1.38 19.66%
Status of various statutory approvals and clearances
Land acquisition (36.92 acres) is complete for the Project. The following
Clearances/ Approvals as per the Indian Environmental Legislations are
applicable to the project:
Clearance from the Divisional Forest Officer: The Company has
obtained clearance from the Divisional Forest Officer for setting up the
power plant.
Water Usage and its availability: The Company has received approval
from Central Ground Water Board for usage of water of 4585 cubic meters
(cum.) per day on permanent basis.
Environmental Clearance: SEPL has obtained Environmental Clearance
from Ministry of Environment and Forest (MoEF), Govt. of India on
09.03.2010.
Consent for Establishment from State Pollution Control Board: SEPL
has received CFE from State Pollution Control Board of Uttarakhand on 10-
06-2010.
Civil Aviation Clearance: NOC has been obtained from Airport Authority
of India (AAI) for chimney height clearance on 21-04-2010.
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87. Notification for industrial use of land: Issued vide notification dated 04
November 2009 by Industrial Development Department, Govt. of
Uttarakhand.
NOC from ASI: Letter of NOC from Archaeological Survey of India on
08.01.2010.
1. Present physical & financial status of project:
Physical Progress:
The progress of work on various critical fronts at the project site as on 31 st
July 2010 is as follows:
Sr Name of Component Quantity Completed
1. Piling GTG- 1 completed and GTG-2 under progress
2. Roads and Drains Stage 1 of plant roads are 90% complete
3. Water Reservoir Excavation has been completed
4. Area Grading 75% complete
5. Workshop Excavation started
6. Construction Power Completed
7. Site Office Completed and functional
8. Store Completed
9. Mechanical Works Fire fighting works started. Structural works are
in progress
10. Electrical Works Plant permanent lighting works in progress
Financial Progress:
As on 31.07.2010, SEPL has infused Rs.118.31 crore which is contributed by
way of share capital (Rs.46.01 crore) and share application money (Rs.72.30
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88. crore). Since than IFCI has also contributed Rs.40.00 crore out of their share for
capital.
2. Implementation schedule
Project site works commenced in April, 2010 while NTP for the EPC contract was May
12, 2010. The COD for the project is September 30, 2011. Indicative timelines for
achievement of key project implementation milestones are as follows:
Sr Description Planned Date Actual/Anticip Status
ated Date
1 EPC Contract Award May 15, 2010 April 30, 2010 Achieved
2 Consent for June 01, 2010 June 10, 2010 Achieved
Establishment
3 Major Package Award Aug 01, 2010 July 1, 2010 Achieved
4 Civil Work Start Date June 10, 2010 June 15, 2010 Achieved
5 Open Cycle Civil Work Nov 30, 2010 Nov 30, 2010 On schedule
Completion
6 Combined Cycle Civil Dec 31, 2010 Dec 31, 2010 On schedule
Work Completion
7 Open Cycle Sept 30, 2011 Sept 30, 2011 On schedule
Commissioning
8 Combined Cycle Dec 31, 2011 Dec 31, 2011 On schedule
Commissioning
9 Project C.O.D Dec 31, 2011 Dec 31, 2011 On schedule
Remarks : As financial closure is yet to be achieved, the schedule is tentative. The actual schedule
with COD will be firmed at the time of documentation/financial closure.
3. Draw Down Schedule Quarter-wise – it will be decided by the lead bank
of the consortium in consultation with the company depending upon the
progress of the project at the time of documentation.
4. Proposed repayment schedule
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89. Scheduled date of Completion of Project December 2011
Commercial Operations Date (COD) 31 December 2011
Implementation period (in months) 18 months
Moratorium (in months) 6 months from CoD
Repayment period in months/quarters/Half year 34 EQI
No. of instalment 34 quarterly
instalments
Starting Date 6 months from CoD
End Date (Last instalment) 01.10.2021
Door to door tenor 10.25 years
The above is tentative and will be finalised at the time of
documentation.
13. Pricing
Facility Existing Proposed Applicable rate
Rate of TL NA BR+3.50+TP i.e. B.R+5.00+TP i.e.
interest 13.00% 14.50%
Upfront Fee NA 0.25% +ST 1.25%+ ST
Other NA As Applicable As Applicable
charges, if
any
1. Justification
The appraising institution IFCI has stipulated ROI of 12%linked to respective BR
of banks and FI. The ROI is attractive considering that this is an infrastructure
project and there is bulk offtake. The ROI is already approved by NBG and CH
has recommended for the same.
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90. 2. ROI/other charges stipulated by other participating banks, if applicable
All lenders will sanction in line with the charges and ROI of appraising institution.
