Financial Appraisal @ Sbi Project Report Mba Finance

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  STATE BANK OF INDIA  Project Financing  Financing .  

CONTENTS

SECTION – I • •

Executive Summary Industrial Profile

4-7 9 -12 SECTION – II



Company Profile

13-21   SECTION – III





Theoretical Background for the project work

-

Introduction to project financing

-

Project financing risks

-

Project Financial Appraisal

Project in Brief- SL flow controls

22- 49

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



Bi Bibl blio iogr grap aphy hy

79

BABASAB PATIL 1

 

  STATE BANK OF INDIA  Project Financing  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  particul ar subject assigne assigned d to him/her. him/her. According Accordingly ly I have been been assigned assigned the the project work  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 project projectss requiri requiring ng large large investm investments ents of funds, funds, such such as the constr constructi uction on of power  power   plants, pipelines, pipelines, transportation systems, 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 project has been undertaken undertaken at State Bank of India, Hubli 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 financing,, mutual mutual funds etc

Financial appraisal which mainly leads to the feasibility study consisting of ratio analysis and capital budgeting calculations.

BABASAB PATIL 2

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Main Objective 

“Financial appraisal of project” Sub Objectives 1.

To kn know ow th thee proj project ectss fina finance nced d by by SBI SBI..

2.

To know know the polic policies ies of of SBI SBI towards towards the proje project ct financin financing. g.

3.

To know know the the risk riskss invol involved ved in proje projects cts financin financing. g.

4.

To app apprai raise se the the projec projects ts using using finan financia ciall tools. tools.

5.

To know know the the measur measures es taken taken by bank bank when when the the clients clients fail to to repay repay the amoun amount. t.

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

www.sbi.com 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 PATIL 3

 

  STATE BANK OF INDIA  Project Financing  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 PATIL 4

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Findings :- The These se are related to bank in general •

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



Sanctioning Sanctio ning for the project projectss is approv approved ed by RASMEC RASMECC C (Retaile (Retailed d Assets 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 Ban k check check only only financi financial, al, technic technical al and commercial commercial feasibil feasibility ity of the  project and it should should not consider sensitivity analysis 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.

BABASAB PATIL 5

 

  STATE BANK OF INDIA  Project Financing  Financing .  



Rationale behind choosing this topic:

Project financing is a comparatively 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, infrastructure, power generation, generation, mining etc. considering considering all these the projects projects must need finance, to fulfill these objectives 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 and then then it will go for financing that project 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 PATIL 6

 

  STATE BANK OF INDIA  Project Financing  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  Nationa lization of of Indian Banks and up to 1991 1991 prior prior to Indian. Indian. Banking sector Reforms.  New phase phase of Indian Banking System System with the advent advent of Indian. Indian.



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

BABASAB PATIL 7

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 headquarters at Lahore. Lahore. Between Between 1906 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 streaml stre amline ine the functio functioning ning and activitie activitiess of banks, banks, mostly small. small. To streamli streamline ne 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 Gove rnment took major steps in this Indian Banking Sector Sector Reform after independence. independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and state government all over the country. Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country

BABASAB PATIL 8

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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: 1949: Enact Enactmen mentt of Bank Banking ing Regu Regulatio lation n Act. Act. 2. 1955: 1955: Natio Nationali nalisat sation ion of of State State Bank Bank of India India.. 3. 1959: 1959: Natio Nationali nalisat sation ion of of SBI subs subsidia idiaries ries.. 4. 1961: 1961: Insu Insuran rance ce cover cover exten extended ded tto o deposi deposits. ts. 5. 1969: 1969: Natio Nationali nalisat sation ion of of 14 majo majorr banks banks.. 6. 1971: 1971: Creat Creation ion of cred credit it guarant guarantee ee corpor corporatio ation. n. 7. 1975: 1975: Crea Creation tion of regio regional nal rural rural banks banks.. 8. 1980: 1980: Nationalisation Nationalisation of seven seven banks banks with deposits deposits over over 200 crores. 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 sunsh sunshine ine of Governm Government ent owners ownership hip gave gave the public public implicit implicit faith faith and immens immensee confidence about the sustainability of these institutions. 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.

BABASAB PATIL 9

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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. suffere d. This is all due to a flexible exchange rate regime, the foreign reserves 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 Dec ades later, foreign foreign Banks Banks like HSBC and Credit Lyonna Lyonnais is Started Started their their Calcutt Calcuttaa 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 Lahore;; Bank of India in 190 1906 6 in Mumbai-both Mumbai-both of which were founded founded under private ownership. Indian Banking Sector was formally regulated by Reserve Bank  Of Indi Indiaa from from 19 1935 35.. Afte Afterr In India dia’s ’s indepe independe ndence nce in 19 1947 47,, the Rese Reserve rve Bank Bank was was nationalised and given broader powers.

BABASAB PATIL 10

 

  STATE BANK OF INDIA  Project Financing  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 followed by nationalis nationalisation ation of of 6 more more commercial commercial Indian Indian banks banks in 1980. 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 ea early rly

1990 1990’s ’s the then then Naras Narasim imha ha rao go gove vernm rnmen entt emba embark rked ed a po polic licy y of 

liberalization and gave licences to a small number of private banks, which came to be known kno wn as New generation generation tech-savvy tech-savvy banks, banks, which which include included d banks banks like ICICI and HDFC. This move along with the rapid growth of the economy of India, kick started the  banking  bankin g sector in India, which has seen rapid growth growth with strong contribution contribution from all the sector sectorss of banks banks,, namely namely Govern Governmen mentt banks, banks, Private Private Banks Banks and Foreig Foreign n banks. 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

BABASAB PATIL 11

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 Rupee is to manage manage volatility-without 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 timeespecia esp ecially lly in its service servicess sector, sector, the demand demand for banking banking services-es services-espec peciall ially y retail retail  banking,  bankin g, mortgages mortgages and and investment investment services services are expected expected to be be strong. strong. M&As, M&As, takeovers, 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.

