Professional Documents
Culture Documents
State Bank of India Project Financing
State Bank of India Project Financing
Project Financing
Declaration
I,Vijayalaxmi.M.Balaraddi,
declare
that
this
project
FINANCIAL
APPRAISAL
OF
hereby
entitled
PROJECT
FINANCIED BY STATE BANK OF INDIA, has
Ms.Mona Agarwal
Vijayalaxmi.M.Balaraddi
(Faculty Member)
No.MBA06002087
Register
Date:
Place:Hubli.
Acknowledgement
I would like to thank
Dr.M.M.Bagali ,Director of KLESs Institute of
Management Studies And Research, Hubli,for
the guidance he has given to me in the conduction
of my project work.
I express my profound thanks to Ms.Mona
Agarwal, my teacher and guide, who has been
magnanimous
in
guiding,
encouraging
and
supporting me during this project and she guided
me to choose this immensely productive topic and it
CONTENTS
.
SECTION I
Executive Summary
4-7
Industrial Profile
9 -12
SECTION II
Company Profile
13-21
SECTION III
22- 49
50- 53
SECTION IV
Financial Analysis
54-74
75
SECTION V
Analysis
76
Findings
77 -78
Recommendations
Limitations
Conclusions
Bibliography
79
Executive Summary
Title of the project
Financial Appraisal Of the Project Financed By SBI, Hubli
As a part of curriculum, every student studying MBA has to undertake a project on a
particular subject assigned to him/her. Accordingly I have been assigned the project
work on the study of project financing in Banking Sector.
As it is rightly said that finance is the life blood of every business so every business
need funds for smooth running of its activities and bank is the one of the source through
which the business get funds, before financing the bank appraise the projects and if the
projects meet the requirement of the bank rules than only they will finance.
Project financing is commonly used as a financing method in capital-intensive
industries for projects requiring large investments of funds, such as the construction of
power plants, pipelines, transportation systems, mining facilities, industrial facilities
and heavy manufacturing plants.
The core area of this project focuses on the financial appraisal of SL flow controls, who
has started Manufacturing of industrial valves which is financed by SBI
.
This project has been undertaken at State Bank of India, Hubli branch which is one of
the largest bank in India having vast domestic network of over 9000 branches. SBI
deals with all financial activities which involves all types of deposits, advances
including project financing, mutual funds etc
Financial appraisal which mainly leads to the feasibility study consisting of ratio
analysis and capital budgeting calculations.
Main Objective
2.
3.
4.
5.
To know the measures taken by bank when the clients fail to repay the amount.
Methodology
Data collection method: The report will be prepared mainly using secondary data viz,
Secondary data
www.sbi.com.
Company manuals.
Commercial Banks Book.
The techniques, which would be used for the study:
1. Discussions with Bank guide and customers.
2. By studying projects reports
.
3. Using Project Techniques:
Analysis:This analysis part is related to the financial viability of the project SL Flow
Controls:
Through ratio analysis I analyzed that the liquidity position of the firm is
good and it is maintaining the standard ratio..
Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
Debt Service Coverage Ratio is also in increasing trend, it shows that the
firms ability to make the loan repayments on time over the debt life of the
project.
The net present value of the project is positive, The positive net present
value will result only if the project generates cash inflows at a rate higher
than the opportunity cost of capital . Since the Net Present Value of the
above project is positive, the proposal can be accepted.
The internal rate of the return is higher than what accepted so the project is
accepted.
Interest rates are fixed depending upon the projects which is known as State
Bank advance rate.
When the clients fail to pay the interest, 3 months from the due date the term
loan granted will be treated as Non Performing Assets.
If the interest is due further 3 more months then it will be treated as doubtful
assets and interest rates becomes zero.
Again for further 3 months it goes as loss assets and the bank write off the
account.
Every firm starting up a new project should make an insurance policy with
the same bank itself.
Recommendations:
analysis of the project so bank should consider this because these are also
important from the point of view of risk and economy growth.
Limitation of the study:Some of the information are confidential in nature that could not divulged for study.
Industrial Profile
HISTORY OF BANKING IN INDIA
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and
internal factors.
For the past three decades Indias banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main
reasons for Indias growth. The governments regular policy for Indian bank since 1969
has paid rich dividends with the nationalization of 14 major private banks of India.
The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of
Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established which started as private shareholders banks, mostly European
shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and
1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small.
To streamline the functioning and activities of banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation
Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India
was vested with extensive powers for the supervision of banking in India as the Central
Banking System.
During those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence.
In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a
large scale specially in rural and semi-urban areas. It formed State Bank of India to act
as the principal agent of RBI and to handle banking transactions of the Union and state
government all over the country.
Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th
July 1969, major process of nationalisation was carried out. It was the effort of the then
Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country
were nationalized.Second phase of nationalisation Indian Banking Sector Reform was
carried out in 1980 with seven more banks. This step brought 80% of the banking
segment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:
1. 1949: Enactment of Banking Regulation Act.
2. 1955: Nationalisation of State Bank of India.
3. 1959: Nationalisation of SBI subsidiaries.
4. 1961: Insurance cover extended to deposits.
India being established as The Bank Of Calcutta in Calcutta in June 1806. Couple of
Decades later, foreign Banks like HSBC and Credit Lyonnais Started their Calcutta
operations in 1850s. At that point of time, Calcutta was the most active trading port,
mainly due to the trade of British Empire and due to which banking actively took roots
there and prospered. The first fully Indian owned bank was the Allahabad Bank set up
in 1865.
By 1900, the market expanded with the establishment of banks like Punjab National
Bank in 1895 in Lahore; Bank of India in 1906 in Mumbai-both of which were founded
under private ownership. Indian Banking Sector was formally regulated by Reserve
Bank Of India from 1935. After Indias independence in 1947, the Reserve Bank was
nationalised and given broader powers.
SBI Group
The Bank of Bengal, which later became the State Bank of India. State Bank of India
with its seven associate banks commands the largest banking resources in India.
Nationalization
The next significant milestone in Indian Banking happened in late 1960s when the then
Indira Gandhi government nationalized on 19th July 1949, 14 major commercial Indian
banks followed by nationalisation of 6 more commercial Indian banks in 1980.
The stated reason for the nationalisation was more control of credit delivery. After this,
until 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as
the Hindu growth of the Indian economy.
