131
STATE BANK OF INDIA Project Financing. CONTENTS SECTION – I Executive Summary 4-7 Industrial Profile 9 -12 SECTION – II Company Profile 13-21 SECTION – III Theoretical Background for the project work 22- 49 - Introduction to project financing - Project financing risks - Project Financial Appraisal Project in Brief- SL flow controls 50- 53 SECTION – IV Financial Analysis 54-74 Measures taken by SBI when the repayment is not possible 75 BABASAB PATIL 1

Financial appraisal of project @ sbi project report mba finance

Embed Size (px)

DESCRIPTION

Financial appraisal of project @ sbi project report mba finance

Citation preview

Page 1: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

CONTENTS

SECTION – I

Executive Summary 4-7

Industrial Profile 9 -12

SECTION – II

Company Profile 13-21

SECTION – III

Theoretical Background for the project work 22- 49

- Introduction to project financing

- Project financing risks

- Project Financial Appraisal

Project in Brief- SL flow controls 50- 53

SECTION – IV

Financial Analysis 54-74

Measures taken by SBI when the repayment is not possible 75

SECTION – V

Analysis 76

Findings 77 -78

Recommendations

Limitations

Conclusions

Bibliography 79

BABASAB PATIL1

Page 2: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Executive Summary

Title of the project

“Financial Appraisal Of the Project Financed By SBI ”

As a part of curriculum, every student studying MBA has to undertake a project on 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.

BABASAB PATIL2

Page 3: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Main Objective

“Financial appraisal of project”

Sub Objectives -

1. To know the projects financed by SBI.

2. To know the policies of SBI towards the project financing.

3. To know the risks involved in projects financing.

4. To appraise the projects using financial tools.

5. To know the measures taken by bank when the clients fail to repay the amount.

Methodology –

Data collection method: The report will be prepared mainly using secondary data viz,

Secondary 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:

BABASAB PATIL3

Page 4: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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.

Profitability ratios related to sales and capital employed are in increasing

trend, it shows that the sales are increasing and the firm using its resources

efficiently.

Debt Service Coverage Ratio is also in increasing trend, it shows that the

firms ability to make the loan repayments on time over the debt life of the

project.

The payback period is within the debt life of the project.

The net present value of the project is positive, The positive net present

value will result only if the project generates cash inflows at a rate higher

than the opportunity cost of capital . Since the Net Present Value of the

above project is positive, the proposal can be accepted.

The internal rate of the return is higher than what accepted so the project is

accepted.

BABASAB PATIL4

Page 5: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Findings :- These are related to bank in general

State bank of India is strictly following the guidelines of RBI on Project

Financing

Sanctioning for the projects is approved by RASMECC (Retailed Assets

Small And Medium Enterprises Credit Cell).

The bank finances the projects only through term loans.

Interest rates are fixed depending upon the projects which is known as State

Bank advance rate.

When the clients fail to pay the interest, 3 months from the due date the term

loan granted will be treated as Non Performing Assets.

If the interest is due further 3 more months then it will be treated as doubtful

assets and interest rates becomes zero.

Again for further 3 months it goes as loss assets and the bank write off the

account.

Every firm starting up a new project should make an insurance policy with

the same bank itself.

Recommendations:-

Bank check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost benefit

analysis of the project so bank should consider this because these are also

important from the point of view of risk and economy growth.

BABASAB PATIL5

Page 6: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Bank should be caution about the availability of security and ensure

honesty of both borrower and guarantor so as to avoid the account

becoming the loss assets.

Limitation of the study:-

Some of the information are confidential in nature that could not divulged for study.

Rationale behind choosing this topic:

Project financing is a comparatively new field for Indian banks,at present scenario India

is becoming developed country so because of that many projects are going on that may

be infrastructure, power generation, mining etc. considering all these the projects must

need finance, to fulfill these objectives the project undertaken companies raise the

funds through capital market, debt market and through banks.

Whenever bank wants to finance these type of projects it must study the feasibility of

the project and then it will go for financing that project

Because of this it is very necessary to study the process of project financed by the bank

so I choose this topic to study how SBI study the projects and the method of financing

the projects.

BABASAB PATIL6

Page 7: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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 India’s 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 India’s growth. The government’s 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:

Early phase from 1786 to 1969 of Indian Banks.

Nationalization of Indian Banks and up to 1991 prior to Indian.

Banking sector Reforms.

New phase of Indian Banking System with the advent of Indian.

BABASAB PATIL7

Page 8: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Financial & Banking Sector Reforms after 1991.

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

BABASAB PATIL8

Page 9: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 19 th

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.

5. 1969: Nationalisation of 14 major banks.

6. 1971: Creation of credit guarantee corporation.

7. 1975: Creation of regional rural banks.

8. 1980: Nationalisation of seven banks with deposits over 200 crores.

After the nationalization of banks, the branches of the public sector bank India raised to

approximately 800% in deposits and advances took a huge jump by 11000%. Banking

in the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

BABASAB PATIL9

Page 10: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Phase III

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee

was set up by his name, which worked for the Liberalization of Banking Practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to customers. Phone banking and net banking is

introduced. The entire system became more convenient and swift. Time is given more

importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian

Countries suffered. This is all due to a flexible exchange rate regime, the foreign

reserves are high, the capital account is not yet fully convertible, and banks and their

customers have limited foreign exchange exposure.

Banking in India originated in the first decade of 18th century with The General Bank

Of India coming into existence in 1786. This was followed by Bank of Hindustan. Both

these banks are now defunct. The oldest bank in existence in India is the State Bank Of

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 India’s independence in 1947, the Reserve Bank was

nationalised and given broader powers.

BABASAB PATIL10

Page 11: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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.

Liberalization-

In the early 1990’s the then Narasimha rao government embarked a policy of

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

BABASAB PATIL11

Page 12: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 volatility-

without any stated exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector, the demand for banking services-especially retail

banking, mortgages and investment services are expected to be strong. M&As,

BABASAB PATIL12

Page 13: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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.