BABASAB PATIL 12

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector   banks (that is with the Government 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 PATIL 13

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Banking in India

1 Central Bank

Reserve Bank of India State Sta te Bank Bank

of Indi India, a, Allah Allahaba abad d

Bank

Baroda,

of

Mahar aharas astr tra, a,C Can anar araa 2 Nationalised Banks

Bank

Bank, ank,

Bank, Bank, Andhra Andhra Bank, Bank,

of

Cen entr tral al

India, Bank ank

Bank of

of  

In Ind dia, ia,

Corpo Co rpora ratio tion n Bank Bank,, Dena Dena Bank Bank,, In India dian n Bank Bank,, In India dian n overseas Bank,Oriental Bank of Commerce, Punjab and Sind Bank, Punjab National Bank, Syndicate Bank, Union Bank Ba nk of India, India, Unite United d Bank Bank of In India dia,, UCO UCO Bank Bank,an ,and d Vijaya Bank. Bank of Rajastan, Bharath overseas Bank, Catholic Syrian Bank, Ba nk, Centu Centurio rion n Bank Bank of Punja Punjab, b, City City Unio Union n Bank Bank,, Develo De velopme pment nt Credit Credit Bank, Bank, Dhanala Dhanalaxmi xmi Bank, Bank, Federal Federal

3 Private Ba Banks

Bank, Ganesh Bank of Kurundwad, HDFC Bank, ICICI Bank, IDBI, IndusInd Bank, ING Vysya Bank, Jammu and Kashmir Kas hmir Bank, Bank, Karnatak Karnatakaa Bank Bank Limited Limited,, Karur Karur Vysya Vysya Bank, Kotek Mahindra Bank, Lakshmivilas Bank, Lord Krish Kr ishna na Bank Bank,, Nain Nainita itak k Bank Bank,, Ratna Ratnakar kar Bank Bank,S ,San angl glii Bank, Ba nk, SBI SBI Commer Commercial cial and Internat Internation ional al Bank, Bank, South South Indian Bank, Tamil Nadu Merchantile Bank Ltd., United Western Bank, UTI Bank, YES Bank.

BABASAB PATIL 14

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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

Reserve Bank of India

 

Scheduled Banks

Scheduled Commercial Banks

Public Sector Public Sector Banks

Nationalized Banks

Private Sector Banks

SBI & its Associates

Old private sector Banks

Scheduled Co-operative Banks

Foreign Banks

Regional Rural Banks

Scheduled Urban cooperative

Scheduled State cooperative Banks

New private sector Banks

BABASAB PATIL 15

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Bank Overview STATE BANK OF INDIA

 Not only many financial institution institution in the world today can claim the antiquity 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  preside ncies 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 agric agricult ultura urall pr prod oduc uctio tion n the Bank Bank beca became me intim intimate ately ly in value valued d in the finan financin cing g of   practically  practicall y and mining activity of the Sub- Continent Continent Although Although large European European and Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions. Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the post depression exe. For instance – when business opportunities become extremely restricted, rules laid down in the book of instructions were relined to ensure that good  business  busine ss did not go post. Yet seldom seldom did the bank contravenes contravenes its value as depart from sound banking banking principles to retain as expand expand its business. business. An innovative innovative array of office, unknown to the world world then, was devised in the form of of branches, sub branches, treasury  pay office, pay office, sub pay office and out students to exploit the opportunities 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 highly effic efficien ientt and and exper experien ience ced d mana manage geme ment nt fu funct nctio ionin ning g in a well well de defin fined ed organizational structure did not take long to place the bank an executed pedestal in the areas of business, business, profitability, profitability, internal discipline and above all credibility credibility A impeccable impeccable

BABASAB PATIL 16

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 administration for the bank was universal as key functionaries of India succes suc cessiv sivee finance finance ministe ministerr of indepe independe ndent nt India India Resou Resource rce Bank Bank of governo governors rs and representatives of chamber of commercial showered showered economics on it. Modern day management techniques were also very much evident in the good old days years before corporate governance had become a puzzled the banks bound functioned with a high degree of responsibility and concerns for the shareholders. An unbroken records of profits and a fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction, prudential management and asset liability management not only protected the interests of the Bank but also ensured that the obligations to customers were not met. The traditions of the past continued to be upheld even to this day as the State Bank years itself to meet the emerging challenges of the millennium.  

ABOUT LOGO

 

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

BABASAB PATIL 17

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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: •

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

BABASAB PATIL 18

 

  STATE BANK OF INDIA  Project Financing  Financing .   •

Learning and renewal



Integrity



Transparency and Discipline in policies and systems.

 Organization Structure

MANAGING DIRECTOR 

CHIEF GENERAL MANAGER 

G. M

G.M

(Operations)

G. M (C&B)

G.M (F&S)

G.M (I) & CVO

(P&D)

  Zonal off

Functional Heads

Regional officers

Theoretical Background for the project work 

BABASAB PATIL 19

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 largescale sca le natural natural resour resource ce project projects, s, from pipeline pipeliness and refineri refineries es to electric electric-gen -generat erating ing facilities and hydroelectric projects. Increasingly, project financing is emerging as the  preferred alternative alternative to conventional conventional method methodss of financing infrastructure infrastructure and other other largescale projects worldwide. MEANINGProject 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. RATIONALEProject financing is commonly used as a financing method in capital-intensive industries for project projectss requiri requiring ng large large investm investments ents of funds, funds, such such as the constr constructi uction on of power  power   plants, pipelines, pipelines, transportation systems, systems, mining facilities, industrial facilities and heavy manufa man ufactur cturing ing plants. plants. The sponso sponsors rs of such such projects projects frequen frequently tly are not sufficie sufficiently ntly creditworthy creditw orthy to obtain traditional traditional financing financing or are unwilling to take the risks and assume 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-

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  STATE BANK OF INDIA  Project Financing  Financing .  

NON RECOURSE

The typical project financing involves a loan to enable the sponsor to construct a  project where the loan is completely "non-recourse" "non-recourse" to the sponsor, sponsor, i.e., the sponsor 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

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 without diluting diluting its equity equity investment investment in the project project and, in certain certain circumstances, circumstances, also als o may may permit permit re redu ducti ction onss in th thee cost cost of ca capit pital al by su subs bstit titut uting ing lo lowe wer-c r-cos ost, t, taxtaxdeductible 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 nonrecourse 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

BABASAB PATIL 21

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 PATIL 22

 

  STATE BANK OF INDIA  Project Financing  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 feasibility study showing the financial viability of the project. Frequently 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  project including the time-frame time-frame for completion completion of the various phases phases of the project project development, and should clearly set forth all of the financial and other assumptions upon which the conclusions of the study are based, Among the more important items contained in a feasibility study are: 1. Desc Descrip riptio tion n of pr proj oject ect 2. Desc Descrip riptio tion n of spo spons nsor or(s (s). ). 3. Spon Sponso sors rs'' Agree Agreeme ments nts.. 4. Proje roject ct sit sitee. 5. Gove Governm rnmen ental tal arran arrange geme ments nts.. 6. Sourc ourcee of of ffun unds ds.. 7. Feed Feedsto stock ck Agree Agreeme ments nts.. 8. Off Off take take Agr Agree eeme ment nts. s. 9. Cons Constru truct ction ion Cont Contrac ract. t. 10. Management Management of project. project. 11. Capital Capital costs costs.. 12. Working Working capital capital.. 13. Equity Equity sourcing. sourcing. 14. Debt Debt sourcing. sourcing.

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  STATE BANK OF INDIA  Project Financing  Financing .  

