INTRODUCTIONBanks play a very important role in the economic
life of the nation. The soundness ofthe banking system is very
essential for any nation to grow and prosper. Thus it can besaid as
a matter of fact thatA bank is just like a heart in the economic
structureand the Capital provided by it is like blood in it. As
long as blood is in circulationtheorganswill
remainsoundandhealthy.Thusasoundbankingsystemisanindicator of
whether the economy is strong or weak.Banking activities like
lending, borrowing etc facilitate the process of
production,distribution, exchange and consumptionof wealth. Inthis
way they become veryeffective partners in the process of economic
development. Today modern banks areveryuseful for theutilizationof
theresourcesof thecountry. Agriculture, industries,infrastructure
etc all these sectors are growing with the finance provided by the
bankingsector.Acceptingdepositsfor thepurposeof
lendingistheessenceof banking!. Banksprovidevarioustypesof
loanssuchaspersonal loans, agricultural loans, corporateloans etc
to individuals, farmers, firms, other financial institutions etc
for meeting theirre"uirements. Individuals are provided by personal
loans to meet his re"uirements such as car loans,educational loans,
home loans etc. Banks provide funds to corporates to enable them
tocontributetotheeconomybyprovidingfundstohimfor
settinguphisbusiness,expanding his business, modernizing it etc.
#ome of the sources of financing to corporate$firms$entrepreneurs
are%1) Term loansproject !inance.") #orking capital loans.$)
%&port !inance ') (emand loans)) (evelopmental loans etc.N L
DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 1Sources
of financing to the corporate/firms/ entrepreneurs*1) Term loans%
As the name suggests, these loans are given for fixed period of
timewith the provision that its repayment shall also come in
regular pre&fixedperiodical installments which may be e"uated
or graduated. These are long
termloanssanctionedforthepurchasefixedassetssuchase"uipment usedin
itsproduction process, land ac"uisition or factory premises by the
persons engagedin business and trade or in manufacturing or
servicing etc..These loans are usedfor the creation of fixed
assets. This is a source of debt finance for long termpurpose as
pro'ect implementation takes from ( year to )years depending on
thetypeof pro'ect
andtheloanisrepayablein*to(+years.Termloanscanbe,upee currency term
loan and -oreign currency term loan. ,upee term loan arefor
expenditureincurredfor purchaseof land,plant andmachinery,
technicalknowhow ,margin for working capital, preliminary expenses
etc. -oreign currencyterm loans are for import of plant and
machinery, technical knowhow etc.") #orking capital loans% In order
to meet the day to day working re"uirements
ofthebusinessworkingcapital
loansaresanctionedsoastofacilitatesmoothfunctioningof thebusiness.
Theseloansareusedtomeet theneedsuchaspurchase of raw materials ,
payment to the workers ,rent, electricity, utility etc .There are
different methods used for assessing the working capital loan
re"uiredbytheunit suchasTurnover method,
.oldingperiodmethodandthecashbudget system. After the assessment
and the sanction of the working capital loanit is disbursed as and
when re"uired for the smooth functioning of operations.The
workingcapitalloansareforashorterdurationascomparedtothetermloan.N
L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 2$)
%&port !inance* These loans are provided to the exporters in
order to encouragetheexportsof thecountry. Intheseloanspre&
shipment andpost&shipmentfinance is provided to the exporter.
The exporters have to however provide thebank with the necessary
documents in relation to exports for availing such loans.') (emand
loans* This is the fund demanded instantaneously by borrower due
touncertain changes /e.g. economic downturn, inflation, price rise
etc.0. This is theloan /such as an overdraft0 with or without a
fixed maturity date, but which can berecalled anytime by the lender
and must be paid in full on the date of demand.This is generally
not used for pro'ect finance but its relevance with pro'ect
financebecomes more important in adverse situations if term loan is
already financed forthe pro'ect.)) (evelopmental loans* -inancing
pro'ects which are different from
conventionalfinancinginvolveslotsof capital andrisk. 1evelopmental
loansareusedforfinancing infrastructure pro'ects which re"uire
large amount of funds and havelong gestation period. In these loans
generally there is public private partnership.The developmental
loans are re"uiring usually huge amounts and so are mostlyforwarded
to the head offices for their approval.PROJECT FINANCEN L DALMIA
INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 32ro'ect
financeinvolvesraisingfundsfor acapital investment pro'ect that
canbeeconomicallyseparatedfromits sponsor.