The upfront fee stipulated is 0.25% of loan amount and stands approved by NBG.
Sanction are received from other lenders.
14. Other Issues not discussed elsewhere: NIL
15. Strengths & Weakness with mitigants:
Strengths:
a) Combined cycle gas based power projects have short gestation period in
comparison with coal based or hydro electric power plants. The COD for the
project is Dec 2011 hence allowing quick access to the power deficit markets
b) SEPL is on the priority list of the MPNG for allocation of gas from Reliance KG
Basin on account of the considerable progress in the project and its location in
Uttarakhand which is priority state for gas allocations due to non availability of
other fossil fuels.
c) Gas is the cleanest of all fossil fuels, emits low NO2, SO2 and no particulate
matter. Further CO2 emission is half of a comparable coal based project. SEPL
will also use air cooling technology in order to minimize consumption of water. It
is hence an ecologically harmonious project. On account of ecological reason,
gas based Thermal Power Plants are approved for hilly areas like Uttrakhand.
Weakness:
a) The Government exercising its sovereign right over Gas produced from the KG
Basin has mandated that the gas shall be utilized in accordance with the Gas
Utilization Policy. Accordingly all firm allocations shall be made to power
projects as and when they are ready to commence production.
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91. Mitigants:
IFCI, appraising agency has submitted that the project is in the priority list of
Ministry of Petroleum and Natural Gas (MPNG) for allocation of gas from D6
field of KG Basin for power projects to be commissioned in the XI Plan. As an
alternative arrangement and keeping in view potential of future expansion,
SEPL has signed a term sheet with GAIL for supply of 0.9 mmscmd
(0.6mmscmd on firm basis and 0.3mmscmd on reasonable endeavour basis) of
gas (NCV of 8600 kcal/SCM). Hence, the gas supply risk involved is minimal.
16. Recommendations:
In view of above CH has recommended for sanction of term loan of Rs.75.00 crores on
proposed ROI of BR+2.50%+TP presently 12.00% and on detailed Terms and Conditions
are as per Appendix– I.
CH has certified that the stipulated terms and conditions have been duly discussed with
the borrower.
PART – III
Based on the projections, the company has been rated as ‘PNB BB-‘ with score of
50.35%, under New Project Rating Model- Upto Implementation, signifying ‘Average
Risk’
The other key areas of risk identified along with observations/ suggested mitigants are as
follows:
RISKS MITIGANTS/OBSERVATIONS
1. The cost of the project has been The promoters have already infused funds to
estimated at ` 845 Crs which has the tune of ` 118.31 Crs. ` 54.93 Crs has
been proposed to be funded through been proposed to be infused by IFCI as
Equity of ` 211.25 Crs & Debt funds equity contribution.
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92. of ` 633.75 Crs.
Also, Co. has approached Axis Bank for TL
Any delay in induction of Promoters’ of ` 200 Crs, State Bank of Patiala for ` 100
Contribution & tie-up of debt funds may Crs, State Bank of Mysore for Rs. 50 Crs,
IFCI Ltd. for ` 175 Crs, Canara Bank for ` 50
result in time & cost overruns and may
Crs and our bank for ` 75 Crs.
impact in achieving projected financials.
MCB to monitor and ensure timely induction
of Promoters’ contribution and tie-up of
remaining debt funds for completion of the
project as per schedule within the given cost
estimates. AGM Branch to release the TL
only after financial closure of the
2) Loan Policy : Compliance of policy guidelines for Term Loans above 5 years:
Ceiling on TLs with The term loans with remaining maturity period of above 5 years
remaining maturity shall not exceed 50% of the term deposits with remaining
period of 5 years maturity period of above 5 years after taking into account the
renewal of term deposits as per the past trend, as is being done
for ALM.
Outstanding as on As per the ALM statement of structural liquidity, as on 30.9.2010
30.9.10 deposit with residual maturity over 5 years are to the tune of
Rs.59335.59 crore and term loans with residual maturity of over 5
years are Rs.22319.38 crore, which works out to 37.62% of term
deposits. Thus this stipulation is complied with.
Compliance of DER policy:
Guidelines Status of compliance Deviation
DER for Power-independent DER of the project is 3:1 No deviation. However in
power producing plant is 2.33:1 view of size of the project
However GM (HO) may relax and the experience of the
the same upto 3:1, ED/CMD promoters in this industry,
may relax the same upto 4.00:1 we may relax the DER to
& MC has full powers. 3:1.