15. Financial Financial projections. projections. 16. Market Market study study.. 17. Assump Assumption tions. s. THE PROJECT COMPANY Legal Form

Sponsors of projects adopt many different legal forms for the ownership of the  project. The specific form adopted adopted for any particular 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. Corpora porati tion onss-

Thiss is the simplest Thi simplest form for owners ownership hip of a project project.. A special special purpose purpose corporation may be formed under the laws of the jurisdiction in which the  project is located, located, or it may be formed in some other jurisdiction jurisdiction and be qualified to do business in the jurisdiction of the project. 2. Gene Genera rall Par Partn tner ersh ship ipss-

Thee sp Th spon onso sors rs may may form form a gener general al part partne ners rship hip.. In most most ju juris risdi dicti ction ons, s, a  partnership  partners hip is recognized recognized as a separate separate legal entity and can own, operate and enter into financing arrangements for a project in its own name. A partnership

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  STATE BANK OF INDIA  Project Financing  Financing .  

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. 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, partnership, a sponsor sponsor frequently will form a wholly owned, single-purpose subsidiary to act as its general partner in a partnership. 3. Li Limi mite ted d Par Partn tner ersh ship ipss-

A limited limited partner partnership ship has similar similar characte characteristi ristics cs to a general general partner partnership ship except that the limited partners have limited control over the business of the  partnership  partners hip and are liable only for the debts and liabilities of the partnership to th thee exten extentt of their their ca capit pital al co contr ntribu ibutio tions ns in the part partne nersh rship. ip. A limite limited d  partnership  partners hip may be useful useful for a project financing when the sponsors 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:

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  STATE BANK OF INDIA  Project Financing  Financing .   

Ownership interests.



Capitalization and capital calls.



Allocation of profits and losses.

 

Distributions. Accounting.



Governing body and voting.



Day-to-day management.



Budgets.



Transfer of ownership interests.



Admission of new participants.



Default.



Termination and dissolution.

Principal Agreements in a Project Financing1. Cons Constr truc ucti tion on Cont Contra ract ct--

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

Project Description- The construction construction contract should set forth a

detaile det ailed d descript description ion of all the Work Work necessar necessary y to complet completee the  project 

project financing construction construction contracts contracts are fixedPrice:- Most project  price contracts contracts although although some projects projects may be built on a cost plus basis. If the

contract contract is not fixed-price, fixed-price, additional additional debt or 

equity contributions may be necessary to complete the project, and the project project agreements agreements should should clearly indicate the party or   parties respon responsible sible for for such contributions. contributions. 

Paymen ents ts ty typic picall ally y are made made on a "mile "milesto stone ne"" or  Payment- Paym "com "compl plet eted ed work work"" ba basi sis, s, wi with th a reta retain in ag age. e. This This pa paym ymen entt

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  STATE BANK OF INDIA  Project Financing  Financing .  

 procedure  proced ure provides provides an incentive for the contractor contractor to keep on schedu sch edule le and usefu usefull monitor monitoring ing

points points for the the owner owner and and the

lender. 

Completio Com pletion n DateDate- The constru constructio ction n comple completion tion date, date, togethe together  r 

with any time extensions resulting from an event of force majeure, must be consistent with the parties' obligations under the other   project documents. documents. If construction construction is not finished finished by the co comp mple letio tion n date, date, the co contr ntract actor or ty typic picall ally y is re requ quire ired d to pay pay liquidated damages to cover debt service for each day until the  project is completed. completed. If construction construction is completed completed early, the contractor frequently is entitled to an early completion bonus. 

Performa Perf ormance nce

Guarant Guaranteesees-

The

co cont ntra ract ctor or

ty typi pica call lly y

will ill

guar aran anttee that the proje jecct will ill be able to meet certain tain  performance  perform ance standards standards when completed. completed. Such standards standards must be set at levels levels to assure assure that the project project will generate generate su sufficie fficient nt revenues for debt service, operating costs and a return on equity. Such guarantees guarantees are measured measured by performance performance tests conducted conducted by the contractor at the end of construction. If the project does not meet me et the the gu guar aran ante teed ed le leve vels ls of pe perf rfor orma manc nce, e, th thee co cont ntra ract ctor  or  typically is required to make liquidated damages payments to the sponsor. spons or. If project performance performance exceeds the guaranteed guaranteed minimum levels, the contractor may be entitled to bonus payments. 2. Feedstock Supply Agreements. The project company will enter into one or more feedstock supply agreements for the supply of raw materials, energy or other resources over the life of the  project. Frequently, Frequently, feedstock supply agreements agreements are structured structured on a "put-or pay" basis, basis, which means that the supplier supplier must either supply the feed feedstock stock or   pay the project company company the difference in costs incurred incurred in obtaining obtaining the feedsto feed stock ck from another another source. source. The price price provis provision ionss of feedst feedstock ock supply supply

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  STATE BANK OF INDIA  Project Financing  Financing .  

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, financing, the product product off take agreements agreements represent represent the source of revenu revenuee for the project project .Such .Such agreeme agreements nts must must be str structu uctured red in a manner to provide provide the project company company with sufficient sufficient revenue revenue to pay pay its its  project debt obligations obligations and all other costs of operating, operating, maintaining maintaining and owning the project project .Frequently,offtak .Frequently,offtakee agreements agreements are structured structured on a "takeor-pay" basis, which which means means that the offtaker offtaker is obligated obligated to pay pay for product 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 company Like feedsto feedstock ck supply supply arrange arrangemen ments, ts, offtake offtake agreeme agreements nts frequently frequen tly are on a fixed or scheduled scheduled price basis during the term of  the project debt financing. 4. Operations and Maintenance Maintenance Agreement The project project company typically typically will enter into a long-term agreement agreement for the day-to-day day-to-day operation operation and and maintenance maintenance of of the project project facilities with with a company compa ny having having the technical technical and financial expertise expertise to operate operate the the project project in accordan accordance ce

with the cost and production production specifications specifications for the project. 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 bonus payments payments for extraordinary extraordinary project performance and be required to pay liquidated damages for project performance below specified levels.

5. Loan and Security Agreement.

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  STATE BANK OF INDIA  Project Financing  Financing .  

The borrower borrower in a project financing typically is the project company company formed  by the sponsor(s) sponsor(s) to own the project. The loan agreement will set forth the  basic terms of the loan and will contain general general provisions provisions relating to maturity, interest rate and fees. The typical project financing loan agreement also will contain yhr provisions such as1. Disbursement Controls. These frequently take the form of conditions  precedent  precede nt to each drawdown, drawdown, requiring requiring the borrower to present present invoices, invoices,  builders’  builde rs’ certificates certificates or other evidence as to the need for f or 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 wa ive any of its ri righ ghts ts un unde derr th thee co cons nstru tructi ction on,, feeds feedsto tock ck,, of offf take take,, operations and maintenance, or other principal agreements without the consent of the lender. 4. Completion Covenants:-T :-Thes hesee require require the borrow borrower er to comple complete te the  project in accordance accordance with project plans and specifications specifications and prohibit prohibit th thee bo borro rrowe werr from from mate materia riall lly y alteri altering ng th thee proje project ct pl plans ans with withou outt th thee consent of the lender. 5. Divide Dividend nd Restricti Restrictions ons. The hese se co cove vena nant ntss pl plac acee re rest stri rict ctio ions ns on th thee  payment  payme nt of dividends dividends or other distributions distributions by the borrower borrower until debt service obligations are satisfied. 6. Debt and Guarantee Restrictions. The borrower may be prohibited from incurring additional debt or from guaranteeing other obligations 7. Fina Such co cove vena nant ntss re requ quir iree th thee main mainte tena nanc ncee of  Financial ncial Covenant Covenantss. Such working capital and liquidity ratios, debt service coverage ratios, debt service ser vice reserves reserves and other financial financial ratios ratios to protect protect the credit credit of the  borrower.  borrow er.