After the amalgamation of New Bank of India with Punjab National Bank, currently
there are 19 nationalized banks in India.
LiberalizationIn the early
liberalization and gave licences to a small number of private banks, which came to be
known as New generation tech-savvy banks, which included banks like ICICI and
HDFC. This move along with the rapid growth of the economy of India, kick started
the banking sector in India, which has seen rapid growth with strong contribution from
all the sectors of banks, namely Government banks, Private Banks and Foreign banks.
However there had been a few hiccups for these new banks with many either being
taken over like Global Trust Bank while others like Centurion Bank have found the
going tough.
The next stage for the Indian Banking has been set up with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in
Banks may be given voting rights which could exceed the present cap of 10%, at
present it has gone up to 49% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.
CURRENT SCENARIO
Currently (2007), overall, banking in India is considered as fairly mature in terms
of supply, product range and reach-even though reach in rural India still remains a
challenge for the private sector and foreign banks. Even in terms of quality of assets
and capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets-as compared to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatilitywithout any stated exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector, the demand for banking services-especially retail
banking, mortgages and investment services are expected to be strong. M&As,
takeovers, asset sales and much more action (as it is unraveling in China) will happen
on this front in India.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake
in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector
banks (that is with the Government of India holding a stake), 29 private banks (these do
not have government stake; they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5% respectively.
.
Banking in India
1 Central Bank
of
Baroda,
Maharastra,Canara
2 Nationalised
Banks
Bank
Bank,
of
Central
India,
Bank
Bank
of
of
India,
3 Private Banks
Scheduled Commercial
Banks
Public Sector
Banks
Nationalized
Banks
Private Sector
Banks
Scheduled Co-operative
Banks
Foreign
Banks
Regional
Rural Banks
Scheduled Urban
cooperative
Bank
Bank Overview
STATE BANK OF INDIA
Not only many financial institution in the world today can claim the antiquity and
majesty of the State Bank Of India founded nearly two centuries ago with primarily
intent of imparting stability to the money market, the bank from its inception mobilized
funds for supporting both the public credit of the companies governments in the three
presidencies of British India and the private credit of the European and India merchants
from about 1860s when the Indian economy book a significant leap forward under the
impulse of quickened world communications and ingenious method of industrial and
agricultural production the Bank became intimately in valued in the financing of
practically and mining activity of the Sub- Continent Although large European and
Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the
small man never ignored loans as low as Rs.100 were disbursed in agricultural districts
against glad ornaments. Added to these the bank till the creation of the Reserve Bank in
1935 carried out numerous Central Banking functions.
Adaptation world and the needs of the hour has been one of the strengths of the Bank,
In the post depression exe. For instance when business opportunities become
extremely restricted, rules laid down in the book of instructions were relined to ensure
that good business did not go post. Yet seldom did the bank contravenes its value as
depart from sound banking principles to retain as expand its business. An innovative
array of office, unknown to the world then, was devised in the form of branches, sub
branches, treasury pay office, pay office, sub pay office and out students to exploit the
opportunities of an expanding economy. New business strategy was also evaded way
back in 1937 to render the best banking service through prompt and courteous attention
to customers.
A highly efficient and experienced management functioning in a well defined
organizational structure did not take long to place the bank an executed pedestal in the
areas of business, profitability, internal discipline and above all credibility A
impeccable 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. No wonders the administration for the bank was universal as key
functionaries of India successive finance minister of independent India Resource Bank
of governors and representatives of chamber of commercial showered economics on it.
Modern day management techniques were also very much evident in the good old days
years before corporate governance had become a puzzled the banks bound functioned
with a high degree of responsibility and concerns for the shareholders. An unbroken
records of profits and a fairly high rate of profit and fairly high rate of dividend all
through ensured satisfaction, prudential management and asset liability management
not only protected the interests of the Bank but also ensured that the obligations to
customers were not met.
The traditions of the past continued to be upheld even to this day as the State Bank
years itself to meet the emerging challenges of the millennium.
ABOUT LOGO
Togetherness is the theme of this corporate loge of SBI where the world of banking
services meet the ever changing customers needs and establishes a link that is like a
circle, it indicates complete services towards customers. The logo also denotes a bank
that it has prepared to do anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for the
growth and newer, more challenging, more promising direction. The key hole indicates
safety and security.
MISSION STATEMENT:
To retain the Banks position as premiere Indian Financial Service Group, with world
class standards and significant global committed to excellence in customer, shareholder
and employee satisfaction and to play a leading role in expanding and diversifying
financial service sectors while containing emphasis on its development banking rule.
VISION STATEMENT:
VALUES
Profit orientation
Team playing
Integrity
Organization Structure
MANAGING DIRECTOR
G. M
G.M
(Operations)
G. M
(C&B)
G.M
(F&S)
G.M
(I) & CVO
(P&D)
Zonal off
Functional Heads
Regional officers
DISADVANTAGES-
Project financings are extremely complex. It may take a much longer period of time to
structure, negotiate and document a project financing than a traditional financing, and
the legal fees and related costs associated with a project financing can be very high.
Because the risks assumed by lenders may be greater in a non-recourse project
financing than in a more traditional financing, the cost of capital may be greater than
with a traditional financing.
independent feasibility study before the lender will commit to lend funds for the
project.
Contents
The feasibility study should analyze every technical, financial and other aspect of the
project, including the time-frame for completion of the various phases of the project
development, and should clearly set forth all of the financial and other assumptions
upon which the conclusions of the study are based, Among the more important items
contained in a feasibility study are:
1. Description of project
2. Description of sponsor(s).
3. Sponsors' Agreements.
4. Project site.
5. Governmental arrangements.
6. Source of funds.
7. Feedstock Agreements.
8. Off take Agreements.
9. Construction Contract.
10. Management of project.
11. Capital costs.
12. Working capital.
13. Equity sourcing.
14. Debt sourcing.
15. Financial projections.
16. Market study.
17. Assumptions.
losses, deductions and credits are allocated among the partners, which
include their allocated share in computing their own individual taxes.
Consequently, a partnership frequently will be used when the tax benefits
associated with the project are significant. Because the general partners of a
partnership are severally liable for all of the debts and liabilities of the
partnership, a sponsor frequently will form a wholly owned, single-purpose
subsidiary to act as its general partner in a partnership.