BABASAB PATIL13

Page 14: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Banking in India

1 Central Bank Reserve Bank of India

2 Nationalised

Banks

State Bank of India, Allahabad Bank, Andhra Bank,

Bank of Baroda, Bank of India, Bank of

Maharastra,Canara Bank, Central Bank of India,

Corporation Bank, Dena Bank, Indian Bank, Indian

overseas Bank,Oriental Bank of Commerce, Punjab and

Sind Bank, Punjab National Bank, Syndicate Bank,

Union Bank of India, United Bank of India, UCO

Bank,and Vijaya Bank.

BABASAB PATIL14

Page 15: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

3 Private Banks

Bank of Rajastan, Bharath overseas Bank, Catholic

Syrian Bank, Centurion Bank of Punjab, City Union

Bank, Development Credit Bank, Dhanalaxmi Bank,

Federal Bank, Ganesh Bank of Kurundwad, HDFC Bank,

ICICI Bank, IDBI, IndusInd Bank, ING Vysya Bank,

Jammu and Kashmir Bank, Karnataka Bank Limited,

Karur Vysya Bank, Kotek Mahindra Bank, Lakshmivilas

Bank, Lord Krishna Bank, Nainitak Bank, Ratnakar

Bank,Sangli Bank, SBI Commercial and International

Bank, South Indian Bank, Tamil Nadu Merchantile Bank

Ltd., United Western Bank, UTI Bank, YES Bank.

Structure of Indian Banking

Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a

mixture of Public sector, Private sector, Co-operative banks and foreign banks. The

private sector banks are further spilt into old banks and new banks.

Scheduled Banks

BABASAB PATIL15

Reserve Bank of India

Scheduled Commercial Banks

Scheduled Co-operative Banks

Page 16: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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

BABASAB PATIL16

Public Sector Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks

Nationalized Banks

SBI & its Associates

Old private sector Banks

New private sector Banks

Scheduled Urban cooperative Bank

Scheduled State co-operative Banks

Page 17: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 pre-

eminent 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.

BABASAB PATIL17

Page 18: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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

THE PLACE TO SHARE THE NEWS ...……

SHARE THE VIEWS ……

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 Bank’s 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:

BABASAB PATIL18

Page 19: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Premier Indian Financial Service Group with prospective world-class

Standards of efficiency and professionalism and institutional values

Retain its position in the country as pioneers in Development banking.

Maximize the shareholders value through high-sustained earnings per Share.

An institution with cultural mutual care and commitment, satisfying and

Good work environment and continues learning opportunities.

VALUES

Excellence in customer service

Profit orientation

Belonging commitment to Bank

Fairness in all dealings and relations

Risk taking and innovative

Team playing

Learning and renewal

Integrity

Transparency and Discipline in policies and systems.

Organization Structure

BABASAB PATIL19

MANAGING DIRECTOR

CHIEF GENERAL MANAGER

Page 20: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

G. M G.M G. M G.M G.M

(Operations) (C&B) (F&S) (I) & CVO (P&D)

Zonal off Functional Heads

Regional officers

Theoretical Background for the project work

Project Financing

INTRODUCTION-

Project financing is an innovative and timely financing technique that has been used on

many high-profile corporate projects, including Euro Disneyland and the Euro tunnel.

Employing a carefully engineered financing mix, it has long been used to fund large-

scale natural resource projects, from pipelines and refineries to electric-generating

facilities and hydroelectric projects. Increasingly, project financing is emerging as the

preferred alternative to conventional methods of financing infrastructure and other

large-scale projects worldwide.

BABASAB PATIL20

Page 21: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. MEANING-

Project financing involves non-recourse financing of the development and construction

of a particular project in which the lender looks principally to the revenues expected to

be generated by the project for the repayment of its loan and to the assets of the project

as collateral for its loan rather than to the general credit of the project sponsor.

RATIONALE-

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 sponsors of such projects frequently are not

sufficiently creditworthy to obtain traditional financing or are unwilling to take the

risks and assume the debt obligations associated with traditional financings. Project

financing permits the risks associated with such projects to be allocated among a

number of parties at levels acceptable to each party.

PRINCIPLE ADVANTAGE AND OBJECTIVES-

NON RECOURSE

The typical project financing involves a loan to enable the sponsor to construct a

project where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor has

no obligation to make payments on the project loan if revenues generated by the project

are insufficient to cover the principal and interest payments on the loan. In order to

minimize the risks associated with a non-recourse loan, a lender typically will require

indirect credit supports in the form of guarantees, warranties and other covenants from

the sponsor, its affiliates and other third parties involved with the project

MAXIMIZE LEVERAGE

BABASAB PATIL21

Page 22: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. In a project financing, the sponsor typically seeks to finance the costs of

development and construction of the project on a highly leveraged basis. Frequently,

such costs are financed using 80 to 100 percent debt. High leverage in a non-recourse

project financing permits a sponsor to put less in funds at risk, permits a sponsor to

finance the project without diluting its equity investment in the project and, in certain

circumstances, also may permit reductions in the cost of capital by substituting lower-

cost, tax-deductible interest for higher-cost, taxable returns on equity.

OFF-BALANCESHEET TREATMENT

Depending upon the structure of a project financing, the project sponsor may not

be required to report any of the project debt on its balance sheet because such debt is

non-recourse or of limited recourse to the sponsor. Off-balance-sheet treatment can

have the added practical benefit of helping the sponsor comply with covenants and

restrictions relating to borrowing funds contained in other indentures and credit

agreements to which the sponsor is a party.

MAXIMIZE TAX-BENEFITS

Project financings should be structured to maximize tax benefits and to assure that all

available tax benefits are used by the sponsor or transferred, to the extent permissible,

to another party through a partnership, lease or other vehicle.

DISADVANTAGES-

Project financings are extremely complex. It may take a much longer period of time 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.