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  STATE BANK OF INDIA  Project Financing  Financing .  

8. Subordination. Lenders typically require other participants in the project to enter into a subordination agreement under which certain payments to su such ch pa parti rticip cipant antss from from the bo borro rrowe werr un unde derr proje project ct ag agree reeme ments nts are restricte rest ricted d (either (either absolu absolutely tely or partiall partially) y) and made subord subordinat inatee to the  payment  payme nt of debt debt service. 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 which borrower borrower is the beneficiary. beneficiary. Liens on the borrower's personal property



Assignment of insurance proceeds.



Assignment of all project agreements



Pledge of stock in project company or assignment of   partnership  partner ship interests. interests.



Assignment of any patents, trademarks or other  intellectual property owned by the borrower.

6 Site Lease Agreement. The project company typically enters into longterm lease for the life of the project relating to the real property on which the project is to be located. Rental payments may be set in advance at a fixed rate or may be tied to project performance. 7.Insurance. The general categories of insurance available in connection

with project financings are:

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  STATE BANK OF INDIA  Project Financing  Financing .  

1. Standard Standard InsuranceInsurance- The following following types of insurance insurance typically typically are obtained for all project financings and cover the most common types of losses that a project may suffer. 

Property Damage, including transportation, fire and extended casualty.



Boiler and Machinery.



Comprehensive General Liability.



Worker's Compensation.



Automobile Liability and Physical Damage.



Excess Liability.

2. Optional Insurance. The following types of insurance often are obtained in connection with a project financing. Coverages such as these are more expensive than standard insurance and require more tailoring to meet the specific needs of the project 

Business Interruption.



Performance Bonds.



Cost Overrun/Delayed Opening.



Design Errors and Omissions



System Performance (Efficiency).



Pollution Liability.

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  STATE BANK OF INDIA  Project Financing  Financing .  

Project Risks Project finance is finance for a particular project, such as a mine, toll road, railway,  pipeline,, power  pipeline power station, station, ship, hospital or prison, prison, which is repaid from the cash-flow of  that project. Project finance is different from traditional forms of finance because the financierr principally looks to the assets and revenue of the project in order financie order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financierr usually has little or no recourse to the non-project financie 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 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 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 substantial amount of mone money. y. The assets that remain are usually highly specialized and possibly in a remote location. If saleable, they the y may may ha have ve little little va value lue outsi outside de the the pr proj oject ect.. There Therefor fore, e, it is no nott su surpr rpris ising ing th that at financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced reduced or eliminated eliminated as far as possible. It is also not surprising that  becausee of the risks involved,  becaus involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided.

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  STATE BANK OF INDIA  Project Financing  Financing .  

Risk minimization process

Financiers Financ iers are concerned concerned with minimizing the dangers of any events events which could have a negative impact on the financial performance of the project, in particular, events which could result in: 1) The project project not being being completed completed on time, time, on budget budget,, or at all; all; 2) The proj project ect not not operati operating ng at its its full full capacity capacity;; 3) The project project failing to generate generate sufficient sufficient revenue revenue to service the the debt; debt; or  4) The proj project ect prema premature turely ly coming coming to to an end. end. The minimization of such risks involves a three step process. 1) The first first step requires requires the identification identification and and analysis analysis of all the the risks that that may bear  bear  upon the project. 2) The second second step step is the allocation allocation of those risks risks among among the parties. parties. 3) The last last step involve involvess the creation creation of of mechanisms mechanisms to to manage manage the risks. 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. schedules. Different Different scenarios scenarios will be examined by adjusting adjusting economic variables such as inflation, interest rates, exchange rates and prices for the

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  STATE BANK OF INDIA  Project Financing  Financing .  

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 appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks widely and to ensure that each  party has an interest in fixing such risks. Generally, commercial commercial risks are sought sought to be allocated to the private sector and political risks to the state sector. Step3- Risk managementmanagement-

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  prepare d 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 measur mea sures es may lead to tension tension between between the flexibil flexibility ity desired desired by bo borrow rrower er and risk  management mechanisms required by the financier.

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  STATE BANK OF INDIA  Project Financing  Financing .  

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 Comp letion risk allocation is a vital part of the risk allocation of any project. This phase carries the greatest risk for the financier. financier. Construction Construction carries the danger that the project will not be completed on time, on budget or at all because of technical, labour, and other  construction difficulties. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. accumulate. They may also jeopardize jeopardize contracts for the sale of  the project's output and supply contacts for raw materials. Commonly Comm only employed mechanisms for minimizing minimizing completion completion risk before lending takes  place include: include: (a) Obtaini Obtaining ng comple completion tion guarant guarantees ees requiri requiring ng the sponso sponsors rs to pay all debts 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 so that they they remain remain committed committed to it by insisting insisting that sponso sponsors rs inject equity into into the  project;;  project (c) Requiring the project to be developed under fixed-price, fixed-time turnkey contracts  by reputable reputable and financially financially sound contractors contractors whose whose performance performance is secured by  performance  perform ance bonds bonds or or guaranteed guaranteed by third parties; parties; and (d) Obtaining independent independent experts' reports on the design design and construction construction of the project. Completion risk is managed during the loan period by methods such as making precompletion phase draw downs of further funds conditional on certificates being issued by independent experts to confirm that the construction is progressing as planned.

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  STATE BANK OF INDIA  Project Financing  Financing .  

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  exam example ple,, the level level of expe experie rience nce and re reso sour urce cess of the op opera erato tor, r, ineffi inefficie cienc ncies ies 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.  bond s. Operating risks are managed managed during the loan period by requiring requiring the provision of  detaile det ailed d reports reports on the operati operations ons of the project project and by contro controllin lling g cash-flo cash-flows ws by requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved operating costs only. 3) Market 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 minimis ing 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 questio que stion n is whethe whetherr they have sufficie sufficient nt resour resources ces to manage manage the constru constructio ction n 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).

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  STATE BANK OF INDIA  Project Financing  Financing .  

