Babasab Patil 1: Project Financing

STATE BANK OF INDIA Project Financing
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CONTENTS
SECTION I
Executive Summary Industria !r"#i e SECTION II C"m'any !r"#i e SECTION III
4-7 $ -%&
%(-&%
T)e"retica Bac*+r"und #"r t)e 'r",ect -"r* Intr"ducti"n t" 'r",ect #inancin+ !r",ect #inancin+ ris*s
&&- 4$
!r",ect Financia A''raisa /0- /(
!r",ect in Brie#- S. # "- c"ntr" s SECTION I1
Financia Ana ysis 2easures ta*en 3y SBI -)en t)e re'ayment is n"t '"ssi3 e SECTION 1
/4-74 7/
Ana ysis Findin+s 6ec"mmendati"ns .imitati"ns C"nc usi"ns Bi3 i"+ra')y
74 77 -75
7$
BABASAB PATIL 1
Executive Summary
Tit e "# t)e 'r",ect 7Financia A''raisa O# t)e !r",ect Financed By SBI 8
As a part of curriculum, every student studying MBA has to undertake a project on a particular subject assigned to him/her. Accordingly I have been assigned the project ork on the study of project financing in Banking !ector. As it is rightly said that finance is the life blood of every business so every business need funds for smooth running of its activities and bank is the one of the source through hich the business get funds, before financing the bank appraise the projects and if the projects meet the re"uirement of the bank rules than only they ill finance. #roject financing is commonly used as a financing method in capital-intensive industries for projects re"uiring large investments of funds, such as the construction of po er plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants.
$he core area of this project focuses on the financial appraisal of !% flo controls, ho has started Manufacturing of industrial valves hich is financed by !BI . $his project has been undertaken at !tate Bank of India, &ubli branch deals ith all financial activities hich is one of the largest bank in India having vast domestic net ork of over '((( branches. !BI hich involves all types of deposits, advances including project financing, mutual funds etc
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hich mainly leads to the feasibility study consisting of ratio
)inancial appraisal
analysis and capital budgeting calculations.
2ain O3,ective
)inancial appraisal of project*

Su3 O3,ectives +. ,. -. .. /. $o kno the projects financed by !BI. $o kno the policies of !BI to ards the project financing. $o kno the risks involved in projects financing. $o appraise the projects using financial tools. $o kno the measures taken by bank hen the clients fail to repay the amount.
2et)"d" "+y
0ata collection method1 $he report ill be prepared mainly using secondary data vi2, Sec"ndary data .sbi.com. 3ompany manuals. 3ommercial Banks Book. T)e tec)ni9ues: -)ic) -"u d 3e used #"r t)e study; +. 0iscussions ith Bank guide and customers. ,. By studying projects reports . -. 4sing #roject $echni"ues1
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Ana ysis;T)is ana ysis 'art is re ated t" t)e #inancia via3i ity "# t)e 'r",ect S. F "C"ntr" s; $hrough ratio analysis I analy2ed that the li"uidity position of the firm is good and it is maintaining the standard ratio.. 0ebt 5"uity ratio is in decreasing trend, it sho s that the firm is reducing its liability portion by paying the loan year on year so the financial risk less. #rofitability ratios related to sales and capital employed are in increasing trend, it sho s that the sales are increasing and the firm using its resources efficiently. 0ebt !ervice 3overage 6atio is also in increasing trend, it sho s that the firms ability to make the loan repayments on time over the debt life of the project. $he payback period is ithin the debt life of the project. $he net present value of the project is positive, $he positive net present value ill result only if the project generates cash inflo s at a rate higher than the opportunity cost of capital . !ince the 7et #resent 8alue of the above project is positive, the proposal can be accepted. $he internal rate of the return is higher than hat accepted so the project is accepted.
BABASAB PATIL 4
Findin+s ;- T)ese are re ated t" 3an* in +enera

!tate bank of India is strictly follo ing the guidelines of 6BI on #roject )inancing !anctioning for the projects is approved by 6A!M533 96etailed Assets !mall And Medium 5nterprises 3redit 3ell:. $he bank finances the projects only through term loans. Interest rates are fi;ed depending upon the projects Bank advance rate. <hen the clients fail to pay the interest, - months from the due date the term loan granted ill be treated as 7on #erforming Assets. If the interest is due further - more months then it ill be treated as doubtful assets and interest rates becomes 2ero. Again for further - months it goes as loss assets and the bank account. 5very firm starting up a ne the same bank itself. project should make an insurance policy ith rite off the hich is kno n as !tate
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6ec"mmendati"ns; Bank check only financial, technical and commercial feasibility of the project and it should not consider sensitivity analysis and social cost benefit analysis of the project so bank should consider this because these are also important from the point of vie of risk and economy gro th. Bank should be caution about the availability of security and ensure honesty of both borro er and guarantor so as to avoid the account becoming the loss assets.
.imitati"n "# t)e study;!ome of the information are confidential in nature that could not divulged for study.
6ati"na e 3e)ind c)""sin+ t)is t"'ic;