3. Limited PartnershipsA limited partnership has similar characteristics to a general partnership
except that the limited partners have limited control over the business of the
partnership and are liable only for the debts and liabilities of the partnership
to the extent of their capital contributions in the partnership. A limited
partnership may be useful for a project financing when the sponsors do not
have substantial capital and the project requires large amounts of outside
equity.
Limited Liability CompaniesThey are a cross between a corporation and a limited partnership.
Project Company Agreements
Depending on the form of project company chosen for a particular project
financing, the sponsors and other equity investors will enter into a stockholder
agreement, general or limited partnership agreement or other agreement that sets forth
the terms under which they will develop, own and operate the project. At a minimum,
such an agreement should cover the following matters:
Ownership interests.
Capitalization and capital calls.
Allocation of profits and losses.
Distributions.
Accounting.
Governing body and voting.
Day-to-day management.
Budgets.
Transfer of ownership interests.
Admission of new participants.
Default.
Termination and dissolution.
Principal Agreements in a Project Financing1. Construction ContractSome of the more important terms of the construction contracts are Project Description- The construction contract should set forth
a detailed description of all the Work necessary to complete the
project
Price:- Most project financing construction contracts are fixedprice contracts although some projects may be built on a costplus basis. If the
necessary
to
complete
the
lender.
Completion Date- The construction completion date, together
with any time extensions resulting from an event of force
majeure, must be consistent with the parties' obligations under
the other project documents. If construction is not finished by the
completion date, the contractor typically is required to pay
liquidated damages to cover debt service for each day until the
project is completed. If construction is completed early, the
contractor frequently is entitled to an early completion bonus.
Performance Guarantees- The contractor typically will
guarantee that the project will be able to meet certain
performance standards when completed. Such standards must
be set at levels to assure that the project will generate sufficient
revenues for debt service, operating costs and a return on equity.
Such guarantees are measured by performance tests conducted
by the contractor at the end of construction. If the project does
not meet the guaranteed levels of performance, the contractor
typically is required to make liquidated damages payments to the
sponsor. If project performance exceeds the guaranteed
minimum levels, the contractor may be entitled to bonus
payments.
2. Feedstock Supply Agreements.
The project company will enter into one or more feedstock supply
agreements for the supply of raw materials, energy or other resources over
the life of the project. Frequently, feedstock supply agreements are
structured on a "put-or-pay" basis, which means that the supplier must either
supply the feedstock or pay the project company the difference in costs
incurred in obtaining the feedstock from another source. The price
provisions of feedstock supply agreements must assure that the cost of the
feedstock is fixed within an acceptable range and consistent with the
financial projections of the project.
3. Product off take Agreements.
In a project financing, the product off take agreements represent the source
of revenue for the project .Such agreements must be structured in a
manner to provide the project company with sufficient revenue to pay its
project debt obligations and all other costs of operating, maintaining and
owning the project .Frequently,offtake agreements are structured on a
"take-or-pay" basis, which means that the offtaker is obligated to pay for
product on a regular basis whether or not the offtaker actually takes the
product unless the product is unavailable due to a default by the
project
company. Like
feedstock
supply
arrangements,
offtake
project in accordance with the cost and production specifications for the
project. The operator may be an independent company, or it may be one of
the sponsors . The operator typically will be paid a fixed compensation and
may be entitled to bonus payments for extraordinary project performance
and be required to pay liquidated damages for project performance below
specified levels.
the borrower from materially altering the project plans without the
consent of the lender.
5. Dividend Restrictions. These covenants place restrictions on the
payment of dividends or other distributions by the borrower until debt
service obligations are satisfied.
6. Debt and Guarantee Restrictions. The borrower may be prohibited
from incurring additional debt or from guaranteeing other obligations
7. Financial Covenants. Such covenants require the maintenance of
working capital and liquidity ratios, debt service coverage ratios, debt
service reserves and other financial ratios to protect the credit of the
borrower.
8. Subordination. Lenders typically require other participants in the
project to enter into a subordination agreement under which certain
payments to such participants from the borrower under project
agreements are restricted (either absolutely or partially) and made
subordinate to the payment of debt service.
9. Security. The project loan typically will be secured by multiple forms of
collateral, including:--- Mortgage on the project facilities and real property.
Assignment of operating revenues.
Pledge of bank deposits
Assignment of any letters of credit or performance or
completion bonds relating to the project.
project under which borrower is the beneficiary.
Liens on the borrower's personal property
Assignment of insurance proceeds.
Assignment of all project agreements
.
Pledge of stock in project company or assignment of
partnership interests.
Assignment of any patents, trademarks or other
intellectual property owned by the borrower.
6 Site Lease Agreement. The project company typically enters into longterm lease for the life of the project relating to the real property on which
the project is to be located. Rental payments may be set in advance at a
fixed rate or may be tied to project performance.
7.Insurance. The general categories of insurance available in connection
with project financings are:
1. Standard Insurance- The following types of insurance typically are
obtained for all project financings and cover the most common
types of losses that a project may suffer.
Property Damage, including transportation, fire and extended
casualty.
Boiler and Machinery.
Comprehensive General Liability.
Worker's Compensation.
Automobile Liability and Physical Damage.
Excess Liability.
2. Optional Insurance. The following types of insurance often are
obtained in connection with a project financing. Coverages such as
.
these are more expensive than standard insurance and require more
tailoring to meet the specific needs of the project
Business Interruption.
Performance Bonds.
Cost Overrun/Delayed Opening.
Design Errors and Omissions
System Performance (Efficiency).
Pollution Liability.
Project Risks
Project finance is finance for a particular project, such as a mine, toll road, railway,
pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of
that project. Project finance is different from traditional forms of finance because the
financier principally looks to the assets and revenue of the project in order to secure
and service the loan. In contrast to an ordinary borrowing situation, in a project
financing the financier usually has little or no recourse to the non-project assets of the
borrower or the sponsors of the project. In this situation, the credit risk associated with
the borrower is not as important as in an ordinary loan transaction; what is most
Once the risks are identified and analyzed, they are allocated by the parties through
negotiation of the contractual framework. Ideally a risk should be allocated to the party
who is the most appropriate to bear it (i.e. who is in the best position to manage, control
and insure against it) and who has the financial capacity to bear it. It has been observed
that financiers attempt to allocate uncontrollable risks widely and to ensure that each
party has an interest in fixing such risks. Generally, commercial risks are sought to be
allocated to the private sector and political risks to the state sector.