5) Technical Risk-

This is the risk of technical difficulties in the construction and operation of the project's  plant and equipment, equipment, including including latent defects. Financiers Financiers usually usually minimise minimise this risk by  preferring tried and tested technolog technologies ies to new unproven unproven technologies. technologies. Technical risk is also minimized before lending takes place by obtaining experts reports as to the proposed techn tec hnol olog ogy. y. Techn Technica icall risks risks are mana manage ged d du durin ring g the lo loan an perio period d by re requ quiri iring ng a maintenance retention account to be maintained to receive a proportion of cash-flows to cover future maintenance expenditure. 6) Regulatory or Approval Risk-

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  thatt the tha the projec projectt will will be subje subject ct to exces excessiv sivee taxat taxation ion,, ro roya yalty lty paym paymen ents ts,, or rigid rigid requirements as to local supply or distribution. Such risks may be reduced by obtaining legal leg al opinion opinionss confirm confirming ing complia compliance nce with with applica applicable ble laws laws and ensurin ensuring g that that any necessary approvals are a condition precedent to the draw down of funds.

.



Appraisal

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  STATE BANK OF INDIA  Project Financing  Financing .  

Project FinancingThe SBI has formed a dedicated dedicated Project Finance Strategic Business Unit to assess credit  proposals  propo sals from and extend term loans for large industrial industrial and infrastructure infrastructure projects. 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 existin exi sting g manufa manufactur cturing ing units, units, constr constructi uction on venture venturess or other other infrastr infrastructu ucture re project projects. s. Capital Cap ital intensiv intensivee busines businesss expans expansion ion and diversif diversificat ication ion as well well as replacem replacement ent of  equipment may be financed through the project term loans. Project finance is quite often channeled through special purpose vehicles and arranged against the future cash streams to emerge from the project.The loans are approved on the  basis of strong in-house appraisal appraisal of the cost and viability of the ventures as well as the credit standing of promoters.

Project finance strategic business unitA on onee-st stop op-s -sho hop p of fi fina nanc ncia iall serv servic ices es fo forr ne new w proj projec ects ts as well well as ex expa pans nsio ion, n, divers div ersifi ificat cation ion and and mode moderni rnizat zatio ion n of exis existin ting g proj project ectss in infra infrast stru ructu cture re an and d no nonninfrastructure sector. Expertise 

Being India's largest bank and with the rich experience gained over generation generation,, SBI  brings considerable considerable expertise expertise in engineering financial financial packages packages that address complex complex financial requirements.



Project Finance SBU is well well equipped equipped to to provide provide a bouquet bouquet of

structured structured financial financial

solutions with the support of the largest Treasury in India (i.e. SBI's), International Division of SBI and SBI Capital Markets Limited.

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  STATE BANK OF INDIA  Project Financing  Financing .   

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 synd ication etc.). In a way, the two institutions are complimentary complimentary to each other. We have in house expertise (in appraising projects) in infrastructure sector as well as noninfrastructure sector. Some of the areas are as follows: Infrastructure sector: Infrastructure Infrastruc ture sector

Road & urban infrastructure



Power and utilities



Oil & gas, other natural resources



Ports and airports



Telecommunications

Non-Infrastructure Non-Infrastr ucture 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

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  STATE BANK OF INDIA  Project Financing  Financing .  

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

Why project finance SBU? 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 grow growing ing & dive diversi rsifie fied d re requ quire ireme ment nt for diffe differen rentt le level velss of the proje project. ct. The The re rece cent nt 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 cost of Rs.50 crores and and SBI SBI Term Loan Loan Rs. 25 crores, crores, respectivel respectively. y. 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 following details  Nature Nature of  the proposal  The purpose for which the term loan is required ( whether for  expansion, modernization, diversification etc..)

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  STATE BANK OF INDIA  Project Financing  Financing .  

2) Brief History- In case of an existing company essential particulars about its  promoters,  promo ters, its incorporation, incorporation, subsequent subsequent corporate corporate growth growth to date, major  developments or changes in management. 3) Pa Past st

Perfor Performa manc ncee-

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 improvement and and growth growth record record has been satisfactor satisfactory. y. 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 feasibility and the financial feasibility of the project is studied. 6) Pro Exam amine ine th thee proje project ct impl impleme ementa ntatio tion n Projec jectt implem implement entati ation on schedu schedulele- Ex schedule schedu le with reference to Bar Chart or PERT/CPM PERT/CPM chart(if proposed proposed to be used  by the company company for monitoring monitoring the the implementation implementation of of the project) project) and in the the light of actual implementation schedules of similar project

Pre sanction processAppraisal –  1. Prel Prelim imin inar ary y appr apprai aisa sall-

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  STATE BANK OF INDIA  Project Financing  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 decis decisio ion n whet whethe herr to supp suppor ortt th thee re requ ques estt or no not. t. If th thee br bran anch ch finds finds the prop propos osal al acceptab acce ptable, le, it will will call for from the applican applicants, ts, a compre comprehen hensiv sivee applica application tion in the  prescribed  prescrib ed pro-forma, pro-forma, along with a copy of project report, covering covering specific credit require req uiremen ments ts of the company company and other other essent essential ial data/ data/ informa information tion.. The informa information tion among other things should include

Orga Or ganiz nizat atio ion n setu setup p with with a list list of bo board ard of direc director torss an and d indica indicati ting ng th thee Qualifi Qu alificati cations ons,, experie experience nce and compet competence ence

of

Charge Cha rge of the main main functio functional nal areas areas e.g.. e.g..

the key

personn personnel el

in

Produc Productio tion n , purcha purchase se

,Marke ,Ma rketing ting and finance finance in other other word word brief brief on the manage managerial rial resour resource ce and whethe whetherr these these are compati compatible ble with with the size and the scope scope of the  proposed  propo sed activity . 

Demand De mand and supply supply project projections ions based based on the overall overall mar market ket prospe prospects cts ogethe oge therr with with a copy copy of market market research research report report . The report report may commen com mentt on the geogra geographic phic spread spread of the market market where where the unit  proposes  propo ses to operate, operate, demand demand and supply supply gap , the competitor’s competitor’s co comp mpet etit itiv ivee adva advant ntag agee

of the the app appli lica cant nt , prop propos osed ed

share,

mark market etin ing g

arrangement. 

Current practices for the particular product or service especially relating to terms of credit sales, probability of bad debts.



Estimates of sales cost of production and profitability.

BABASAB PATIL 42

 

  STATE BANK OF INDIA  Project Financing  Financing .   

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, 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, 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



Fina Financ ncial ial state stateme ments nts and bo borro rrowi wing ng relati relations onship hip of as asso socia ciate te firms firms/g /grou roup p 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 accruals from the business. While appraising a project all the data/ information furnished  by the borrower is counter checked and wherever wherever possible, inter-firm and inter-industry 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-

BABASAB PATIL 43

 

  STATE BANK OF INDIA  Project Financing  Financing .   •

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.

  If the proposal involves financing of a new project, the commercial, economic and financial viability and other aspects are to be examined as ind indicated icated 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 Feasib Fea sibility ility of the project projections ions/est /estimat imates es of sales sales cost cost of produc production tion and profit profit covering the period of repayment.