BABASAB PATIL22

Page 23: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

PROCESS OF PROJECT FINANCING

Feasibility Study

As one of the first steps in a project financing is hiring of a technical consultant and he

will prepare a feasibility study showing the financial viability of the project.

Frequently, a prospective lender will hire its own independent consultants to prepare an

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

BABASAB PATIL23

Page 24: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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.

BABASAB PATIL24

Page 25: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. THE PROJECT COMPANY

Legal Form

Sponsors of projects adopt many different legal forms for the ownership of the

project. The specific form adopted for any particular project will depend upon many

factors, including:

The amount of equity required for the project

The concern with management of the project

The availability of tax benefits associated with the project

The need to allocate tax benefits in a specific manner among the project

company investors.

The three basic forms for ownership of a project are:

1. Corporations-

This is the simplest form for ownership of a project. A special purpose

corporation may be formed under the laws of the jurisdiction in which the

project is located, or it may be formed in some other jurisdiction and be

qualified to do business in the jurisdiction of the project.

2. General Partnerships-

The sponsors may form a general partnership. In most jurisdictions, a

partnership is recognized as a separate legal entity and can own, operate and

enter into financing arrangements for a project in its own name. A

partnership is not a separate taxable entity, and although a partnership is

required to file tax returns for reporting purposes, items of income, gain,

losses, deductions and credits are allocated among the partners, which

include their allocated share in computing their own individual taxes.

BABASAB PATIL25

Page 26: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Consequently, a partnership frequently will be used when the tax benefits

associated with the project are significant. Because the general partners of a

partnership are severally liable for all of the debts and liabilities of the

partnership, a sponsor frequently will form a wholly owned, single-purpose

subsidiary to act as its general partner in a partnership.

3. Limited Partnerships-

A limited partnership has similar characteristics to a general partnership

except that the limited partners have limited control over the business of the

partnership and are liable only for the debts and liabilities of the partnership

to the extent of their capital contributions in the partnership. A limited

partnership may be useful for a project financing when the sponsors do not

have substantial capital and the project requires large amounts of outside

equity.

Limited Liability Companies-

They are a cross between a corporation and a limited partnership.

Project Company Agreements

Depending on the form of project company chosen for a particular 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.

BABASAB PATIL26

Page 27: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Distributions.

Accounting.

Governing body and voting.

Day-to-day management.

Budgets.

Transfer of ownership interests.

Admission of new participants.

Default.

Termination and dissolution.

Principal Agreements in a Project Financing-

1. Construction Contract-

Some of the more important terms of the construction contracts are-

Project Description- The construction contract should set forth

a detailed description of all the Work necessary to complete the

project

Price:- Most project financing construction contracts are fixed-

price contracts although some projects may be built on a cost-

plus basis. If the contract is not fixed-price, additional debt or

equity contributions may be necessary to complete the

project, and the project agreements should clearly indicate the

party or parties responsible for such contributions.

BABASAB PATIL27

Page 28: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Payment- Payments typically are made on a "milestone" or

"completed work" basis, with a retain age. This payment

procedure provides an incentive for the contractor to keep on

schedule and useful monitoring points for the owner and the

lender.

Completion Date- The construction completion date, together

with any time extensions resulting from an event of force

majeure, must be consistent with the parties' obligations under

the other project documents. If construction is not finished by the

completion date, the contractor typically is required to pay

liquidated damages to cover debt service for each day until the

project is completed. If construction is completed early, the

contractor frequently is entitled to an early completion bonus.

Performance Guarantees- The contractor typically will

guarantee that the project will be able to meet certain

performance standards when completed. Such standards must

be set at levels to assure that the project will generate sufficient

revenues for debt service, operating costs and a return on equity.

Such guarantees are measured by performance tests conducted

by the contractor at the end of construction. If the project does

not meet the guaranteed levels of performance, the contractor

typically is required to make liquidated damages payments to the

sponsor. If project performance exceeds the guaranteed

minimum levels, the contractor may be entitled to bonus

payments.

2. Feedstock Supply Agreements.

The project company will enter into one or more feedstock supply

agreements for the supply of raw materials, energy or other resources over

BABASAB PATIL28

Page 29: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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

agreements frequently are on a fixed or scheduled price basis during

the term of the project debt financing.

4. Operations and Maintenance Agreement -

The project company typically will enter into a long-term agreement

for the day-to-day operation and maintenance of the project facilities with a

company having the technical and financial expertise to operate the project

in accordance with the cost and production specifications for the project.

The operator may be an independent company, or it may be one of the

sponsors . The operator typically will be paid a fixed compensation and

may be entitled to bonus payments for extraordinary project performance

BABASAB PATIL29

Page 30: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

and be required to pay liquidated damages for project performance below

specified levels.

5. Loan and Security Agreement.

The borrower in a project financing typically is the project company formed

by the sponsor(s) to own the project. The loan agreement will set forth the

basic terms of the loan and will contain general provisions relating to

maturity, interest rate and fees. The typical project financing loan agreement

also will contain yhr provisions such as-

1. Disbursement Controls. These frequently take the form of conditions

precedent to each drawdown, requiring the borrower to present invoices,

builders’ certificates or other evidence as to the need for and use of the

funds.

2. Progress Reports.:- The lender may require periodic reports certified by

an independent consultant on the status of construction progress.

3. Covenants Not to Amend:- The borrower will covenant not to amend

or waive any of its rights under the construction, feedstock, off take,

operations and maintenance, or other principal agreements without the

consent of the lender.

4. Completion Covenants:-These require the borrower to complete the

project in accordance with project plans and specifications and prohibit

the borrower from materially altering the project plans without the

consent of the lender.

5. Dividend Restrictions. These covenants place restrictions on the

payment of dividends or other distributions by the borrower until debt

service obligations are satisfied.

BABASAB PATIL30

Page 31: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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

BABASAB PATIL31

Page 32: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Pledge of stock in project company or assignment of

partnership interests.

Assignment of any patents, trademarks or other

intellectual property owned by the borrower.