Step3- Risk managementRisks must be also managed in order to minimise the possibility of the risk event
occurring and to minimise its consequences if it does occur. Financiers need to ensure
that the greater the risks that they bear, the more informed they are and the greater their
control over the project. Since they take security over the entire project and must be
prepared to step in and take it over if the borrower defaults. This requires the financiers
to be involved in and monitor the project closely. Such risk management is facilitated
by imposing reporting obligations on the borrower and controls over project accounts.
Such measures may lead to tension between the flexibility desired by borrower and risk
management mechanisms required by the financier.
Types of Risks
Basically different types of projects are posed to different risks. Similarly the risks
mentioned below are related to this particular project.
1) Completion RiskCompletion risk allocation is a vital part of the risk allocation of any project. This phase
carries the greatest risk for the financier. Construction carries the danger that the project
will not be completed on time, on budget or at all because of technical, labour, and
other construction difficulties. Such delays or cost increases may delay loan repayments
and cause interest and debt to accumulate. They may also jeopardize contracts for the
sale of the project's output and supply contacts for raw materials.
Commonly employed mechanisms for minimizing completion risk before lending takes
place include:
(a) Obtaining completion guarantees requiring the sponsors to pay all debts and
liquidated damages if completion does not occur by the required date;
(b) Ensuring that sponsors have a significant financial interest in the success of the
project so that they remain committed to it by insisting that sponsors inject equity into
the project;
(c) Requiring the project to be developed under fixed-price, fixed-time turnkey
contracts by reputable and financially sound contractors whose performance is secured
by performance bonds or guaranteed by third parties; and
(d) Obtaining independent experts' reports on the design and construction of the project.
Completion risk is managed during the loan period by methods such as making precompletion phase draw downs of further funds conditional on certificates being issued
by independent experts to confirm that the construction is progressing as planned.
2) Operating RiskThese are general risks that may affect the cash-flow of the project by increasing the
operating costs or affecting the project's capacity to continue to generate the quantity
and quality of the planned output over the life of the project. Operating risks include,
for example, the level of experience and resources of the operator, inefficiencies in
operations or shortages in the supply of skilled labour. The usual way for minimising
operating risks before lending takes place is to require the project to be operated by a
reputable and financially sound operator whose performance is secured by performance
bonds. Operating risks are managed during the loan period by requiring the provision of
detailed reports on the operations of the project and by controlling cash-flows by
requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds
account to ensure that funds are used for approved operating costs only.
3) Market RiskObviously, the loan can only be repaid if the product that is generated can be turned
into cash. Market risk is the risk that a buyer cannot be found for the product at a price
sufficient to provide adequate cash-flow to service the debt. The best mechanism for
minimising market risk before lending takes place is an acceptable forward sales
contact entered into with a financially sound purchaser.
4) Credit RiskThese are the risks associated with the sponsors or the borrowers themselves. The
question is whether they have sufficient resources to manage the construction and
operation of the project and to efficiently resolve any problems which may arise. Of
course, credit risk is also important for the sponsors' completion guarantees. To
minimise these risks, the financiers need to satisfy themselves that the participants in
the project have the necessary human resources, experience in past projects of this
nature and are financially strong (e.g. so that they can inject funds into an ailing project
to save it).
5) Technical RiskThis is the risk of technical difficulties in the construction and operation of the project's
plant and equipment, including latent defects. Financiers usually minimise this risk by
preferring tried and tested technologies to new unproven technologies. Technical risk is
also minimized before lending takes place by obtaining experts reports as to the
proposed technology. Technical risks are managed during the loan period by requiring
a maintenance retention account to be maintained to receive a proportion of cash-flows
to cover future maintenance expenditure.
6) Regulatory or Approval RiskThese are risks that government licenses and approvals required to construct or operate
the project will not be issued (or will only be issued subject to onerous conditions), or
that the project will be subject to excessive taxation, royalty payments, or rigid
requirements as to local supply or distribution. Such risks may be reduced by obtaining
legal opinions confirming compliance with applicable laws and ensuring that any
necessary approvals are a condition precedent to the draw down of funds.
Appraisal
Project FinancingThe SBI has formed a dedicated Project Finance Strategic Business Unit to assess
credit proposals from and extend term loans for large industrial and infrastructure
projects. Apart from this, project term loans for medium sized projects and smaller
clients are delivered through the CAG and the NBG.
In general, project finance covers Greenfield industrial projects, capacity expansion at
existing manufacturing units, construction ventures or other infrastructure projects.
Capital intensive business expansion and diversification as well as replacement of
equipment may be financed through the project term loans.
Project finance is quite often channeled through special purpose vehicles and arranged
against the future cash streams to emerge from the project.The loans are approved on
the basis of strong in-house appraisal of the cost and viability of the ventures as well as
the credit standing of promoters.
Project finance strategic business unitA one-stop-shop of financial services for new projects as well as expansion,
diversification and modernization of existing projects in infrastructure and noninfrastructure sector.
Expertise
Being India's largest bank and with the rich experience gained over generation, SBI
brings considerable expertise in engineering financial packages that address
complex financial requirements.
Project Finance SBU is well equipped to provide a bouquet of
structured financial
solutions with the support of the largest Treasury in India (i.e. SBI's), International
Division of SBI and SBI Capital Markets Limited.
The global presence as also the well spread domestic branch network of SBI
ensures that the delivery of your project specific financial needs are totally taken
care of.
infrastructure
wing
of
PF
SBU
deals
with
projects
wherein:
the project cost is more than Rs 100 Crores. The proposed share of SBI in the term loan
is more than Rs.50 crores. In case of projects in Road sector alone, the cut off will be
project cost of Rs.50 crores and SBI Term Loan Rs. 25 crores, respectively.
commercial
wing
of
PF
SBU
deals
with
projects
wherein:
The minimum project cost is Rs. 200 crores (Rs. 100 crores in respect of Services
sector). The minimum proposed term commitment is of Rs. 50 crores from SBI.
Process of sanctioning1) Proposal- The bank usually asks the firm to give the following details Nature of
the proposal The purpose for which the term loan is required ( whether for
expansion, modernization, diversification etc..)
2) Brief History- In case of an existing company essential particulars about its
promoters, its incorporation, subsequent corporate growth to date, major
developments or changes in management.