BABASAB PATIL 44

 

  STATE BANK OF INDIA  Project Financing  Financing .   

Break-even Break-e ven point in terms of sales value and percentage percentage of installed installed capacity under a normal production year.



Cash flows and fund flows



Whether profitability Whether profitability is adequate adequate to meet stipulated stipulated repayments repayments with with reference reference to Debt Service Coverage Ratio, Return on Investment.



Industry profile and prospectus



Critical Cri tical factors factors of

indust industry ry and whether whether

the

assess assessmen mentt of

these these

and

management plans in this regard are acceptable 

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 takes into account account the the following following aspectsaspects

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.



Comp Co mplia lianc ncee with with requir requirem emen ents ts re rega gard rding ing su subm bmiss ission ion of st stoc ock k st state ateme ments nts,, Financial Follow-up Reports, renewal data, etc…

BABASAB PATIL 45

 

  STATE BANK OF INDIA  Project Financing  Financing .   

Stock turnover, realization of book debts.



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



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 RatingDraw 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  propo sed facility facility wise and overall: overall: 

Limit for each facility- sub limits.



Security- Primary & collateral, Guarantee.



Margins- for each facility as applicable.

BABASAB PATIL 46

 

  STATE BANK OF INDIA  Project Financing  Financing .   

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.

SBI has presently financed the following Projects-

BABASAB PATIL 47

 

  STATE BANK OF INDIA  Project Financing  Financing .  

SL.NO

Name Of The Project

Amt(in crores)

1

Hescom

82.00

2 3 4 5 6 7 8 9 10 11 12 13 14

Manoj Jewellers Mahaveer developers. JTK Arihant appliances Shreyalaxmi properties Shri laxmi trading co. SL flow controls Hubli Cigarette center Mahindrakar Agencies Shri gopal industries Atul agencies Kashyap j. Majethia Shree meenaxi pharma Shree meenaxi medical agency

6.00 93.00 2.25 5.95 5.8 1.25 1.10 35 2.40 2.02 4.40 2.5 4.0

15 16 17

Fine lab Shree engineers and process Swastik winding works

5.0 5.8 4.5

BABASAB PATIL 48

 

  STATE BANK OF INDIA  Project Financing  Financing .  

The further part has been dealt with respect to the project of  SL flow controls. •

Project in Brief 

BABASAB PATIL 49

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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

Cost of the project Cost of the project Building land Machinery Electrification Electricity Deposit Preliminary Expenses - Technical know how 5.00 - Personnel training 2.00

Amount(Lakhs) 25.00 22.00 83.38 6.50 5.00

BABASAB PATIL 50

 

  STATE BANK OF INDIA  Project Financing  Financing .  

-Patterns  Net Working Working Captial Total

5.00

12.00 67.53 67.53 221.41

Means of finance Amounts in lakhs

Term loan Working Captial loan Own Contribution Marg Ma rgin in Mone Money y for for work working ing Capit Capital al Total

102.50 50.00 51.38 17.5 17.53 3 221.41

Financiall analysis Financia •

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

BABASAB PATIL 51

 

  STATE BANK OF INDIA  Project Financing  Financing .  

the pre-requisite for the very survival of a firm. A proper balance between the liquidit liqu idity y and profita profitabili bility ty is require required d for efficien efficientt financia financiall manage managemen ment. t. 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) Curr Curren entt ra rati tiooThe current ratio is defined as the ratio of total current assets to total current liabilities. It is computed by, Current assets Current ratio Current liabilities

Particulars Current assets Current li liabilities Current ratio

2004 91.47 144.32 0.634

2005 101.72 127.66 0.767

2006 112.76 121.59 0.927

2007 128.7 96.05 1.339

2008 145.25 80.09 1.8134

BABASAB PATIL 52

 

  STATE BANK OF INDIA  Project Financing  Financing .   Cu rre nt ra

2

1.813

1.8 1.6 1.33

1.4    o    i 1 . 2    t    a    R 1    t    n    e 0 . 8    r    r    u    C0 . 6

0.92 0.76 0.63

0.4 0.2 0 1

2

3

4

5

 Ye a r 

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 ideal current ratio is 2:1. The The firm current ratio indicate that the firm is in a position to meet its short term obligation because the ratio is in increasing trend , by observing the above table we can say that though the firm does not maintain ideal current ratio, it is still in a position position to meet its i ts current obligations. obligations. After clearing all the dues the firm is still in a position to maintain liquidity.

b) Acid Acid test test or quick quick ratio 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

BABASAB PATIL 53

 

  STATE BANK OF INDIA  Project Financing  Financing .  

and constitutes a better test of liquidity. It is often called as quick quick ratio because it is a measurement of a firms ability to convert its assets quickly into cash in order to meet its current liabilities.

Particulars Quick assets Current li liabilities Current ratio

2004 60.47 144.32 0.534

2005 67.65 127.66 0.53

2006 75.28 121.59 0.62

2007 87.47 96.05 0.911

2008 99.9 80.09 1.247

Quick rati 1.4 1.247

1.2 0.911

1   o    i    t   a 0.8    R    k   c 0.6    i   u    Q

0 . 53 4

0 . 53

1

2

0.62

0.4 0.2 0 3

4

5

 Ye a rs

 

Interpretation-

Acid test ratio is a rigorous measure measure of firm’s f irm’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

BABASAB PATIL 54

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 cap ital structu structure re ratios. ratios. The leverage leverage or capital capital structur structuree ratio’s ratio’s may be defined defined as financial ratios which throw light on the long term solvency of a firm as reflected in its ability to assure the long term lenders with regard to (i) periodic payment of interest during the period of the loan and (ii) repayment of the principal on maturity or in  predetermined  predete rmined installme installments nts at due due dates. dates. a) Debt Debt equ equity ity rat ratioio- This ratio measures the long term or total debt to

shar shareh ehol olde ders rs eq equi uity ty.. This This rati ratio o re refle flect ctss cl clai aims ms of cr cred edit itor orss an and d shareholders against the assets of the firm. Debt Equity Ratio is given by: Long term debt Debt Equity Ratio =

Shareholders equity

Particulars Debt Equity(Promoter contribution) Debt equity ratio

2004 82.00 56.38 1.454

2005 61.50 54.07 1.14

2006 41.00 56.88 0.721

2007 20.05 68.94 0.291

2008 0.00 84.49 0.00

BABASAB PATIL 55

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Debt equity rati 1.6 1. 6 1.454

1.4 1. 4 1.2 1. 2

1.14

  y 1    t    i   u   q 0.8 0. 8    E    /    t    b 0. 6   e 0.6    D

0.721

0.4 0. 4

0.291

0.2 0. 2 0

0 1

2

3

4

5

 Ye a r 

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 salesThese ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If adequate profits are not earned on sales, there will be difficulty in meeting the operating expenses and no returns will be available to the owners.