6 Site Lease Agreement. The project company typically enters into long-

term lease for the life of the project relating to the real property on which

the project is to be located. Rental payments may be set in advance at a

fixed rate or may be tied to project performance.

7.Insurance. The general categories of insurance available in connection

with project financings are:

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

BABASAB PATIL32

Page 33: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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 important

BABASAB PATIL33

Page 34: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. is the identification, analysis, allocation and management of every risk associated with

the project.

The following details shows the manner in which risks are approached by

financiers in a project finance transaction. Such risk minimization lies at the heart

of project finance.

In a no recourse or limited recourse project financing, the risks for a financier are

great. Since the loan can only be repaid when the project is operational, if a major part

of the project fails, the financiers are likely to lose a substantial amount of money. The

assets that remain are usually highly specialized and possibly in a remote location. If

saleable, they may have little value outside the project. Therefore, it is not surprising

that financiers, and their advisers, go to substantial efforts to ensure that the risks

associated with the project are reduced or eliminated as far as possible. It is also not

surprising that because of the risks involved, the cost of such finance is generally

higher and it is more time consuming for such finance to be provided.

Risk minimization process

Financiers are concerned with minimizing the dangers of any events which could have

a negative impact on the financial performance of the project, in particular, events

which could result in:

1) The project not being completed on time, on budget, or at all;

2) The project not operating at its full capacity;

3) The project failing to generate sufficient revenue to service the debt; or

BABASAB PATIL34

Page 35: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

4) The project prematurely coming to an end.

The minimization of such risks involves a three step process.

1) The first step requires the identification and analysis of all the risks that may

bear upon the project.

2) The second step is the allocation of those risks among the parties.

3) The last step involves the creation of mechanisms to manage the risks.

If a risk to the financiers cannot be minimized, the financiers will need to build it into

the interest rate margin for the loan.

Step 1- Risk identification and analysis-

The project sponsors will usually prepare a feasibility study, e.g. as to the construction

and operation of a mine or pipeline. The financiers will carefully review the study and

may engage independent expert consultants to supplement it. The matters of particular

focus will be whether the costs of the project have been properly assessed and whether

the cash-flow streams from the project are properly calculated. Some risks are analysed

using financial models to determine the project's cash-flow and hence the ability of the

project to meet repayment schedules. Different scenarios will be examined by adjusting

economic variables such as inflation, interest rates, exchange rates and prices for the

inputs and output of the project. Various classes of risk that may be identified in a

project financing will be discussed below.

Step2- Risk allocation-

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

BABASAB PATIL35

Page 36: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 management-

Risks 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 Risk-

Completion 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

BABASAB PATIL36

Page 37: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 pre-

completion 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 Risk-

These 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

BABASAB PATIL37

Page 38: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 Risk-

Obviously, 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 Risk-

These 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 Risk-

This 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 Risk-

BABASAB PATIL38

Page 39: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. These 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 Financing-

The 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.

BABASAB PATIL39

Page 40: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 unit-

A one-stop-shop of financial services for new projects as well as expansion,

diversification and modernization of existing projects in infrastructure and non-

infrastructure sector.

Expertise

Being 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.

Lead role in many projects

Allied roles such as security agent, monitoring/TRA agent etc.

Synergy with SBI caps (exchange of leads, joint attempt in bidding for projects,

joint syndication etc.). In a way, the two institutions are complimentary to each

other. We have in house expertise (in appraising projects) in infrastructure sector as

well as non-infrastructure sector. Some of the areas are as follows: Infrastructure

sector:

BABASAB PATIL40

Page 41: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Infrastructure sector-

Road & urban infrastructure

Power and utilities

Oil & gas, other natural resources

Ports and airports

Telecommunications

Non-Infrastructure sector-

Manufacturing: Cement, steel, mining, engineering, auto components, textiles,

Pulp & papers, chemical & pharmaceuticals …

Services: Tourism & hospitality, educational Institutions, health industry …

Expertise

Rupee term loan

Foreign currency term loan/convertible bonds/GDR/ADR

Debt advisory service

Loan syndication

Loan underwriting

Deferred payment guarantee

Other customized products i.e. receivables securitization, etc.

Why project finance SBU?

BABASAB PATIL41

Page 42: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Since its inception in 1995 the Project Finance SBU has built-up a strong reputation for

it's in-depth understanding of the infrastructure sector as well as non-infrastructure

sector in India and we have the ability to provide tailor made financial solutions to meet

the growing & diversified requirement for different levels of the project. The recent

transactions undertaken by PF-SBU include a wide range of projects undertaken by the

Indian corporate.

Eligibility-

The infrastructure wing of PF SBU deals with projects wherein:

the project cost is more than Rs 100 Crores. The proposed share of SBI in the term 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.

The 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 sanctioning -

1) Proposal- The bank usually asks the firm to give the following details Nature of

the proposal The purpose for which the term loan is required ( whether for

expansion, modernization, diversification etc..)

2) Brief History- In case of an existing company essential particulars about its

promoters, its incorporation, subsequent corporate growth to date, major

developments or changes in management.

BABASAB PATIL42

Page 43: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

3) Past Performance- A summary of past performance in terms of

licensed/installed or operating capacities, sales, operating capacities, and sales

and net profit for the three years should be analyzed. The figures relating to

sales and profitability should be analyzed to ascertain the trend during the 3

years. In sum, the company’s past performance has to be assessed to study if

there has been a steady improvement and growth record has been satisfactory.

4) Present financial position- The Company’s audited balance sheets and profit

and loss account have to be analyzed. If the latest audited balance sheet has

more than 6 months old, a pro-forma balance sheet as on a recent date should be

obtained and analysed.

5) Project- Here the technical feasibility and the financial feasibility of the project

is studied.

6) Project implementation schedule- Examine the project implementation

schedule with reference to Bar Chart or PERT/CPM chart(if proposed to be

used by the company for monitoring the implementation of the project) and in

the light of actual implementation schedules of similar project

Pre sanction process-

Appraisal –

1. Preliminary appraisal-

BABASAB PATIL43

Page 44: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. The following aspects have to be examined if the proposal is to Financing a

project-

Whether the project cost is prima facie acceptable.

