Project Finance

( Banks v/s NBFC )

 Executive Summary

Considering the growing use of project finance, we undertook this project with an
objective of understanding the salient features of project finance. It is a method of
financing very large capital intensive projects, with long gestation period, where the
lenders rely on the assets created for the project as security and the cash flow
generated by the project as source of funds for repaying their dues.

As project financing is adopted by a majority of companies at least once in their

lifetime, we decided to study this concept in detail. Banks as well as non-banking
financial companies provide project financing.

Banks enjoy a major market share among the borrowers and the NBFC firms are
lagging far behind and will slowly loose their market share if adequate steps are not
taken. Banks are usually preferred over NBFC firms due to the security aspect and
brand name. also the documentation process is one such aspect which the borrowers
find lengthy and tiresome in both the banks and NBFC.

Awareness regarding the nationalized banks providing project finance is more than
the NBFC firms providing the same. Also a borrower chooses a project finance
provider mainly due reference and time frame within which the loan would be
approved.

The NBFC firms need to take adequate steps to improve their position in the minds
of the borrowers so as to stay in the market. The NBFC firms should try to inculcate
in the minds of the borrowers that NBFC is as safe as any bank and should try and
develop a feeling of security among borrowers with regard to NBFC.

Table of Contents
 Introduction to project finance.

Origins of project finance

Project financing is generally sought for infrastructure related projects. Its linkages to
the economy are mutiple and complex, because it affects production and consumption
directly, creates negative and positive externalities, and involves large flow of
expenditure.

Prior to World War I, private entrepreneurs built major infrastructure projects all over
the world. During the 19th century ambitious projects such as the suez canal and the
Trans-Siberian Railway were constructed, financed and owned by private companies.
However the private sector entrepreneur disappeared after world War I and as colonial
powers lost control, new governments financed infrastructure projects through public
sector borrowing. The state and the public utility organizations became the main clients
in the commissioning of public works, which were then paid for out of general taxation.
After World War II, most infrastructure projects in industrialized countries were built
under the supervision of the state and were funded from the respective budgetary
resources of sovereign borrowings.

This traditional approach of government in identifying needs, setting policy and

procuring infrastructure was by and large followed by developing countries, with the
public finance being supported by bond instruments or direct sovereign loans by such
organizations as the world Bank, the Asian Development Bank and the International
Monetary Fund.
Development In the early 1980s

 The convergence of a number of factors by the early 1980s led to the search for
alternative ways to develop and finance infrastructure projects around the world.
These factors include:

 Continued population and economic growth meant that the need for additional
infrastructure- roads, power plants, and water-treatment plants-continued to
grow.

 The debt crisis meant that many countries had less borrowing capacity and
fewer budgetary resources to finance badly needed projects; compelling them to
look to the private sector for investors for projects which in the past would have
been constructed and operated in the public sector

 Major international contracting firms, which in the mid-1970s had been kept
busy, particularly in the oil rich Middle East, were, by the early 1980s, facing a
significant downturn in business and looking for creative ways to promote
additional projects.

 Competition for global markets among major equipment suppliers and operators
led them to become promoters of projects to enable them to sell their products
or services.

 Outright privatization was not acceptable in some countries or appropriate in

some sectors for political or strategic reasons and governments were reluctant to
relinquish total control of what maybe regarded as state assets.
During the 1980s, as a number of governments, as well as international lending
institutions, became increasingly interested in promoting the development for the
private sector, and the discipline imposed by its profit motive, to enhance the efficiency
and productivity of what had previously been considered public sector services. It is
now increasingly recognized that private sector can play a dynamic role in accelerating
growth and development. Many countries are encouraging direct private sector
involvement and making strong efforts to attract new money through new project
financing techniques.

Such encouragement is not borne solely out of the need for additional financing, but it
has been recognized that the private sector involvement can bring with it the ability to
implement projects in a shorter time, the expectation of more efficient operation, better
management and higher technical capability and, in some cases, the introduction of an
element of competition into monopolistic structures.

However, the private sector, driven by commercial objectives, would not want to take
up any project whose returns are not consumerate with the risks. Infrastructure projects
typically have a long gestation period and returns are uncertain. What then are the
incentives of private capital providers to participate in infrastructure projects, which are
fraught with huge risks? Project finance provides satisfactory answers to these
questions.
Definition of project finance

Project finance is typically defined as limited or non-recourse financing of a new

project through separate incorporation of vehicle or Project Company. Project financing
involves non-recourse financing of the development and construction of a particular
project in which the lender looks principally to the revenues expected to be generated
by the project for the repayment of its loan and to the assets of the project as collateral
for its loan rather than to the general credit of the project sponsor.

In other words the lenders finance the project looking at the creditworthiness of the
project, not the creditworthiness of the borrowing party. Project Financing discipline
includes understanding the rationale for project financing, how to prepare the financial
plan, assess the risk, design the financing mix, and raise the funds.

A knowledge base is required regarding the design of contractual arrangements to

support project financing; issues fior the host government legislative provisions,
public/private infrastructure partnerships, public/private financing structures; credit
requirements of lenders, and how to determine the projects borrowing capacity; how to
prepare cash flow projections and use them to measure expected rates of return; tax and
accounting considerations; and analytical techniques to validate the projects feasibility.

Comparison between corporate finance and project finance

Traditional finance is corporate finance, where the primary source of repayment for
investor and creditors is the sponsoring company, backed by its entire balance sheet, not
the project alone. Although creditors will usually still seek to assure themselves of
economic viability of the project being financed so that it is not a drain on the corporate
sponsors existing pool of assets, an important influence on their credit decision is the
overall strength of the sponsors balance sheet, as well as their business reputation. If the
project fails, lenders do not necessarily suffer, as long as the company owning the
project remains financially viable.
Corporate finance is often used for shorter, less capital-intensive projects that do not
warrant outside financing. The company borrows funds to construct a new facility and
guarantees to repay the lenders from its available operating income and its base of
assets. However private companies avoid this option, as it strains their balance sheets
and capacity, and limits their potential participation in future projects. Project financing
is different from traditional forms of finance because the financier principally looks to
the assets and revenue of the project in order to secure and service the loan.

In project finance a team or consortium of private firms establishes a new project

company to build, own and operate a separate infrastructure project. The new project
company to build own and operate a separate infrastructure project. The new project
company is capitalized with equity contributions from each of the sponsors. In contrast
to an ordinary borrowing situation, in a project financing the financier usually has little
or no recourse to the non-project assets of the borrower or the sponsors of the project.
The project is not reflected in the sponsors’ balance sheets.

Extent of recourse

Recourse refers to the right to claim a refund from another party, which has handled a
bill at an earlier stage. The extent of recourse refers to the range of reliance on sponsors
and other project participants for enhancement to protect against certain projects risks.
In project financing there is limited or no recourse. Non-recourse project finance is an
arrangement under which investors and credit financing the project do not have any
direct recourse to the sponsors.

In other words, the lender is not permitted to request repayment from the parent
company if borrower fails to meet its payment obligation. Although creditors security
will include the assets being financed, lenders rely on the operating cash flow generated
from those assets for repayment.
When the project has assured cash flows in the form of a reliable off taker and well-
allocated construction and operating risks, the lenders are comfortable with non-
recourse financing. Lenders prefer limited recourse when the project has significantly
higher risks. Limited recourse project finance permits creditors and investors some
recourse to the sponsors.

This frequently takes the form of a precompletion guarantee during a projects

construction period, or other assurance of some form of support for the project. In most
developing market projects and in other projects with significant construction risk,
project finance is generally of the limited recourse type.
Merits and Demerits of project financing

Project financing is continuously used as a financing method in capital-intensive

industries for projects requiring large investments of funds, such as the construction of
power plants, pipelines, transportation systems, mining facilities, industrial facilities
and heavy manufacturing plants. The sponsors of such projects frequently are not
sufficiently creditworthy ot obtain tr5aditional financing or unwilling to take the risk
and assume the debt obligation associated with traditional financing. Project financing
permits the risk associated with such projects to be allocated among number of parties
at levels acceptable to each party. The advantages of project financing are as follows:

1. Non recourse: the typical project financing involves a loan to enable the sponsor
to construct a project where the loan is completely “Non-recourse” to the
s[sponsor i.e. the sponsor has no obligation to make payments on the project
loan if revenues generated by the project are insufficient to cover the principle
and interest payable on the loan. This safeguards the assets of sponsors. The
risks of new projects remain separate from the existing business.
2. Maximizes leverage: in project financing. The sponsors typically seek to finance
the cost of development and construction of project on highly leverage basis.
Frequently such costs are financed using 80 to 100 percent debt. High leverage
in an non recourse financing permits a sponsor to put less in funds at risk,
permits a sponsor to finance a project without diluting its equity investment in
the project and in certain circumstances, also may permit reduction in cost of
capital by substituting lower cost, tax deductible interest for higher cost, taxable
return on equity.
3. Off balance sheet treatment: depending upon the structure of project financing
the project sponsors may not be required to report any of the project debt on its
balance sheet because such debt is non recourse or of limited recourse to the
sponsor. Off balance sheet treatment can have the added practical benefit of
helping the sponsor comply with convenient and restrictions related to the
 board. Borrowings funds contain in other indentures and credit agreements to
which the sponsor is a party.
4. Maximizes tax benefits: project finance is generally structured to maximize tax
benefit and to assure that all available tax benefit are used by the sponsors or
transferred to the extent possible to another party through a partnership, lease or
vehicle.
5. Diversifies risk: by allocating the risk and financing need of the projects among
a group of interested parties or sponsors, project financing makes it possible to
undertake project that would be too large or would pose too great a risk for one
party ion its own.
Demerits

1. Complexity of risk allocation: project financing is complex transaction

involving many participants with diverse interest. If a project is to be
successful risk must be allocated among the participants in an economically
efficient way. However, there is necessary tension between the participants.
For e.g between the lender and the sponsor regarding the degree of recourse,
between the sponsor and contractor regarding the nature of guarantees., etc
which may slow down the realization of the project.
2. Increase transaction cost: it involves higher transaction costs compared to
other types of transactions, because it requires an expensive and time-
consuming due diligence conducted by the lenders lawyer, the
independent engineers etc., since the documentation is usually complex and
lengthy.
3. higher interest rates and fees: the interest rates and fees charged in project
financing are higher than on direct loan made to the project sponsor since the
lender takes on more risk.
4. lender supervision: in accordance with a higher risk taken in project
financing the lender imposes a greater supervion on the mangement and
operation of the project to make sure that the project success is not impaired.
The degree of lender supervision will usually result into higher costs which
will typically have to be borne by the sponsor.
Importance of project finance

Whether expanding manufacturing facilities, implementing new processing capabilities,

or leveraging existing assets in new markets, innovative financing is often at the core of
long-term projects to transform a company’s operations. Akin to the underlying
corporate transformation, the challenge with innovative financial structures such as
project finance is that the investment is made upfront while the anticipated benefits of
the initiative are realized years later.

There has been a rise in number of companies that need innovative financing to satisfy
their capital needs, in a significant number of instances they have viable goals but find
that traditional lenders are unable to understand their initiatives. And so the need
emerged for project finance.