BABASAB PATIL 56

 

  STATE BANK OF INDIA  Project Financing  Financing .  

A. Net Net prof profit it marg margin in--

It is also known as net margin. This measures the relationship between the net profits and sales of a firm. Depending Depending on the concept of net profit employed. employed. , this ratio can  be computed computed as as followsfollowsEarnings after tax Net Profit ratio =

100

 

Net sales

Particulars

2004

2005

2006

2007

2008

Earnings after tax  Net sales sales  Net profit profit margin margin

10.68 265.49 265.49 4.023% 4.023%

17.82 292.04 292.04 6.102% 6.102%

27.05 321.24 321.24 8.420% 8.420%

35.56 353.36 353.36 10.06% 10.06%

43.75 388.7 11.25% 11.25%

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 withst wit hstand and adverse adverse econom economic ic condit condition ions. s. A low net profit profit margin margin has the opposi opposite te implications. With respect to the above firm the net profit margin is increasing trend so it

BABASAB PATIL 57

 

  STATE BANK OF INDIA  Project Financing  Financing .  

will show that the company is in good condition and the demand for the product is increasing.

4 . Profitability ratios related to InvestmentsReturn on Investments-

Return Ret urn on invest investmen ments ts measure measuress the overall overall effective effectiveness ness of manage managemen mentt in generat gen erating ing profits profits with its availab available le assets. assets. There are three three differe different nt concept conceptss 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. Retu Return rn on as asse sets ts,, II. Return Return on total total capit capital al empl employe oyed. d.

Return on assetsThe profitability ratio is measured in terms of relationship between net profits and assets. The ROA may also be called profit-to-asset ratio. It can be computed as followsNet profit after tax Return on Assets =

 

100 Average total assets

Particulars Earnings after tax Average tto otal as assets ROA

2004 10.68 208.39 5.125%

2005 17.82 199.54 8.93%

2006 27.05 195.9 13.81%

2007 35.56 200.54 17.73%

2008 43.75 208.34 20.99%

BABASAB PATIL 58

 

  STATE BANK OF INDIA  Project Financing  Financing .  

ROA

5.13% 8.93%

20.99%

13.81% 17.73%

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 formulaEBIT Return on Capital employed =

 

100 Average total capital employed

BABASAB PATIL 59

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Particulars EBIT total capital employed ROCE

2004 34.82 203.39 17.2%

2005 42.24 199.54 21.16%

2006 52.66 195.90 28.92%

2007 62.04 200.54 30.9%

2008 70.99 208.34 34.07%

ROCE 35.00% 30.00%

28.92% 30.90%

25.00% 20.00% Returns

34.07%

21.16% 17.20%

15.00% 10.00% 5.00% 0.00% 1

2  Ye ar s

3

ROCE 4

5

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.  

BABASAB PATIL 60

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Repayment Period and debt service coverage A) Projections of performance and profitability  particulars  particula rs

2004 300.00 34.51 265.49

2005 330.00 37.96 292.04

2006 363.00 41.76 321.24

2007 399.30 45.94 353.36

2008 439.23 50.53 388.70

185.84 6.00

204.42 6.60

224.87 7.26

247.35 7.99

272.09 8.78

1.26.2 0 04 1.20 0.72 24.97 2.40 233.47

1.36.6 46 0 1.32 0.79 19.10 2.40 248.76

1.47.3 81 0 1.65 1.11 14.66 2.40 267.49

1.68.0 29 0 2.48 1.55 11.30 2.40 290.16

1 92 07 .8.8 3.47 2.17 8.75 2.40 316.46

Add: Opening stock Less: Closing Stock D)Cost of goods sold E) Gross Profit (B-D) F) Interest on 1) Term Loan

0.00 4.50 229.47 36.02

4.50 4.78 248.78 43.56

4.78 5.14 267.13 54.11

5.14 5.58 289.72 63.64

5.58 6.09 315.96 72.74

12.80

10.03

7.26

4.50

1.73

2) Working Captial Total G) Selling, administration Exp H)Pr Prof ofit it Befo fore re Tax axat atio ion n(E(E-

6.75 19.55 1.20 15.27

6.75 16.78 1.32 25.45

6.75 14.01 1.45 38.65

6.75 11.25 1.60 50.80

6.75 8.48 1.76 62.51

4.58 10.69

7.64 17.82

11.59 27.05

15.24 35.56

18.75 43.75

24.97 35.66

19.10 36.92

14.66 41.72

11.30 46.86

8.75 52.5

A) Sales Less: Excise

 Net sales B) cost of Production 1.Raw ma material co consumed 2.Power & Fuel 3..cDoinrescutmlaabboler s&tow 4 reasges 5.Repair & Maintenance 6.Othermanufacturingexpences 7.Depreciation 8.Preliminary expenses w/off

Total Cost of Production

(F+G)) I) Provision for Taxation J) Profit after tax (H-I) K) Depreciation L) Net Cash accruals( J+K)

B) Projected Cash Flow Statement

BABASAB PATIL 61

 

  STATE BANK OF INDIA  Project Financing  Financing .  

SL.NO A)

B)

Particulars Sources of funds 1.Net profit before interest and tax

2004

2005

2006

2007

2008

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 4.own contribution towards

51.38 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

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

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

2004

2005

2006

2007

2008

0.00 56.38 3,00

64.07 0.00 10.00

71.88 0.00 15.00

83.94 0.00 15.00

104.49 0.00 20.00

Projectd Balance Sheet SL.NO A

Less

Particulars Captial & Liability Promoter captial Own contribution Drawings

BABASAB PATIL 62

 

  STATE BANK OF INDIA  Project Financing  Financing .  

Equity Retained Earning

53.38 10.69 64.07 82.00 7.74 50.00 4.58 203.39

54.07 17.82 71.88 61.50 8.52 50.00 7.64 199.54

56.88 27.05 83.94 41.00 9.37 50.00 11.59 195.90

68,94 35.56 104.49 20.50 10.31 50.00 15.24 200.54

84.49 43.75 128.25 0.00 11.34 50.00 18.75 208.34

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

Term loan(Debt) Sundry creditors Working Captial loan Provision for tax Grand Total Assets: Fixed assets

Debt Service Coverage Ratio:(DSCR) It is considered considered a more comprehensive comprehensive and apt measure to compute 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 operating funds available available after the payment payment of tax : earnings earnings after taxes, EAT+interest+Depreciation+Other non cash expenditure like amortization. EAT+interest+Depreciation+Other Non cash expenditure DSCR

= Installments

BABASAB PATIL 63

 

  STATE BANK OF INDIA  Project Financing  Financing .  

year year Net Net pro profi fitt for for the the year ear 2004 35 35.66 2005 36 36.92