Thistypeoffinanceismainlyusedforthepurchase of plant and machinery3
land ac"uisition, factory premises etc. The suppliersof funds
depend primarily on the cash flows of the pro'ect to service their
loans andprovide return on their investment in the pro'ect.In the
case of pro'ect finance the banks or the financial institutions
have to check theviability of the pro'ect before providing
financial assistance to the corporate. They haveto find out the
expected returns from the pro'ect and the risks associated with it.
Thebanks should also know clearly the main purpose for the pro'ect,
its viability,government restrictions, industry trend etc.In order
to provide the finance for the pro'ect the banks goes through
different phasesfor the purpose of lending these phases are%2ro'ect
Identification% Identifying the needs and re"uirements of the
pro'ect. The amountof finance re"uired.2ro'ect #election% The banks
do not provide loans for all the pro'ects some banks preferto lend
to a particular type of pro'ect due to its lower risk. Banks ask
for a pro'ect reportgiving the details about the estimations and
future pro'ections made by the proponent.2ro'ect Appraisal%In this
phase the banks conduct the appraisal of the pro'ect so as toknow
whether it is financially, commercially and technically feasible or
not.Implementation% It involves the sanctioning of the pro'ect in
this phase and the re"uiredformalities to be done.-ollow&up%
4onitoring the funds which are provided by the bank for the pro'ect
purpose.REASONS FOR PROJECT FINANCINN L DALMIA INSTITUTE OF
MANAGEMENT STUDIES AND RESEARCH Page 4The pro'ects that re"uire
finance from the banks or the financial institutions are namely for
the following purposes%1) +etting up o! ,ew projects*It is one of
the basic purpose where corporatefirms, entrepreneurs etcturn
towards the banks for financing .The entrepreneurswhowouldliketo
set upanewunit andare not havingsufficientfundsforitapproach the
bank along with the proposal for meeting their need of financing
.Thebanksthanlooksintothepurposeandthereasonbehindthedesireofentrepreneurship
of the proponent in such cases before taking any decision.")
%&pansionprojects*Thesepro'ectsareundertakentoincreasetheexistingcapacityof
theunitssoastoenablemoreproductiontomeet theincreasingdemand.
5xpansion pro'ects increase the existing capacity by adopting new
andbetter technology e"uipments and for this purpose the need for
finance arises.$)
(iversi!icationprojects*Thechangingbusinessscenarioforcestobringoutnew
products as per the demand and re"uirements of the end user. Thus
for themanufacturingof thenewproductsbyexistingunitsthereisneedfor
funds.Thesepro'ectsdiversifytheproduct linebytheexistingunits.
1iversificationpro'ects are more seen in firms that have large
product mix. ') -ackward .ntegration projects*Backwardintegration
means moving towardsthe source of raw materials i.e moving towards
the suppliers .-or manufacturingcertain products which are being
used as raw material by the existing unit financeis re"uired and
for this purpose the need for funds arises.)) /orward .ntegration
projects*These pro'ects are the ones that are aiming
formanufacturing of certain products which re"uire the products of
the existing unitas raw material. They are moving ahead towards the
consumers.N L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
Page 50) 1ehabilitation projects*-inance is re"uired for the
purpose to revive the sickunits which have a potential to be
healthy again with some infusion of fund andproper management in
these cases the units are studied in detail and funds areinfused in
them only on the being almost certain about the recovery and
revival ofthese sick units. The sick units are made viable to
compete with normal$healthyunits. 2) 3oderni4ation projects* These
pro'ects are for the improvement of the existingunits in one or a
number of ways by modernizing the present activities by % Adopting
the new method of production by setting up new machinery withnew
and better technology and replacing the old machinery with
obsoletetechnology. Increasingtheproduct mixtomeet
thechangingre"uirementsof themarket. To increase the demand and
grow in the competitive market byincreasing the product range.
4odernizing the existing units by reducing the manufacturing cost
with aview to en'oy the economies of large scale production at
lower cost andalsoforimprovingthe"ualityof theexistingproduct
soastogeneratemore demand for the product. 6hangingthere"uirement
of therawmaterialsbyadoptingsomethingnew or different. ORIENTA!