Project financing is a specialized form of financing that may offer some cost
advantages when very large amounts of capital are involved It can be tricky to
structure, and is usually limited to projects where a good cash flow is anticipated.
Project finance can be defined as: financing of an industrial (or infrastructure) project
with myriad capital
needs, usually based on non-recourse or limited recourse structures, where project debt
and equity (and potentially leases) used to finance the project are paid back from the
cash flow generated by the project, with the project's assets, rights and interests held as
collateral. In other words, it’s an incredibly flexible and comprehensive financing
solution that demands a long-term lending approach not typical in today’s market place.

Whether expanding manufacturing facilities, implementing new processing capabilities,

or leveraging existing assets in new markets, innovative financing is often at the core of
long-term projects to transform a company’s operations. Akin to the underlying
corporate transformation, the challenge with innovative financial structures such as
project finance is that the investment is made upfront while the anticipated benefits of
the initiative are realized years later.
Infrastructure is the backbone of any economy and the key to achieving rapid
sustainable rate of economic development and competitive advantage. Realizing its
importance governments commit substantial portions of their resources for
development of the infrastructure sector. As more projects emerge getting them
financed will continue to require a balance between equity and debt. With infrastructure
stocks and bonds being traded in the markets around the world, the traditionalist face
change. A country on the crest of change is India. Unlike many developing countries
India has developed judicial framework of trust laws, company laws and contract laws
necessary for project finance to flourish.

Types of Project Finance

 • Build operate transfer (BOT)
• Build own operate transfer (BOOT)
• Build own operate (BOO)

Build operate transfer

Build operate transfer is a project financing and operating approach that has found an
application in recent years primarily in the area of infrastructure privatization in the
developing countries. It enables direct private sector investment in large scale
infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period.
The public agency pays the contractor a fee, which may be a fixed sum, linked to
output or, more likely, a combination of the two. The fee will cover the operators fixed
and variable costs, including recovery of the capital invested by the contractor. In this
case, ownership of the facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a

public infrastructure project. The company then secures their own financing to
construct the project.

Operate – The private developer then operates, maintains, and manages the facility for a
agreed concession period and recoups their investment through charges or tolls.

Transfer - After the concessionary period the company transfers ownership and
operation of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances
its construction and operates and maintains it over a period, often as long as 20 or 30
years. This period is referred to as the “concession” period. In short, under a BOT
structure, a government typically grants a concession to a project company under which
the project company has the right to build and operate a facility. The project company
borrows from the lending institutions in order to finance the construction of the facility.
The loans are repaid from “tariffs” paid by the government under the off take
agreement during the life of the concession. At the end of the concession period the
facility is usually transferred back to the government.

Advantages

The Government gets the benefit of the private sector to mobilize finance and to use the
best management skills in the construction, operation and maintenance of the project.

The private participation also ensures efficiency and quality by using the best
equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency

through performance-based contracts and output-oriented targets

The projects are conducted in a fully competitive bidding situation and are thus
completed at the lowest possible cost.

The risks of the project are shared by the private sector

Disadvantages
There is a profit element in the equity portion of the financing, which is higher than the
debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a BOT
financing deal as it involves multiple entities and requires a relatively complicated legal
and institutional framework. There the BOT may not be suitable for small projects

It may take time to develop the necessary institutional capacity to ensure that the full
benefits of BOT are realized, such as development and enforcement of transparent and
fair bidding and evaluation procedures and the resolution of potential disputes during
implementation.
Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT

provider) who designs, builds, funds, owns and operates the scheme for a defined
period of time and then transfers this ownership across to a agreed party. BOOT
projects are a way for governments to bundle together the design and construction,
finance, operations and maintenance and potentially marketing and customer interface
aspects of a project and let these as a package to a single private sector service provider.
The asset is transferred back to the government after the concession period at little or
no cost.

The Components of BOOT.

B for build

The concession grants the promoter the right to design, construct, and finance the
project. A construction contract will be required between the promoter and a contractor.
The contract is often among the most difficult to negotiate in a BOOT project because
of the conflict that increasingly arises between the promoter, the contractor responsible
for building the facility and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the
construction contract are reasonable and that the construction risk is placed as far as
possible on the contractors. The contractor undertakes responsibility for constructing
the asset and is expected to build the project on time, within budget and according to a
clear specification and to warrant that the asset will perform its design function.
Typically this is done by way of a lump-sum turnkey contract.
O for Own

The concession from the state provides concessionaire to own, or at least possess, the
assets that are to be built and to operate them for a period of time: the life of the
concession. The concession agreement between the state and the concessionaire will
define the extent to which ownership, and its associated attributes of possession and
control, of the assets lies with the concessionaire.

O for Operate

An operator assumes the responsibility for maintaining the facility’s assets and the
operating them on the basis that maximizes the profit or minimizes the cost on behalf of
the concessionaire and, like the contractor undertaking construction and be a
shareholder in the project company. The operator is s often an independent through the
promoter company.

T for Transfer

This relates to a change in ownership of the assets that occurs at the end of the
concession period, when the concession assets revert to the government grantor. The
transfer may be at book value or no value and may occur earlier in the event of failure
of concessionaire.

Stages of Boot Project

Build

 Design
 Manage project implementation
 Carry out procurement
 Finance
 Construct
Own
 Hold in interest under concession

Operates
 Mange and operate facility
 Carry out maintenance
 Deliver products/services
 Receive payment for product/ service

Transfer
 Hand over project in operating condition at the end of concession period

Advantages

• The majority of construction and long term risk can be transferred onto the
BOOT provider.
• The BOOT operator can claim depreciation on the facility constructed and
depreciation being a tax-deductible expense shareholder returns are maximized.
• Using an output based purchasing model, the tender process will encourage
maximum innovations allowing the most efficient designs to be explored for the
scheme. This process may also be built into more traditional tendering
processes.
• Accountability for the asset design, construction and service delivery is very
high given that if the performance targets are not met, the operator stands to lose
a portion of capital expenditure, capital profit, operating expenditure and
operating profit.
• Boot operators are experienced with management and operation of
infrastructure assets and bring these skills to scheme.
• Corporate structuring issues and costs are minimal within a BOOT model, as
project funding, ownership and operation are the responsibility of the BOOT
operator. These costs will however be built into the BOOT project pricing.

Disadvantages

• Boot is likely to result in higher cost of the product/ service for the end user.
This is a result of the BOOT provider incurring the risks associated with 100
percnet financing of the scheme and the acceptance of the ongoing maintenance
liabilities.
• Users may have a negative reaction to private sector involvement in the scheme,
particularly if the private sector is an overseas owned company.
• Management and monitoring of the service level agreement with the BOOT
operators can be time consuming and resource hungry. Procedures need to be in
place to allow users to assess service performance and penalize the BOOT
operator where necessary.
• A rigorous selection process is required when selecting a boot partner. Users
need to be confident that the BOOT operator is financially secure and
sufficiently committed to the market prior to considering their bid.
Build Own Operate

In BOO, the concessionaire constructs the facility and then operates it on behalf of the
public agency. The initial operating period {over which the capital cost will be
recovered} is defined. Legal title to the facility remains in the private sector, and there
is no obligation for the public sector to purchase the facility or take title. The private
sector partner owns the project outright and retains the operating revenue risk and all of
the surplus operating revenue in perpetuity. As an alternative to transfer, a further
operating contract {at a lower cost} may be negotiated.

Design Build Finance Operate (DBFO):

Under this approach, the responsibilities fro designing, building, financing and
operating are bundled together and transferred to private sector partners. They are also
often supplemented by public sector grants in the from of money or contributions in
kind, such as right of way. In certain cases, private partners may be required to make
equity investments as well. DBFO shifts a great deal of the responsibility for
developing and operating to private sector partners, the public agency sponsoring a
project would retain full ownership over the project.

Others:

•Build Transfer Operate (BTO)

The BTO model is similar to BOT model except that the transfer to the public owner
takes place at the time that construction is completed, rather than at the end of the
franchise period. The concessionary builds and transfers a facility to the owner but
exclusively operates the facility on behalf of the owner by means of management
contract.

•Buy Build Operate (BBO)

A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing

facility. The government sells the asset to the private sector entity, which then makes
the improvements necessary to operate the facility in a profitable manner.

•Lease Own Operate (LOO)

This approach is similar to a BOO project but an existing asset is leased from the
government for a specified time. the asset may require refurbishment or expansion.

•Build Lease Transfer (BLT)

The concessionaire builds a facility, lease out the operating portion of the contract, and
on completion of the contract, returns the facility to the owner.

•Build Own Lease Transfer (BOLT)

BOLT is a financing scheme in which the asset is owned by the asset provider and is
then leased to the public agency, during which the owner receives lease rentals. On
completion of the contract the asset is transferred to the public agency.

•Build Lease Operate Transfer (BLOT)

The private sector designs finance and construct a new facility on public land under a
long term lease and operate the facility during the term of the lease. the private owner
transfers the new facility to the public sector at the end of the lease term.

•Design Build (DB)

A DB is when the private partner provides both design and construction of a project to
the public agency. This type of partnership can reduce time, save money, provide
stronger guarantees and allocate additional project risk to the private sector. It also
reduces conflict by having a single entity responsible to the public owner for the design
and construction. The public sector partner owns the assets and has the responsibility
for the operation and maintenance.

•Design Bid Build (DBB)

Design bid build is the traditional project delivery approach, which segregates design
and construction responsibilities by awarding them to an independent private engineer
and a separate private contractor. By doing so, design bid build separates the delivery
process in to the three liner phases: Design, Bid and Construction. The public sector
retains responsibility for financing, operating and maintaining infrastructure procured
using the traditional design bid build approach.

•Design Build Maintain (DBM)

A DBM is similar to a DB except the maintenance of the facility for the some period of
time becomes the responsibility of the private sector partner. The benefits are similar to
the DB with maintenance risk being allocated to the private sector partner and the
guarantee expanded to include maintenance. The public sector partner owns and
operates the assets.
•Design Build Operate (DBO)

A single contract is awarded for the design, construction and operation of a capital
improvement. Title to the facility remains with the public sector unless the project is a
design\build\operate\transfer or design\build\own\operate project. The DBO method of
contracting is contrary to the separated and sequential approach ordinarily used in the
United States by both the public and private sectors. This method involves one contract
for design with an architect or engineer, followed by a different contract with a builder
for project construction, followed by the owner's taking over the project and operating
it.

A simple design build approach credits a single point of responsibility for design and
construction and can speed project completion by facilitating the overlap of the design
and construction phases of the project. On a public project, the operations phase is
normally handled by the public sector under a separate operations and maintenance
agreement. Combining all three phases in to a DBO approach maintains the continuity
of private sector involvement and can facilitate private sector financing of public
projects supported by user fees generated during the operations phase.

•Lease Develop Operate (LDO) or Build Develop Operate (BDO)

Under these partnerships arrangements, the private party leases or buys an existing
facility from a public agency invests its own capital to renovate modernize, and expand
the facility, and then operates it under a contract with the public agency. A number of
different types of municipal transit facilities have been leased and developed under
LDO and BDO arrangements.
Project Finance Strategic Business Unit

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

diversification and modernization of existing projects in infrastructure and non
-infrastructure sectors

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 they have the ability to provide tailor made financial solutions to
meet the growing & diversified requirement for different levels of the project. The
recent transactions undertaken by PF-SBU include a wide range of projects undertaken
by the Indian Corporates. Wide branch network ensuring ease of disbursement.