Debt and equity gearing proposed and whether acceptable

Promoter’s ability to access capital market for debt/ equity support

Whether critical aspects of project- demand, cost of production, profitability

etc.are prima facie in order.

After undertaking the preliminary examination of the proposal, the branch will arrive at

a decision whether to support the request or not. If the branch finds the proposal

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 ,Marketing and finance in other word brief on the managerial

resource and whether these are compatible with the size and the

scope of the proposed activity .

Demand and supply projections based on the overall market prospects

ogether with a copy of market research report . The report may

comment on the geographic spread of the market where the unit

proposes to operate, demand and supply gap , the competitor’s

share, competitive advantage of the applicant , proposed marketing

arrangement.

BABASAB PATIL44

Page 45: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Current practices for the particular product or service especially relating to

terms of credit sales, probability of bad debts.

Estimates of sales cost of production and profitability.

Projected profit and loss account and Balance Sheet for the operating

years during currency r of the bank assistance.

Branch should also obtain additionally

Appraisal report from any other bank/financial institution in case appraisal has been

done by them,

‘NO Objection Certificate’ from term lenders if already financed by them and

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 Appraisal-

The 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

BABASAB PATIL45

Page 46: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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-

Promoters track record;

Types of fixed assets to be acquired;

Technical feasibility

Marketability

Production process

Management

Time schedule

Cost of project

Sources of finance

Commercial Profitability;

Security and Margin

Repayment period and debt service coverage;

Funds Flows statement ;and

Rates of return.

BABASAB PATIL46

Page 47: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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

Whether profitability is adequate to meet stipulated repayments with reference

to Debt Service Coverage Ratio, Return on Investment.

Industry profile and prospectus

Critical factors of industry and whether the assessment of these and

management plans in this regard are acceptable

BABASAB PATIL47

Page 48: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Technical feasibility with reference to report of technical consultants, if

available

Management quality, competence, track record

Company’s structure and systems.

Also examine and comment on the status of approvals from other term lenders, project

implementation schedule. A pre-sanction inspection of the project site or the factory

should be carried out in the case of existing units.

3. Present relationship with the Bank:

The banks also take into consideration the relationship of the firm or the customer with the

banks. It takes into account the following aspects-

Credit Facilities now granted.

Conduct of the existing accounts.

Utilization of limits- FB & NFB.

Occurrence of irregularities, if any.

Frequency of irregularity i.e.; the number of times and the total number of days

the account was irregular during the last twelve months.

Repayment of term commitments.

Compliance with requirements regarding submission of stock statements,

Financial Follow-up Reports, renewal data, etc…

Stock turnover, realization of book debts.

Value of accounts with breakup of income earned. Pro-rata share of

BABASAB PATIL48

Page 49: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

non-fund and foreign exchange business.

Concessions extended and value thereof.

Compliance with other terms and conditions.

Action taken on comments /observations contained in

RBI inspection Reports.

CO inspection and audit reports.

Verification Audit Reports.

Concurrent audit reports.

Stock Audit Reports

Spot Audit Reports.

Long Form Audit Report (statutory Report).

4. Credit risk Rating-

Draw up rating for Working Capital and Term Finance.

5. Opinion Reports- Compile opinion Reports on the company, partners/ promoters

and the proposed guarantors.

6. Existing charges on assets of the unit-If the company, report on search of charges

with proposed guarantors.

7. Structure of facilities and Terms of Sanction-Fix terms and conditions for

exposures proposed facility wise and overall:

Limit for each facility- sub limits.

BABASAB PATIL49

Page 50: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Security- Primary & collateral, Guarantee.

Margins- for each facility as applicable.

Rate of interest.

Rate of commission/exchange/other fees.

Concessional facilities and value thereof.

Repayment terms, where applicable.

Other standard covenants.

8. Review of the proposal-Review of the proposal should be done covering Strengths

and weaknesses of the exposure proposed Risk factors and steps proposed to mitigate

themDeviations if any, proposed from usual norms of the bank and the reasons thereof.

9. Proposal for sanction- Prepare a draft in prescribed format with required back-up

details and with recommendations for sanction.

BABASAB PATIL50

Page 51: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

SBI has presently financed the following Projects-

BABASAB PATIL51

SL.NO Name Of The ProjectAmt(in crores)

1 Hescom 82.00

2 Manoj Jewellers 6.00

3 Mahaveer developers. 93.00

4 JTK Arihant appliances 2.25

5 Shreyalaxmi properties 5.95

6 Shri laxmi trading co. 5.8

7 SL flow controls 1.25

8 Hubli Cigarette center 1.10

9 Mahindrakar Agencies 35

10 Shri gopal industries 2.40

11 Atul agencies 2.02

12 Kashyap j. Majethia 4.40

13 Shree meenaxi pharma 2.5

14 Shree meenaxi medical agency 4.0

15 Fine lab 5.0

16 Shree engineers and process 5.8

17 Swastik winding works 4.5

Page 52: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

The further part has been dealt with respect to the project of

SL flow controls.

Project in Brief

Name M/S SL Flow Control

Address 98/A, 2A1, Sri Laxmi Business house near

Airport road Gokul road Hubli.

Nature of Business Manufacturing of industrial valves.

Status Proprietary Concern.

Name of the promoter Sri Verendra.B.Koujalagi.

Cost of the project Rs 221.41 lakhs

Employment potential 30 employees

Debt Service coverage ratio 2.08

BABASAB PATIL52

Page 53: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Cost of the project

Cost of the project Amount(Lakhs)

Building 25.00

land 22.00

Machinery 83.38

Electrification 6.50

Electricity Deposit 5.00

Preliminary Expenses

- Technical know how 5.00

- Personnel training 2.00

-Patterns 5.00 12.00

Net Working Captial 67.53

Total 221.41

Means of finance

Amounts in lakhs

BABASAB PATIL53

Term loan 102.50

Working Captial loan 50.00

Own Contribution 51.38

Margin Money for working Capital 17.53

Total 221.41

Page 54: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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 ratio’s measure a project’s

ability to meet its current or short-term obligations when they become due.