3) Past Performance- A summary of past performance in terms of
licensed/installed or operating capacities, sales, operating capacities, and sales
and net profit for the three years should be analyzed. The figures relating to
sales and profitability should be analyzed to ascertain the trend during the 3
years. In sum, the companys past performance has to be assessed to study if
there has been a steady improvement and growth record has been satisfactory.
4) Present financial position- The Companys audited balance sheets and profit
and loss account have to be analyzed. If the latest audited balance sheet has
more than 6 months old, a pro-forma balance sheet as on a recent date should be
obtained and analysed.
5) Project- Here the technical feasibility and the financial feasibility of the project
is studied.
6) Project implementation schedule- Examine the project implementation
schedule with reference to Bar Chart or PERT/CPM chart(if proposed to be
used by the company for monitoring the implementation of the project) and in
the light of actual implementation schedules of similar project
acceptable, it will call for from the applicants, a comprehensive application in the
prescribed pro-forma, along with a copy of project report, covering specific credit
requirements of the company and other essential data/ information. The information
among other things should include Organization setup with a list of board of directors and indicating the
Qualifications, experience and competence of the key personnel in
Charge of the main functional areas e.g..
Production , purchase
competitors
marketing
arrangement.
Current practices for the particular product or service especially relating to
terms of credit sales, probability of bad debts.
Estimates of sales cost of production and profitability.
Projected profit and loss account and Balance Sheet for the operating
years during currency r of the bank assistance.
Report from Merchant bankers in case the company plans to access capital market,
wherever necessary.
In respect of existing concerns, in addition to the above particulars regarding the history
of the concern, its past performance, present financial position, etc. Should also be
called for. This data should be supplemented by supporting statements such as:
Audited profit and loss account and balance sheet for the past three years
Details of existing borrowing arrangements, if any,
Credit information reports from the existing bankers on the applicant company
Financial statements and borrowing relationship of associate firms/group
companies.
2. Detailed AppraisalThe viability of a project is examined to ascertain that the
company would have the ability to service its loan and interest obligations out of cash
accruals from the business. While appraising a project all the data/ information
furnished by the borrower is counter checked and wherever possible, inter-firm and
inter-industry comparisons should be made to establish their veracity.
The appraisal of the new project could be broadly divided into the following sub
heads
Technical feasibility
Marketability
Production process
Management
Time schedule
Cost of project
Sources of finance
Commercial Profitability;
Rates of return.
If the proposal involves financing of a new project, the commercial, economic and
financial viability and other aspects are to be examined as indicated below Statutory clearance from various government depts/agencies
License/ clearance /permits as applicable
Details of sources of energy requirements, power, fuel etc..
Pollution control clearance
Cost of project and source of finance
Buildup of fixed assets.
Arrangements proposed for raising debt and equity
Capital structure
Feasibility of arrangements to access capital market
Feasibility of the projections/estimates of sales cost of production and profit
covering the period of repayment.
Break-even point in terms of sales value and percentage of installed capacity
under a normal production year.
Cash flows and fund flows
SBI has presently financed the following ProjectsSL.NO Name Of The Project
Amt(in crores)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
82.00
6.00
93.00
2.25
5.95
5.8
1.25
1.10
35
2.40
2.02
4.40
2.5
4.0
5.0
5.8
4.5
Hescom
Manoj Jewellers
Mahaveer developers.
JTK Arihant appliances
Shreyalaxmi properties
Shri laxmi trading co.
SL flow controls
Hubli Cigarette center
Mahindrakar Agencies
Shri gopal industries
Atul agencies
Kashyap j. Majethia
Shree meenaxi pharma
Shree meenaxi medical agency
Fine lab
Shree engineers and process
Swastik winding works
The further part has been dealt with respect to the project of
SL flow controls.
Project in Brief
Name
Address
Nature of Business
Status
Proprietary Concern.
Sri Verendra.B.Koujalagi.
Rs 221.41 lakhs
Employment potential
30 employees
Amount(Lakhs)
25.00
22.00
83.38
6.50
5.00
Preliminary Expenses
- Technical know how 5.00
- Personnel training
2.00
-Patterns
5.00
Net Working Captial
Total
12.00
67.53
221.41
Means of finance
Amounts in lakhs
Term loan
Working Captial loan
Own Contribution
Margin Money for working Capital
Total
102.50
50.00
51.38
17.53
221.41
Financial analysis
Ratio Analysis:An integral aspect of financial appraisal is financial analysis, which takes into account
the financial features of a project, especially source of finance. Financial analysis helps
to determine smooth operation of the project over its entire life cycle.
The two major aspects of financial analysis are liquidity analysis and capital
structure. For this purpose ratios are employed which reveal existing strengths and
weakness of the project.
1) Liquidity ratios- Liquidity ratio or solvency ratios measure a projects
ability to meet its current or short-term obligations when they become due.
Liquidity is the pre-requisite for the very survival of a firm. A proper balance
between the liquidity and profitability is required for efficient financial
management. It reflects the short-term financial strength or solvency of the firm.
Two ratios are calculated to measure liquidity, the current ratio and quick ratio.
a) Current ratioThe current ratio is defined as the ratio of total current assets to total current
liabilities. It is computed by,
Current assets
Current ratio
Current liabilities
Particulars
Current assets
2004
91.47
2005
101.7
2006
112.7
2007
128.
2008
145.25
2
127.6
6
121.5
7
96.0
80.09
2
0.634
6
0.767
9
0.927
5
1.33
1.8134
Current ratio
Current Ratio
C u rren t ratio
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1 .8 13 4
1.3 39
0.9 2 7
0 .63 4
0.7 6 7
Ye a rs
InterpretationIt is an indicator of the extent to which short term creditors are covered
by assets that are expected to be converted to cash in a period corresponding to the
maturity of claims. The ideal current ratio is 2:1. The firm current ratio indicate that
the firm is in a position to meet its short term obligation because the ratio is in
increasing trend , by observing the above table we can say that though the firm does not
maintain ideal current ratio, it is still in a position to meet its current obligations. After
clearing all the dues the firm is still in a position to maintain liquidity.
b) Acid test or quick ratioIt is a measure of liquidity calculated dividing current assets minus
inventory and prepaid expenses by current liabilities. Since inventories among current
assets are not quite liquid (means not quickly converted into cash), the quick ratio
excludes it. The quick ratio includes only assets, which can be readily converted into
cash and constitutes a better test of liquidity. It is often called as quick quick ratio
because it is a measurement of a firms ability to convert its assets quickly into cash in
order to meet its current liabilities.