3) Industry Exposure as on 31.3.2010
Industry Infrastructure-Power
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93. Outstanding ( Rs. in Crore) 9913.67
% of Gross Credit in the Industry 5.26%
Ceiling in terms of outstanding as per current loan No ceiling stipulated
policy
Amount of NPA in industry 11.85
% to total advances in --------industry 0.05%
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94. 14 Conclusion and Recommendations
• Risk rating: Broadly there are two rating grades:
 Investment grade – with rating B or more
 Non investment grade – with rating below B
These grades are further bifurcated into eight grades already mentioned in the credit risk rating
section.
In the given case, the company has risk rating of B+ with marginally acceptable risk (investment
grade). Hence it can be financed by the bank.
• Debt-Equity Ratio (DER): Ideal DER should be 2:1 except for infrastructure project
having long gestation period or having huge capital investment projects, indicating debt paying
capacity of the company with respect to its long term liability. The company has a DER of 3:1
which can be accepted as project being a long term infrastructure project.
• Debt Service Coverage Ratio (DSCR): The minimum DSCR of borrowing company
should be greater than or equal to 1.25 and the average DSCR of the same should be greater than
or equal to 1.5:1
In the given case, the company has minimum DSCR of 1.36:1, where as its average is 1.60:1,
which indicates that the company is able enough to service its debts. The ratio of 1.60:1 is
indicating that the company is having a margin of safety of 60%.
• Sensitivity Analysis of DSCR: Value of DSCR in sensitivity analysis should never be less
than 1.10. The values of DSCR which are less than 1 are indicating that the company will not be
able to honour its commitment. For this purpose, the bank goes for the credit enhancement i.e.
demanding collateral security, corporate and personal guarantee on behalf of the borrower.
• Current Ratio: This ratio shows the short-term financial position of the business. It
measures the ability of the business to pay its current liabilities. Current ratio as per second
method of lending should be at least 1.33:1.
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95. On the basis of above factors I conclude that the given company is eligible for term loan financing
and working capital demand loan. Hence bank has sanctioned the term loan proposal of Rs. 75
crore .
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96. 15 Limitations of the study
 The data availability is proprietary, not readily shared for dissemination and is highly
confidential.
 Assumptions and projections are based on current market conditions and have not taken into
account the price volatility.
 Financial statements of the proposed project are subject to risks and uncertainties that could
cause actual results to differ materially from those mentioned in the report. The risks and
uncertainties include, but are not limited to, the following:
(i) Changes in Indian laws
(ii) Changes in Indian in global economic conditions
(iii) Changes in government regulations
(iv) Introduction of new technologies
 The staff although are very helpful but are not able to give much of their time due to their
own work constraints.
 The study is being done keeping in mind the policies of the Head Office.
 Due to the ongoing process of globalization and increasing competition, no single model or
method will suffice over a long period of time and constant up gradation will be required.
96 | P a g e

97. 16 Scope for future improvements
 Sensitivity analysis: This should be done on the basis of the Industry average values. For
eg: if the profit margin for an industry is 2% and if the sensitivity base (on parameters like
raw materials, sales etc) is 5 % , then it will give the wrong picture.
And also the price volatility should be taken into account during sensitivity analysis.
 Social cost benefit analysis: In SCBA the focus is on the social cost and benefits of the
project. These tend to differ from the monetary cost and benefits of the project. SCBA
helps in evaluating the individual project within the planning frameworks which spells out
national economic objectives and broad allocation of resources. The social cost is
quantified in terms of employment generation, railways, road, forex etc. It is done by
certain banks like World Bank etc.* (This is more discussed in glossary section)
 Economic rate of return: Some term lending FIs appraise project proposals primarily
from the financial point of view. However, they also scrutinize projects from the larger
social point of view. IDBI introduced a method to calculate a rate of return at which the
costs and benefits of a project, discounted over its life, are equal. ERR differs from the
financial rate of return in that it takes into account the effects of factors such as price
control, subsidies, and tax breaks to compute the actual cost of the project to the economy.
 Partial seasonality: In CMA, the holding levels of inventory should be of monthly
closing average instead of valuing the inventory on the last day of financial year. This will
help in dealing with partial seasonality if any. Hence it will provide more accurate position
of the same.
 Internal Rate of Return: The bank should analyze the internal rate of return (IRR) to
verify the exact financial soundness of the company. IRR should be greater than inflation
rate, cost of debt and cost of equity to the company.
 Comparison with peers: Company‘s operating cycle and other key financials should be
compared with that of competitors and peers in the same industry. This is to check
inefficiency on the part of company if any.
For eg: the borrower company has operating cycle of 5 months but peer companies have
that of 3 months. This shows the inefficiency of the borrower company which can only be
highlighted if we compare it with peers. Similarly Cost comparison should be done with
peers.