Expertise

• Being India's largest bank and with the rich experience gained over generation,
SBI brings considerable expertise in engineering financial packages that address
complex financial requirements.
• Project Finance SBU is well equipped to provide a bouquet of structured
financial solutions with the support of the largest Treasury in India (i.e. SBI's),
International Division of SBI and SBI Capital Markets Limited.
• The global presence as also the well spread domestic branch network of SBI
ensures that the delivery of your project specific financial needs are totally
taken care of.
 • Lead role in many projects
• Allied roles such as security agent, monitoring/TRA agent etc.
• Synergy with SBI caps (exchange of leads, joint attempt in bidding for projects,
joint syndication etc.). In a way, the two institutions are complimentary to each
other.
• We have in house expertise (in appraising projects) in infrastructure sector as
well as non-infrastructure sector. Some of the areas are as follows:
Infrastructure sector:

Infrastructure sector:

 Road & urban infrastructure

 Power and utilities
 Oil & gas, other natural resources
 Ports and airports
 Telecommunications

Non-infrastructure sector:

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

Pulp & papers, chemical & pharmaceuticals …
 Services: Tourism & hospitality, educational Institutions, health industry …

Expertise

• Rupee term loan

• Foreign currency term loan/convertible bonds/GDR/ADR
• Debt advisory service
• Loan syndication
• Loan underwriting
 • Deferred payment guarantee
• Other customized products i.e. receivables securitization, etc.

Services offered

Single window solution

 Appetite for large value loans.

 Proven ability to arrange/syndicate loans.

 Competitive pricing.

Professional team

 Dedicated group with sector expertise

 Panel of legal and technical experts.

Procedural ease

 Standardized information requirements

 Credit appraisal/ delivery time period is minimized.

Eligibility

The infrastructure wing of PF SBU deals with projects wherein the project cost is
more than Rs 100 Crores. The proposed share of SBI in the term loan is more than
Rs.50 crores. In case of projects in Road sector alone, the cut off will be project cost
of Rs.50 crores and SBI Term Loan Rs. 25 Crores, respectively.

The commercial wing of PF SBU deals with projects wherein the minimum project
cost is Rs. 200 crores (Rs. 100 crores in respect of Services sector).
The minimum proposed term commitment is of Rs. 50 crores from SBI.
ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$
96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine
months ended December 31, 2007. ICICI Bank is second amongst all the companies
listed on the Indian stock exchanges in terms of free float market capitalization.

The Bank has a network of about 955 branches and 3,687 ATMs in India and presence
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services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment banking, life
and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada,
branches in Unites States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai
International Finance Centre and representative offices in United Arab Emirates, China,
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established a branch in Belgium.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the
National Stock Exchange of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).

At ICICI Bank, they offer corporates a wide range of products and services, the
technologies to leverage them anytime, anywhere and the expertise to customize them
to client-specific requirements.
From cash management to corporate finance, from forex to acquisition financing, we
provide you with end-to-end services for all your banking needs. The result is an
overall financial solution for your company that helps you accomplish your objectives.

Corporate Services

• ICICI Bank can guide one through the universe of strategic alternatives - from
identifying potential merger or acquisition targets to realigning your business' capital
structure.
• ICICI Bank has been the foremost arrangers of acquisition finance for cross border
transactions and is the preferred financer for acquisitions by Indian companies in
overseas markets.
• The Bank has also developed Forex risk hedging products for clients after
comprehensive research of the risks a corporate body is exposed to, e.g., Interest Rate,
Forex, Commodity, Credit Risk, etc.
• They offer you global services through our correspondent banking relationship with
950 foreign banks and maintain a NOSTRO account in 19 currencies to service you
better and have strong ties with our neighboring countries
• ICICI Bank is the leading collecting bankers to Public & Private Placement/ Mutual
Funds/ Capital Gains Bonds issues. Besides, we have products specially designed for
the
They support international business by meeting working capital requirements of export
and import financing. They also have a host of non-funded services for our clients •
whatever the industry, size or financial requirements, ICICI Bank has the expertise and
the solutions to partner all the way.
Transaction Banking

The Bank delivers world class banking services to financial sector clients. Their current
roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed
for customers convenience.

Our comprehensive collection and payment services span India's largest CMS network
of over 4,500 branches. They provide correspondent banking tie-ups with foreign banks
to assist them in their India-related businesses.

Loan Syndication

The FISG is responsible for syndication of loans to corporate clients.

They ensure the participation of banks and financial institution for the syndication of
loans. Some of the products syndicated are

• Project Finance
• Corporate Term Loans
• Working Capital Loans
• Acquisition Finance, etc.

Sell Down

ICICI Bank is a market leader in the securitization and asset sell-down market.
From its portfolio, the FISG offers different products to its clients in this segment.
The products are:

• Asset-Backed Securities (ABS).

• Mortgage-Backed Securities (MBS).
• Corporate Loan Sell-down.
• Direct Loan Assignment.
Buyouts

As a part of a risk-diversification and portfolio-churning strategy, ICICI Bank offers

buyouts of the assets of its financial sector clients.

Resources

The Bank also raises resources, from clients, for internal use by issuing a gamut of
products, which run from Certificates of Deposit (CDs) to Term deposits to Term
Loans.
IDBI was set up under an Act of Parliament as a wholly-owned subsidiary of Reserve
Bank of India in July 1964. In February 1976, the ownership of IDBI was transferred to
Government of India.

In January 1992, IDBI accessed domestic retail debt market for the first time with
innovative Deep Discount Bonds and registered path-breaking success. In December
1993, IDBI set up IDBI Capital Market Services Ltd. as a wholly-owned subsidiary to
offer a broad range of financial services, including Bond Trading, Equity Broking,
Client Asset Management and Depository Services.

In September 1994, in response to RBI's policy of opening up domestic banking sector

to private participation, IDBI in association with SIDBI set up IDBI Bank Ltd. Today,
IDBI Bank has a network of 161 branches, 369 ATMs, and 8 Extension Counters spread
over 95 cities.

It provides an array of services like:

Personal banking

 Deposits
 Loans
 Payments
 Insurance
  Cards
 24 hours banking
 Institutional banking
 Other products
 Preferred banking
 NRI Services

Corporate banking
 Project Finance
 Infrastructure finance
 Advisory
 Carbon credits Business
 Working Capital
 Cash Management Service
 Trade Finance
 Tax Payments
 Derivates

SME Finance
IDBI has been actively engaged in providing a major thrust to financing of SMEs. With
a view to improving the credit delivery mechanism and shorten the Turn Around Time
(TAT), IDBI has set up Centralized Loan Processing Cells (CLPCs) at major centers
across the country. To strengthen the credit delivery process, the CART (Credit
Appraisal & Rating Tool) Module developed by Small Industries Development Bank of
India (SIDBI), which combines both rating and appraisal mechanism for loan
proposals, was adopted by IDBI for faster processing of loan proposals. Recently, a
number of products have been rolled out for the SME sector, which considerably
expanded IDBI’s offerings to its customers. Also, the German Technical Co-operation
and IDBI entered into an understanding for strengthening the growth and
competitiveness of SMEs by providing better access to demand-oriented business
development and financial services.

Agri Business

Agriculture continues to be the largest and the most dominant sector in India,
contributing 22 % to the country’s GDP. It provides a source of employment and
livelihood to over 60 % of the population. Its linkages with industry are growing with
increasing stress on food and agri processing industry on account of changing demand
patterns for processed food by consumers. With this background Corporate India has
started finding new opportunities in Agriculture.

The emergence of modern economic system has institutionalized agriculture sector on

business models. Agribusiness is a broad term that encompasses a number of businesses
in agriculture including food production, farming, agrochemicals, farm machinery,
warehousing, wholesale and distribution, and processing, marketing and sale of food
products.

The bank has launched several products catering to the rural and agri community.

Project Finance Scheme

Under the Project Finance scheme IDBI provides finance to the corporates for
projects. The Bank provides project finance in both rupee and foreign currencies for
Greenfield projects as also for expansion, diversification and modernization. IDBI
follows the Global Best Practices in project appraisal and monitoring and has a well-
diversified industry portfolio. IDBI has signed a Memorandum of Understanding
(MoU) with LIC in December 2006 for undertaking joint and take-out financing of
long-gestation projects, including infrastructure projects
It has been a long and eventful journey of almost a century across 24 countries. Starting
in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate
Centre in Mumbai is a saga of vision, enterprise, financial prudence and corporate
governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in private
capital, princely patronage and state ownership. It is a story of ordinary bankers and
their extraordinary contribution in the ascent of Bank of Baroda to the formidable
heights of corporate glory. It is a story that needs to be shared with all those millions of
people - customers, stakeholders, employees & the public at large - who in ample
measure, have contributed to the making of an institution.

Personal Banking Services

Bank of Baroda believes in the strength and integrity of relationships built with its
customers like you. With over 90 years of experience in the banking industry and a
wide network of over 2700 branches all over the country, we have always been active
in extending financial support and adapting to your changing needs.

Their Deposit Products, Retail Loans, Credit Cards and Debit Cards help you with your
growing financial needs. With facilities like Lockers we ensure that your valuables are
safe with us.
Their countrywide branches offer you convenience and ease in operating your account
wherever you are. Their 24-hour ATMs enable you to withdraw cash, check your
account balance and request for a new chequebook even after banking hours.

Baroda Internet Banking / Baroda Mobile Banking, their latest Internet and Mobile
banking initiatives enable you to operate your account just as you would in any of our
branches. You can through the Internet check your balance, request for chequebooks
and print account details.

Choose from other various products and services, that they sincerely feel will put a
smile on your face; an investment we would like to bank on forever.

Business Operations

The small and medium business enterprise is one of the fastest growing sectors in the
country. Bank of Baroda offers various products and services that meet the specific
requirements of such enterprises and help them grow.

In addition to tailor-made products, you can depend on the strength of other nation-
wide network and facilities that will enable you to conduct your business smoothly,
without geographical constraints.

Be it Deposits, Loans & Advances, Collection Services, Working Capital Finance, Term
Finance, Non-Fund based Facilities, Trade Finance, Merchant Banking or other such
aspects of banking, they have a solution to help your business run smoothly and
efficiently.
Corporate Banking Services

As corporations grow they feel the need to expand and invest in new infrastructure.
External finance is one of the most important sources for funding expansion plans.

With services ranging from Working Capital Finance, Short Term Corporate Loans,
Project Finance to Cash Management and Merchant Banking, Bank of Baroda
Corporate Banking offers various options that help fund and enable corporations in
their investment and expansion plans. These products also offer merchant banking and
cash management solutions.

Their global presence, large-scale operability, highly networked systems and local
market penetration allow our customers to reap financial benefits to the maximum.

Loans & Advances

For immediate financial need in times, Bank of Baroda has a host of loan options for a
corporate to choose from. These enable smooth functioning without monitory hassles.