"AN# OF CO$$ERCE7riental bankof
commercewasestablishedon(8th-ebruary(89)in:ahore. itsmodest
beginning is creditable to its founder :ate ,ai Bahadur :ala #ohan
:al, the first6hairman of the 7B6. ;ithin four years of coming into
existence, the
countrypartitionedandtheBankshiftedits,egistered7fficefrom:ahoreto
Amritsar.TheN L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
Page 67riental Bank of 6ommerce was nationalized on (*th April (8
wealthbyensuringsoundgrowthof businessandmake valuable
contributions to national economic growth. The banks undertakes
many development programmes and pro'ect such as the
7B6Indiagrameenpro'ect, 6omprehensivevillagedevelopment
programmeetc. It offersvarious services and products, like current$
savings account, general loans, educationalloans,
agriculturalloans, corporate loans etc, for the benefit of various
section of thesociety.PROCEDURE OF PROJECT FINANCE %AT ORIENTA!
"AN# OF CO$$ERCE&'N L DALMIA INSTITUTE OF MANAGEMENT STUDIES
AND RESEARCH Page 7INTERVIEW WITH THE MANAGER OFTHE LOAN
DEPARTMENT.SUMISSION OF THE PRO!ECTREPORT WITH ALL THE DETAILS
INTER(IE) OF T*E APP!ICANT At 7riental bank of commerce the
proponent has to approach the manager ofthe loan department and
state his re"uirements for the loan .This step is 'ust aN L DALMIA
INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page "ASSESSMENT OF
THEREPORT#PRO!ECT APPRAISALSUMISSION OF THE FILLED
INAPPLICATIONPROCESSING OF THE APPLICATION PROPOSAL FORWARDED
TOSANCTIONING AUTHORIT$SANCTION LETTER ISSUEDDOCUMENTATION %
DISURSEMENTCREDIT MONITORING AND FOLLOWUPSANCTIONRE!ECTEDdiscussion
but it is undertaken to help build confidence in the loan manager
tobe satisfied that the applicant has the need for the appropriate
purpose. It is more like a discussion where in both can clear the
doubts going in their mindand would help in better understanding.
Interviewing the proponent will help the manager to know about the
purpose forthe loan prior moving to steps ahead and the manager can
than decide whetherthey are financing loans for such purposes as
stated by the proponent. It willhelp the manager to know whether
the proponent has strong desire forstarting a new venture,
expansion of the existing unit etc or he has come to thebank for
financial assistance because scheme is available and he 'ust want
to tryout something new . If the banker is successful in studying
the above aspect halfof his 'ob is almost done. The manager can
also raise the doubts that he have from the pro'ect idea forwhich
theproponent has approachedhim .If the proponentis certain
whathewants to do in the pro'ect, he knows what he aspires to
achieve from the pro'ectand has the re"uired knowledge for the
same, the proponent would answer the"ueries put upbythemanager this
wouldhelpthemanager to'udgethecapability and knowledge of the
proponent. The manager if he is satisfied and has confidence in the
proponent after all thediscussionthanhewouldasktheproponent
tosubmit thepro'ect report indetails, thus moving to the next step
of the pro'ect financing.PROJECT REPORT The second step is the
submission of the pro'ect report by proponent $ borrowerto the
manager .This report is very helpful for the bank to make the
investmentdecision. N L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND
RESEARCH Page & The borrower has to submit a detailed pro'ect
report containing the details aboutthe pro'ect, proponent,
industry, security, feasibility etc. These details are re"uired by
the manager to make a further decision thus theborrower has to try
an incorporate most of the details that he could to explain
thefeasibility of the pro'ect. Thepro'ect report generally contains
the following information%A) (etails about the 5wnershipType o!
business% ;hether the business issole proprietorship, partnership
or public$ private limited co. In case of% +ole6proprietor(0
1etailed bio&data of the proprietor, age, educational
"ualifications, workexperience, photo identity, residential address
etc.?0 :ist of total assets owned by proprietor.)0 :ist of total
liabilities of the proprietor. 90 Income tax details for the last
three years.