#roject financing is a comparatively ne field for Indian banks,at present scenario
India is becoming developed country so because of that many projects are going on that may be infrastructure, po er generation, mining etc. considering all these the projects must need finance, to fulfill these objectives the project undertaken companies raise the funds through capital market, debt market and through banks. <henever bank ants to finance these type of projects it must study the feasibility of
the project and then it ill go for financing that project Because of this it is very necessary to study the process of project financed by the bank so I choose this topic to study ho the projects. !BI study the projects and the method of financing
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Industria !r"#i e
<ISTO6= OF BANKIN> IN INDIA
<ithout a sound and effective banking system in India it cannot have a healthy economy. $he banking system of India should not only be hassle free but it should be able to meet ne internal factors. )or the past three decades India=s banking system has several outstanding achievements to its credit. $he most striking is its e;tensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. $his is one of the main reasons for India=s gro th. $he government=s regular policy for Indian bank since +'>' has paid rich dividends ith the nationali2ation of +. major private banks of India. challenges posed by the technology and any other e;ternal and
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as established in +?@>. )rom +?@> till
$he first bank in India, though conservative, phases. $hey are as mentioned belo 1 !)ase I $he Beneral Bank of India
today, the journey of Indian Banking !ystem can be segregated into three distinct
5arly phase from +?@> to +'>' of Indian Banks. 7ationali2ation of Indian Banks and up to +''+ prior to Indian. Banking sector 6eforms. 7e phase of Indian Banking !ystem ith the advent of Indian. )inancial A Banking !ector 6eforms after +''+.
as set up in the year +?@>. 7e;t came Bank of &industan
and Bengal Bank. $he 5ast India 3ompany established Bank of Bengal 9+@(':, Bank of Bombay 9+@.(: and Bank of Madras 9+@.-: as independent units and called it #residency Banks. $hese three banks India as established shareholders. In +@>/ Allahabad Bank 7ational Bank %td. as established and first time e;clusively by Indians, #unjab ith head"uarters at %ahore. Bet een +'(> and ere amalgamated in +',( and Imperial Bank of hich started as private shareholders banks, mostly 5uropean
as set up in +@'.
+'+-, Bank of India, 3entral Bank of India, Bank of Baroda, 3anara Bank, Indian Bank, and Bank of Mysore ere set up. 6eserve Bank of India came in +'-/. 0uring the first phase the gro th as very slo and banks also e;perienced periodic
failures bet een +'+- and +'.@. $here
ere appro;imately ++(( banks, mostly small. ith
$o streamline the functioning and activities of banks, mostly small. $o streamline the functioning and activities of commercial banks, the Bovernment of India came up
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hich as later changed to Banking 6egulation
$he Banking 3ompanies Act, +'.'
Act +'.' as per amending Act of +'>/ 9Act 7o. ,- of +'>/:. 6eserve Bank of India as vested ith e;tensive po ers for the supervision of banking in India as the 3entral Banking !ystem. 0uring those days public has lesser confidence in the banks. As an aftermath deposit mobilisation as slo . Abreast of it the savings bank facility provided by the #ostal department as comparatively safer. Moreover, funds ere largely given to traders. !)ase II Bovernment took major steps in this Indian Banking !ector 6eform after independence. In +'//, it nationalised Imperial Bank of India ith e;tensive banking facilities on a large scale specially in rural and semi-urban areas. It formed !tate Bank of India to act as the principal agent of 6BI and to handle banking transactions of the 4nion and state government all over the country. !even banks forming subsidiary of !tate Bank of India as nationalised in +'>( on +' th Culy +'>', major process of nationalisation as carried out. It as the effort of the then #rime Minister of India, Mrs. Indira Bandhi. +. major commercial banks in the country ere nationali2ed.!econd phase of nationalisation Indian Banking !ector 6eform carried out in +'@( segment in India under Bovernment o nership. T)e #" "-in+ are t)e ste's ta*en 3y t)e >"vernment "# India t" 6e+u ate Ban*in+ Instituti"ns in t)e C"untry; +. +'.'1 5nactment of Banking 6egulation Act. ,. +'//1 7ationalisation of !tate Bank of India. -. +'/'1 7ationalisation of !BI subsidiaries. as ith seven more banks. $his step brought @(D of the banking
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.. +'>+1 Insurance cover e;tended to deposits. /. +'>'1 7ationalisation of +. major banks. >. +'?+1 3reation of credit guarantee corporation. ?. +'?/1 3reation of regional rural banks. @. +'@(1 7ationalisation of seven banks ith deposits over ,(( crores. After the nationali2ation of banks, the branches of the public sector bank India raised to appro;imately @((D in deposits and advances took a huge jump by ++(((D. Banking in the sunshine of Bovernment o nership gave the public implicit faith and immense confidence about the sustainability of these institutions. !)ase III $his phase has introduced many more products and facilities in the banking sector in its reforms measure. In +''+, under the chairmanship of M 7arasimham, a committee as set up by his name, hich orked for the %iberali2ation of Banking #ractices. $he country is flooded ith foreign banks and their A$M stations. 5fforts are being
put to give a satisfactory service to customers. #hone banking and net banking is introduced. $he entire system became more convenient and s ift. $ime is given more importance than money. $he financial system of India has sho n a great deal of resilience. It is sheltered from any crisis triggered by any e;ternal macroeconomics shock as other 5ast Asian 3ountries suffered. $his is all due to a fle;ible e;change rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign e;change e;posure.
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.
ith $he Beneral Bank
Banking in India originated in the first decade of +@th century
Ef India coming into e;istence in +?@>. $his as follo ed by Bank of &industan. Both these banks are no defunct. $he oldest bank in e;istence in India is the !tate Bank Ef India being established as F $he Bank Ef 3alcutta* in 3alcutta in Cune +@(>. 3ouple of 0ecades later, foreign Banks like &!B3 and 3redit %yonnais !tarted their 3alcutta operations in +@/(s. At that point of time, 3alcutta mainly due to the trade of British 5mpire and due to in +@>/. By +'((, the market e;panded ith the establishment of banks like #unjab 7ational as formally regulated by 6eserve as there and prospered. $he first fully Indian o ned bank as the most active trading port, hich banking actively took roots as the Allahabad Bank set up
Bank in +@'/ in %ahoreG Bank of India in +'(> in Mumbai-both of hich ere founded under private o nership. Indian Banking !ector nationalised and given broader po ers. Bank Ef India from +'-/. After India=s independence in +'.?, the 6eserve Bank
SBI >r"u'
$he Bank of Bengal, hich later became the !tate Bank of India. !tate Bank of India
ith its seven associate banks commands the largest banking resources in India. Nati"na i?ati"n
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$he ne;t significant milestone in Indian Banking happened in late +'>(s hen the then Indira Bandhi government nationali2ed on +'th Culy +'.', +. major commercial Indian banks follo ed by nationalisation of > more commercial Indian banks in +'@(. $he stated reason for the nationalisation the &indu gro th of the Indian economy. After the amalgamation of 7e Bank of India ith #unjab 7ational Bank, currently as more control of credit delivery. After this,
until +''(s, the nationali2ed banks gre at a leisurely pace of around .D also called as
there are +' nationali2ed banks in India. .i3era i?ati"nIn the early kno n as 7e +''(=s the then 7arasimha rao government embarked a policy of hich came to be generation tech-savvy banks, hich included banks like I3I3I and ith strong contribution from ith many either being
liberali2ation and gave licences to a small number of private banks, &0)3. $his move along the banking sector in India,
ith the rapid gro th of the economy of India, kick started hich has seen rapid gro th hiccups for these ne
all the sectors of banks, namely Bovernment banks, #rivate Banks and )oreign banks. &o ever there had been a fe going tough. $he ne;t stage for the Indian Banking has been set up rela;ation in the norms for )oreign 0irect Investment, Banks may be given voting rights present it has gone up to .'D ith some restrictions. $he ne time, policy shook the Banking sector in India completely. Bankers, till this at .DG %end at >DG Bo home at .: of ave ushered in a modern outlook and tech-savvy methods of ith the proposed banks taken over like Blobal $rust Bank hile others like 3enturion Bank have found the
here all )oreign Investors in
hich could e;ceed the present cap of +(D, at
ere used to the .->-. method 9Borro
functioning. $he ne
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orking for traditional banks. All this led to the retail boom in India. #eople not just demanded more from their banks but also received more. C@66ENT SCENA6IO 3urrently 9,((?:, overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. 5ven in terms of "uality of assets and capital ade"uacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. $he 6eserve Bank of India is an autonomous body, ith minimal pressure from the government. $he stated policy of the Bank on the Indian 6upee is to manage volatilityithout any stated e;change rate-and this has mostly been true. <ith the gro th in the Indian economy e;pected to be strong for "uite some timeespecially in its services sector, the demand for banking services-especially retail banking, mortgages and investment services are e;pected to be strong. MAAs, takeovers, asset sales and much more action 9as it is unraveling in 3hina: on this front in India. In March ,((>, the 6eserve Bank of India allo ed <arburg #incus to increase its stake in Hotak Mahindra Bank 9a private sector bank: to +(D. $his is the first time an investor has been allo ed to hold more than /D in a private sector bank since the 6BI announced norms in ,((/ that any stake e;ceeding /D in the private sector banks ould need to be vetted by them. 3urrently, India has @@ scheduled commercial banks 9!3Bs: - ,@ public sector banks 9that is ith the Bovernment of India holding a stake:, ,' private banks 9these do not have government stakeG they may be publicly listed and traded on stock e;changes: and -+ foreign banks. $hey have a combined net ork of over /-,((( branches and +?,((( A$Ms. According to a report by I36A %imited, a rating agency, the public ill happen
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ith the
sector banks hold over ?/ percent of total assets of the banking industry, private and foreign banks holding +@.,D and >./D respectively.
Ban*in+ in India
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6eserve Bank of India !tate Bank of India, Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharastra,3anara Bank, 3entral Bank of India,
+ 3entral Bank
, 7ationalised Banks
3orporation Bank, 0ena Bank, Indian Bank, Indian overseas Bank,Eriental Bank of 3ommerce, #unjab and !ind Bank, #unjab 7ational Bank, !yndicate Bank, 4nion Bank of India, 4nited Bank of India, 43E Bank,and 8ijaya Bank. Bank of 6ajastan, Bharath overseas Bank, 3atholic !yrian Bank, 3enturion Bank of #unjab, 3ity 4nion Bank, 0evelopment 3redit Bank, 0hanala;mi Bank,
- #rivate Banks
)ederal Bank, Banesh Bank of Hurund ad, &0)3 Bank, I3I3I Bank, I0BI, IndusInd Bank, I7B 8ysya Bank, Cammu and Hashmir Bank, Harnataka Bank %imited, Harur 8ysya Bank, Hotek Mahindra Bank, %akshmivilas Bank, %ord Hrishna Bank, 7ainitak Bank, 6atnakar Bank,!angli Bank, !BI 3ommercial and International Bank, !outh Indian Bank, $amil 7adu Merchantile Bank %td., 4nited <estern Bank, 4$I Bank, I5! Bank.
Structure "# Indian Ban*in+
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6eserve Bank of India is the regulating body for the Indian Banking Industry. It is a mi;ture of #ublic sector, #rivate sector, 3o-operative banks and foreign banks. $he private sector banks are further spilt into old banks and ne banks.
6eserve Ban* "# India Sc)edu ed Ban*s
Sc)edu ed C"mmercia Ban*s
Sc)edu ed C"-"'erative Ban*s
!u3 ic Sect"r Ban*s
!rivate Sect"r Ban*s
F"rei+n Ban*s
6e+i"na 6ura Ban*s
Nati"na i?ed Ban*s
SBI A its Ass"ciates
Sc)edu ed @r3an c""'erative Ban*
Sc)edu ed State c""'erative Ban*s
O d 'rivate sect"r Ban*s
Ne- 'rivate sect"r Ban*s
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Ban* OvervieSTATE BANK OF INDIA 7ot only many financial institution in the orld today can claim the anti"uity and ith primarily
majesty of the !tate Bank Ef India founded nearly t o centuries ago
intent of imparting stability to the money market, the bank from its inception mobili2ed funds for supporting both the public credit of the companies governments in the three presidencies of British India and the private credit of the 5uropean and India merchants from about +@>(s hen the Indian economy book a significant leap for ard under the orld communications and ingenious method of industrial and impulse of "uickened
agricultural production the Bank became intimately in valued in the financing of practically and mining activity of the !ub- 3ontinent Although large 5uropean and Indian merchants and manufacturers small man never ignored loans as lo ere undoubtedly thee principal beneficiaries, the as 6s.+(( ere disbursed in agricultural districts
against glad ornaments. Added to these the bank till the creation of the 6eserve Bank in +'-/ carried out numerous 3entral J Banking functions. Adaptation orld and the needs of the hour has been one of the strengths of the Bank, hen business opportunities become ere relined to ensure
In the post depression e;e. )or instance J
e;tremely restricted, rules laid do n in the book of instructions
that good business did not go post. Iet seldom did the bank contravenes its value as depart from sound banking principles to retain as e;pand its business. An innovative array of office, unkno n to the orld then, as devised in the form of branches, sub business strategy as also evaded ay branches, treasury pay office, pay office, sub pay office and out students to e;ploit the opportunities of an e;panding economy. 7e to customers. back in +'-? to render the best banking service through prompt and courteous attention
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.
ell defined
A highly efficient and e;perienced management functioning in a
organi2ational structure did not take long to place the bank an e;ecuted pedestal in the areas of business, profitability, internal discipline and above all credibility A impeccable financial status consistent maintenance of the lofty traditions if banking an observation of a high standard of integrity in its operations helped the bank gain a preeminent status. 7o onders the administration for the bank as universal as key functionaries of India successive finance minister of independent India 6esource Bank of governors and representatives of chamber of commercial sho ered economics on it. Modern day management techni"ues ere also very much evident in the good old days
years before corporate governance had become a pu22led the banks bound functioned ith a high degree of responsibility and concerns for the shareholders. An unbroken records of profits and a fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction, prudential management and asset liability management not only protected the interests of the Bank but also ensured that the obligations to customers ere not met. $he traditions of the past continued to be upheld even to this day as the !tate Bank years itself to meet the emerging challenges of the millennium.
ABO@T .O>O
T<E !.ACE TO S<A6E T<E NEBS CCCDD S<A6E T<E 1IEBS DD
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$ogetherness is the theme of this corporate loge of !BI
here the
orld of banking
services meet the ever changing customers needs and establishes a link that is like a circle, it indicates complete services to ards customers. $he logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers. $he blue pointer represent the philosophy of the bank that is al ays looking for the gro th and ne er, more challenging, more promising direction. $he key hole indicates safety and security. 2ISSION STATE2ENT; $o retain the Bank=s position as premiere Indian )inancial !ervice Broup, ith orld
class standards and significant global committed to e;cellence in customer, shareholder and employee satisfaction and to play a leading role in e;panding and diversifying financial service sectors hile containing emphasis on its development banking rule. 1ISION STATE2ENT; #remier Indian )inancial !ervice Broup ith prospective orld-class
!tandards of efficiency and professionalism and institutional values 6etain its position in the country as pioneers in 0evelopment banking. Ma;imi2e the shareholders value through high-sustained earnings per !hare. An institution ith cultural mutual care and commitment, satisfying and Bood ork environment and continues learning opportunities.
1A.@ES
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5;cellence in customer service #rofit orientation Belonging commitment to Bank )airness in all dealings and relations 6isk taking and innovative $eam playing %earning and rene al Integrity $ransparency and 0iscipline in policies and systems.
Or+ani?ati"n Structure
MA7ABI7B 0I653$E6
3&I5) B5756A% MA7AB56
B. M
B.M 93AB:
B. M 9)A!:
B.M
B.M 9I: A 38E 9#A0:
9Eperations:
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Konal off 6egional officers
)unctional &eads
T)e"retica Bac*+r"und #"r t)e 'r",ect -"r* #roject )inancing