Project Finance

Bank of Baroda provides its customers with the option of a loan to take care of the
needs of an ongoing project, whether it is in Indian or foreign currency. This facility is
available for project finance and also for project exports.

International Operations

Bank of Baroda started its overseas journey by opening its first branch way back in
1953 in Mombassa, Kenya. Since then the Bank has come a long way in expanding its
international network to serve NRIs/PIOs and locals. Today it has transformed into
India’s International Bank.
It has significant international presence with a network of 70 offices in 24 countries
including 45 branches of the Bank, 21 branches of its eight Subsidiaries and four
Representative Offices in Malaysia, China, Thailand, & Australia. The Bank also has
one Joint Venture in Zambia with 9 branches.

The Bank has presence in world’s major financial centers i.e. New York, London,
Dubai, Hong Kong, Brussels and Singapore.

The "round the clock around the globe", Bank of Baroda is further in the process of
identifying/opening more overseas centers for increasing its global presence to serve its
29 million global customers in still better way.

The Bank has recently upgraded its operations in Hong Kong on 2nd April 2007 and
now offers full banking service through its two branches at Central and Tsim Sha Tsui.
It would also be upgrading its operations to full banking service in China and through
JV in Malaysia shortly.

It is also in process of establishing offices in Canada, New Zealand, Qatar, Bahrain,

Saudi Arabia, Mozambique, Russia etc. Besides this, it has plans to extend its reach in
existing countries of operations in US and UAE.

Treasury operations

In the changing economic environment of the country in particular and the globe in
general, Bank of Baroda was the premier public sector bank in India to set up a
Specialized Integrated Treasury Branch (SITB) in Mumbai and the integrated approach
initiated by the Bank in its treasury operations is now being emulated by other peer
banks.

Bank of Baroda has consciously adopted a focused approach towards improving

efficiency and profitability by successfully integrating the operations of different
financial markets, viz. Domestic Money, Investments, Foreign Exchange and
Derivatives and has made its mark as an important player in the market-place.

The SITB at Mumbai, equipped with the State-of-the-art technology, with modern
communication facilities, handles all types of financial transactions, both for managing
its resources and deployments and effective compliance of regulatory requirements.

Rural Operations

Rural India contributes a major chunk to the economy every year. To give this sector a
stronghold on finance and to enable economic independence, Bank of Baroda has
special offerings that extend credit facilities to small and marginal farmers, agricultural
labourers and cottage industry entrepreneurs.

With the objective of developing rural economy through promotion of agriculture,

trade, commerce, industry and extending credit facilities particularly to small and
marginal farmers, agricultural labourers and small entrepreneurs, Bank of Baroda, over
the years, has reached out to larger part of rural India. They extend loans for
agricultural activities and a host of services for farmers well tuned to the rural market,
and aim to make a Self Reliant Rural India.
Axis Bank was the first of the new private banks to have begun operations in 1994,
after the Government of India allowed new private banks to be established. The Bank
was promoted jointly by the Administrator of the specified undertaking of the Unit
Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General
Insurance Corporation Ltd. and other four PSU companies, i.e. National Insurance
Company Ltd., The New India Assurance Company, The Oriental Insurance
Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 357.48 crore with the public holding
(other than promoters) at 57.03%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at
Mumbai. Presently, the Bank has a very wide network of more than 608 branch offices
and Extension Counters. The Bank has a network of over 2595 ATMs providing 24 hrs
a day banking convenience to its customers. This is one of the largest ATM networks in
the country.

The Bank has strengths in both retail and corporate banking and is committed to
adopting the best industry practices internationally in order to achieve excellence. It
provides an array of services like Personal Banking, Corporate Services, NRI services
and Priority Banking.
In personal Banking it offers different accounts like EasyAccess Account Senior
Citizen's Account Prime Savings Account Women's Account Salary Power etc. . It also
offers deposits services like Fixed Deposit, Recurring Deposit, and Tax Saving Fixed
Deposits. It provides an array of loan services like Home Loan, Car Loan, Personal
Loan, Study Loan, Mortgage etc.

In Corporate Services it offers the option of different accounts like Normal Current
Account Business Advantage Account Current Account for Govt. Organizations
Business Classic Account Current Account for Banks Business Privilege Account
Trust/NGO Savings Account, further it also offers Credit Facility like Structured
Finance, Microfinance Commodity Power, Microfinance project Finance. It also offers
Capital Market Services in the form of Debt Solutions Advisory Services Private
Equity, Mergers & Acquisitions Capital Market Funding Trusteeship Services
eDepository Services

It also provides Cash Management Services as in today's competitive market place,

effectively managing cash flow can make the difference between success and failure.
Axis Bank offers a wide range of collection and payment services to meet your
complex cash management needs. Payments received from your buyers and made to
your suppliers are efficiently processed to optimize your cash flow position and to
ensure the effective management of your business' operating funds.
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when
it was nationalized along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50
employees, the Bank has made a rapid growth over the years and blossomed into a
mighty institution with a strong national presence and sizable international operations.
In business volume, the Bank occupies a premier position among the nationalized
banks.

The Bank has 2644 branches in India spread over all states/ union territories including
93 specialized branches. These branches are controlled through 48 Zonal Offices .
There are 24 branches/ offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997. Total number of shareholders
as on 30/09/2006 is 2, 25,704.

While firmly adhering to a policy of prudence and caution, the Bank has been in the
forefront of introducing various innovative services and systems. Business has been
conducted with the successful blend of traditional values and ethics and the most
modern infrastructure. The Bank has been the first among the nationalized banks to
establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at
Mumbai way back in 1989.
The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction
of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into
an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing
House. It is an association that has blossomed into a joint venture with BSE, called the
BOI Shareholding Ltd. to extend depository services to the stock broking community.
Bank of India was the first Indian Bank to open a branch outside the country, at
London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank
has sizable presence abroad, with a network of 23 branches (including three
representative office) at key banking and financial centres viz. London,
Newyork,Paris,Tokyo,Hong-Kong,and Singapore. The international business accounts
for around 20.10% of Bank's total business.

Apart from personal banking services it offers different products like Insurance
Products:

 Tie-up for Life Insurance: ICICI Prudential Life Insurance Co Ltd.

 Tie-up for General Insurance ( Non-life) National Insurance Co Ltd.
(NICL)

 Mutual Funds Products:

It also offers credit facility like Personal Loan, Bullion Banking, Kisan Credit Card,
Agriculture Loan, Bill Finance, Bank Guarantee, export Finance, Interest Rates,
Channel Credit etc. It also offers deposit services like Safe Deposit Vaults, fixed
Deposits, Term Deposits, Tax Saving Deposits etc. It also offers corporate services like
Bonds, Loans, and Project Finance Etc.
 NBFC – The Future

OVER the last decade or so, the Reserve Bank of India has been blowing hot and cold
about non-banking finance companies (NBFCs). The RBI reacted to a series of defaults
and misdemeanors by a few NBFCs, restricting their ability to take public deposits.

This unfortunately led to a collapse of many NBFCs which depended on a continuous

inflow of deposits to meet redemption obligations. Subsequently, there seems to have
been a better realization of the role of NBFCs in financing the small-scale industry,
particularly the transport sector.

The RBI in its latest monetary policy statement has cautioned that NBFCs should be
encouraged to exit from public deposits, in essence saying NBFCs should not take
public deposits. This is, indeed, extraordinary. The reasons given are that nowhere in
the world are private financial institutions allowed to accept public deposits.

The fact is that non-bank finance institutions are active in other economies. They accept
deposits in developed countries as well as in some developing countries, like Malaysia.
The existence of thrift societies in the US and housing societies in the UK is well-
known.

Thrift and savings associations are almost omnipresent in the US. Credit unions of
employees are, in effect, self-help groups, present in every organization. So are housing
societies in the UK. They perform a useful role in garnering public savings and
extending credit to those in need. The same is the situation with non-bank finance
companies in Malaysia.

The position in the US is that as against deposits of $4,391 billion held by commercial
banks, thrift institutions and finance companies hold $1,247 billion. These non-banks as
a whole hold 28.4 per cent of the deposits of banks. In India, however, public deposits
of NBFCs are only 0.003 per cent of banks in India.
Non-bank finance institutions in the US are even covered by deposit insurance even as
they are subject to supervision by a special office of thrift supervision. These
institutions handle a substantial channel of local savings and transfer them as loans to
deserving borrowers, besides small and medium-scale industries, as well as housing
needs. These institutions are also liberally allowed to access the capital market, where
banks subscribe to bonds issued by them.

The situation in UK is broadly similar. Building Societies in the UK have a big share of
business compared to their analogues in India, which hold deposits amounting to 18 per
cent of total retail deposit balances.

They also are entitled to receive compensation from the Financial Services
Compensation Scheme in the event of failure in the business of deposit-taking, among
others. In Malaysia, non-bank finance companies' deposits as a percentage of bank
deposits amount to 21 per cent. It is, therefore, wrong to argue that non-bank finance
companies cannot access public deposits in other countries.

Again, the new-fangled notion of Grameen banks and self-help groups is nothing but
thrift societies in another form. Traditionally in India, chit funds have performed the
role of collecting deposits from savers and lending money to those who are in need.
Constrained as they are by numerous restrictions, they still perform a signal service in
funding small and medium business, trade and transport

The fact is that NBFCs in India have played a useful role in financing various sectors of
the economy, particularly those that have been underserved by the banks. No business
flourishes unless there is a need for it and it fulfils the need efficiently.

The success of NBFCs bears testimony to its role. Anywhere in India, the small
entrepreneur goes first to an NBFC for funds even before he approaches banks in view
of the former's easy access, freedom from red-tape and quick response. The large
expansion of the consumer durable business in India in the last few years would not
have taken place if NBFCs had not entered the trade.

Similarly, housing activity has also been encouraged by NBFCs. The role of NBFCs in
funding transport activities is well-known. Latterly, some NBFCs have been active in
funding infrastructure quite successfully using the securitization of obligations.

NBFCs in India have played a useful role in financing various sectors of the economy,
particularly those that have been underserved by the banks. The tendency of regulators
to deny access to these institutions to public deposit is a confession of inability to see
the economic reality, which calls for a flexible and customer-friendly financial
intermediary, which is what NBFCs and chit funds are.

The tendency of regulators to deny access to these institutions to public deposit is a

confession of inability to see the economic reality, which calls for a flexible and
customer-friendly financial intermediary, which is what NBFCs and chit funds are.

In fact, many banks are forming NBFCs to take advantage of their greater flexibility in
dealing with customers. The fact that some NBFCs were found abusing their position in
the 1990s seems to have scared the regulator out of its wits. The answer lay in better
regulation, supervision and prudential norms.

The RBI has now strengthened its machinery of registration and supervision and
extended prudential norms to NBFCs. Denying access to deposits would seem a case of
throwing the baby out with the bathwater. On the contrary, the RBI should apply its
mind to strengthening the functioning of NBFCs, if necessary, facilitating better access
to the capital market.