7artnership (0 The number of partners and their contribution in
the company.?0 1etails of the partners work experience,
"ualifications etc. )0 Assets and liabilities of the partnership
firm.90 Any other debt liability.*0 -inancial data of the
partnership firm. 8imited company(0Brief history of the company.?0
2romoters of the company and the board of directors.)0 #hareholding
pattern and the capital structure.90 1ate of commencement of
business.*0 -inancial performance of the company in the last three
years and prior.@0 2ast borrowings details from banks and other
financial institutions. -) (etails relating to the -usiness*(0 1ate
of commencement of the business.?0 :icenses re"uired for carrying
the business.)0 -inancial statements of the business for the past
years.90 4anufacturing process in the business.*0 2rofitability of
the business.@0 2ro'ects already undertaken and future pro'ects.N L
DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 1'C)
7roject details*(0 Brief description of the pro'ect.?0 1etailed
cost of the pro'ect.)0 5stimated revenue from the pro'ect.90 ,aw
material and utilities re"uirements.*0 2rofitability.@0 Technology
to be used.A0 #tatutory approvals.s test. This test comprises of
the followingcharacter, capacity, capital, condition,
cashflowandcollateral. 5venthemanagersshouldbecompetent
enoughtohandlethepro'ect3
theyshouldhavethere"uiredknowledge,expertise andskills which the
bankmanager takes "uiteanoteof whilestudying the report and during
the initialinterview. The contribution of funds from thebusiness
for the pro'ect should be sufficient. The bank will provide the
funds if there iscontribution from the business also.The bank takes
into account the following for the appraisal respectively%(0
-inancial appraisal.?0 Technical appraisal.)0 4anagerial
appraisal.N L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
Page 1290 6ommercial appraisal. FINANCIA! APPRAISA!At orientalbank
of commerce, more emphasis is given on !inancial appraisalof
thereport. Thefinancial appraisal of thereport istodeal
withthefinancial sideof thepro'ect. #ince the bank is providing the
loan it wants to know about how it would be ableto recover the loan
and in how many years. Thus the financial appraisal would enablethe
bank to know all the necessary details as per the loan recovery.
-or conducting thefinancial appraisal the bank would study the
following%(0 The cost of the 2ro'ect.?0 5stimates of the revenue )0
6ost of production.90 #ources of finance.*0 ,atio analysis.@0
Breakeven point.A0 2ro'ected 6ash flow statements.t re"uire any
interest payments as in debt. Asregard promoters> contribution
details are to be given about whether it is by wayof e"uity,
internalaccruals, private e"uity etc and how much would be
infusedupfront. Identifiable sources of promoters> contribution
should be clearly broughtout.(ebt* Banks and financial institutions
provide the funds that are re"uires as longterm loans or working
capital loans for the pro'ect. These loans attract an intereston
the loan amount. The banks would however see how much e"uity
financing isdoneinthepro'ect
beforegrantinganyloanasthee"uityfinancingwouldindicate whether
there is any cushion or not , e"uity provided will buildconfidence
as the promoters have even put in their funds. $) Cost o!
production*Thecost of
productionispro'ectedbydeterminingthecapacityof theproduction,
therawmaterialsre"uiredandthevariousotherresources re"uired for the
purposeof production. Appropriateestimates wouldgive a basic idea
about how much would be the cost of production. It will help
toseehowwouldbetheprofit that canbeearned.Therawmaterial sourcesN L
DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 15whether
they are imported or not , the labor used such as skilled or
unskilledlabor for the purpose of production and variousother
resources utilized would allcomprise of the cost that would be paid
for production.') 7ro!itability%stimates% Theprofitability
estimates aretheestimates of theexpected sales revenue and the cost
that is incurred for production by the units.Theestimatesthat
aremadeforthesalesandthecostsshouldbecheckedcorrectly so as to not
give a rosier picture than what is expected in actual fromthe
pro'ect thusthe verification becomesvery essentialin thecase of
makingprofitability estimates. The bases for the various costs are
to be identified andchecked. The estimation can be done as
follows%A0 #ales estimates Berify the installed capacity3do not