I7$6E043$IE7#roject financing is an innovative and timely financing techni"ue that has been used on many high-profile corporate projects, including 5uro 0isneyland and the 5uro tunnel. 5mploying a carefully engineered financing mi;, it has long been used to fund largescale natural resource projects, from pipelines and refineries to electric-generating facilities and hydroelectric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects orld ide. M5A7I7B#roject financing involves non-recourse financing of the development and construction of a particular project in hich the lender looks principally to the revenues e;pected to
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be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. 6A$IE7A%5#roject financing is commonly used as a financing method in capital-intensive industries for projects re"uiring large investments of funds, such as the construction of po er plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants. $he sponsors of such projects fre"uently are not sufficiently credit orthy to obtain traditional financing or are un illing to take the risks and assume the debt obligations associated financing permits the risks associated number of parties at levels acceptable to each party. !6INCI!.E AD1ANTA>E AND OBEECTI1ESNON 6ECO@6SE $he typical project financing involves a loan to enable the sponsor to construct a project here the loan is completely Lnon-recourseL to the sponsor, i.e., the sponsor has no obligation to make payments on the project loan if revenues generated by the project are insufficient to cover the principal and interest payments on the loan. In order to minimi2e the risks associated ith a non-recourse loan, a lender typically ill re"uire indirect credit supports in the form of guarantees, arranties and other covenants from ith traditional financings. #roject ith such projects to be allocated among a
the sponsor, its affiliates and other third parties involved ith the project 2AFI2IGE .E1E6A>E In a project financing, the sponsor typically seeks to finance the costs of development and construction of the project on a highly leveraged basis. )re"uently, such costs are financed using @( to +(( percent debt. &igh leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to
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ithout diluting its e"uity investment in the project and, in certain
finance the project
circumstances, also may permit reductions in the cost of capital by substituting lo ercost, ta;-deductible interest for higher-cost, ta;able returns on e"uity. OFF-BA.ANCES<EET T6EAT2ENT 0epending upon the structure of a project financing, the project sponsor may not be re"uired to report any of the project debt on its balance sheet because such debt is non-recourse or of limited recourse to the sponsor. Eff-balance-sheet treatment can have the added practical benefit of helping the sponsor comply agreements to hich the sponsor is a party. 2AFI2IGE TAF-BENEFITS #roject financings should be structured to ma;imi2e ta; benefits and to assure that all available ta; benefits are used by the sponsor or transferred, to the e;tent permissible, to another party through a partnership, lease or other vehicle. DISAD1ANTA>ESith covenants and restrictions relating to borro ing funds contained in other indentures and credit
#roject financings are e;tremely comple;. It may take a much longer period of time to structure, negotiate and document a project financing than a traditional financing, and the legal fees and related costs associated ith a project financing can be very high. Because the risks assumed by lenders may be greater in a non-recourse project financing than in a more traditional financing, the cost of capital may be greater than ith a traditional financing.
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!6OCESS OF !6OEECT FINANCIN>

Feasi3i ity Study As one of the first steps in a project financing is hiring of a technical consultant and he ill prepare a feasibility study sho ing the financial viability of the project. )re"uently, a prospective lender ill hire its o n independent consultants to prepare an independent feasibility study before the lender project. C"ntents $he feasibility study should analy2e every technical, financial and other aspect of the project, including the time-frame for completion of the various phases of the project development, and should clearly set forth all of the financial and other assumptions ill commit to lend funds for the
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STATE BANK OF INDIA Project Financing upon
hich the conclusions of the study are based, Among the more important items
contained in a feasibility study are1 +. 0escription of project ,. 0escription of sponsor9s:. -. !ponsorsM Agreements. .. #roject site. /. Bovernmental arrangements. >. !ource of funds. ?. )eedstock Agreements. @. Eff take Agreements. '. 3onstruction 3ontract. +(. Management of project. ++. 3apital costs. +,. <orking capital. +-. 5"uity sourcing. +.. 0ebt sourcing. +/. )inancial projections. +>. Market study.
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+?. Assumptions. T<E !6OEECT CO2!AN= .e+a F"rm !ponsors of projects adopt many different legal forms for the o nership of the project. $he specific form adopted for any particular project factors, including1 $he amount of e"uity re"uired for the project $he concern ith management of the project $he availability of ta; benefits associated ith the project $he need to allocate ta; benefits in a specific manner among the project company investors. T)e t)ree 3asic #"rms #"r "-ners)i' "# a 'r",ect are; %C C"r'"rati"ns$his is the simplest form for o nership of a project. A special purpose corporation may be formed under the la s of the jurisdiction in "ualified to do business in the jurisdiction of the project. &C >enera !artners)i's$he sponsors may form a general partnership. In most jurisdictions, a partnership is recogni2ed as a separate legal entity and can o n, operate and enter into financing arrangements for a project in its o n name. A partnership is not a separate ta;able entity, and although a partnership is hich the project is located, or it may be formed in some other jurisdiction and be ill depend upon many
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hich
re"uired to file ta; returns for reporting purposes, items of income, gain, losses, deductions and credits are allocated among the partners, 3onse"uently, a partnership fre"uently associated ill be used include their allocated share in computing their o n individual ta;es. hen the ta; benefits ith the project are significant. Because the general partners of a ill form a holly o ned, single-purpose
partnership are severally liable for all of the debts and liabilities of the partnership, a sponsor fre"uently subsidiary to act as its general partner in a partnership. (C .imited !artners)i'sA limited partnership has similar characteristics to a general partnership e;cept that the limited partners have limited control over the business of the partnership and are liable only for the debts and liabilities of the partnership to the e;tent of their capital contributions in the partnership. A limited partnership may be useful for a project financing e"uity. .imited .ia3i ity C"m'anies$hey are a cross bet een a corporation and a limited partnership. !r",ect C"m'any A+reements 0epending on the form of project company chosen for a particular project financing, the sponsors and other e"uity investors the terms under hich they ill enter into a stockholder agreement, general or limited partnership agreement or other agreement that sets forth ill develop, o n and operate the project. At a minimum, such an agreement should cover the follo ing matters1 E nership interests. hen the sponsors do not have substantial capital and the project re"uires large amounts of outside
BABASAB PATIL 27
3apitali2ation and capital calls. Allocation of profits and losses. 0istributions. Accounting. Boverning body and voting. 0ay-to-day management. Budgets. $ransfer of o nership interests. Admission of ne participants. 0efault. $ermination and dissolution. !rinci'a A+reements in a !r",ect Financin+%C C"nstructi"n C"ntract!ome of the more important terms of the construction contracts are !r",ect Descri'ti"n- $he construction contract should set forth a detailed description of all the <ork necessary to complete the project !rice;- Most project financing construction contracts are fi;edprice contracts although some projects may be built on a cost-
BABASAB PATIL 28
.
plus basis. If the contract is not fi;ed-price, additional debt or necessary to complete the e"uity contributions may be
project, and the project agreements should clearly indicate the party or parties responsible for such contributions. !ayment- #ayments typically are made on a LmilestoneL or Lcompleted orkL basis, ith a retain age. $his payment points for the o ner and the procedure provides an incentive for the contractor to keep on schedule and useful monitoring lender. C"m' eti"n Date- $he construction completion date, together ith any time e;tensions resulting from an event of force majeure, must be consistent ith the partiesM obligations under the other project documents. If construction is not finished by the completion date, the contractor typically is re"uired to pay li"uidated damages to cover debt service for each day until the project is completed. If construction is completed early, the contractor fre"uently is entitled to an early completion bonus. !er#"rmance >uarantees- $he contractor typically guarantee that the project performance standards ill
ill be able to meet certain ill generate sufficient
hen completed. !uch standards must
be set at levels to assure that the project
revenues for debt service, operating costs and a return on e"uity. !uch guarantees are measured by performance tests conducted by the contractor at the end of construction. If the project does not meet the guaranteed levels of performance, the contractor typically is re"uired to make li"uidated damages payments to the sponsor. If project performance e;ceeds the guaranteed
BABASAB PATIL 29
.
minimum levels, the contractor may be entitled to bonus payments.
,. Feedst"c* Su'' y A+reements. $he project company ill enter into one or more feedstock supply materials, energy or other resources over
agreements for the supply of ra
the life of the project. )re"uently, feedstock supply agreements are structured on a Lput-or-payL basis, hich means that the supplier must either supply the feedstock or pay the project company the difference in costs incurred in obtaining the feedstock from another source. $he price provisions of feedstock supply agreements must assure that the cost of the feedstock is fi;ed ithin an acceptable range and consistent ith the financial projections of the project. -. !r"duct "## ta*e A+reements. In a project financing, the product off take agreements represent the source of revenue for the project .!uch agreements must be structured in a manner to provide the project company ith sufficient revenue to pay its project debt obligations and all other costs of operating, maintaining and o ning the project .)re"uently,offtake agreements are structured on a Ltake-or-payL basis, hich means that the offtaker is obligated to pay for product on a regular basis hether or not the offtaker actually takes the product unless the product is unavailable due to a default by the project company. %ike feedstock supply arrangements, offtake agreements fre"uently are on a fi;ed or scheduled price basis during the term of the project debt financing. .. O'erati"ns and 2aintenance A+reement -
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ill enter into a long-term agreement ith
$he project company typically
for the day-to-day operation and maintenance of the project facilities project in accordance
a company having the technical and financial e;pertise to operate the ith the cost and production specifications for the ill be paid a fi;ed compensation and project. $he operator may be an independent company, or it may be one of the sponsors . $he operator typically may be entitled to bonus payments for e;traordinary project performance and be re"uired to pay li"uidated damages for project performance belo specified levels.
/. ."an and Security A+reement. $he borro er in a project financing typically is the project company formed by the sponsor9s: to o n the project. $he loan agreement basic terms of the loan and ill set forth the ill contain general provisions relating to
maturity, interest rate and fees. $he typical project financing loan agreement also ill contain yhr provisions such as+. Dis3ursement C"ntr" s. $hese fre"uently take the form of conditions precedent to each dra do n, re"uiring the borro er to present invoices, builders= certificates or other evidence as to the need for and use of the funds. ,. !r"+ress 6e'"rts.1- $he lender may re"uire periodic reports certified by an independent consultant on the status of construction progress. -. C"venants N"t t" Amend1- $he borro er or ill covenant not to amend ithout the
aive any of its rights under the construction, feedstock, off take,
operations and maintenance, or other principal agreements consent of the lender.
BABASAB PATIL 31
.
ith project plans and specifications and prohibit ithout the
.. C"m' eti"n C"venants1-$hese re"uire the borro er to complete the project in accordance consent of the lender. /. Dividend 6estricti"ns. $hese covenants place restrictions on the payment of dividends or other distributions by the borro er until debt service obligations are satisfied. >. De3t and >uarantee 6estricti"ns . $he borro er may be prohibited from incurring additional debt or from guaranteeing other obligations ?. Financia C"venants. !uch covenants re"uire the maintenance of orking capital and li"uidity ratios, debt service coverage ratios, debt service reserves and other financial ratios to protect the credit of the borro er. @. Su3"rdinati"n. %enders typically re"uire other participants in the project to enter into a subordination agreement under hich certain payments to such participants from the borro er under project agreements are restricted 9either absolutely or partially: and made subordinate to the payment of debt service. '. SecurityC $he project loan typically ill be secured by multiple forms of collateral, including1--- Mortgage on the project facilities and real property. Assignment of operating revenues. #ledge of bank deposits the borro er from materially altering the project plans
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Assignment of any letters of credit or performance or completion bonds relating to the project. project under hich borro er is the beneficiary. %iens on the borro erMs personal property Assignment of insurance proceeds. Assignment of all project agreements #ledge of stock in project company or assignment of partnership interests. Assignment of any patents, trademarks or other intellectual property o ned by the borro er.
> Site .ease A+reement. $he project company typically enters into longterm lease for the life of the project relating to the real property on fi;ed rate or may be tied to project performance. 7CInsuranceC $he general categories of insurance available in connection ith project financings are1 +. !tandard Insurance- $he follo ing types of insurance typically are obtained for all project financings and cover the most common types of losses that a project may suffer. #roperty 0amage, including transportation, fire and e;tended casualty. hich the project is to be located. 6ental payments may be set in advance at a
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Boiler and Machinery. 3omprehensive Beneral %iability. <orkerMs 3ompensation. Automobile %iability and #hysical 0amage. 5;cess %iability. ,. O'ti"na Insurance. $he follo ing types of insurance often are obtained in connection ith a project financing. 3overages such as these are more e;pensive than standard insurance and re"uire more tailoring to meet the specific needs of the project Business Interruption. #erformance Bonds. 3ost Everrun/0elayed Epening. 0esign 5rrors and Emissions !ystem #erformance 95fficiency:. #ollution %iability.
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!r",ect 6is*s
#roject finance is finance for a particular project, such as a mine, toll road, rail ay, pipeline, po er station, ship, hospital or prison, hich is repaid from the cash-flo of that project. #roject finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borro ing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borro er or the sponsors of the project. In this situation, the credit risk associated borro er is not as important as in an ordinary loan transactionG the project. T)e #" "-in+ detai s s)"-s t)e manner in -)ic) ris*s are a''r"ac)ed 3y #inanciers in a 'r",ect #inance transacti"nC Suc) ris* minimi?ati"n ies at t)e )eart "# 'r",ect #inanceC In a no recourse or limited recourse project financing, the risks for a financier are great. !ince the loan can only be repaid hen the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. $he assets that remain are usually highly speciali2ed and possibly in a remote location. If saleable, they may have little value outside the project. $herefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated ith the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided. ith the ith hat is most important
is the identification, analysis, allocation and management of every risk associated
BABASAB PATIL 35
6is* minimi?ati"n 'r"cess )inanciers are concerned hich could result in1 +: $he project not being completed on time, on budget, or at allG ,: $he project not operating at its full capacityG -: $he project failing to generate sufficient revenue to service the debtG or .: $he project prematurely coming to an end. $he minimi2ation of such risks involves a three step process. +: $he first step re"uires the identification and analysis of all the risks that may bear upon the project. ,: $he second step is the allocation of those risks among the parties. -: $he last step involves the creation of mechanisms to manage the risks. If a risk to the financiers cannot be minimi2ed, the financiers ill need to build it into the interest rate margin for the loan. Ste' %- 6is* identi#icati"n and ana ysis$he project sponsors ill usually prepare a feasibility study, e.g. as to the construction ill carefully revie the study and ith minimi2ing the dangers of any events hich could have
a negative impact on the financial performance of the project, in particular, events
and operation of a mine or pipeline. $he financiers
may engage independent e;pert consultants to supplement it. $he matters of particular
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STATE BANK OF INDIA Project Financing focus ill be
.
hether
hether the costs of the project have been properly assessed and
the cash-flo streams from the project are properly calculated. !ome risks are analysed using financial models to determine the projectMs cash-flo and hence the ability of the project to meet repayment schedules. 0ifferent scenarios ill be e;amined by adjusting economic variables such as inflation, interest rates, e;change rates and prices for the inputs and output of the project. 8arious classes of risk that may be identified in a project financing ill be discussed belo . Ste'&- 6is* a "cati"nEnce the risks are identified and analy2ed, they are allocated by the parties through negotiation of the contractual frame ork. Ideally a risk should be allocated to the party ho is the most appropriate to bear it 9i.e. ho is in the best position to manage, control and insure against it: and ho has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks idely and to ensure that each party has an interest in fi;ing such risks. Benerally, commercial risks are sought to be allocated to the private sector and political risks to the state sector. Ste'(- 6is* mana+ement6isks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its conse"uences if it does occur. )inanciers need to ensure that the greater the risks that they bear, the more informed they are and the greater their control over the project. !ince they take security over the entire project and must be prepared to step in and take it over if the borro er defaults. $his re"uires the financiers to be involved in and monitor the project closely. !uch risk management is facilitated by imposing reporting obligations on the borro er and controls over project accounts. !uch measures may lead to tension bet een the fle;ibility desired by borro er and risk management mechanisms re"uired by the financier.
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Ty'es "# 6is*s