It is, however, interesting to note that the RBI is thinking of using in some form an
instrumentality like the NBFC to extend its credit reach. Observations in recent RBI
reports show that the central bank would prefer to use microfinance credit agencies
dedicated to serving SME clusters.
The RBI's Report on Trend and Progress of Banking in India 2004 mentions that
"banks should extend wholesale financial assistance to non-governmental
organizations/microfinance intermediaries and work as innovative models for
securitisation of MFIs' receivable portfolios. Such micro-credit institutions can take the
form of NBFCs funded by individuals or a group of banks, but not permitted to take
public deposits".

A strange requirement, indeed, of exclusion from public deposits! The recommendation

of setting up an institution in the form of NBFC is significant, although excluding such
institutions from deposit-taking is not correct.

NBFCs have, indeed, served a useful purpose as instruments for extending outreach of
credit in the Indian countryside. To ignore them but recreate them in the form of
microfinance institutions or NGOs of the same kind is being ritualistic.

After all, let us recognise that NBFCs have a set of characteristics that have made them
an effective form of financial intermediation. It is these characteristics that the RBI
wants to incorporate in its version of microfinance groups. The path of wisdom is to
incorporate NBFCs as such into India's financial structure rather than reinventing them
in another form.

There are, of course, some persistent problems for NBFCs, apart from deposit-taking.
These relate to flexible handling of their capital issues. Both SEBI and the RBI need to
revisit their case for relaxations with sympathy, especially since they are rated and
supervised. These specific relaxations are more a matter of confidence-building. The
requests made by NBFCs deserve sympathetic treatment by both the securities market
regulator and the central bank.
In short, NBFCs are vitally needed to give the Indian economy a much-needed boost by
enabling easier access to credit. As it is, public and private sector banks are finding it
difficult to extend their reach for various reasons. It behooves the RBI and the
Government to look at the problems faced by NBFCs with sympathy rather than with a
recollection of the past follies of a few institutions.

The time has come for the RBI to "make" peace with NBFCs as a class. They are
proven instruments of efficient and customer-friendly outreach in the credit space —
not only for consumer durables, but also housing and transport, besides infrastructure.

These are also critical areas in which the Government is vitally interested as part of
boosting economic growth. I hope the regulators will not forget that their role is not
only to regulate but to spur the growth of the economy. The NBFCs' request to be
allowed to continue to accept public deposits deserves to be nurtured, not restricted.

Over the years, in its developmental role, the RBI has been attempting to expand credit
by exhortation. But public sector banks have proved that even with their best efforts
they are able to reach only a limited extent of credit expansion.

The experiment of Regional Rural Banks, Urban Cooperative Banks and Kisan Credit
Cards has also been a mixture of success and failure. It is in this background that the
proven successful record of credit growth, exemplified by the NBFCs, deserves to be
replicated at least in respect of their better features by the banking system.

Commercial banks by their very nature cannot take on all the features of NBFCs, but
they can collaborate with NBFCs by extending credit and participation in the
securitisation.

While the flow of bank finance will help, it will be more important to remember that
NBFCs started by accessing public deposits. These can be an additional window for
savings. All this would of course require a change of mindset on the part of both our
regulators and policy-makers.
The government is planning to treat mortgage guarantee Companies as non-banking
finance Companies (NBFCs). This would enable foreign firms to set up wholly owned
subsidiaries in India as there is no foreign direct investment (FDI) cap for NBFCs. The
rules governing this are expected to be unveiled soon, according to sources.

The finance ministry favoured the inclusion of mortgage guarantee Companies in the
relatively relaxed NBFC norms rather than the stricter insurance sector guidelines.

The move would help overseas Companies like Genworth Financial, PMI Group,
Mortgage Guaranty Insurance Corporation and Radian set up wholly owned mortgage
guarantee subsidiaries in India. It will also allow joint ventures such as India Mortgage
Guarantee Company Ltd and ICICI Lombard General Insurance start local operations.

Though mortgage guarantee Companies usually fall under the non-life insurance sector
overseas, in India they want to be governed by rules similar to NBFCs, an industry
insider said requesting anonymity. This is because only 26% FDI is allowed in the
insurance sector.

Commercial Banks and non-banking finance companies are not subject to uniform
regulation although for both the principal regulator is the Reserve Bank of India.

The dichotomy has many practical implications. While the two undertake many
common functions, there are also certain spheres in which they do not compete. For
instance, certain typical NBFC activities such as hire purchase and leasing, IPO
funding, small ticket loans and venture capital are financial services that mainline banks
in India have traditionally kept away from or placed much less emphasis.

On their part, banks alone provide working capital by way of cash credits and mobilize
demand deposits (savings bank and current accounts).
As a category, NBFCs are heterogeneous in their ownership patterns (such as foreign or
domestic) and in the nature of activities undertaken. Hence regulation impacts unevenly
even within this broad category. Hence there is no level playing field not only between
banks and NBFCs but among NBFCs themselves.

Banks, by definition, are the most regulated, being subject to prudential norms, capital
adequacy stipulations, CRR/SLR requirements, priority sector lending limits and so on.

While deposit taking NBFCs have been brought under regulation, non-deposit taking
companies (NBFC-NDs) are, for all practical purposes, still out of it. "Even in the
former case, regulation is less rigorous than for banks. This gives NBFCs as a category
and the minimally regulated non-deposit taking ones among them in particular an
opportunity to exploit the "regulatory arbitrage.''

An outstanding example is the enormous capacity of NBFC-NDs to leverage their

balance sheets to raise funds. There is practically no regulation to constrain them. As
pointed out, only deposit taking NBFCs have been brought under regulation and even
they have fewer norms than banks.

Banks and NBFCs complement as well as compete with one another. This should on the
whole lead to a widening of the financial sector and benefit the customer. For instance,
ownership of an NBFC by a bank gives the former a status and an assurance that its
well-regulated owner will ensure its solvency.

At the same time the relatively easy regulatory norms have made it easier to set up
NBFCs. (Many foreign banks have used the NBFC route to expand or even enter
India). Naturally the cost of conducting similar businesses should be lower with
NBFCs.
In 2006 the RBI laid down a number of guidelines to fine-tune the existing financial
linkages between banks and NBFCs, the objective being to protect the interests of bank
depositors.

In the normal course, NBFCs are more advantageously placed than banks. Likewise
there are norms covering the structural linkages between the two. However, there are
still several grey areas. The RBI identified the following key principles that should
guide a revised framework for NBFCs.

(1) While as a rule any financial service provider should be regulated, as a first step all
"systemically relevant entities'' should be covered. What is systemically relevant will be
covered from time to time.

(2) To avoid regulatory arbitrage, regulation and supervision should be centered on

activities and not be institution centric, as it is now.

(3) New norms should be made applicable to NBFCs that are less regulated now, the
objective being to enhance their governance.

(4) Ownership of an NBFC should not be the criterion for deciding on the products it
offers.

(5) Foreign entities now gain a foothold in the Indian financial sector by investing in an
NBFC through the automatic route available for FDI. Certain checks and balances must
be prescribed to monitor their movements into other fields without undergoing an
authorisation process.

(6) Banks should not use an NBFC as a vehicle for creating arbitrage opportunities.
Under no circumstances should the NBFC route be used for undermining existing
regulations.
Some of these have been put into practice already. For now, all NBFC-NDs with an
asset size of Rs. 100 crore and more will be considered systemically important.

They cannot raise borrowings more than ten times their net owned funds. These will
have to follow new capital adequacy norms. Other restrictions such as those laid down
under group exposure limits will have to be complied with.

Among the other new guidelines, the one that has received wide publicity relates to
ownership and governance of NBFCs.

The RBI has laid down that banks including foreign banks operating in India shall not
hold more than 10 per cent of the paid up capital of a deposit taking NBFC. Housing
finance companies have been excluded from this stipulation.

Some of these new regulatory norms have had a far-reaching impact on the NBFCs.
Procedural aspects of project financing in banks as well as NBFCs

Development operations financed by follow a procedure cycle, which is almost

identical for all kinds of projects whose technical, economic, and financial feasibility
has been established. These projects must have a reasonable economic rate of return
and should be intended to promote development in the beneficiary country. The
procedure consists of the following

1) Identification of the project:

The project’s idea is introduced to providers by various sources: a request from the
government concerned or financials identification missions may identify a proposal
from other financiers, or it. Applications for financing are then sorted out and classified:
projects to be financed are selected from amongst projects which have top priority in
the development plans of the beneficiary countries and which meet the requirements
established by the rules for financing set out by the providers and agreed upon by the
government concerned. In all cases, an official request from the government should be
submitted to financials before it decides to participate in the financing.

2) Desk review and determination of the project’s scope:

Experts, each in his field of specialization, study all the documents available on the
project and examine its components, its estimated local and foreign costs, the
preliminary financing plan, the position of the other sources of financing, the current
economic situation and the development policy of the beneficiary country and,
generally, review all elements which may help in making the project a success.

3) Preliminary approval:
The findings of the project’s review are set out in a report prepared by financials
experts and submitted to Board of Directors for preliminary approval for undertaking
further studies on the said project with the intention of considering the possibility of
organization’s participation in its financing.

4) Project appraisal and submission to the Board:

After the project has been granted preliminary approval, organizations usually
dispatches an appraisal mission to the project’s site. The appraisal stage is considered to
be one of the key stages of the procedure in this stage the project’s objectives,
components, cost, financing plan, justification and all its economic, technical and legal
aspects are determined. The project’s implementation schedule, the methods of
procurement of goods and services, the economic and financial analysis and the
implementing and operating agencies are also examined at this stage. Based on the
results of the appraisal mission, an appraisal report is prepared, as well as a Director
General’s report which is submitted to the Board of Directors for final approval.

5) Consultations with other co financiers:

Consultations are considered to be one of the important stages in the procedure. It is

during this stage that agreement is reached regarding the financing plan, the type of
financing, and distribution of the components of the project so as to ensure the smooth
flow of disbursements during execution of the various components of the project. This
coordination should continue throughout the project implementation period to ensure
the fulfillment of its objectives.

6) Negotiations and signature of the loan agreement:

After the beneficiary government is informed of the Board of Directors’ decision to
extend the loan according to the terms agreed upon during the appraisal of the project,
the loan agreement is prepared and negotiated, and eventually signed with the
government concerned.

7) Declaration of effectiveness of the loan agreement:

A loan agreement is declared effective after continuous contacts with the government
concerned and the other co-financiers and after fulfillment of all conditions precedent
to effectiveness stipulated in the loan agreement.

8) Project implementation and disbursement from the loan:

After the declaration of effectiveness of the loan agreement, the project’s

implementation and, consequently, the disbursements from the loan funds start
according to the plan agreed upon during the appraisal process and in line with the rules
and provisions of the loan agreement signed between the two parties.

9) Supervision and follow-up:

Financials undertakes the follow-up of the project’s implementation through its field
missions sent to the project’s site or through the periodic reports which it requires the
beneficiary country to provide on a quarterly basis. These reports enable them to advise
the government concerned on the best ways to implement the project.

10) Current status reports:

Whenever necessary, experts prepare status reports which include the most recent
information and developments on the project’s implementation. These reports are
submitted to the Board of Directors for information and approval of any possible
amendments, which may be required for implementation. This is done in coordination
and agreement with the government concerned and the other co-financiers.