Liquidity is the pre-requisite for the very survival of a firm. A proper balance

between the liquidity and profitability is required for efficient financial

management. It reflects the short-term financial strength or solvency of the firm.

Two ratios are calculated to measure liquidity, the current ratio and quick ratio.

a) Current ratio-

The current ratio is defined as the ratio of total current assets to total current

liabilities. It is computed by,

Current assets

Current ratio

BABASAB PATIL54

Page 55: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Current liabilities

Current ratio

0.6340.767

0.927

1.339

1.8134

00.20.40.60.8

1

1.21.41.61.8

2

1 2 3 4 5

Years

Curr

ent R

atio

Interpretation-

It 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

BABASAB PATIL55

Particulars 2004 2005 2006 2007 2008

Current assets 91.47 101.72 112.76 128.7 145.25

Current liabilities 144.32 127.66 121.59 96.05 80.09

Current ratio 0.634 0.767 0.927 1.339 1.8134

Page 56: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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 ratio-

It 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.

BABASAB PATIL56

Particulars 2004 2005 2006 2007 2008

Quick assets 60.47 67.65 75.28 87.47 99.9

Current liabilities 144.32 127.66 121.59 96.05 80.09

Current ratio 0.534 0.53 0.62 0.911 1.247

Page 57: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Quick ratio

0.534 0.530.62

0.911

1.247

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1 2 3 4 5

Years

Qui

ck R

atio

Interpretation-

Acid test ratio is a rigorous measure of firm’s ability to service short term liabilities.

The usefulness of the ratio lies in the fact that it is widely accepted as the best 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

2. Capital structure ratio’

The long-term lenders/creditors would judge the soundness of a firm on the basis of the

long term financial strength measured in terms of its ability to pay the interest regularly

as well as repay the installment of the principal on due dates or in one lump sum at the

time of maturity. The long term solvency of firm can be examined by using leverage or

capital structure ratios. The leverage or capital structure ratio’s may be defined as

financial ratios which throw light on the long term solvency of a firm as reflected in its

BABASAB PATIL57

Page 58: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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

BABASAB PATIL58

Particulars 2004 2005 2006 2007 2008

Debt 82.00 61.50 41.00 20.05 0.00

Equity(Promoter contribution) 56.38 54.07 56.88 68.94 84.49

Debt equity ratio 1.454 1.14 0.721 0.291 0.00

Page 59: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Debt equity ratio

1.454

1.14

0.721

0.291

00

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1 2 3 4 5

Years

Deb

t/Equ

ity

Interpretation-

The 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 ratio’s related to sales-

These 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 margin-

BABASAB PATIL59

Page 60: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

It is also known as net margin. This measures the relationship between the net

profits and sales of a firm. Depending on the concept of net profit employed. , this

ratio can be computed as follows-

Earnings after tax

Net Profit ratio = 100

Net sales

Interpretation

The net profit margin is indicative of management’s 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 Investments-

Return on Investments-

BABASAB PATIL60

Particulars 2004 2005 2006 2007 2008

Earnings after tax 10.68 17.82 27.05 35.56 43.75

Net sales 265.49 292.04 321.24 353.36 388.7

Net profit margin 4.023% 6.102% 8.420% 10.06% 11.25%

Page 61: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Return on investments measures the overall effectiveness of management in

generating profits with its available assets. There are three different concepts of

investments in financial literature: assets, capital employed and shareholder’s

equity. Based on each of them, there are three broad categories of ROIs. They are

I. Return on assets,

II. Return on total capital employed.

Return on assets-

The profitability ratio is measured in terms of relationship between net profits and

assets. The ROA may also be called profit-to-asset ratio. It can be computed as follows-

Net profit after tax

Return on Assets = 100

Average total assets

BABASAB PATIL61

Particulars 2004 2005 2006 2007 2008

Earnings after tax 10.68 17.82 27.05 35.56 43.75

Average total assets 208.39 199.54 195.9 200.54 208.34

ROA 5.125% 8.93% 13.81% 17.73% 20.99%

Page 62: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

ROA

5.13%8.93%

13.81%

17.73%

20.99%

Interpretation-

Return on assets employed is favorable. That means the firm is in a position to employ

its assets in an efficient manner.

Return on Capital Employed-

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 formula-

EBIT

Return on Capital employed = 100

Average total capital employed

BABASAB PATIL62

Particulars 2004 2005 2006 2007 2008

EBIT 34.82 42.24 52.66 62.04 70.99

total capital employed 203.39 199.54 195.90 200.54 208.34

ROCE 17.2% 21.16% 28.92% 30.9% 34.07%

Page 63: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

1 2 3 4 5

ROCE

17.20%21.16%

28.92% 30.90%34.07%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Returns

Years

ROCE

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.

Repayment Period and debt service coverage

A) Projections of performance and profitability

particulars 2004 2005 2006 2007 2008

BABASAB PATIL63

Page 64: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

A) Sales 300.00 330.00 363.00 399.30 439.23

Less: Excise 34.51 37.96 41.76 45.94 50.53

Net sales 265.49 292.04 321.24 353.36 388.70

B) cost of Production

1.Raw material consumed 185.84 204.42 224.87 247.35 272.09

2.Power & Fuel 6.00 6.60 7.26 7.99 8.78

3.Direct labor & wages 12.24 13.46 14.81 16.29 17.92

4.consumable stores 0.60 0.66 0.73 0.80 0.88

5.Repair & Maintenance 1.20 1.32 1.65 2.48 3.47

6.Othermanufacturingexpences 0.72 0.79 1.11 1.55 2.17

7.Depreciation 24.97 19.10 14.66 11.30 8.75

8.Preliminary expenses w/off 2.40 2.40 2.40 2.40 2.40

Total Cost of Production 233.47 248.76 267.49 290.16 316.46

Add: Opening stock 0.00 4.50 4.78 5.14 5.58

Less: Closing Stock 4.50 4.78 5.14 5.58 6.09

D)Cost of goods sold 229.47 248.78 267.13 289.72 315.96

E) Gross Profit (B-D) 36.02 43.56 54.11 63.64 72.74

BABASAB PATIL64

Page 65: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

F) Interest on

1) Term Loan 12.80 10.03 7.26 4.50 1.73

2) Working Captial 6.75 6.75 6.75 6.75 6.75

Total 19.55 16.78 14.01 11.25 8.48

G) Selling, administration Exp 1.20 1.32 1.45 1.60 1.76

H)Profit Before Taxation(E-

(F+G))