Basically different types of projects are posed to different risks. !imilarly the risks mentioned belo are related to this particular project. %H C"m' eti"n 6is*3ompletion risk allocation is a vital part of the risk allocation of any project. $his phase carries the greatest risk for the financier. 3onstruction carries the danger that the project ill not be completed on time, on budget or at all because of technical, labour, and other construction difficulties. !uch delays or cost increases may delay loan repayments and cause interest and debt to accumulate. $hey may also jeopardi2e contracts for the sale of the projectMs output and supply contacts for ra materials. 3ommonly employed mechanisms for minimi2ing completion risk before lending takes place include1 9a: Ebtaining completion guarantees re"uiring the sponsors to pay all debts and li"uidated damages if completion does not occur by the re"uired dateG 9b: 5nsuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject e"uity into the projectG
BABASAB PATIL 38
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hose performance is secured
9c: 6e"uiring the project to be developed under fi;ed-price, fi;ed-time turnkey contracts by reputable and financially sound contractors by performance bonds or guaranteed by third partiesG and 9d: Ebtaining independent e;pertsM reports on the design and construction of the project. 3ompletion risk is managed during the loan period by methods such as making precompletion phase dra do ns of further funds conditional on certificates being issued by independent e;perts to confirm that the construction is progressing as planned. &H O'eratin+ 6is*$hese are general risks that may affect the cash-flo of the project by increasing the
operating costs or affecting the projectMs capacity to continue to generate the "uantity and "uality of the planned output over the life of the project. Eperating risks include, for e;ample, the level of e;perience and resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour. $he usual ay for minimising operating risks before lending takes place is to re"uire the project to be operated by a reputable and financially sound operator hose performance is secured by performance bonds. Eperating risks are managed during the loan period by re"uiring the provision of detailed reports on the operations of the project and by controlling cash-flo s by re"uiring the proceeds of the sale of product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved operating costs only. (H 2ar*et 6is*Ebviously, the loan can only be repaid if the product that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide ade"uate cash-flo to service the debt. $he best mechanism for minimising market risk before lending takes place is an acceptable for ard sales contact entered into ith a financially sound purchaser.
BABASAB PATIL 39
STATE BANK OF INDIA Project Financing 4H Credit 6is*$hese are the risks associated "uestion is ith the sponsors or the borro ers themselves. $he hich may arise. Ef
hether they have sufficient resources to manage the construction and
operation of the project and to efficiently resolve any problems
course, credit risk is also important for the sponsorsM completion guarantees. $o minimise these risks, the financiers need to satisfy themselves that the participants in the project have the necessary human resources, e;perience in past projects of this nature and are financially strong 9e.g. so that they can inject funds into an ailing project to save it:. /H Tec)nica 6is*$his is the risk of technical difficulties in the construction and operation of the projectMs plant and e"uipment, including latent defects. )inanciers usually minimise this risk by preferring tried and tested technologies to ne unproven technologies. $echnical risk is also minimi2ed before lending takes place by obtaining e;perts reports as to the proposed technology. $echnical risks are managed during the loan period by re"uiring a maintenance retention account to be maintained to receive a proportion of cash-flo s to cover future maintenance e;penditure. 4H 6e+u at"ry "r A''r"va 6is*$hese are risks that government licenses and approvals re"uired to construct or operate the project ill not be issued 9or ill only be issued subject to onerous conditions:, or that the project ill be subject to e;cessive ta;ation, royalty payments, or rigid ith applicable la s and ensuring that any
re"uirements as to local supply or distribution. !uch risks may be reduced by obtaining legal opinions confirming compliance necessary approvals are a condition precedent to the dra do n of funds.
BABASAB PATIL 40
STATE BANK OF INDIA Project Financing .
A''raisa !r",ect Financin+$he !BI has formed a dedicated #roject )inance !trategic Business 4nit to assess credit proposals from and e;tend term loans for large industrial and infrastructure projects. Apart from this, project term loans for medium si2ed projects and smaller clients are delivered through the 3AB and the 7BB. In general, project finance covers Breenfield industrial projects, capacity e;pansion at e;isting manufacturing units, construction ventures or other infrastructure projects. 3apital intensive business e;pansion and diversification as e"uipment may be financed through the project term loans. #roject finance is "uite often channeled through special purpose vehicles and arranged against the future cash streams to emerge from the project.$he loans are approved on the basis of strong in-house appraisal of the cost and viability of the ventures as the credit standing of promoters. ell as ell as replacement of
!r",ect #inance strate+ic 3usiness unit-
BABASAB PATIL 41
.
projects as ell as e;pansion,
A one-stop-shop of financial services for ne infrastructure sector. 5;pertise
diversification and moderni2ation of e;isting projects in infrastructure and non-
Being IndiaMs largest bank and ith the rich e;perience gained over generation, !BI brings considerable e;pertise in engineering financial packages that address comple; financial re"uirements. #roject )inance !B4 is ell e"uipped to provide a bou"uet of solutions 0ivision of !BI and !BI 3apital Markets %imited. $he global presence as also the care of. %ead role in many projects Allied roles such as security agent, monitoring/$6A agent etc. !ynergy ith !BI caps 9e;change of leads, joint attempt in bidding for projects, ay, the t o institutions are complimentary to each ell spread domestic branch net ork of !BI structured financial ith the support of the largest $reasury in India 9i.e. !BIMs:, International
ensures that the delivery of your project specific financial needs are totally taken
joint syndication etc.:. In a
other. <e have in house e;pertise 9in appraising projects: in infrastructure sector as ell as non-infrastructure sector. !ome of the areas are as follo s1 Infrastructure sector1 In#rastructure sect"r 6oad A urban infrastructure #o er and utilities
BABASAB PATIL 42
Eil A gas, other natural resources #orts and airports $elecommunications N"n-In#rastructure sect"r Manufacturing1 3ement, steel, mining, engineering, auto components, te;tiles, #ulp A papers, chemical A pharmaceuticals N !ervices1 $ourism A hospitality, educational Institutions, health industry N Ex'ertise 6upee term loan )oreign currency term loan/convertible bonds/B06/A06 0ebt advisory service %oan syndication %oan under riting 0eferred payment guarantee Ether customi2ed products i.e. receivables securiti2ation, etc.
B)y 'r",ect #inance SB@I