assume fullproductioncapacityintheinitial year. Assumeapproximately
@+ D production in the first
year.Eraduallyassumealittlehigherinthesecondyear approximately
A+& s of the bank to a greater extent.SANCTIONINAt oriental
bank there are discretionary powers for sanctioning the loans, The
powersaredividedintoathreetiersystemsuchasBranchlevel, ,egional
level
and.eadofficeralongwiththeboard.Againthereisdiscretionarypowerthat
areassignedtoeach bank for sanctioning the loan amount for ex% At
:okhandwala branch the managerhas the power to sanction the loan
amount up to ,upees (.* crores only. #imilarly theN L DALMIA
INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 37smaller
branches have lesser sanctioning power and can sanction lower
amounts below( crores. The hierarchy of sanctioning power is shown
in the table below%
#AC6TI7C A47QCT A::7;51 AQT.7,ITT:oans below * crores Branch
office /discretionary power to each branch0:oans between * crores
to ?+ crores ,egional office:oansabove ?+ crores .ead office along
with B717ncethefinal report
ispreparedandforwardedtothesanctioningofficer for theapproval the
sanctioning authority than have to decision about the rate of
interest, fees,termsandconditionsandsecuritiesthat
aretobemortgagedor pledged.Thesedecisionsarecrucial
andtheyaretakenkeepingintoaccount thecapacityof theborrower. The
rate of interest charged can be fixed rate of interest or floating
rate ofinterest. These rate of interest will determine the cash
flow to the bank in terms of theinterest they are going to receive
from the borrower. 1) 1ate o! interest The bank may charge either
fixed or floating rate of interest on the loan amount.a)
/i&edrateo!interest%A fixedinterest
rateloanisaloanwheretheinterestdoesn=t fluctuate during the fixed
rate period of the loan. A fixed interest rate
isbasedonthelender=sassumptionsabout theaveragediscount rateover
thefixed rate period. -or example, when the discount rate is
historically low,
fixedratesarenormallyhigherthanvariableratesbecauseinterest
ratesaremoreN L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
Page 3"likelytoriseduringthefixedrateperiod.
6onversely,wheninterest ratesarehistorically high, lenders normally
offer a discount to borrowers to fix their interestrate over time,
as rates are more likely to fall during the fixed rate period.
-ixedinterestrates allows the borrowerto accurately predict
theirfuture payments.The borrowers are certain about the payments
they have to make so it is lessdifficult for them to manage.b)
/loating rate o! interest* The rate of interest keeps on floating
i.e. changing inrelation to some base rate to which a margin is
added generally.-loating rateloans are common in the banking
industry and for large corporate customers. Afloating rate mortgage
is a mortgage with a floating rate, as opposed to a fixedinterest
rate loans. The rate of interest is decided on the basis of the
B2:,, pastperformance of the company, risk premium, market
conditions etc.") Terms and conditions* In order ensure that the
borrower does not make any ma'or deviation from plan of theschedule
and activities without the bank>s knowledge or prior approval,
it is customary for banks to stipulate certain special covenants
governing the borrower>s operations in addition to the normal
terms and conditions stipulated for all loans by the bank. The
covenants could be positive i.e. allowing the borrower to do
certain actions and negative such as prohibiting the borrower
fromdoing certain action. -ew of the positive and negative
covenants are as follows% N L DALMIA INSTITUTE OF MANAGEMENT
STUDIES AND RESEARCH Page 3& 75+.T.E% C5E%,A,T+ Qse of loan for
the specified purpose only. 4aintenance of the assets that are
given as security. Timely payments of the wages, salaries,
interests etc. ,epayment of the installments on due date. ,egular
payment of the insurance premium of the assets kept as security.
2ermissiontobanksfor conductingtheir
followupandsupervisionthroughinspections. 4aintenance of the books,
records and all details. ,%9AT.E% C5E%,A,T+ Cot to create any
mortgage, lien on the assets already kept as security. Cot to
invest in any other purpose other than what the loan was seeked
for. Cot to alter the capital structure. Cot to sell or dispose the
property that is with the bank. Cot to give guarantees without
prior consent of the bank. Cot tomodernizeorexpandwithout
theconsent of thebankother thanthatwhich was specified in the
report.