Particulars
Quick assets
2004
60.47
2005
67.65
2006
75.28
2007
87.4
2008
99.9
127.6
121.5
7
96.0
80.09
6
0.53
9
0.62
5
0.91
1.247
Current ratio
2
0.534
.
Quick ratio
1.4
1.247
1.2
0.911
Quick Ratio
1
0.8
0.6
0.534
0.53
0.62
0.4
0.2
0
3
Ye a rs
InterpretationAcid test ratio is a rigorous measure of firms ability to service short term liabilities.
The usefulness of the ratio lies in the fact that it is widely accepted as the best available
test of liquidity position of a firm. Generally an acid test ratio of 1:1 is considered
satisfactory as a firm can easily meet all its current claims. In the case of the above firm
the quick ratio is in increasing trend by year on. So it shows that firm is capable of
paying its quick short term obligations
time of maturity. The long term solvency of firm can be examined by using leverage or
capital structure ratios. The leverage or capital structure ratios may be defined as
financial ratios which throw light on the long term solvency of a firm as reflected in its
ability to assure the long term lenders with regard to (i) periodic payment of interest
during the period of the loan and (ii) repayment of the principal on maturity or in
predetermined installments at due dates.
a) Debt equity ratio- This ratio measures the long term or total debt to
shareholders equity. This ratio reflects claims of creditors and
shareholders against the assets of the firm. Debt Equity Ratio is given
by:
Long term debt
Debt Equity Ratio =
Shareholders equity
Particulars
Debt
2004
82.0
2005
61.5
2006
41.0
2007
20.0
2008
0.00
0
Equity(Promoter contribution) 56.3
0
54.0
0
56.8
5
68.9
84.49
8
1.45
7
1.14
8
0.72
4
0.29
0.00
.
Debt equity ratio
1.6
1.454
1.4
Debt/Equity
1.2
1.14
1
0.8
0.721
0.6
0.4
0.291
0.2
0
0
1
Ye a rs
InterpretationThe debt equity ratio is an important tool of financial analysis to appraise the financial
structure of the firm. The ratio reflects the relative contribution of creditors and owners
of the business in its financing. A high ratio shows a large share of financing by the
creditors of the firm; a low ratio implies the a smaller claim of the creditors. Debt
Equity ratio indicates the margin of safety to the creditors. The debt-equity ratio is in
decreasing and in 2008 it become nil, which implies that the owners are putting up
relatively more money of their own.
3. Profitability ratios related to salesThese ratios are based on the premise that a firm should earn sufficient profit on each
rupee of sales. If adequate profits are not earned on sales, there will be difficulty in
meeting the operating expenses and no returns will be available to the owners.
A. Net profit marginIt is also known as net margin. This measures the relationship between the net
profits and sales of a firm. Depending on the concept of net profit employed. , this
ratio can be computed as followsEarnings after tax
100
Particulars
Earnings after
2004
10.68
2005
17.82
2006
27.05
2007
35.56
2008
43.75
tax
Net sales
Net profit margin
265.49
4.023
292.04
6.102
321.24
8.420
353.36
10.06
388.7
11.25%
Interpretation
The net profit margin is indicative of managements ability to operate the business with
sufficient success not only to recover from revenues of the period, the cost of services,
the operating expenses and the cost of borrowed funds, but also to leave a margin of
reasonable compensation to the owners for providing their capital at risk. A high profit
margin would ensure the adequate return to the owners as well as enable the firm to
withstand adverse economic conditions. A low net profit margin has the opposite
implications. With respect to the above firm the net profit margin is increasing trend so
it will show that the company is in good condition and the demand for the product is
increasing.
4 . Profitability ratios related to InvestmentsReturn on InvestmentsReturn on investments measures the overall effectiveness of management in
generating profits with its available assets. There are three different concepts of
investments in financial literature: assets, capital employed and shareholders
equity. Based on each of them, there are three broad categories of ROIs. They are
I. Return on assets,
II. Return on total capital employed.
Return on assetsThe profitability ratio is measured in terms of relationship between net profits and
assets. The ROA may also be called profit-to-asset ratio. It can be computed as followsNet profit after tax
100
Return on Assets =
Average total assets
Particulars
2004
Earnings after tax
10.68
Average total assets 208.39
2005
17.82
199.5
2006
27.05
195.9
2007
35.56
200.54
2008
43.75
208.34
ROA
4
8.93%
13.81
17.73
20.99%
5.125
%
ROA
5.13%
8.93%
20.99%
13.81%
17.73%
InterpretationReturn on assets employed is favorable. That means the firm is in a position to employ
its assets in an efficient manner.
It is similar to ROI except in one respect. Here the profits are related to the total capital
employed. The term capital employed refers to long term funds supplied by the lenders
and owners of the firm. It is given by the formulaEBIT
100
2005
42.24
199.54
9
17.2%
ROCE
2006
52.66
195.90
2007
62.04
200.5
2008
70.99
208.34
21.16
28.92
4
30.9%
34.07%
ROCE
35.00%
30.00%
25.00%
Returns
20.00%
15.00%
28.92% 30.90%
34.07%
21.16%
17.20%
10.00%
5.00%
0.00%
1
2
Years
ROCE
4
Interpretation:The capital employed basis provides a test of profitability related to the source of long
term funds. The higher the ratio, the more efficient is the use of capital employed. From
the above table we can say that the ROCE is quite high. Compared to previous years
ratio. It is good for the company.