!ince its inception in +''/ the #roject )inance !B4 has built-up a strong reputation for itMs in-depth understanding of the infrastructure sector as ell as non-infrastructure sector in India and e have the ability to provide tailor made financial solutions to meet
BABASAB PATIL 43
.
ide range of projects undertaken by the
the gro ing A diversified re"uirement for different levels of the project. $he recent transactions undertaken by #)-!B4 include a Indian corporate. E i+i3i ity$he infrastructure ing of #) !B4 deals ith projects herein1 ill be the project cost is more than 6s +(( 3rores. $he proposed share of !BI in the term loan is more than 6s./( crores. In case of projects in 6oad sector alone, the cut off project cost of 6s./( crores and !BI $erm %oan 6s. ,/ crores, respectively. $he commercial ing of #) !B4 deals ith projects herein1
$he minimum project cost is 6s. ,(( crores 96s. +(( crores in respect of !ervices sector:. $he minimum proposed term commitment is of 6s. /( crores from !BI.
!r"cess "# sancti"nin++: !r"'"sa - $he bank usually asks the firm to give the follo ing details 7ature of the proposal $he purpose for hich the term loan is re"uired 9 hether for e;pansion, moderni2ation, diversification etc..: ,: Brie# <ist"ry- In case of an e;isting company essential particulars about its promoters, its incorporation, subse"uent corporate gro th to date, major developments or changes in management. -: !ast !er#"rmance- A summary of past performance in terms of licensed/installed or operating capacities, sales, operating capacities, and sales
BABASAB PATIL 44
and net profit for the three years should be analy2ed. $he figures relating to sales and profitability should be analy2ed to ascertain the trend during the years. In sum, the company=s past performance has to be assessed to study if there has been a steady improvement and gro th record has been satisfactory. .: !resent #inancia '"siti"n- $he 3ompany=s audited balance sheets and profit and loss account have to be analy2ed. If the latest audited balance sheet has more than > months old, a pro-forma balance sheet as on a recent date should be obtained and analysed. /: !r",ect- &ere the technical feasibility and the financial feasibility of the project is studied. >: !r",ect im' ementati"n sc)edu e- 5;amine the project implementation schedule ith reference to Bar 3hart or #56$/3#M chart9if proposed to be used by the company for monitoring the implementation of the project: and in the light of actual implementation schedules of similar project
!re sancti"n 'r"cessA''raisa %C !re iminary a''raisa $he follo ing aspects have to be e;amined if the proposal is to )inancing a project-
BABASAB PATIL 45
<hether the project cost is prima facie acceptable. 0ebt and e"uity gearing proposed and hether acceptable #romoter=s ability to access capital market for debt/ e"uity support <hether critical aspects of project- demand, cost of production, profitability etc.are prima facie in order. After undertaking the preliminary e;amination of the proposal, the branch ill arrive at a decision hether to support the re"uest or not. If the branch finds the proposal ill call for from the applicants, a comprehensive application in the ith a copy of project report, covering specific credit acceptable, it
prescribed pro-forma, along
re"uirements of the company and other essential data/ information. $he information among other things should include Ergani2ation setup ith a list of board of directors and indicating the #roduction , purchase
Oualifications, e;perience and competence of the key personnel in 3harge of the main functional areas e.g.. ,Marketing and finance in other and hether these are compatible proposed activity . 0emand and supply projections based on the overall market prospects ogether ith a copy of market research report . $he report may here the unit competitor=s marketing supply gap , the comment on the geographic spread of the market proposes to operate, demand and share, competitive advantage arrangement. 3urrent practices for the particular product or service especially relating to terms of credit sales, probability of bad debts. ord brief on the managerial resource ith the si2e and the scope of the
of the applicant , proposed
BABASAB PATIL 46
5stimates of sales cost of production and profitability. #rojected profit and loss account and Balance !heet for the operating years during currency r of the bank assistance. Branch should also obtain additionally Appraisal report from any other bank/financial institution in case appraisal has been done by them, PNO O3,ecti"n Certi#icateJ from term lenders if already financed by them and 6eport from Merchant bankers in case the company plans to access capital market, herever necessary. In respect of e;isting concerns, in addition to the above particulars regarding the history of the concern, its past performance, present financial position, etc. !hould also be called for. $his data should be supplemented by supporting statements such as1 Audited profit and loss account and balance sheet for the past three years 0etails of e;isting borro ing arrangements, if any, 3redit information reports from the e;isting bankers on the applicant company )inancial statements and borro ing relationship of associate firms/group companies. &C Detai ed A''raisa $he viability of a project is e;amined to ascertain that the company ould have the ability to service its loan and interest obligations out of cash accruals from the business. <hile appraising a project all the data/ information
BABASAB PATIL 47
.
herever possible, inter-firm and
furnished by the borro er is counter checked and
inter-industry comparisons should be made to establish their veracity. T)e a''raisa "# t)e ne- 'r",ect c"u d 3e 3r"ad y divided int" t)e #" "-in+ su3 )eads #romoters track recordG $ypes of fi;ed assets to be ac"uiredG $echnical feasibility Marketability #roduction process Management $ime schedule 3ost of project !ources of finance 3ommercial #rofitabilityG !ecurity and Margin 6epayment period and debt service coverageG )unds )lo s statement Gand 6ates of return.
BABASAB PATIL 48
I# t)e 'r"'"sa inv" ves #inancin+ "# a ne- 'r",ect: t)e c"mmercia : ec"n"mic and #inancia via3i ity and "t)er as'ects are t" 3e examined as indicated 3e "- !tatutory clearance from various government depts/agencies %icense/ clearance /permits as applicable 0etails of sources of energy re"uirements, po er, fuel etc.. #ollution control clearance 3ost of project and source of finance Buildup of fi;ed assets. Arrangements proposed for raising debt and e"uity 3apital structure )easibility of arrangements to access capital market )easibility of the projections/estimates of sales cost of production and profit covering the period of repayment. Break-even point in terms of sales value and percentage of installed capacity under a normal production year. 3ash flo s and fund flo s <hether profitability is ade"uate to meet stipulated repayments to 0ebt !ervice 3overage 6atio, 6eturn on Investment. Industry profile and prospectus ith reference
BABASAB PATIL 49
.
hether the assessment of these and
3ritical factors of industry and
management plans in this regard are acceptable $echnical feasibility available Management "uality, competence, track record 3ompany=s structure and systems. Also e;amine and comment on the status of approvals from other term lenders, project implementation schedule. A pre-sanction inspection of the project site or the factory should be carried out in the case of e;isting units. (C !resent re ati"ns)i' -it) t)e Ban*1 $he banks also take into consideration the relationship of the firm or the customer banks. It takes into account the follo ing aspects 3redit )acilities no granted. 3onduct of the e;isting accounts. 4tili2ation of limits- )B A 7)B. Eccurrence of irregularities, if any. )re"uency of irregularity i.e.G the number of times and the total number of days the account as irregular during the last t elve months. 6epayment of term commitments. ith the ith reference to report of technical consultants, if
BABASAB PATIL 50
.
ith re"uirements regarding submission of stock statements,
3ompliance
)inancial )ollo -up 6eports, rene al data, etcN !tock turnover, reali2ation of book debts. 8alue of accounts ith breakup of income earned. #ro-rata share of non-fund and foreign e;change business. 3oncessions e;tended and value thereof. 3ompliance ith other terms and conditions. Action taken on comments /observations contained in 6BI inspection 6eports. 3E inspection and audit reports. 8erification Audit 6eports. 3oncurrent audit reports. !tock Audit 6eports !pot Audit 6eports. %ong )orm Audit 6eport 9statutory 6eport:. .. Credit ris* 6atin+0ra up rating for <orking 3apital and $erm )inance.
BABASAB PATIL 51
/. O'ini"n 6e'"rts- 3ompile opinion 6eports on the company, partners/ promoters and the proposed guarantors. >C Existin+ c)ar+es "n assets "# t)e unit- If the company, report on search of charges ith proposed guarantors. ?. Structure "# #aci ities and Terms "# Sancti"n-)i; terms and conditions for e;posures proposed facility ise and overall1 %imit for each facility- sub limits. !ecurity- #rimary A collateral, Buarantee. Margins- for each facility as applicable. 6ate of interest. 6ate of commission/e;change/other fees. 3oncessional facilities and value thereof. 6epayment terms, here applicable. Ether standard covenants. @C 6evie- "# t)e 'r"'"sa -6evie and of the proposal should be done covering !trengths
eaknesses of the e;posure proposed 6isk factors and steps proposed to mitigate
them0eviations if any, proposed from usual norms of the bank and the reasons thereof. '. !r"'"sa #"r sancti"n- #repare a draft in prescribed format details and ith recommendations for sanction. ith re"uired back-up
BABASAB PATIL 52
SBI )as 'resent y #inanced t)e #" "-in+ !r",ects-
BABASAB PATIL 53
.
AmtKin cr"resH
S.CNO Name O# T)e !r",ect
+ , . / > ? @ ' +( ++ +, ++. +/ +> +?
&escom Manoj Ce ellers Mahaveer developers. C$H Arihant appliances !hreyala;mi properties !hri la;mi trading co. !% flo controls &ubli 3igarette center Mahindrakar Agencies !hri gopal industries Atul agencies Hashyap j. Majethia !hree meena;i pharma !hree meena;i medical agency )ine lab !hree engineers and process ! astik inding orks
@,.(( >.(( '-.(( ,.,/ /.'/ /.@ +.,/ +.+( -/ ,..( ,.(, ...( ,./ ..( /.( /.@ ../
BABASAB PATIL 54
T)e #urt)er 'art )as 3een dea t -it) res'ect t" t)e 'r",ect "# S. # "- c"ntr" sC
BABASAB PATIL 55
!r",ect in Brie#
Name Address
2LS S. F "- C"ntr" $5LA: &A%: Sri .axmi Business )"use near Air'"rt r"ad >"*u r"ad <u3 iC
Nature "# Business Status Name "# t)e 'r"m"ter C"st "# t)e 'r",ect Em' "yment '"tentia
2anu#acturin+ "# industria va vesC !r"'rietary C"ncernC Sri 1erendraCBCK"u,a a+iC 6s &&%C4% a*)s (0 em' "yees
De3t Service c"vera+e rati" &C05
C"st "# t)e 'r",ect
3ost of the project
Amount9%akhs:
BABASAB PATIL 56
.
,/.(( ,,.(( @-.-@ >./( /.((
Building land Machinery 5lectrification 5lectricity 0eposit #reliminary 5;penses - $echnical kno ho - #ersonnel training -#atterns 7et <orking 3aptial $otal /.(( ,.(( /.((
+,.(( >?./,,+..+
2eans "# #inance