15.27 25.45 38.65 50.80 62.51

I) Provision for Taxation 4.58 7.64 11.59 15.24 18.75

J) Profit after tax (H-I) 10.69 17.82 27.05 35.56 43.75

K) Depreciation 24.97 19.10 14.66 11.30 8.75

L) Net Cash accruals( J+K) 35.66 36.92 41.72 46.86 52.5

B) Projected Cash Flow Statement

SL.NO Particulars 2004 2005 2006 2007 2008

A) Sources of funds

1.Net profit before interest and tax 34.82 42.24 52.66 62.04 70.99

2. Depreciation 24.97 19.10 14.66 11.30 8.75

3.Promoters capital 51.38

BABASAB PATIL65

Page 66: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

4.own contribution towards 5.00

5.term loan 102.50

6.working capital loan 50.00

7.Sundry creditior 7.74 0.77 0.85 0.94 1.03

8.Amortisationofpreliminaryexpences 2.40 2.40 2.40 2.40 2.40

Total: 278.8 64.52 70.58 76.68 83.17

B) Application of funds

1. Buldings 25.00

2. Land 22.00

3.Macinary 83.38

4.Electrification 6.50

5.Electricity Deposit 5.00

6.Preliminary Expenditure

6. Increase in receivables 44.25 4.42 4.87 5.35 5.89

7.incerase in stock of material 30.97 3.10 3.41 3.75 4.12

9.increase in stock of finished goods 4.50 0.28 0.36 0.44 0.51

BABASAB PATIL66

Page 67: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

10.Drawing/ Dividend 3.00 10.00 15.00 15.00 20.00

11.interest on loans 19.55 16.78 14.01 11.25 8.48

12.income tax 0.00 4.58 7.64 11.59 15.24

13.Repayment of term loans 20.5 20.5 20.5 20.5 20.5

Total 276.65 59.67 65.79 67.88 74.74

Surplus/deficit 2.15 4.85 4.79 8.80 8.43

Opening Balance 0.00 2,15 7.00 11.80 20.6

Add: surplus/ deficit 2.15 4.85 4.79 8.80 8.43

Closing Balance 2.15 7.00 11.80 20.6 29.03

Projectd Balance Sheet

SL.NO Particulars 2004 2005 2006 2007 2008

A Captial & Liability

Promoter captial 0.00 64.07 71.88 83.94 104.49

Own contribution 56.38 0.00 0.00 0.00 0.00

Less Drawings 3,00 10.00 15.00 15.00 20.00

Equity 53.38 54.07 56.88 68,94 84.49

BABASAB PATIL67

Page 68: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Retained Earning 10.69 17.82 27.05 35.56 43.75

64.07 71.88 83.94 104.49 128.25

Term loan(Debt) 82.00 61.50 41.00 20.50 0.00

Sundry creditors 7.74 8.52 9.37 10.31 11.34

Working Captial loan 50.00 50.00 50.00 50.00 50.00

Provision for tax 4.58 7.64 11.59 15.24 18.75

Grand Total 203.39 199.54 195.90 200.54 208.34

Assets:

Fixed assets 89.91 70.81 56.14 44.84 36.09

land 22.00 22.00 22.00 22.00 22.00

Electricity deposit 5.00 5.00 5.00 5.00 5.00

Cash & Bank Balances 2.15 7.00 11.80 20.6 29.03

Receivables 44.25 48.67 53.54 58.89 64.78

Stock of material 30.97 34.07 37.48 41.23 45.35

Stock of finished goods 4.50 4.78 5.14 5.58 6.09

Preliminary expences not w/off 9.60 7.20 4.80 2.40 0.00

Grand Total 208.39 199.54 195.9 200.54 208.34

BABASAB PATIL68

Page 69: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Debt Service Coverage Ratio:(DSCR)

It is considered a more comprehensive and apt measure to compute debt service

capacity of firm. It provides the value in terms of the number of times the total debt

service obligations consisting of interest and repayment of principal in installments are

covered by the operating funds available after the payment of tax : earnings after taxes,

EAT+interest+Depreciation+Other non cash expenditure like amortization.

EAT+interest+Depreciation+Other Non cash expenditure

DSCR =

Installments

BABASAB PATIL69

Particulars 2004 2005 2006 2007 2008

Net Cash Accruals 35.66 36.92 41.72 46.86 52.50

Instalment 20.5 20.5 20.5 20.5 20.5

DSCR 1.74 1.80 2.03 2.29 2.56

Page 70: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

12 3

45

DSCR

1.74 1.82.03

2.292.56

0

0.5

1

1.5

2

2.5

3

Years

DSCR

Debt service coverage Ratio

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

BABASAB PATIL70

year Net profit for the year Interest on term loan Repayment of term loan

2004 35.66 19.55 20.5

2005 36.92 16.78 20.5

2006 41.72 14.01 20.5

2007 46.86 11.25 20.5

2008 52.50 8.48 20.5

Page 71: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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.

Capital investment evaluation methods

Successful completion of a project mainly depends on the selection criteria adopted

while choosing the project in the initial phases itself and the choice of a project must be

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.