11) Project completion report:

This report is prepared at the project’s site and in the office as well, after completion of
the project. This report enables organizations to make use of the experience gained
from the completed project, when implementing similar projects in future. In addition,
it may help in identifying a new project in the same sector.
 Risk involved in project financing

Each of these risks, along with their possible mitigates, is discussed in the following
sections.

 Completion Risk

Completion risk refers to the inability of a project to commence commercial operations

on time and within the stated cost. Given that project financiers are often reluctant to
underwrite the completion risk associated with a project, project structures usually
incorporate recourse to the sponsors during the construction stage. However, this link
gets severed once the project starts generating its own cash flows. Hence, during the
construction period, risk perception is significantly influenced by the credit worthiness
and track record of the sponsors and their ability and willingness to support the project
via contingent equity/subordinated debt for funding cost and time over-runs, if any.

The risks are also dependent on the complexity of construction, as greater the
complexity (for instance, in the case of a petrochemical facility), higher the risks arising
on this count. In addition, for projects with strong vertical linkages, the non-availability
of upstream and downstream infrastructure is an important source of completion risk.

Typical examples of such projects would be liquefied natural gas (LNG), natural gas,
and toll road projects. In certain types of projects, such as ports and roads, project
completion is also a function of the permitting risks associated with obtaining the
necessary Rights of Way (ROW), environmental clearances and Government approvals.

Completion risks are usually mitigated through strong fixed price; date certain, turnkey
contracts with credit-worthy contractors, along with the provision of adequate
liquidated damages for delays in construction, which need to be seen in relation to debt
service commitments.
While assessing completion risk, adequate attention is also paid to the experience of the
engineering, procurement & construction (EPC) contractor and its track record in
constructing similar projects, on time and within the cost budgets. Further, it looks at
the reasonableness of the time available for project completion, and an aggressive
schedule for project completion, which does not provide for adequate contingency
provisions, is often viewed negatively.

 Funding and Financing Risks

A project company’s financial structure and its ability to tie up the requisite finances are
the focus of analysis here. The financing structure is usually reviewed for the capital
structure of a project, which is evaluated to assess whether the debt-equity ratio is in
line with the underlying business risks and that of other projects of similar size and
complexity.

The protections provided to bondholders such as minimum coverage ratios that must be
met before shareholder distributions are made, and the availability of substantial debt
reserves to meet unforeseen circumstances. The matching of project cash flows (under
various sensitivity scenarios) with the debt service payouts and the potential for cash
flow mismatches.

The pricing structure adopted for debt and the exposure of the debt to interest rate and
currency risks. Such risks are particularly significant where the project raises variable
rate debt or liabilities in a currency other than the one in which its revenues would be
denominated. The presence of an experienced trustee to control cash flows and monitor
project performance on behalf of the bondholders.
Limitations on the ability of the project company to take on new debt. The average cost
of debt, given that the cost of financing is increasingly becoming a key determinant of
project viability, in view of the fact that differences in technical and operating abilities
have virtually become indistinguishable among front-runners.

Usually, most projects have a high leverage, and while equity is arranged privately from
sponsors, the project would be dependent on financial institutions and banks for
arranging the debt component. In assessing the funding risk, the extent to which the
funding is already in place and the likelihood of the balance funding being available in
time is considered, so that the project’s progress is not delayed.

 Operating and Technology Risks

Operating and technology risks refer to a project’s inability to function at the desired
production levels and within the design parameters on a sustainable basis. Such risks
usually arise in projects using complex technology (power plants or refinery projects,
for instance); for projects in the roads, ports, and airport sectors, such risks are usually
of a lower order. Technology risk usually arises because of the newness of technology
or the possibility of its obsolescence, most often seen in telecom projects.

Where technology is well established, the focus of analysis is usually on determining

its reliability and the sustainability of the technology platform over the tenure of debt.
The Independent Engineer’s Report (IER) is used to review and assesses whether the
engineer’s findings support the views of the sponsors and the EPC contractor..
Technology risks, where imminent, are usually mitigated through performance
guarantees/warranties from the manufacturer, contractor or operator, and the
availability of adequate debt reserves to allow for operating disruptions.

The sponsors would conduct a due diligence to establish the credit-worthiness of the
technology suppliers/operators and the ability of these participants to compensate the
project for failure of the technology adopted. The risks associated with disruptions in
operations due to mechanical failure of equipment are usually mitigated through
Operations and Maintenance (O&M) contracts.

Here again, sponsors evaluates the quality/experience of the O&M contractor, the
familiarity of the O&M contractor with the technology being used, and the adequacy of
the performance guarantees from the O&M contractor.

 Market Risks

Market risks usually arise because of insufficient demand for products/services,

changing industry structures, or pricing volatility (for input and also output). Given the
long-term nature of project financing, a considerable source of market risk is the
possibility of dramatic changes in demand patterns for the product, either because of
product obsolescence or sudden and large capacity creations, which could severely
affect the economics of the project under consideration.

For analytical convenience, one can group projects into two categories: one, which
produces commodities (e.g. LNG projects, refinery projects, and power projects), and
two, where certain natural monopolies exist (e.g. roads, ports, airports, power or gas
transmission projects). While the first category of projects is exposed to most of the
risks identified above, the market risks for the latter type of projects are more demand
related, with the pricing usually being subject to regulatory or political controls.

Until recently, the implementation of some of these “commodity” projects, such as

power and LNG projects, in the international markets was supported by long-term off-
take contracts, which provided considerable comfort to project financiers. However,
with the development of a spot market for these commodities, customers of such
projects are not willing to commit themselves to such long-term contracts; this has
considerably increased the market risks associated with such projects.
Under the circumstances, cost competitiveness and the nature (regional or global) and
adequacy of demand have emerged as critical determinants of a project’s long-term
viability.

For instance, even in India, despite power projects being backed by off-take
commitments and adequate payment security mechanisms, there are numerous
instances where cost competitiveness has emerged as the principal mitigant against the
rather well documented market risks associated with India’s power sector. Thus the
point of focus, while assessing market risks for projects producing a commodity, is
usually the cost structure of a project, which is a function of the capital costs incurred to
set it up, the input costs and also the costs required to operate and maintain the asset.

One usually benchmarks the capital cost of a project with those of recently
commissioned facilities across the world to ascertain the global cost competitiveness of
the project; this is a key determinant of the project’s long-term economic viability. On
the input side, ICRA looks at issues related to certainty of supply, ability of the supplier
to meet contractual commitments over the life of the project, the pricing structure of
such supplies, and the ability of the project to pass on variations in input costs.

In situations where the primary input is scarce or is not actively traded, one attempts to
evaluate the cost implications for replenishing shortfalls in supply and the availability
of liquidated damages in the supply contracts for compensating the project for such
costs. For the second category of projects, the primary focus is on evaluating the
adequacy of existing demand, the potential for growth in demand and the possibility of
alternative assets being created, which could undermine demand for the project being
financed.

Assessing demand patterns for such projects, particularly road projects, is often a
daunting task since in most cases, the demand is highly price elastic and a function of
the pattern of socioeconomic development in the service area of the road.
One refers to “independently” conducted traffic/demand studies by reputed agencies to
establish the veracity of the demand estimations prepared by the project sponsors.

 Counter-party Risks

As discussed earlier, a project involves a number of counter-parties who are bound to it

by the contractual structure. Therefore, an evaluation of the strength and reliability of
such participants assumes considerable importance in ascertaining the credit strength of
the project. Counter-parties to projects usually include feedstock/raw material suppliers,
principal off takers, and EPC contractors.

Even a sponsor could become a source of counter-party risk, as it needs to provide

equity during the construction stage. Because projects have inherently complex
structures, a counter-party’s failure can put a project’s viability at risk. The counter-
party risks are usually addressed through performance guarantees, letters of credit and
payment security mechanisms (such as escrows), most commonly seen in the case of
power projects.

However, it has been observed that such contractual risk mitigants, however strong,
may not be effective in insulating a project from this risk, unless the project is
fundamentally cost competitive and makes commercial sense for all the project
participants.

 Regulatory and Political Risks

Political and regulatory risks continue to play an important role in the development of
the project finance business in India. Most project financing transactions carry an
element of political risk by virtue of the fact that they are often related to capital-
intensive infrastructure development and the resultant goods/services are consumed by
the masses, directly or indirectly.
Political and regulatory risks could manifest themselves in various forms, and
significantly impact the economics of the project under evaluation. For instance, such
risks may take the form of: Lack of transparency and predictability in the functioning of
the regulatory commissions which are typically involved in granting licences,
specifying the terms and conditions for use of infrastructure on a “common carrier”
basis and fixing tariffs.

For instance, some of the stand-alone LNG projects being set up in the country require
a change in regulatory policy for allowing them to use the available gas evacuation
infrastructure on a common carrier basis. Resistance to increases in user charges for
common utilities such as water charges, toll tax rates, and energy charges, despite such
tariff increases being envisioned in the project documents. Changes in environmental
norms, which could impact power plants and refinery projects by requiring them to
invest substantially in meeting such norms.

Problems in acquisition of land, which are typical in the case of road projects. As is
apparent from the preceding discussion, regulatory and political risks are often difficult
to quantify and also mitigate. While assessing such risks, an attempt is often made to
understand the vulnerability of the project to such risks and also the nature of the
relationship between the local/central Government and the project under review.

 Force Majeure Risks

Project financed transactions, which are different from corporate or structured finance
because of their dependence on a single asset for generating cash flows, are potentially
vulnerable to force majeure risks. The legal doctrine of force majeure excuses the
performance of parties when they are confronted by unanticipated events beyond their
control. A careful analysis of force majeure events is critical in project financing
because such events, if not properly recompensed, can severely disrupt the careful
allocation of risk on which project financing depends.
Natural disasters, such as floods and earthquakes, civil disturbances, and strikes can
potentially disrupt a project’s operations and hence its cash flow. In addition,
catastrophic mechanical failure, due to either human error or material failure can be a
form of force majeure that may excuse a project from its contractual obligations.
Projects are usually not able to cope with force majeure events as well as large
corporations, which have a diversified portfolio of assets.

It is therefore important that force majeure events be tightly defined, and that such risks
be allocated away from the project through suitable insurance covers taken from
financially strong insurance companies. One usually studies the nature, coverage and
appropriateness of the insurance policies taken and also evaluates the adequacy of debt
reserves for meeting debt service commitments in force majeure circumstances.

Types of Project Finance

 1) Build operate transfer (BOT)
2) Build own operate transfer (BOOT)
3) Build own operate (BOO)

 Build operate transfer

Build operate transfer is a project financing and operating approach that has found an
application in recent years primarily in the area of infrastructure privatization in the
developing countries. It enables direct private sector investment in large scale
infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period.
The public agency pays the contractor a fee, which may be a fixed sum, linked to
output or, more likely, a combination of the two. The fee will cover the operators fixed
and variable costs, including recovery of the capital invested by the contractor. In this
case, ownership of the facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a

public infrastructure project. The company then secures their own financing to
construct the project.

Operate – The private developer then operates, maintains, and manages the facility for a
agreed concession period and recoups their investment through charges or tolls.