Am"unts in a*)s
$erm loan <orking 3aptial loan E n 3ontribution
+(,./( /(.(( /+.-@
Margin Money for orking 3apital +?./$otal ,,+..+
BABASAB PATIL 57
Financia ana ysis 6ati" Ana ysis;An integral aspect of financial appraisal is financial analysis, hich takes into account the financial features of a project, especially source of finance. )inancial analysis helps to determine smooth operation of the project over its entire life cycle. T)e t-" ma,"r as'ects "# #inancia ana ysis are i9uidity ana ysis and ca'ita structure. )or this purpose ratios are employed hich reveal e;isting strengths and eakness of the projectC +: .i9uidity rati"s- %i"uidity ratio or solvency ratio=s measure a project=s ability to meet its current or short-term obligations hen they become due. %i"uidity is the pre-re"uisite for the very survival of a firm. A proper balance bet een the li"uidity and profitability is re"uired for efficient financial management. It reflects the short-term financial strength or solvency of the firm. $ o ratios are calculated to measure li"uidity, the current ratio and "uick ratio. aH Current rati"$he current ratio is defined as the ratio of total current assets to total current liabilities. It is computed by, Current assets
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Current rati" Current ia3i ities
#articulars 3urrent assets
,((. '+..?
,((/ +(+.? ,
,((> ++,.? > +,+./ ' (.',?
,((? +,@. ? '>.( / +.-'
,((@ +./.,/
3urrent liabilities +..., 3urrent ratio (.>-.
+,?.> > (.?>?
@(.('
+.@+-.
BABASAB PATIL 59
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Current ratio
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
1.8134 1.339 0.927 0.634 0.767
Current Ratio
3 Years
Inter'retati"nIt is an indicator of the e;tent to hich short term creditors are covered by assets that are e;pected to be converted to cash in a period corresponding to the maturity of claims. $he ideal current ratio is ,1+. $he firm current ratio indicate that the firm is in a position to meet its short term obligation because the ratio is in increasing trend , by observing the above table e can say that though the firm does not maintain ideal current ratio, it is still in a position to meet its current obligations. After clearing all the dues the firm is still in a position to maintain li"uidity.
3H Acid test "r 9uic* rati"It is a measure of li"uidity calculated dividing current assets minus inventory and prepaid e;penses by current liabilities. !ince inventories among current assets are not "uite li"uid 9means not "uickly converted into cash:, the "uick ratio
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hich can be readily converted into
e;cludes it. $he "uick ratio includes only assets,
cash and constitutes a better test of li"uidity. It is often called as "uick "uick ratio because it is a measurement of a firms ability to convert its assets "uickly into cash in order to meet its current liabilities.
#articulars Ouick assets
,((. >(..?
,((/ >?.>/
,((> ?/.,@
,((? @?.. ?
,((@ ''.'
3urrent liabilities +..., 3urrent ratio (./-.
+,?.> > (./-
+,+./ ' (.>,
'>.( / (.'+ +
@(.('
+.,.?
BABASAB PATIL 61
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Quick ratio
1.4 1.2 1 Quick Ratio 0.8 0.6 0.4 0.2 0 1 2 3 Years 4 0.534 0.53 0.62 0.911
1.247
Inter'retati"nAcid test ratio is a rigorous measure of firm=s ability to service short term liabilities. $he usefulness of the ratio lies in the fact that it is idely accepted as the best available test of li"uidity position of a firm. Benerally an acid test ratio of +1+ is considered satisfactory as a firm can easily meet all its current claims. In the case of the above firm the "uick ratio is in increasing trend by year on. !o it sho s that firm is capable of paying its "uick short term obligations
&C Ca'ita structure rati"J

$he long-term lenders/creditors ould judge the soundness of a firm on the basis of the long term financial strength measured in terms of its ability to pay the interest regularly as ell as repay the installment of the principal on due dates or in one lump sum at the time of maturity. $he long term solvency of firm can be e;amined by using leverage or capital structure ratios. $he leverage or capital structure ratio=s may be defined as
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STATE BANK OF INDIA Project Financing financial ratios
.
light on the long term solvency of a firm as reflected in its ith regard to 9i: periodic payment of interest
hich thro
ability to assure the long term lenders predetermined installments at due dates.
during the period of the loan and 9ii: repayment of the principal on maturity or in
aH De3t e9uity rati"- $his ratio measures the long term or total debt to shareholders e"uity. $his ratio reflects claims of creditors and shareholders against the assets of the firm. 0ebt 5"uity 6atio is given by1 ."n+ term de3t De3t E9uity 6ati" M S)are)" ders e9uity
#articulars 0ebt
,((. @,.( (
,((/ >+./ ( /..( ? +.+.
,((> .+.( ( />.@ @ (.?, +
,((? ,(.( / >@.' . (.,' +
,((@ (.((
5"uity9#romoter contribution: />.@ 0ebt e"uity ratio +../ .
@...'
(.((
BABASAB PATIL 63
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Debt equity ratio 1.6 1.4 1.2 1.454 1.14 0.721
Debt/Equity
1 0.8 0.6 0.4 0.2 0 1 2 3 Years 4 5
0.291 0
Inter'retati"n$he debt e"uity ratio is an important tool of financial analysis to appraise the financial structure of the firm. $he ratio reflects the relative contribution of creditors and o ners of the business in its financing. A high ratio sho s a large share of financing by the creditors of the firmG a lo ratio implies the a smaller claim of the creditors. 0ebt J hich implies that the o ners are putting up 5"uity ratio indicates the margin of safety to the creditors. $he debt-e"uity ratio is in decreasing and in ,((@ it become nil, relatively more money of their o n.
(C !r"#ita3i ity rati"Js re ated t" sa es$hese ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If ade"uate profits are not earned on sales, there ill be difficulty in meeting the operating e;penses and no returns ill be available to the o ners.
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AC Net 'r"#it mar+inIt is also kno n as net margin. $his measures the relationship bet een the net profits and sales of a firm. 0epending on the concept of net profit employed. , this ratio can be computed as follo sEarnin+s a#ter tax Net !r"#it rati" M Net sa es %00
#articulars 5arnings after ta; 7et sales 7et profit margin
,((. +(.>@
,((/ +?.@,
,((> ,?.(/
,((? -/./>
,((@ .-.?/
,>/..' ..(,D
,',.(. >.+(, D
-,+.,. @..,( D
-/-.-> +(.(> D
-@@.? ++.,/D
Inter'retati"n $he net profit margin is indicative of management=s ability to operate the business ith sufficient success not only to recover from revenues of the period, the cost of services, the operating e;penses and the cost of borro ed funds, but also to leave a margin of
BABASAB PATIL 65
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ell as enable the firm to
reasonable compensation to the o ners for providing their capital at risk. A high profit margin ould ensure the ade"uate return to the o ners as ithstand adverse economic conditions. A lo it ill sho net profit margin has the opposite
implications. <ith respect to the above firm the net profit margin is increasing trend so that the company is in good condition and the demand for the product is increasing.
4 C !r"#ita3i ity rati"s re ated t" Investments6eturn "n Investments6eturn on investments measures the overall effectiveness of management in generating profits ith its available assets. $here are three different concepts of investments in financial literature1 assets, capital employed and shareholder=s e"uity. Based on each of them, there are three broad categories of 6EIs. $hey are I. 6eturn on assets, II. 6eturn on total capital employed.
6eturn "n assets$he profitability ratio is measured in terms of relationship bet een net profits and assets. $he 6EA may also be called profit-to-asset ratio. It can be computed as follo sNet 'r"#it a#ter tax 6eturn "n Assets M Avera+e t"ta assets %00
BABASAB PATIL 66
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,((. +(.>@ ,((/ +?.@, +''./ . ,((> ,?.(/ +'/.' ,((? -/./> ,((./. ,((@ .-.?/ ,(@.-.
#articulars 5arnings after ta;
Average total assets ,(@.-'
6EA
/.+,/ D
@.'-D
+-.@+ D
+?.?D
,(.''D
ROA
5.13 20.99 8.93
13.81 17.73
Inter'retati"n6eturn on assets employed is favorable. $hat means the firm is in a position to employ its assets in an efficient manner.
6eturn "n Ca'ita Em' "yed-
BABASAB PATIL 67
It is similar to 6EI e;cept in one respect. &ere the profits are related to the total capital employed. $he term capital employed refers to long term funds supplied by the lenders and o ners of the firm. It is given by the formulaEBIT 6eturn "n Ca'ita em' "yed M Avera+e t"ta ca'ita em' "yed %00
#articulars 5BI$
,((. -..@,
,((/ .,.,. +''./.
,((> /,.>> +'/.'(
,((? >,.(. ,((./ .
,((@ ?(.'' ,(@.-.
total capital employed ,(-.' 6E35 +?.,D
,+.+> D
,@.', D
-(.'D
-..(?D
BABASAB PATIL 68
.
ROC! 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 1 2 Years 3 ROC! 4 5 17.20 21.16 28.92 30.90
34.07
Returns
Inter'retati"n;$he capital employed basis provides a test of profitability related to the source of long term funds. $he higher the ratio, the more efficient is the use of capital employed. )rom the above table e can say that the 6E35 is "uite high. 3ompared to previous years ratio. It is good for the companyC
6e'ayment !eri"d and de3t service c"vera+e AH !r",ecti"ns "# 'er#"rmance and 'r"#ita3i ity
BABASAB PATIL 69
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,((. -((.(( -../+ ,>/..' ,((/ --(.(( -?.'> ,',.(. ,((> ->-.(( .+.?> -,+.,. ,((? -''.-( ./.'. -/-.-> ,((@ .-'.,/(./-@@.?(
particulars A: !ales %ess1 5;cise
7et sales
B: cost of #roduction +.6a material consumed ,.#o er A )uel -.0irect labor A ages ..consumable stores /.6epair A Maintenance >.Ethermanufacturinge;pences ?.0epreciation @.#reliminary e;penses /off
+@/.@. >.(( +,.,. (.>( +.,( (.?, ,..'? ,..( ,--..? (.(( ../( ,,'..? ->.(,
,(..., >.>( +-..> (.>> +.-, (.?' +'.+( ,..( ,.@.?> ../( ..?@ ,.@.?@ .-./>
,,..@? ?.,> +..@+ (.?+.>/ +.++ +..>> ,..( ,>?..' ..?@ /.+. ,>?.+/..++
,.?.-/ ?.'' +>.,' (.@( ,..@ +.// ++.-( ,..( ,'(.+> /.+. /./@ ,@'.?, >-.>.
,?,.(' @.?@ +?.', (.@@ -..? ,.+? @.?/ ,..( -+>..> /./@ >.(' -+/.'> ?,.?.
$otal 3ost of #roduction