Net sales
2004
300.00
34.51
265.49
2005
330.00
37.96
292.04
2006
363.00
41.76
321.24
2007
399.30
45.94
353.36
2008
439.23
50.53
388.70
B) cost of Production
1.Raw material consumed
2.Power & Fuel
3.Direct labor & wages
4.consumable stores
5.Repair & Maintenance
6.Othermanufacturingexpences
7.Depreciation
8.Preliminary expenses w/off
185.84
6.00
12.24
0.60
1.20
0.72
24.97
2.40
204.42
6.60
13.46
0.66
1.32
0.79
19.10
2.40
224.87
7.26
14.81
0.73
1.65
1.11
14.66
2.40
247.35
7.99
16.29
0.80
2.48
1.55
11.30
2.40
272.09
8.78
17.92
0.88
3.47
2.17
8.75
2.40
233.47
0.00
4.50
229.47
36.02
248.76
4.50
4.78
248.78
43.56
267.49
4.78
5.14
267.13
54.11
290.16
5.14
5.58
289.72
63.64
316.46
5.58
6.09
315.96
72.74
12.80
6.75
19.55
1.20
15.27
10.03
6.75
16.78
1.32
25.45
7.26
6.75
14.01
1.45
38.65
4.50
6.75
11.25
1.60
50.80
1.73
6.75
8.48
1.76
62.51
4.58
10.69
24.97
35.66
7.64
17.82
19.10
36.92
11.59
27.05
14.66
41.72
15.24
35.56
11.30
46.86
18.75
43.75
8.75
52.5
2004
2005
2006
2007
2008
34.82
24.97
51.38
5.00
102.50
50.00
7.74
2.40
278.8
42.24
19.10
52.66
14.66
62.04
11.30
70.99
8.75
0.77
2.40
64.52
0.85
2.40
70.58
0.94
2.40
76.68
1.03
2.40
83.17
B)
Particulars
Sources of funds
1.Net profit before interest and tax
2. Depreciation
3.Promoters capital
4.own contribution towards
5.term loan
6.working capital loan
7.Sundry creditior
8.Amortisationofpreliminaryexpences
Total:
Application of funds
1. Buldings
2. Land
3.Macinary
4.Electrification
5.Electricity Deposit
25.00
22.00
83.38
6.50
5.00
6.Preliminary Expenditure
6. Increase in receivables
7.incerase in stock of material
9.increase in stock of finished goods
10.Drawing/ Dividend
11.interest on loans
12.income tax
13.Repayment of term loans
Total
Surplus/deficit
Opening Balance
Add: surplus/ deficit
Closing Balance
44.25
30.97
4.50
3.00
19.55
0.00
20.5
276.65
2.15
0.00
2.15
2.15
4.42
3.10
0.28
10.00
16.78
4.58
20.5
59.67
4.85
2,15
4.85
7.00
4.87
3.41
0.36
15.00
14.01
7.64
20.5
65.79
4.79
7.00
4.79
11.80
5.35
3.75
0.44
15.00
11.25
11.59
20.5
67.88
8.80
11.80
8.80
20.6
2004
2005
2006
2007
2008
0.00
56.38
3,00
53.38
10.69
64.07
64.07
0.00
10.00
54.07
17.82
71.88
71.88
0.00
15.00
56.88
27.05
83.94
83.94
0.00
15.00
68,94
35.56
104.4
104.49
0.00
20.00
84.49
43.75
128.25
82.00
7.74
50.00
4.58
203.3
61.50
8.52
50.00
7.64
199.5
41.00
9.37
50.00
11.59
195.9
9
20.50
10.31
50.00
15.24
200.5
0.00
11.34
50.00
18.75
208.34
89.91
22.00
5.00
2.15
70.81
22.00
5.00
7.00
56.14
22.00
5.00
11.80
44.84
22.00
5.00
20.6
5.89
4.12
0.51
20.00
8.48
15.24
20.5
74.74
8.43
20.6
8.43
29.03
Term loan(Debt)
Sundry creditors
Working Captial loan
Provision for tax
Grand Total
Assets:
Fixed assets
land
Electricity deposit
Cash & Bank Balances
36.09
22.00
5.00
29.03
Receivables
Stock of material
Stock of finished goods
Preliminary expences not w/off
Grand Total
44.25
30.97
4.50
9.60
208.3
48.67
34.07
4.78
7.20
199.5
53.54
37.48
5.14
4.80
195.9
58.89
41.23
5.58
2.40
200.5
64.78
45.35
6.09
0.00
208.34
=
Installments
year
Net profit for the Interest on term loan Repayment of term loan
200
year
35.66
4
200
19.55
Particulars
2004
36.92 Net Cash Accruals
16.7835.6
5
200
41.72
6
200
46.86
7
200
52.50
Instalment
DSCR
14.016
20.5
1.74
11.25
8.48
20.5
2005
36.9
2006 2007
20.5 46.8
41.7
20.5
1.80
6
20.5
20.5 20.5
2.03 2.29
20.5
2008
52.50
20.5
2.56
20.5
.
Debt service coverage Ratio
3
2.5
2
1.74
1.8
2.03
2.29
2.56
1.5
1
0.5
0
1
2
Years
DSCR
4
DSCR
Interpretation:The 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 2:1 as
satisfactory ratio.
In this project DSCR is in increasing trend it shows that firm is able to meet its debt
obligation.
based on a sound financial assessment and not based on impressions. Among the
several criteria available for financial assessment of projects, Discounted Cash Flow
(DCF) techniques are being widely used in both public and private sectors. Usually the
basic criterion used in project appraisal is Internal Rate of Returns (IRR), which is the
most popular DCF technique used in the country. However, in most of the projects of
the projects , the actual returns are vastly different from the expected returns based on
IRR, necessitating looking for alternative project appraisal criteria. Therefore, an
attempt is made to analyse other alternative project appraisal methods available for
catering to the requirements of vivid circumstances. Emphasis is given for DCF
techniques as they were proved to be the best techniques for project appraisal all over
the world.
1) Pay Back Period (PBP) Method:
Pay back period is the minimum period required to cover the initial cost and a
project with minimum PBP is acceptable in this model. This is a very useful tool to
decide rapidly if it is worth to do a small investment by a local manager and also helps
to reduce the risk of bad choices. But the basic economic principles involved in PBP
method are not as reliable as the other methods like NPV etc. The most important
drawback of PWP method is, it is insensitive to changes in timing with in the payback
period and ignores the cash flows beyond the PBP. This method also lacks a natural
bench mark against which comparisons can be made among various projects.
Discounted PBP method gives a more accurate period to cover the initial cost but
doesnt overcome the above drawbacks. However this is a very good method to use in
combination with other methods.