 ROCE in consideration: ROCE should be taken into consideration along with the PBT
and Other Income. Timely measurement of ROCE indicates if any diversion of funds from
the project (for which financing has been done) to any other project or company.
It gives a better picture of the profitability of the company and the shareholder‘s share in
profit making.
=
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98. ROCE should always be higher than the rate at which the company borrows; otherwise
any increase in borrowings will reduce shareholder‘s earnings.
 NWC/ Sales Ratio: For working capital assessment, NWC/ Sales ratio can be added.
=
Ideally this ratio should be around 8% - 12%. If this ratio is low, it indicates that the
business is growing too fast without building an adequate cushion in the form of NWC. It
indicates symptom of overtrading and undue reliance on borrowed short term funds.
Falling ratio is indicative of overtrading and serious liquidity problems and it needs to be
investigated.
 PBF vs Sales: Bank should also keep a track of the movement of PBF as the sales
changes.
 Working capital loan financing along with term loan financing: Bank should also
finance working capital requirements of the company if it is lending the term loan to the
same. This is required to monitor the cash flows, operating income etc. on a monthly basis
which is not possible to track in case of term financing only.
If the borrower company does not take working capital loan fund from the same bank, then
the company should maintain an Escrow account with the bank so that the bank can charge
its timely interest on term loan.
 Standardization of rating process: There should be a standard rating process to remove
the subjectivity and different perceptions of the rater (person who does credit rating
process for a borrower company). It will remove the human biasness in the process.
 Personal Guarantee: Personal guarantee does not give any physical asset to the bank. It is
for the moral binding on the part of borrower. Hence, bank should prefer to use this type of
guarantee as this will reduce the default rate on the part of borrower.
 CMA and Real Growth Index: CMA does not give real growth index. So it is better to
compare the quantitative production, capacity utilization to ascertain real growth
productivity rather than sales volume alone as sales growth can only be on account of
inflation during the review period.
 Reduction of tier system for process: Faster dispersion of credit is of paramount
importance. A proposal has to pass through three channels and none touch points, which
lead to delay in the dispersal of credit.
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99. Circle Office
• Officer • Chief Manager
• Manager • Deupty General
• Officer
• Chief Manager Manager
• Manager • General Manager
• Circle Head
Branch Office Head Office
Figure 7: Tier System of Approval of Loans at PNB
Thus there is a need of drastic reduction in these channels for faster decision making. This
will curtail avoidable delays, improved efficiency besides reducing appraisal time as well
as cost.
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100. 17 Glossary
 Borrowing Entity: It is the entity that borrows money. For instance Videocon, Reliance
borrowed money against their share of future production of oil from another company
owned by them as a joint venture.
 Commercial Lenders: Providers of debt both foreign and local.
 Arranging bank: Bank that syndicates loan from various lenders as single bank cannot
provide the entire loan.
 Lead Bank: Coordinator for all banks for credit administration and compliance of
covenants.
 Rating Agency: Provide credit rating services for public debt (CRISIL, ICRA).
 Technical Consultant: Consultants to the projects on technical matters such as energy,
environment etc. Also analyses all technical aspects of the project.
 Credit Enhancement: Improvement of rating through structuring – extra collateral,
guarantees from sponsor, debt service reserve fund etc.
 Escrow A/C: Channeling of funds through a special account with a third party to be
utilized in consultation with the lender.
 Force Majeure: Occurrence of a type of risk outside the control of the participants like
cyclone war etc.
 Loan Amortization/ Loan Tenor: The repayment schedule of loans.
 Pari Passu: A legal term that denotes equality of payment and security for all senior
lenders.
 Loan Agreement: Agreement entered into between the lenders and the project company.
 Cost overruns: Unplanned cost incurred over the budgeted cost.
 Cash Credit (CC) system: Cash credit method of delivery allows drawings by a
borrowing enterprise to the extent of value chargeable assets less margin. This system
dominates the scenario of credit dispensation by Indian banks.
 Consortium System of credit delivery: In consortium lending, several banks pool
together their banking resources and expertise in credit management and provide to a
single borrower with a common appraisal, common documentation and a system of joint
supervision and follow up. The consortium selects a leader which is called lead bank. Lead
bank takes maximum exposure and carries out certain task like appraising the various
aspects of credit proposal, convenes the consortium meeting etc.
 Multiple Banking system: In multiple banking system, a company can arrange multiple
finances through multiple banking arrangements. Under this system every bank has its
own procedures, norms and different sets of documentation which the borrowing company
has to follow. Unlike consortium system of financing there is no lead bank framing
policies and procedures for other banks.