Documentation an. Dis-ursementsThere are many necessary
documents that are to be provided in order to execute the loan
agreement. The following documents are that are re"uired %(0 2roof
of the identity and other constitutional documents&
:etter$declaration from the proprietor, partnership deed,
4emorandum of Association, 6ertificate of Incorporation,
6ertificate of 6ommencement of business, 6opy of bye&laws
etc.?0 :icenses to carry on the business activity)0 Eovernment
approval and the re"uired clearances.90 2ast and current year
balance sheet and other financial documents.*0 1etails of the
collateral security along with the proof of ownership.@0 :atest
income tax assessment order and latest income tax return filed.A0
,egistration re"uirements such as in case of ##I etc.sboardof
directorsauthorizing any director /s0 or any other person /s0 to
execute the documents andprovide security for the institutional
loans.()06ertified copy of the resolution passed by the company in
the general meeting forborrowing in excess of its paid&up
capital and free reserves.(907ther debt obligation details if
any.7nce these documents are submitted, verified and the proposal
gets sanctioned thanthe loan agreement is to be made. The loan
agreement is formulated along with thenecessarydetailsabout
therateof interest, loanamount, typeof loan, repaymentperiod,
security assigned for the loan, borrower>s details, terms and
conditions,declaration of the proponent etc. After the loan
agreement is duly signed than the bankwould disburse the loan
amount.1isbursement of the loan amount are done as per the
re"uirements of the borrower, at7riental Bank of 6ommerce the bank
gives the loan amount for specific purpose, thisimpliesthat
theloanamount couldnot beusedfor anyother purpose5x%
Bankisproviding loan to buy plant and machinery at the pro'ect site
thus the bank would as faraspossiblemakethepayment tothesupplierof
theplant andmachinetherebytoensure that the loan proceeds are
towards the very purpose of taking the loan.1isbursement of the
loan amount is also done in installments as may be re"uired.
Theloan amount is disbursed in installment especially for the
Infrastructure pro'ects whichre"uire huge funding for its different
phases.5ven in the case of construction pro'ectsN L DALMIA
INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page
41theloansaregivenininstallmentswhentheloanamount isveryhigh.
Thiswayofdisbursingtheloanamount doesnot put
pressureonbankstofundthehighcostpro'ects. $ONITORIN AND FO!!O)
UP4onitoring is the process of observing progress and resource
utilization and anticipatingdeviations from planned performance. In
the monitoring and controlling phase there ismonitoring of the
technical performance, time and cost performance in addition to
theorganizational performance. 6orrection and re&planning are
some of the actions takenafter monitoring. The monitoring is done
periodically or continuously by fixing milestonesinthepro'ect
phases.Therearemanyreasonsthat thebanksnowadaysfollowthecontinous
monitoring approach. The reason for continous monitoring are% To
ensure the end use of funds. To ensure the compliance of the terms
and conditions. To evaluate the performance of production, sales
and profit. To find out the efficiency of the management. To assess
the impact of external factors such as Eovernment policies,
availabilityof ,aw materials, availability of labor etc. To detect
the early signals of non compliance and default. To evaluate the
total performance of the pro'ect.N L DALMIA INSTITUTE OF MANAGEMENT
STUDIES AND RESEARCH Page 42At 7riental bank of commerce there are
different techni"ues followed for the purpose ofdoing the continous
monitoring of the loans given. The techni"ues are as follows%1)
Assessment o! the periodical reportsThebanksget theperiodical
performancereportscoveringthefinancial andoperational data from the
borrowers. These reports contains the details about thecost of the
pro'ect incurred, time schedule of the various activities,
profitability,inventory and receivables. The cost of the pro'ect
determines the various costsincurred and whether there is any
escalation of prices of steel, cement, materialsetc which is
leading to cost overruns. If there is escalation of costs the
reason forthe same has to be identified and corrected if possible.
If the costs overruns aredue to the improper scheduling of the
activities than the activities must be re&scheduled so as to
reduce the cost of the pro'ect.The production of the unit should
also be identified from the figures of licensed,installed and
utilized capacity. It has to be seen whether the plant is
operationalon all days or the plant is facing problems due to
power&cuts, strikes etc.
Afterdeterminingthereasonfortheproductionhalt remedial
measureshavetobeidentified for the same. -ollowing the production
nowthe sales should bestudied. It is important to know that the
production is being sold at the target priceor not. If
thereareanyvariationsinthefigurestheyshouldbecorrectedbyincreasing
the sales. 2rofitability would be identified from the costs and the
sales.It has to be checked whether the pro'ect is making profit or
loss. Any changes ifre"uiredshouldbemadetothepro'ect.