Year Cash Flows (in lakhs) Cumulative cash flows
200 35.66
35.66
4
200
36.92
72.58
KLESs
of114.3
Management
200 Institute
41.72
6 Studies and Research
200
46.86
161.16
7
200
52.50
213.66
75
2. Average Rate of ReturnThe average rate of return (ARR) method of evaluating proposed capital
expenditure is also known as the accounting rate of return method. It is also known as
Return on Investment, as it uses the information revealed by financial statements, to
measure the profitability of an investment. The accounting rate of return can be found
out by dividing the average after-tax profit by the average investment. It is given by the
formula-
.
Average annual profit after tax
* 100
Average investment
213.66/ 5
* 100
152.5/ 2
42.732
Average rate of return =
* 100
76.25
56.04%.
InterpretationHere the ARR is more consistent as the ARR is quite higher ( more than average) and
the project can be accepted.
3. Net Present valueIt is calculated by discounting the future cash flows of the project to the present value
with the required rate of return to finance the cost of capital. A project is acceptable if
the capital value of the project is less than or equal to the net present value of cash
flows over the operating life cycle of the project. This method is highly useful when
selection has to be made among many projects, which are mutually exclusive, and there
are no budgetary constraints. Selection of projects with the largest positive NPV will
yield highest returns. But this method is useful only to determine whether a project is
acceptable or not but doesnt indicate which project is best under budgetary constraints.
It is difficult to rank different compatible projects with NPV as there is no account for
scale of investment while calculating NPV.
InterpretationYear
Cash Flows(lakhs)
PV factor @10%
1
2
3
4
5
Total PV
Less- Initial outlay
Net Present Value
35.66
36.92
41.72
46.86
52.50
0.909
0.826
0.751
0.683
0.621
32.414
30.495
31.290
32.005
32.603
158.807
152.5
6.307
The acceptance rule using NPV method is to accept the investment proposal if its
net present value is positive (NPV > 0) and to reject it if the NPV is negative (NPV<0).
Positive NPVs contribute to the net wealth of the shareholders which should result in
the increased price of a firms share. The positive net present value will result only if
the project generates cash inflows at a rate higher than the opportunity cost of capital .
Since the Net Present Value of the above project is positive, the proposal can be
accepted.
4 . Profitability IndexIt is also known as Benefit Cost Ratio. It is similar to NPV approach. The
profitability index approach measures the present value of returns per rupee invested,
While the NPV is based on the difference between the present value of the future cash
inflows and the present value of cash outlays. It may be defined as the ratio which is
obtained dividing the present value of cash inflows by the present value of cash outlays.
It is given by the formula:
Present value of cash inflows
Profitabillity Index =
Present value of cash outflows
158.807
Profitabillity Index =
152.5
Profitability Index =
1.041
InterpretationUsing the profitability index, a project will qualify for acceptance if its PI exceeds one
(PI>1). When PI is greater than or equal to or less than 1, the net present value is
greater than or equal to or less than zero respectively. Since the Profitability Index of
the above project shows the PI greater than 1 and hence the project should be accepted.
It is the rate of return at which the Net Present Value (NPV) of a project becomes zero.
A project is acceptable if the IRR exceeds the cost of capital. It is possible to rank
various compatible projects with IRR method and a project with highest IRR can be
selected. However, this method is not useful when selection has to be made among
mutually exclusive projects. This method assumes that the net cash flows from a project
are first negative and then positive for the rest of the project life and vice versa. But
this condition is not always fulfilled resulting in multiple IRRs for the same project.
Due to ambiguous results, project selection becomes difficult. Further, selection of a
project based on highest IRR alone, without taking project specific risk factors into
consideration, may be often misleading.
Year
1
2
3
4
5
Total
Cash flows
35.66
36.92
41.72
46.86
52.50
Weights
Weighted average
5
4
3
2
1
15
CFs
178.3
147.68
125.16
93.72
52.5
597.36
597.36
Weighted Average Cost =
15
=
39.824
Initial Investment
=
Weighted average cost
152.5
.
39.824
3.8 years
A)
Year
CashFlows(lakhs)
PV factor @10%
present value
1
2
3
35.66
36.92
41.72
0.909
0.826
0.751
32.414
30.495
31.290
46.86
0.683
32.005
52.50
0.621
32.603
Total PV
B)
Year
1
2
3
4
5
Total PV
Less- Initial outlay
Net Present Value
158.807
152.5
Cash flows
35.66
36.92
41.72
46.86
52.50
PV factor @ 12%
0.893
0.797
0.712
0.636
0.567
6.307
Present value
31.84
29.43
29.70
29.80
29.76
150.53
152.53
-1.97
{H-L}
L+
A- B
6.307
10 +
6.307-1.97
(12-10)
6.307
Internal rate of return =
10+
4.337
10 + 2.908
12.91%
{2}
InterpretationSince the expected rate of return is 10% so the project is said to be accepted.
Analysis:This analysis part is related to the financial viability of the project SL Flow
Controls:-
Through ratio analysis I analyzed that the liquidity position of the firm is
good and it is maintaining the standard ratio..
Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
Debt Service Coverage Ratio is also in increasing trend, it shows that the
firms ability to make the loan repayments on time over the debt life of the
project.
The net present value of the project is positive, The positive net present
value will result only if the project generates cash inflows at a rate higher
than the opportunity cost of capital . Since the Net Present Value of the
above project is positive, the proposal can be accepted.
The internal rate of the return is higher than what accepted so the project is
accepted.
Interest rates are fixed depending upon the projects which is known as State
Bank advance rate.
When the clients fail to pay the interest, 3 months from the due date the term
loan granted will be treated as Non Performing Assets.
If the interest is due further 3 more months then it will be treated as doubtful
assets and interest rates becomes zero.
Again for further 3 months it goes as loss assets and the bank write off the
account.
Every firm starting up a new project should make an insurance policy with
the same bank itself.
Recommendations:
Some of the information are confidential in nature that could not divulged for study.
Conclusion:The project undertaken has helped a lot in understanding the concept of project
financing in nationalized bank with reference to state bank of India. The project
financing is an important aspect which helps in increasing the profit of the banks.
Project financing is a vast subject and it is very difficult to apply all the aspect in all
type of project when bank want to finance, and it is very difficult to cover all aspect in
this project.
To sum up it would not be out of way to mention here that the state bank of India has
given a special impetus on Project Financing .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.
Finally the success of project financing would mostly depend on the proper analysis of
the projects before financing.
Bibliography
The data is collected from the list of books and web site given below
www.sbi.com.
www.Google.com
Company manuals.