Add1 Epening stock %ess1 3losing !tock 0:3ost of goods sold 5: Bross #rofit 9B-0: ): Interest on +: $erm %oan ,: <orking 3aptial
+,.@( >.?/
+(.(>.?/
?.,> >.?/
../( >.?/
+.?>.?/
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+'.// +.,( +>.?@ +.-, ,/../ +..(+ +../ -@.>/ ++.,/ +.>( /(.@( @..@ +.?> >,./+
$otal B: !elling, administration 5;p
&:#rofit
9)QB::
Before
$a;ation95- +/.,?
I: #rovision for $a;ation C: #rofit after ta; 9&-I: H: 0epreciation %: 7et 3ash accruals9 CQH:
../@ +(.>' ,..'? -/.>>
?.>. +?.@, +'.+( ->.',
++./' ,?.(/ +..>> .+.?,
+/.,. -/./> ++.-( .>.@>
+@.?/ .-.?/ @.?/ /,./
BH !r",ected Cas) F "- Statement
!%.7E A:
#articulars !ources of funds +.7et profit before interest and ta; ,. 0epreciation -.#romoters capital ..o n contribution to ards /.term loan >. orking capital loan ?.!undry creditior @.Amortisationofpreliminarye;pences
,((.
,((/
,((>
,((?
,((@
-..@, ,..'? /+.-@ /.(( +(,./( /(.(( ?.?. ,..(
.,.,. +'.+(
/,.>> +..>>
>,.(. ++.-(
?(.'' @.?/
(.?? ,..(
(.@/ ,..(
(.'. ,..(
+.(,..(
BABASAB PATIL 71
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,?@.@ >../, ?(./@ ?>.>@ @-.+?
$otal1
BH
Application of funds +. Buldings ,. %and -.Macinary ..5lectrification /.5lectricity 0eposit >.#reliminary 5;penditure >. Increase in receivables ?.incerase in stock of material '.increase in stock of finished goods +(.0ra ing/ 0ividend ++.interest on loans +,.income ta; +-.6epayment of term loans $otal !urplus/deficit Epening Balance Add1 surplus/ deficit ...,/ -(.'? ../( -.(( +'.// (.(( ,(./ ,?>.>/ ,.+/ (.(( ,.+/ ..., -.+( (.,@ +(.(( +>.?@ ../@ ,(./ /'.>? ..@/ ,,+/ ..@/ ..@? -..+ (.-> +/.(( +..(+ ?.>. ,(./ >/.?' ..?' ?.(( ..?' /.-/ -.?/ (... +/.(( ++.,/ ++./' ,(./ >?.@@ @.@( ++.@( @.@( /.@' ..+, (./+ ,(.(( @..@ +/.,. ,(./ ?..?. @..,(.> @..,/.(( ,,.(( @-.-@ >./( /.((
BABASAB PATIL 72
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,.+/ ?.(( ++.@( ,(.> ,'.(-
3losing Balance
!r",ectd Ba ance S)eet
!%.7E #articulars A 3aptial A %iability #romoter captial E n contribution %ess 0ra ings 5"uity 6etained 5arning
,((.
,((/
,((>
,((?
,((@
(.(( />.-@ -,(( /-.-@ +(.>' >..(?
>..(? (.(( +(.(( /..(? +?.@, ?+.@@
?+.@@ (.(( +/.(( />.@@ ,?.(/ @-.'.
@-.'. (.(( +/.(( >@,'. -/./> +(... '
+(...' (.(( ,(.(( @...' .-.?/ +,@.,/
$erm loan90ebt: !undry creditors <orking 3aptial loan #rovision for ta; Brand $otal
@,.(( ?.?. /(.(( ../@ ,(-.'
>+./( @./, /(.(( ?.>. +''./ .
.+.(( '.-? /(.(( ++./' +'/.' (
,(./( +(.-+ /(.(( +/.,. ,((./ .
(.(( ++.-. /(.(( +@.?/ ,(@.-.
Assets; )i;ed assets land @'.'+ ,,.(( ?(.@+ ,,.(( />.+. ,,.(( ...@. ,,.(( ->.(' ,,.((
BABASAB PATIL 73
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/.(( ,.+/ ...,/ -(.'? ../( /.(( ?.(( .@.>? -..(? ..?@ ?.,( +''./ . /.(( ++.@( /-./. -?..@ /.+. ..@( +'/.' /.(( ,(.> /@.@' .+.,/./@ ,..( ,((./ . /.(( ,'.(>..?@ ./.-/ >.(' (.(( ,(@.-.
5lectricity deposit 3ash A Bank Balances 6eceivables !tock of material !tock of finished goods
#reliminary e;pences not /off '.>( Brand $otal ,(@.'
De3t Service C"vera+e 6ati";KDSC6H

It is considered a more comprehensive and apt measure to compute debt service capacity of firm. It provides the value in terms of the number of times the total debt service obligations consisting of interest and repayment of principal in installments are covered by the operating funds available after the payment of ta; 1 earnings after ta;es, 5A$QinterestQ0epreciationQEther non cash e;penditure like amorti2ation. 5A$QinterestQ0epreciationQEther 7on cash e;penditure 0!36 R Installments
BABASAB PATIL 74
year
7et profit for the Interest on term loan 6epayment of term loan year
,(( . ,(( / ,(( > ,(( ? ,(( @
-/.>>
+'.//
,(./
->.',
+>.?@
,(./
.+.?, #articulars
+..(+ ,((. ,((/ ->.' , ,(./ +.@(
,(./ ,((> ,((? ,((@ /,./(
.>.@> 7et 3ash Accruals ++.,/ -/.>
.+.? ,(./ .>.@ , >
>
/,./( Instalment 0!36 @..@,(./ +.?.
,(./ ,(./ ,(./ ,.(,.,'
,(./ ,./>
BABASAB PATIL 75
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Debt service coverage Ratio
3 2.5 2 1.5 1 0.5 0 1 2 Years 3 D"CR 4 5 DSCR 1.74 1.8 2.03 2.29 2.56
Inter'retati"n;$he higher the ratio, the better it is, A ratio of less than one may be taken as a sign of long term solvency problem as it indicates that the firm does not generate enough cash internally to service debt. in general, lending financial institution consider ,1+ as satisfactory ratio. In this project 0!36 is in increasing trend it sho s that firm is able to meet its debt obligation.
Ca'ita investment eva uati"n met)"ds