Theavailabilityof thestockof rawmaterial, finished goods, labor all
have to be checked.") Analysis o! the borrowers Audited /inancial
statements The financial statements i.e. the balance sheet and the
profit and loss accounthave to be studied. 6omparison should be
made between the current and thepast performance. After identifying
the changes between the previous years andthecurrent year if
thereareanyproblemstheyshouldbeworkeduponandshould not be repeated
in future. Balance sheets are used not only for comparingour past
and previous performance but also inter company performances.N L
DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 43$)
.nspection There should be surprise inspections to check the
operations of the pro'ect. Theofficer shouldgofor asurprisevisit
anycheckthebooks, physical assets,availability of the facilities at
the site of the pro'ect.') (iscussion with the party and its
sta!!There should be discussion with the party and its staff such
as the productionmanager, salesmanager, supervisor,
,esearchanddevelopment manager toknow about the status of their
departments and any improvement or correctionthat is re"uired in
their departments.)) +tudy o! the stock and the book debt
statementsThe bank officer doing the follow up would also study the
stock statements aswell as the book debt statements. The reason for
studying the stock statement isit helps to know whether the pro'ect
is having sufficient level of inventory or not.Thelevel of
inventory shouldbeoptimumas shortageor excess botharedetrimental
for thefunctioningof thepro'ect. #hortageof stockmayleadtodelays in
production schedule while excess stock could lead to
increasedexpense for warehousing, wastages etc. The book debts
should not be too highasthismayincreasethechancesof default
andaffect theprofitabilityof thepro'ect.0) 3arket reports and the
newsThe reports in the market about the pro'ect also have an impact
on the pro'ect.The success of the pro'ect depends upon the
acceptability by the market. If thereports are favorable it would
benefit the pro'ect.2) (iscussion with the 3anagement sta!!It is
important to know about the promoters, executives,
internalmanagement,Con financial issues, expansion plans etc. -or
these purposes it is important todiscuss with the management staff
and extract the information needed.The follow up process should be
done continuously so as to protect the banksfrom losses due to
negligence and lack of supervision. At the orientalbank ofcommerce
continuous monitoring process is followed for the purpose
ofsupervision and control.N L DALMIA INSTITUTE OF MANAGEMENT
STUDIES AND RESEARCH Page 44CONC!USIONBanks play a ma'or role in
any economy by meeting the funding re"uirements
ofthevarioussectors. It becomesextremelycrucial
forabanktofinancethosepro'ectsthat
wouldbeviable,profitableandbeneficial toall theconcernedparties.
The bank is the custodian of people>s money so this money has to
bechannelized into the productive areas. This makes 2ro'ect
Appraisalof utmostimportance. Thekeylearning>sfromthepro'ect
appraisal processof pro'ectfinancing for corporates at 7riental
bank of commerce are%a) Theimportanceofappraisingthepro'ectfrom the
conception stage toimplementation stage and from periodical
monitoring to evaluationstage is inevitable.b) The bank officers
take utmost care that only the viable pro'ects aresanctioned and so
they follow a strict procedure to avoid any C2A>s later.c)
2ro'ects Appraisal is getting more advanced with the use of better
technologysoftwarethat reducesthecalculationsburden. -or ex%
I4A6#at 7rientalbank of commerce.d) 5stablishingnewunits,
4odernizationof existingunitsand5xpansionofexisting units are
encouraged so as to facilitate growth.e) -ollow up is to be done
continuously so as to detect any cases of default atthe earliest.N
L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 45
Anne/ureAnnexure (% :oan Application -orm.Annexure ?%
Acknowledgement #lip.1eclaration by the Applicant.:ist of the
1ocuments re"uired.Annexure )% Euidelines for 2ro'ect
,eport.Annexure 9% Appraisal cum #anction note./Findly refer the
hard copy of the pro'ect for the annexure as they are the
documentsprovided by the bank0N L DALMIA INSTITUTE OF MANAGEMENT
STUDIES AND RESEARCH Page 46"i-+iograph0-55D++r. ,5 ,ame o! the
Author Title o! the book( 2rasana chandra -inancial management? 1 2
#harda .andbook on 2ro'ect Appraisal and -ollow up) B. Iyengar
Introduction to Banking.#%-+.T%++r. ,5 ,ame o! the #ebsite(
www.obcindia.co.in? www.sidbi.com) www.rbi.org.in9 www.google.comN
L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 47