Transfer - After the concessionary period the company transfers ownership and
operation of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances
its construction and operates and maintains it over a period, often as long as 20 or 30
years. This period is referred to as the “concession” period. In short, under a BOT
structure, a government typically grants a concession to a project company under which
the project company has the right to build and operate a facility. The project company
borrows from the lending institutions in order to finance the construction of the facility.
The loans are repaid from “tariffs” paid by the government under the off take
agreement during the life of the concession. At the end of the concession period the
facility is usually transferred back to the government.

Advantages.

The Government gets the benefit of the private sector to mobilize finance and to use the
best management skills in the construction, operation and maintenance of the project.

The private participation also ensures efficiency and quality by using the best
equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency

through performance-based contracts and output-oriented targets

The projects are conducted in a fully competitive bidding situation and are thus
completed at the lowest possible cost.

The risks of the project are shared by the private sector

Disadvantages
There is a profit element in the equity portion of the financing, which is higher than the
debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a BOT
financing deal as it involves multiple entities and requires a relatively complicated
legal and institutional framework. There the BOT may not be suitable for small
projects

It may take time to develop the necessary institutional capacity to ensure that the full
benefits of BOT are realized, such as development and enforcement of transparent and
fair bidding and evaluation procedures and the resolution of potential disputes during
implementation.

 Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT
provider) who designs, builds, funds, owns and operates the scheme for a defined
period of time and then transfers this ownership across to a agreed party. BOOT
projects are a way for governments to bundle together the design and construction,
finance, operations and maintenance and potentially marketing and customer interface
aspects of a project and let these as a package to a single private sector service provider.
The asset is transferred back to the government after the concession period at little or
no cost.

The Components of BOOT.

B for build

The concession grants the promoter the right to design, construct, and finance the
project. A construction contract will be required between the promoter and a contractor.
The contract is often among the most difficult to negotiate in a BOOT project because
of the conflict that increasingly arises between the promoter, the contractor responsible
for building the facility and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the
construction contract are reasonable and that the construction risk is placed as far as
possible on the contractors. The contractor undertakes responsibility for constructing
the asset and is expected to build the project on time, within budget and according to a
clear specification and to warrant that the asset will perform its design function.
Typically this is done by way of a lump-sum turnkey contract.

O for Own
The concession from the state provides concessionaire to own, or at least possess, the
assets that are to be built and to operate them for a period of time: the life of the
concession. The concession agreement between the state and the concessionaire will
define the extent to which ownership, and its associated attributes of possession and
control, of the assets lies with the concessionaire.

O for Operate

An operator assumes the responsibility for maintaining the facility’s assets and the
operating them on the basis that maximizes the profit or minimizes the cost on behalf of
the concessionaire and, like the contractor undertaking construction and be a
shareholder in the project company. The operator is s often an independent through the
promoter company.

T for Transfer

This relates to a change in ownership of the asssets that occurs at the ent of the
concession period, when the concession asets revert to the government grantor. The
transfer may be at book value or no value and may occur earlier in the event of failure
oof concessionaire.

Stages of Boot Project

Build
  Design
 Manage project implementation
 Carry out procurement
 Finance
 Construct

Own
 Hold in interest under concession

Operates
 Mange and operate facility
 Carry out maintenance
 Deliver products/services
 Receive payment for product/ service

Transfer
 Hand over project in operating condition at the end of concession period

Advantages

• The majority of construction and long term risk can be transferred onto the
BOOT provider.
• The BOOT operator can claim depreciation on the facility constructed and
depreciation being a tax-deductible expense shareholder returns are maximized.
• Using an output based purchasing model, the tender process will encourage
maximum innovations allowing the most efficient designs to be explored for the
scheme. This process may also be built into more traditional tendering
processes.
• Accountability for the asset design, construction and service delivery is very
high given that if the performance targets are not met, the operator stands to lose
a portion of capital expenditure, capital profit, operating expenditure and
operating profit.
• Boot operators are experienced with management and operation of
infrastructure assets and bring these skills to scheme.
• Corporate structuring issues and costs are minimal within a BOOT model, as
project funding, ownership and operation are the responsibility of the BOOT
operator. These costs will however be built into the BOOT project pricing.

Disadvantages

• Boot is likely to result in higher cost of the product/ service for the end user.
This is a result of the BOOT provider incurring the risks associated with 100
percnet financing of the scheme and the acceptance of the ongoing maintenance
liabilities.
• Users may have a negative reaction to private sector involvement in the scheme,
particularly if the private sector is an overseas owned company.
• Management and monitoring of the service level agreement with the BOOT
operators can be time consuming and resource hungry. Procedures need to be in
place to allow users to assess service performance and penalize the BOOT
operator where necessary.
• A rigorous selection process is required when selecting a boot partner. Users
need to be confident that the BOOT operator is financially secure and
sufficiently committed to the market prior to considering their bid.
 Swot analysis of banks
Strengths

Over the years both private sector and public sector banks have developed to a great
extent and are a major factor for the flow of money in the economy. Banks are using
latest technologies to cater to the needs of the people. The number of branches that a
bank opens, the ATM facility, other services like payment of bills etc. is proof to the
fact that customer satisfaction is the objective of any bank. Retail Banking, Business
Banking, Merchant Establishment Services (EDC Machine), Personal loans & Car
loans, Demat Services with E-Broking, Mutual Fund, Insurance, and Housing Loans.
Keeping the need of the consumers in mind, banks all over are offering an array of
services.

Weakness

The rural market is still waiting to be tapped. There is latent demand for the same, only
awareness is to be created. If the organized urban financial sector can somehow connect
to its rural counterpart, it can accelerate the growth of the rural financial sector. With
the help of latest technologies this feat could be achieved. Banks currently provide
overdrafts against property. While the younger population believes in looking at future
cash flows to spend today, senior citizens often have their investments locked in not-so-
liquid securities. This could lead to a problem in future for the banks. Affluent investors
typically overlook banks as a source for personal financial advice. Wealthy clients tend
to consult financial advisers and accountants for personal financial advice before they
speak with banks.
Opportunity

The Budget provides for increased medical insurance coverage through more insurance
companies of the GIC group. There is perhaps an opportunity here for banks to look at
bundling insurance with liability products. Income from rural insurance is around Rs
2,700 crore and is estimated to grow to Rs 8,000 crore in three years. Banks could
easily exploit this opportunity. Even after the Reserve Bank of India having okayed
institutional lending to the film industry, very few banks have even done a study of
financing films. The film industry could provide banks with good business
opportunities, at a time when the credit off take is poor.

Threats

With distribution of financial services in the rural areas being touted as the next big
wave, there could be more competition for banks and NBFCs (non-banking financial
companies) operating in the hinterland. The regional rural banks would be given charge
of rural areas hence increasing competition. Exploiting the impressive growth of e-
commerce and the desire of many merchants to provide their customers with more
online payment options at a lower cost, nonblank players like PayPal and BillMeLater
are carving out a niche in the Internet payments business. At the same time, the e-check
is emerging as an attractive payments alternative for merchants tired of paying high
credit card interchange fees. The e-check is essentially a debit against the customer's
checking account that travels over the Automated Clearing House network.

These and other technologies threaten to wrest more payments revenues from banks,
which still rely on the credit card as their primary online payments product.
Swot analysis of NBFC

Strengths

The core strengths of NBFCs lie in their strong customer relationships, good
understanding of regional dynamics, service orientation, and ability to reach out to
customers who would otherwise have been ignored by banks. Because of their niche
strengths, local knowledge, and presence in remote topographies, these NBFCs are able
to appraise and service non-bankable customer profiles and ticket sizes. They are thus
able to service segments of the population whose only other source of funding would be
moneylenders, often charging usurious rates of interest

Weakness

With the onset of retail financing, NBFCs are loosing ground to banks. Also the
profitability of NBFCs has also come under pressure due to the competitive dynamics
in the Indian financial system. Under these circumstances, NBFCs have begun to look
at high-yield segments such as personal loans of small ticket sizes, home equity, loans
against shares, and public issue (IPO) financing, to boost profitability. To benefit from
access to funding at lower costs, among other reasons, some leading NBFCs have also
metamorphosed into banks: Ashok Leyland Finance Ltd, for instance, merged into
IndusInd Bank Ltd, and Kotak Mahindra Finance Ltd converted into Kotak Mahindra
Bank Ltd.

Opportunity

Virgin business segments are likely to have NBFCs as innovators. The NBFCs will
leverage their first mover advantage to make reasonable profits in these segments.
NBFCs will play the role of innovators, going forward, with some doubling up as
partners to banks. As innovators, they will help identify new businesses, or new ways of
doing traditional businesses; they will build business models that will attain a measure
of stability over time, before the banks step in.

When that happens, it will be difficult for some NBFCs to hold their own against the
competition, and some will move out; others will enter into partnerships with banks,
resulting in a win-win relationship for both. Partnerships with banks can take a variety
of forms. Some NBFCs will become originating agents working for a fee, like DSAs,
but others are likely to have more substantial partnerships with banks. Such a
partnership could, for instance, involve the NBFC performing credit appraisals, and
sharing credit risk on assets that it has originated and sold to its partner bank. The
success of this business model will depend critically on the NBFCs ability to assess the
risks involved in the exposures it originates.

Threats

Factors such as ability to sustain good asset quality, provide prompt and customized
services, enter into franchises or tie up arrangements with manufacturers and dealers,
and build large networks to reach out to customers, are vital for success on the business
front; so are strong collection and recovery capabilities. NBFC lack such facilities. On
the financial side, competitive cost of funds and the ability to capitalize at regular
intervals, in line with growth requirements, are key requirements for maintaining
competitive positions. Slowly and steadily NBFC is loosing ground to banks and it only
way out is go for partnership with banks.
 Analysis

Q.1 Have you obtained project financing previously?

First time takers 11

Taken previously 69
Not aware 20

11%
20%

fitst time takers

taken previously
not aware

69%

Of the 100 respondents, 11 were first time takers of project financing, 20 had never
taken project financing and most of them had not heard of the same, 69 of the
respondents had taken project financing previously.
Q.2 If yes, how many times?

1to3 60
4to6 6
7to9 1
>10 2

70 60
60
50
40
30
20
10 6
1 2
0
1to3 4to6 7to9 >10

Of the 100 respondents, 20 have never taken project financing, 11 are first time takers,
60 fall in the category of having taken project financing 1to 3 times previously, 6 who
have taken project finance 4 to 6 times, one respondent falls in the category of having
taken project finance 7 to 9 times and 2 who have taken project financing more than 10
times.

We can see that majority of the respondents have taken project finance 1to3 times and
only 2 respondents have taken project finance more than 10 times. This shows that
project finance is not such a favorable option of finance among the borrowers. This is
be due to the fact that documentation process involved in financing a project is very
lengthy and also that approval time for funding is long. Also the borrowers have other
options like loan from banks, deposits, loan from relatives, investment in bonds etc.
Q.3 Please name the lenders from whom you have obtained project financing in past.