In Inte tere rest st on term term lo loan an 19.55 16.78

Rep epay ayme ment nt of te term rm lo loan an 20.5 20.5

2 41 46 1..8 72 20 00 06 7 46 4 6 2008 52 52.50

11 4..2 05 1 1 8.48

20 0..5 5 2 20.5

Particulars Net Cash Accruals

2004

2005 35.66 36.92

2006 41.72

2007 46.86

2008 52.50

stR alment DISnC

2 5 1.07.4

2 20 .0.5 3

2 20 .2.5 9

2 20 .5.5 6

2 1.08.5 0

BABASAB PATIL 64

 

  STATE BANK OF INDIA  Project Financing  Financing .   Debt se rvice coverage Ratio 3 2.5

2.56 2.29

2 1.74

1.8

2.03

1.5 1 0.5 0 1

2

3

DSCR 4

 Years

DSCR

5

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 inter int ernal nally ly to serv service ice debt debt.. in gene general ral,, lendi lending ng finan financi cial al insti institu tutio tion n co cons nsid ider er 2: 2:1 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 crite ria availab available le for financia financiall assess assessmen mentt of project projects, s, Discou Discounte nted d Cash Cash Flow Flow (DCF) (DCF)

BABASAB PATIL 65

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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  popul ar DCF technique technique used in the country. country. However, However, in most of the projects projects of the  projects , the actual returns are vastly different from the expected returns based on IRR,  projects 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  prove d to be the best best techniques techniques for project appraisal appraisal all over over the world 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 minimum PBP is acceptable acceptable in this model. model. This is a very useful 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 ignores the cash flows beyond the PBP. This method also lacks a ‘natural’ ‘natural’  bench mark mark against which which comparisons comparisons can can be made among among various various projects. projects. Discounted 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.

Year ear 2004 2005 2006 2007 2008

 

Cas ash h Flo Flows ws (in (in llak akhs hs)) 35.66 36.92 41.72 46.86 52.50

Cumul ulat ativ ivee cas cash h flo flows ws 35.66 72.58 114.3 161.16 213.66

Total cash outflow

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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.  profitab ility. Since the period within which the total cost of the period is less than the completion comple tion period, the project can be accepted. 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 ReturnThe averag averagee rate of return return (ARR) (ARR) method method of evaluat evaluating ing propos proposed ed capital 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 dividing the average after-tax profit by the average average investment. investment. It is given by the formula  Average annual profit after tax Average rate of return =

 

* 100 Average investment

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  STATE BANK OF INDIA  Project Financing  Financing .  

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%.

Interpretation-

Here the ARR is more consistent as the ARR is quite higher ( more than average) and the  project can can be accepted. 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 among many projects projects,, which are mutually mutually exclusive, exclusive, and there there are no budgetary 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

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  STATE BANK OF INDIA  Project Financing  Financing .  

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. Interpretation-

Year

Cash Flows(lakhs)

PV factor @10%

Total present value

1 2 3 4 5 Total PV Less- Initial outlay  Net Present Present Value Value

35.66 36.92 41.72 46.86 52.50

0.909 0.826 0.751 0.683 0.621

32.414 30.495 31.290 32.005 32.603 158.807 152.5 6.307 6.307

-

-

The acceptance rule using NPV method is to accept the investment proposal if its net  present value is positive positive (NPV > 0) and to reject it if the NPV is negative negative (NPV<0). (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 generates cash inflows inflows at a rate higher than the opportun opportunity ity cost of capital . Since the Net Present Value of the above project is positive, the proposal can be accepted.

4 . Profitability IndexIt is also known as Benefit –Cost Ratio. It is similar to NPV approach. The  profitability  profitab ility index approach approach measures measures the present present value of returns per rupee invested, 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 obtaine d dividing the present 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 =

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  STATE BANK OF INDIA  Project Financing  Financing .  

Present value of cash outflows

158.807

 

Profitabillity Index =

 

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 When PI is greater greater than or equal to or less than 1, the net present present value is greater  than or equal to or less than zero respectively. Since the Profitability Index of the above  project shows shows the PI greater greater than than 1 and hence the the project project should should be accepted. accepted.

5. Internal Rate of ReturnIt 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 nega negativ tivee and then then po posi sitiv tivee for the rest of the projec projectt life life an and d vi vice ce versa. versa.

But But this 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 highest IRR alone, without without taking project specific risk factors into consideration, may be often misleading.

Year

Cash flows

Weights

Weighted average CF’s

1 2 3 4 5

3 5 35 6..6 96 2 4 41.7BABASAB 2 3 46.86 2 52.50 1

PATIL

1 17 48 7..3 68 125.16 93.72 52.5

70

Total

15

597.36

 

  STATE BANK OF INDIA  Project Financing  Financing .  

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 2 3

35.66 36.92 41.72

0.909 0.826 0.751

32.414 30.495 31.290

4

46.86

0.683

32.005

5

52.50

0.621

32.603

Total PV

-

Less- Initial outlay  Net Present Present Value Value

B) Year

158.807 152.5

-

Cash flows

-

PV factor @ 12%

6.307 6.307

Present value

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  STATE BANK OF INDIA  Project Financing  Financing .  

1 2 3 4 5 Total PV Less- Initial outlay  Net Present Present Value Value

35.66 36.92 41.72 46.86 52.50

0.893 0.797 0.712 0.636 0.567

31.84 29.43 29.70 29.80 29.76 150.53 152.53 -1.97

-

A Internal rate of return =

L+

{H-L} A- B

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 send a notice notice to the the clients stating therein to pay their dues. dues.

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3) When there no no improvem improvements ents in the repaymen repayments ts even even after after the notice being sent then the bank will forward the legal notice stating the the clients to make payments 4) Third is the compromise compromise dealing wherein both the parties sit together together and decide what measur what measures es has to be ta take ken n which which means means whethe whetherr th thee cli clien ents ts make make the  payments,  payme nts, or whether whether to file a suit or decide to to sell the the Properties Properties etc..

Analysis:-

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  STATE BANK OF INDIA  Project Financing  Financing .  

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.

 

Findings :- The These se are related to bank in general

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



Sanctio San ctioning ning for the project projectss is approv approved ed by RASMEC RASMECC C (Retaile (Retailed d Assets 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 Ban k check check only only financi financial, al, technic technical al and commercial commercial feasibil feasibility ity of the  project and it should should not consider sensitivity analysis 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.

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  STATE BANK OF INDIA  Project Financing  Financing .  

Conclusion:The project undertaken has helped a lot in understanding the concept of project financing in nationalized bank with reference to state bank of India. The project financing is an important aspect which helps in increasing the profit of the banks. Project financing is a vast subject and it is very difficult to apply all the aspect in all type of project when bank want to finance, and it is very difficult to cover all aspect in this  project. To sum up it would not be out of way to mention here that the state bank of India has given a special impetus on “Project Financing” .the concerted efforts of the management and staff of state bank of India has helped the bank in achieving remarkable progress in almost all important aspects. Finally the success of project financing would mostly depend on the proper analysis of  the projects before financing.

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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.

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