!uccessful completion of a project mainly depends on the selection criteria adopted hile choosing the project in the initial phases itself and the choice of a project must be based on a sound Pfinancial assessment= and not based on Pimpressions=. Among the
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idely used in both public and private sectors. 4sually the hich is the
several criteria available for financial assessment of projects, 0iscounted 3ash )lo 903): techni"ues are being basic criterion used in project appraisal is Internal 6ate of 6eturns 9I66:,
most popular 03) techni"ue used in the country. &o ever, in most of the projects of the projects , the actual returns are vastly different from the e;pected returns based on I66, necessitating looking for alternative project appraisal criteria. $herefore, an attempt is made to analyse other alternative project appraisal methods available for catering to the re"uirements of vivid circumstances. 5mphasis is given for 03) techni"ues as they the orldC %H !ay Bac* !eri"d K!B!H 2et)"d; #ay back period is the minimum period re"uired to cover the initial cost and a project ith minimum #B# is acceptable in this model. $his is a very useful tool to orth to do a small investment by a local manager and also helps decide rapidly if it is ere proved to be the best techni"ues for project appraisal all over
to reduce the risk of bad choices. But the basic economic principles involved in #B# method are not as reliable as the other methods like 7#8 etc. $he most important dra back of #<# method is, it is insensitive to changes in timing bench mark against ith in the payback period and ignores the cash flo s beyond the #B#. $his method also lacks a Pnatural= hich comparisons can be made among various projects. 0iscounted #B# method gives a more accurate period to cover the initial cost but doesn=t overcome the above dra backs. &o ever this is a very good method to use in combination ith other methods.
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Iear 3ash )lo s 9in lakhs: 3umulative cash flo s ,(( . ,(( / ,(( > ,(( ? ,(( @ /,./( ,+-.>> .>.@> +>+.+> .+.?, ++..->.', ?,./@ -/.>> -/.>>
T"ta cas) "ut# "!ay Bac* !eri"d R Annua cas) in# "$he recovery of the investment is in the -rd year and (.>. month. Inter'retati"n-
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ithin hich the total cost of the period is less than the ill be able to
$he #ay back period is a measure of li"uidity of investments rather than their profitability. !ince the period completion period, the project can be accepted. It means that the firm
pay the dues out of their inflo s. $herefore the project is said to be feasible.
&C Avera+e 6ate "# 6eturn$he average rate of return 9A66: method of evaluating proposed capital e;penditure is also kno n as the accounting rate of return method. It is also kno n as 6eturn on Investment, as it uses the information revealed by financial statements, to measure the profitability of an investment. $he accounting rate of return can be found out by dividing the average after-ta; profit by the average investment. It is given by the formula-
Avera+e annua 'r"#it a#ter tax Avera+e rate "# return M Avera+e investment ,+-.>>/ / Average rate of return R +/,.// , S +(( N %00
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.
.,.?-,
Average rate of return R ?>.,/
S +((
Average rate of return R
/>.(.D.
Inter'retati"n&ere the A66 is more consistent as the A66 is "uite higher 9 more than average: and the project can be accepted.
(C Net !resent va ueIt is calculated by discounting the future cash flo s of the project to the present value ith the re"uired rate of return to finance the cost of capital. A project is acceptable if the capital value of the project is less than or e"ual to the net present value of cash flo s over the operating life cycle of the project. $his method is highly useful are no budgetary constraints. !election of projects ith the largest positive 7#8 hen ill selection has to be made among many projects, hich are mutually e;clusive, and there yield highest returns. But this method is useful only to determine It is difficult to rank different compatible projects Pscale= of investment hile calculating 7#8. hether a project is
acceptable or not but doesn=t indicate hich project is best under budgetary constraints. ith 7#8 as there is no account for
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STATE BANK OF INDIA Project Financing Inter'retati"nIear + , . / $otal #8 %ess- Initial outlay 7et #resent 8alue 3ash )lo s9lakhs: -/.>> ->.', .+.?, .>.@> /,./( #8 factor V+(D (.'(' (.@,> (.?/+ (.>@(.>,+ $otal present value -,..+. -(..'/ -+.,'( -,.((/ -,.>(+/@.@(? +/,./ >.-(?
$he acceptance rule using 7#8 method is to accept the investment proposal if its net present value is positive 97#8 T (: and to reject it if the 7#8 is negative 97#8U(:. #ositive 7#8=s contribute to the net ealth of the shareholders hich should result in ill result only if the increased price of a firm=s share. $he positive net present value
the project generates cash inflo s at a rate higher than the opportunity cost of capital . !ince the 7et #resent 8alue of the above project is positive, the proposal can be accepted.
4 C !r"#ita3i ity IndexIt is also kno n as Benefit J3ost 6atio. It is similar to 7#8 approach. $he profitability inde; approach measures the present value of returns per rupee invested, <hile the 7#8 is based on the difference bet een the present value of the future cash inflo s and the present value of cash outlays. It may be defined as the ratio It is given by the formula1 hich is obtained dividing the present value of cash inflo s by the present value of cash outlays.
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!resent va ue "# cas) in# "-s
!r"#ita3i ity Index M !resent va ue "# cas) "ut# "-s +/@.@(? #rofitabillity Inde; R +/,./ #rofitability Inde; R Inter'retati"n4sing the profitability inde;, a project ill "ualify for acceptance if its #I e;ceeds one +.(.+
9#IT+:. <hen #I is greater than or e"ual to or less than +, the net present value is greater than or e"ual to or less than 2ero respectively. !ince the #rofitability Inde; of the above project sho s the #I greater than + and hence the project should be accepted.
/C Interna 6ate "# 6eturnIt is the rate of return at hich the 7et #resent 8alue 97#8: of a project becomes 2ero. A project is acceptable if the I66 e;ceeds the cost of capital. It is possible to rank various compatible projects ith I66 method and a project ith highest I66 can be selected. &o ever, this method is not useful hen selection has to be made among
mutually e;clusive projects. $his method assumes that the net cash flo s from a project are first negative and then positive for the rest of the project life and vice versa. But this condition is not al ays fulfilled resulting in multiple I66s for the same project. 0ue to ambiguous results, project selection becomes difficult. )urther, selection of a
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ithout taking project specific risk factors into
project based on highest I66 alone, consideration, may be often misleading.
Iear
3ash flo s
<eights
<eighted average 3)=s
+ , . / $otal
-/.>> ->.', .+.?, .>.@> /,./(
/ . , + +/ /'?.->
+?@.+.?.>@ +,/.+> '-.?, /,./ /'?.->
<eighted Average 3ost R +/ R !ay Bac* !eri"d M Bei+)ted avera+e c"st +/,./ #ay Back #eriod #ay back period AH R -'.@,. R -.@ years -'.@,. Initia Investment
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3ash)lo s9lakhs: -/.>> ->.', .+.?, .>.@> /,./( #8 factor V+(D (.'(' (.@,> (.?/+ (.>@(.>,+ present value -,..+. -(..'/ -+.,'( -,.((/ -,.>(+/@.@(? +/,./ >.-(?
Iear + , . / $otal #8 %ess- Initial outlay 7et #resent 8alue
BH Iear + , . / $otal #8
3ash flo s -/.>>
#8 factor V +,D (.@'(.?'?
#resent value -+.@. ,'..,'.?( ,'.@( ,'.?> +/(./-
->.', (.?+, .+.?, (.>-> .>.@> (./>? /,./(
BABASAB PATIL 84
.
+/,./-+.'?
%ess- Initial outlay 7et #resent 8alue A Interna rate "# return M .O A- B >.-(? Internal rate of return R +( Q >.-(?-+.'? >.-(? Internal rate of return R +(Q ..--? Internal rate of return R Internal rate of return R Inter'retati"n!ince the e;pected rate of return is +(D so the project is said to be accepted. +( Q ,.'(@ +,.'+D W,X 9+,-+(:
P<-.Q
2easures ta*en 3y SBI -)en t)e re'ayment is n"t '"ssi3 e

,: )irstly they send a notice to the clients stating therein to pay their dues. -: <hen there no improvements in the repayments even after the notice being sent then the bank payments ill for ard the legal notice stating the clients to make
BABASAB PATIL 85
.
herein both the parties sit together and hich means hether the clients make
.: $hird is the compromise dealing decide
hat measures has to be taken
the payments, or hether to file a suit or decide to sell the #roperties etc..
Ana ysis;T)is ana ysis 'art is re ated t" t)e #inancia via3i ity "# t)e 'r",ect S. F "C"ntr" s;-
BABASAB PATIL 86
$hrough ratio analysis I analy2ed that the li"uidity position of the firm is good and it is maintaining the standard ratio.. 0ebt 5"uity ratio is in decreasing trend, it sho s that the firm is reducing its liability portion by paying the loan year on year so the financial risk less.
#rofitability ratios related to sales and capital employed are in increasing trend, it sho s that the sales are increasing and the firm using its resources efficiently.
0ebt !ervice 3overage 6atio is also in increasing trend, it sho s that the firms ability to make the loan repayments on time over the debt life of the project.
$he payback period is ithin the debt life of the project. $he net present value of the project is positive, $he positive net present value ill result only if the project generates cash inflo s at a rate higher than the opportunity cost of capital . !ince the 7et #resent 8alue of the above project is positive, the proposal can be accepted.
$he internal rate of the return is higher than hat accepted so the project is accepted.
BABASAB PATIL 87
Findin+s ;- T)ese are re ated t" 3an* in +enera

!tate bank of India is strictly follo ing the guidelines of 6BI on #roject )inancing !anctioning for the projects is approved by 6A!M533 96etailed Assets !mall And Medium 5nterprises 3redit 3ell:. $he bank finances the projects only through term loans. Interest rates are fi;ed depending upon the projects Bank advance rate. <hen the clients fail to pay the interest, - months from the due date the term loan granted ill be treated as 7on #erforming Assets. If the interest is due further - more months then it ill be treated as doubtful assets and interest rates becomes 2ero. Again for further - months it goes as loss assets and the bank account. 5very firm starting up a ne the same bank itself. project should make an insurance policy ith rite off the hich is kno n as !tate
6ec"mmendati"ns; Bank check only financial, technical and commercial feasibility of the project and it should not consider sensitivity analysis and social cost benefit analysis of the project so bank should consider this because these are also important from the point of vie of risk and economy gro th.
BABASAB PATIL 88
Bank should be caution about the availability of security and ensure honesty of both borro er and guarantor so as to avoid the account becoming the loss assets.
.imitati"n "# t)e study;!ome of the information are confidential in nature that could not divulged for study.
C"nc usi"n;$he project undertaken has helped a lot in understanding the concept of project financing in nationali2ed bank ith reference to state bank of India. $he project financing is an important aspect hich helps in increasing the profit of the banks. #roject financing is a vast subject and it is very difficult to apply all the aspect in all type of project this project. $o sum up it ould not be out of ay to mention here that the state bank of India has hen bank ant to finance, and it is very difficult to cover all aspect in
given a special impetus on F#roject )inancing* .the concerted efforts of the management and staff of state bank of India has helped the bank in achieving remarkable progress in almost all important aspects. )inally the success of project financing the projects before financing. ould mostly depend on the proper analysis of
BABASAB PATIL 89
Bi3 i"+ra')y
$he data is collected from the list of books and eb site given belo .sbi.com. .Boogle.com 3ompany manuals. 3ommercial Banks Book. #roject financing by J Machiraju )inancial management by J Hhan and Cain.
BABASAB PATIL 90

Babasab Patil 1: Project Financing

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Babasab Patil 1: Project Financing

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STATE BANK OF INDIA Project Financing

Executive Summary Industria !r"#i e SECTION II C"m'any !r"#i e SECTION III

!r",ect Financia A''raisa /0- /(

!r",ect in Brie#- S. # "- c"ntr" s SECTION I1

Ana ysis Findin+s 6ec"mmendati"ns .imitati"ns C"nc usi"ns Bi3 i"+ra')y

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

analysis and capital budgeting calculations.

)inancial appraisal of project*

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

Findin+s ;- T)ese are re ated t" 3an* in +enera

STATE BANK OF INDIA Project Financing

6ati"na e 3e)ind c)""sin+ t)is t"'ic;

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

as set up in the year +?@>. 7e;t came Bank of &industan

failures bet een +'+- and +'.@. $here

ere appro;imately ++(( banks, mostly small. ith

STATE BANK OF INDIA Project Financing

$he Banking 3ompanies Act, +'.'

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

Banking in India originated in the first decade of +@th century

STATE BANK OF INDIA Project Financing

here all )oreign Investors in

hich could e;ceed the present cap of +(D, at

ere used to the .->-. method 9Borro

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

Structure "# Indian Ban*in+

STATE BANK OF INDIA Project Financing

6eserve Ban* "# India Sc)edu ed Ban*s

Sc)edu ed C"mmercia Ban*s

Sc)edu ed C"-"'erative Ban*s

!u3 ic Sect"r Ban*s

!rivate Sect"r Ban*s

6e+i"na 6ura Ban*s

Nati"na i?ed Ban*s

SBI A its Ass"ciates

Sc)edu ed @r3an c""'erative Ban*

Sc)edu ed State c""'erative Ban*s

O d 'rivate sect"r Ban*s

Ne- 'rivate sect"r Ban*s

STATE BANK OF INDIA Project Financing

majesty of the !tate Bank Ef India founded nearly t o centuries ago

In the post depression e;e. )or instance J

e;tremely restricted, rules laid do n in the book of instructions

STATE BANK OF INDIA Project Financing

A highly efficient and e;perienced management functioning in a

T<E !.ACE TO S<A6E T<E NEBS CCCDD S<A6E T<E 1IEBS DD

STATE BANK OF INDIA Project Financing

$ogetherness is the theme of this corporate loge of !BI

STATE BANK OF INDIA Project Financing

3&I5) B5756A% MA7AB56

B.M 9I: A 38E 9#A0:

STATE BANK OF INDIA Project Financing

Konal off 6egional officers

T)e"retica Bac*+r"und #"r t)e 'r",ect -"r* #roject )inancing

STATE BANK OF INDIA Project Financing

STATE BANK OF INDIA Project Financing

finance the project

T)e"retica Bac+r"und #"r t)e 'r",ect -"r #roject )inancing