BABASAB PATIL71

Page 72: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Discounted PBP method gives a more accurate period to cover the initial cost but

doesn’t overcome the above drawbacks. However this is a very good method to use in

combination with other methods.

Total cash

outflow

Pay Back

Period =

Annual cash inflow

The recovery of the investment is in the 3rd year and 0.64 month.

Interpretation-

The Pay back period is a measure of liquidity of investments rather than their

profitability. Since the period within which the total cost of the period is less than the

completion period, the project can be accepted. It means that the firm will be able to

pay the dues out of their inflows. Therefore the project is said to be feasible.

2. Average Rate of Return-

BABASAB PATIL72

Year Cash Flows (in lakhs) Cumulative cash flows

2004 35.66 35.66

2005 36.92 72.58

2006 41.72 114.3

2007 46.86 161.16

2008 52.50 213.66

Page 73: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. The 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

Average rate of return = * 100

Average investment

213.66/ 5

Average rate of return = * 100

152.5/ 2

42.732

Average rate of return = * 100

76.25

Average rate of return = 56.04%.

BABASAB PATIL73

Page 74: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Interpretation-

Here the ARR is more consistent as the ARR is quite higher ( more than average) and

the project can be accepted.

3. Net Present value-

It 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 doesn’t 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.

Year Cash Flows(lakhs) PV factor @10% Total present value

1 35.66 0.909 32.414

2 36.92 0.826 30.495

3 41.72 0.751 31.290

4 46.86 0.683 32.005

5 52.50 0.621 32.603

Total PV - 158.807

BABASAB PATIL74

Page 75: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Less- Initial outlay 152.5

Net Present Value - - 6.307

Interpretation-

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 NPV’s contribute to the net wealth of the shareholders which should result in

the increased price of a firm’s 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 Index-

It 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 =

BABASAB PATIL75

Page 76: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 152.5

Profitability Index = 1.041

Interpretation-

Using 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.

5. Internal Rate of Return-

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 Cash flows Weights Weighted average

CF’s

1 35.66 5 178.3

2 36.92 4 147.68

3 41.72 3 125.16

BABASAB PATIL76

Page 77: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

4 46.86 2 93.72

5 52.50 1 52.5

Total 15 597.36

597.36

Weighted Average Cost = 15 = 39.824

Initial Investment Pay Back Period = Weighted average cost

152.5 Pay Back Period =

39.824

Pay back period = 3.8 years

A)

Year CashFlows(lakhs) PV factor @10% present value

1 35.66 0.909 32.414

2 36.92 0.826 30.495

3 41.72 0.751 31.290

4 46.86 0.683 32.005

5 52.50 0.621 32.603

BABASAB PATIL77

Page 78: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Total PV - 158.807

Less- Initial outlay 152.5

Net Present Value - - 6.307

B)Year Cash flows PV factor @ 12% Present value

1 35.660.893 31.84

2 36.920.797 29.43

3 41.720.712 29.70

4 46.860.636 29.80

5 52.500.567 29.76

Total PV150.53

Less- Initial outlay152.53

Net Present Value --1.97

A Internal rate of return = L+ {H-L}

A- B

BABASAB PATIL78

Page 79: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

6.307 Internal rate of return = 10 + (12-10) 6.307-1.97

6.307 Internal rate of return = 10+ {2} 4.337

Internal rate of return = 10 + 2.908

Internal rate of return = 12.91%

Interpretation-

Since the expected rate of return is 10% so the project is said to be accepted.

Measures taken by SBI when the repayment is not possible

2) Firstly they send a notice to the clients stating therein to pay their dues.

3) When there no improvements in the repayments even after the notice being sent

then the bank will forward the legal notice stating the clients to make

payments

4) Third is the compromise dealing wherein both the parties sit together and

decide what measures has to be taken which means whether the clients make

the payments, or whether to file a suit or decide to sell the Properties etc..

BABASAB PATIL79

Page 80: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

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.

BABASAB PATIL80

Page 81: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

Profitability ratios related to sales and capital employed are in increasing

trend, it shows that the sales are increasing and the firm using its resources

efficiently.

Debt Service Coverage Ratio is also in increasing trend, it shows that the

firms ability to make the loan repayments on time over the debt life of the

project.

The payback period is within the debt life of the project.

The net present value of the project is positive, The positive net present

value will result only if the project generates cash inflows at a rate higher

than the opportunity cost of capital . Since the Net Present Value of the

above project is positive, the proposal can be accepted.

The internal rate of the return is higher than what accepted so the project is

accepted.

Findings :- These are related to bank in general

State bank of India is strictly following the guidelines of RBI on Project

Financing

Sanctioning for the projects is approved by RASMECC (Retailed Assets

Small And Medium Enterprises Credit Cell).

BABASAB PATIL81

Page 82: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing.

The bank finances the projects only through term loans.

Interest rates are fixed depending upon the projects which is known as State

Bank advance rate.

When the clients fail to pay the interest, 3 months from the due date the term

loan granted will be treated as Non Performing Assets.

If the interest is due further 3 more months then it will be treated as doubtful

assets and interest rates becomes zero.

Again for further 3 months it goes as loss assets and the bank write off the

account.

Every firm starting up a new project should make an insurance policy with

the same bank itself.

Recommendations:-

Bank check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost benefit

analysis of the project so bank should consider this because these are also

important from the point of view of risk and economy growth.

Bank should be caution about the availability of security and ensure

honesty of both borrower and guarantor so as to avoid the account

becoming the loss assets.

Limitation of the study:-

Some of the information are confidential in nature that could not divulged for study.

Conclusion:-

BABASAB PATIL82

Page 83: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. 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.

BABASAB PATIL83

Page 84: Financial appraisal of project @ sbi project report mba finance

STATE BANK OF INDIA

Project Financing. Bibliography

The data is collected from the list of books and web site given below

www.sbi.com.

www.Google.com

Company manuals.

Commercial Banks Book.

Project financing by – Machiraju

Financial management by – Khan and Jain.

BABASAB PATIL84