 Syndication of credit: A syndicated loan is one that is provided by a group of lenders and
is structured, arranged, and administered by one or several commercial banks or
investment banks known as arrangers. At the most basic level, arrangers serve the
investment-banking role of raising investor funding for a company in need of credit. The
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101. company pays the arranger a fee for this service, and this fee increases with the complexity
and risk factors of the loan. This is a preferred mode of credit delivery especially when the
amount of credit is large and is ling term in nature. Thus, syndication of credit is most
suitable for long term cross border financing and long gestation period infrastructure
projects.
 Social Cost Benefit Analysis (SCBA) In SCBA the focus is on the social cost and
benefits of the project. These tend to differ from the monetary cost and benefits of the
project. SCBA helps in evaluating the individual project within the planning frameworks
which spells out national economic objectives and broad allocation of resources.
In SCBA the focus is on the social costs and benefits of the project. These often tend to
differ from the monetary costs and benefits of the project. The principal sources of
differences are:
 Market Imperfections
 Externalities
 Taxes and subsidies
 Concern for savings
 Concern for redistribution
 Merit wants
One principal approach for SCBA is UNIDO approach. It provides a comprehensive
framework for SCBA in developing countries. This method of project appraisal involves 5
stages:
1. Calculation of the financial profitability of the project measured at market
prices.
2. Obtaining the net benefit of the project measured in terms of economic
(efficiency) prices.
3. Adjustment for the impact of the project on savings and investment.
4. Adjustment for the impact of the project on income distribution.
5. Adjustment for the impact of the project on merit goods and demerit goods
whose social values differ from their economic values.
 Pledge: It is delivery of goods by a borrower to a lender as security for the payment of a
debt or the performance of a promise. The ownership remains with the borrower but the
possession of the goods is with the lender until the debt is paid.
 Hypothecation: It is a mode of creating an equitable charge on a property to secure the
payment of a debt in which the property itself continues to be in the possession of the
debtor. It is a legal transaction whereby a merge charge is given on the goods for the
amount of the debt but the hypothecated goods remain in the actual possession of the
borrower. And neither possession nor ownership passes to the lender. The instrument
which creates a charge is known as Letter of Hypothecation.
 Lien: It is the right of one person to retain the goods or a security belonging to another
person until a debt due from the latter is paid to the former. After a lien has been obtained
the debtor remains the legal owner of the property although he loses his right to sell.
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102.  Mortgage: It is the creation or transfer of a legal or a equitable interest in property by the
borrower to the lender as security for the payment of a debt or the discharge of some other
obligation.
 Moratorium: It is an agreement between a creditor and a debtor to allow additional time
for the settlement of a debt.
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103. 18 References
Books
1. Mukherjee, DD (2010), Credit Appraisal Risk Analysis & Decision Making, Jain Book
Depot
2. Ganguin, B. and Bilardello,J (2005), Fundamentals of Corporate Credit Analysis,
McGraw-Hill
3. Dash, S. K.(2006),Tit Bits of General Advances & Financial Services, Bank House
4. Martin, J. P. and Cendrowski, H. (2010), Financial Statement Fraud and the Lending
Decision, COMMERCIAL LENDING REVIEW
5. Kiehnau, L. and Budyak, J. T. (2009),The Valuation of Collateral, THDE SECURED
LENDER
6. Gunjan,M; Vikram,S. and Soumyadeep,S.(2010), Indian Banks' Methods for Assessing
Working Capital, Advances In Management, Vol. 3 (12) Dec. (2010) pp7-16
7. Bidani,S.N. and Sahay,B. (1988), How Bank Credit is Administered: Supervision and
Follow-up, Vision Books, Delhi
8. Hale, Roger H.H. (1983), Credit Analysis-A Completer Guide, John Wiley & Sons Inc.,
NewYork
9. Donaldson, T.H. (1983), Understanding Corporate Credit, Macmillan
10. Chatterjee, A. (1978), Bank Credit Management (How to Lend Effectively), Suneja
Publishing Corporation, Delhi
PNB journal (Internal Circulation)
11. PNB, Annual Report ( 2009-2010)
12. PNB, Ready Reckoner 2010
13. PNB, Book of Instruction 2010, Chapter – 03, 04, 12.
14. Gist of operative circulars on loans and advances
15. Internal files of PNB
Internet Websites
16. www.investopedia.com accessed on 25 April 2011
17. www.rbi.org.in accessed on 01 June 2011
18. www.pnbindia.com accessed on 02 June 2011
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