SBI 21
ICICI 16
DENA 10
Others 22

29%
35% SBI

ICICI

DENA
14% 22%
Others

29% of the respondents had taken project financing from State Bank of India, 22%
from ICICI Bank and 14% from Dena Bank and 35% have taken project finance from
other banks.

None of the respondents had taken project finance from NBFCs, all of them had opted
for Banks as there is more security and also it is backed by strong brand name. Further
of all the banks, nationalized banks have more market share than private banks in terms
of popularity. Majority of the respondents have taken project financing from SBI,
followed by ICICI and Dena Bank.
Q4 Please describe your experience with the lender in terms of the following criteria

(A) Accessibility of officers:

Very satisfied 26
Satisfied 40
Neither satisfied nor
dissatisfied 14
Dissatisfied 0
Fullydissatisfied 0

45 40
40
35
30 26
25
20
14
15
10
5 0 0
0
Satisfied

satisfied nor

Fullydissatisfied
Dissatisfied
Very satisfied

dissatisfied
Neither

26 respondents were very satisfied in terms of the accessibility of officers, 40 were

satisfied in terms of accessibility of officers, 14 respondents were neutral on this aspect
and none were dissatisfied or dissatisfied.
It can be observed that majority of the respondents are very satisfied or near to satisfied
with regard to accessibility of the officers. The lenders have taken care to see that the
borrowers can easily access the officers. Majority of the respondents had taken project
fiancé from SBI and are very satisfied in terms of accessibility of officers. This is the
starting point for any prospective borrower and lenders should take care to see that their
officers are easily accessible because many a times bad response in terms of
accessibility repulses the prospective lender.
Q 4 (B) Speed of dealing: (documentation and formalities)

Particulars No.
Very satisfied 10
Satisfied 42
Neither satisfied nor
dissatisfied 19
Dissatisfied 7
Fully dissatisfied 2

45 42
40
35
30
25 19
20
15 10
10 7
5 2
0
Fullydissatisfied
satisfied nor
Very satisfied

Satisfied

Dissatisfied
dissatisfied
Neither

Only 10 of the respondents were very satisfied with the speed of dealing with regard to
documentation process, 42 were satisfied with the speed of dealing, 19 were neutral on
this aspect, 7 dissatisfied and 2 fully dissatisfied with the speed of dealing.

Those that were very satisfied with the documentation process had taken project
finance from ICICI and also the customers of Dena Bank were satisfied with
documentation process. This shows that ICICI and Dena Bank Have taken due care in
finishing the paper work quickly so that the borrowers can start with the project as soon
as possible.
It has been observed that the documentation process in terms of SBI is the lengthiest.
Many a times due to this factor SBI is not preferred by the borrowers as the approval
time is more and the borrowers cannot afford this delay.
Q4(C) Quality of interaction:

Particulars No.
Very satisfied 15
Satisfied 45
Neither satisfied nor
dissatisfied 19
Dissatisfied 1
Fully dissatisfied 0

50 45
45
40
35
30
25 19
20 15
15
10 1
5 0
0
Satisfied

Dissatisfied

Fullydissatisfied
Very satisfied

satisfied nor
dissatisfied
Neither

From the above chart we can see that 15% of the respondents were very satisfied with
the quality of interaction, 45% were satisfied with the interaction, and 19% were neutral
on this aspect, 1% dissatisfied with the quality of interaction.

It can be observed that the above graph more or less depicts the graph of accessibility
of officers. It means that those who felt that officers were easily accessible also felt that
quality of interaction was also good.
All the lenders are taking care to see that the prospective borrowers feel at ease with the
officers and that it results in a project finance deal. This is also an important aspect that
the lenders should consider as the quality of interaction would determine whether the
project would be financed or not.
Q5 What was/were the reason/s fro selecting this particular project financing
company?

Particulars No.
Reference 54
Time frame 14
Documentation process 10
Others 5

6% Reference
12%
Time frame

17% Documentation
65% process
Others

From the above chart we can see that 65% of the respondents choose a particular firm
because of reference, i.e. either they had a bank account there or someone
recommended the firm, for 17% time frame was the deciding factor, 12% of the
respondents gave importance to documentation process and 6% gave importance to
other factors like security, brand name etc.

The lenders should promote project finance facility to all its existing customers as we
can see that 65% of respondents choose a particular firm because of reference. The
lenders should take care to see that the time needed for approval of project should also
be shortened as this one of the factors which gives advantage to the competitor.

The lenders should also try and reduce the number of documents that a borrower is
expected to present. This is also one deciding factor for the borrowers as in the case of
SBI there is stringent checking of documents and the approval of finance takes more
than 1 month usually.
Q6 Which other source of finance would you prefer for financing projects?

Particulars No.
Loan from banks 62
Loan from relatives 17
Deposits 14
Investments in bonds 3
Others 0

70 62
60
50
40
30
17 14
20
10 3 0
0
Investments
Loan from

Loan from

Others
Deposits
relatives

in bonds
banks

From the above chart we can see that 62 respondents would take loans from banks to
finance their projects, 17 would have taken loan from relatives, 14 would use their
deposits to finance their projects and 3 respondents would use their investments in
bonds for the same.

Apart from taking project finance to finance their project, there are various other
avenues from where the borrowers can finance their project. The major competitor of
project finance is the loans provided by the banks, we can say this as this is the most
favored option of the respondents. Better promotional strategies should be adopted by
the lenders so as to meet the competition.
The lenders should try and educate the customers regarding the benefits of taking
project finance over other options like loan, deposits etc. in order to meet competition.
Also the NBFCs should market themselves as the easiest option available for
entrepreneurs and this is the only way they can sustain the competition.
Q7 What are/were your reasons for obtaining project finance?

Particulars No.
Equipment purchase 24
New unit setup 31
Further investment 26
Ongoing project 6
Other 0

35 31
30 24 26
25
20
15
10 6
5 0
0
investment

Other
Ongoing
Equipment

New unit
purchase

project
setup

Further

From the above chart we can see that out of the 80 respondents who had taken project
financing 24 had taken it for purchase of equipment, 31 for new unit setup, 26 for
further investment and 6 for ongoing project.

We can observe that project finance is usually preferred for new unit set up. This is
because such project usually requires more capital for initialization and also as the
finance is provided on the merits of the project, approval time is less. Close to new unit
setup, the next is further investment in business for which project finance is taken. As
loan is provided on the credit of the project the borrowers would not have a problem in
getting the finance.
Q8 Are you aware of the factors considered by the lender before providing you project
financing?

Particulars No.
Yes 64
No 16

From the 20%

above chart
we can see Yes

that 80% of No
the 80%
respondents
were aware
of the factors considered by the lender before financing the project, but most of them
are not aware of all the factors. 20% of the respondents were unaware of the factors
considered by the lender.

Only 16 respondents were unaware about the factors considered by the lender before
providing finance, they not aware about all the factors considered. These respondents
were about some factors like feasibility of the project, credit worthiness, financial
soundness and availability of documents. They were not aware that the lenders also
consider the current government policies, market scenario, macro economic factors and
also sole lendership.
Those who knew about the factors considered were aware of most of the factors
considered by the lender. They were aware regarding what all documents would be
expected by them and would keep them ready before meeting the lenders so that the
process is completed quickly. Also that agriculture related projects got easy clearance.
Q 9 Which of the following do you think are factors that your lender might have
considered before giving you project financing?

Particulars No.
Previous projects 54
Present business 53
Market scenario 38
Government policy 17
Macro economic factors 6
Agriculture related 10
Sole lender 8

60 54 53
50
38
40
30
20 17
10 8
10 6

0
icy

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s
ts

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io

e
es

r
ec

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at
ol
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en
oj

l
tp

le
re
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us
pr

ts

en

le
e
ic
tb
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m
nm

tu
u

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ac
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54 respondents felt that previous projects was a deciding factor for the lenders before
financing the project, 53 respondents felt that their current business conditions was a
deciding factor, for 38 respondents market scenario was a deciding factor for the
lenders, 17 felt government policy affected the decision of the lenders,
10 respondents thought that agriculture related project got faster approval and 8
respondents felt sole lendership was given importance by the lender.

According to the lenders before giving finance to any project, the feasibility of the
project, credit worthiness of the project and availability of documents are given
foremost importance. They also consider the government policies like which sector has
been given subsidies or tax holiday, also the current market scenario as to which sector
is growing or is expected to grow, macro economic factors. The lender also preferred
that it be the only lender to the project and that no other lender had a claim on the cash
flows of the project.

Majority of the respondents were aware of the foremost three factors i.e. feasibility of
project, credit worthiness and availability of documents. So we can say that there is
considerable awareness regarding the same among the borrowers.
Q10 In which of the flowing range does your debt/equity ratio lies?

Particulars No.
0.25-0.5 17
0.50-1.00 7
1.00-1.50 37
1.25-2.00 13
>2.00 0

40 37
35
30
25
20 17
13
15
10 7
5 0
0
0.25-0.5 0.50-1.00 1.00-1.50 1.25-2.00 >2.00

Out of the 80 respondents who had taken project financing, 4 did not want to disclose
their debt equity ratio, the debt equity ratio of firms of the respondents lied between
0.25-0.5, 44 firms had their debt equity ratio between 0.50-1, 10 firms had their debt
equity ratio between 1.00-1.50 and 5 firms had their equity ratio between 1.25-2.00

Majority of the respondents hesitated in giving this ratio. It shows that majority of the
respondents have debt equity ratio between 1-1.5 it shows that they have taken loans
from the market.
Q11 Which type of Repayment schedule do you prefer?

Particulars No.
Bullet 7
Installment 73

9%

Bullet
Instalment

91%

91% of the respondents were more comfortable with the installment repayment system,
and 9% with the bullet repayment system.
Q12 Out of these how many project financing providers are you aware of?

Particulars No.
SBI 61
IDBI 52
BOB 37
Other Banks 70
GSFS 27
GLF 27
Sundaram 10

80 70
70 61
60 52
50 37
40 27 27
30
20 10
10
0
BI
I

am
LF
ks
SB

BO

SF
ID

ar
Ba

d
Su
er
th
O

Banks have a majority of mind share among the respondents, it can be clearly seen that
SBI is very well know among the respondents, 52 respondents were aware that IDBI
also provides project finance, 37 respondents were aware about Bank of Baroda giving
the same service. The awareness regarding the NBFCs in this field is very low. Of all
the respondents only 27 were aware about Gujarat State Financial Services and Gujarat
Lease Finance Ltd providing project finance and that is due to the fact that they are
state run firms.
NBFC firms need to invest more in marketing their products to stay in competition. The
awareness regarding NBFCs is very less among all the respondents, they should try and
market themselves as the lender for new entrepreneur as project finance deals with the
merits of the product. Also they should try to inculcate in the minds of the borrowers
that NBFC is as safe as any bank and should try and develop a feeling of security
among borrowers with regard to NBFC.
Q13 How would you prefer risk to be managed?

Particulars No.
Lenders 53
Third party 17
Allocate between two 10

14%
Lenders

21% Third party

65% Allocate between

two

65% of the respondents preferred risk to be managed by the lenders, 21% wanted third
party to absorb the risk and 14% felt that risk should be allocated equally between the
lenders and the respondents.
Q14 For future projects from whom would you prefer to take project financing?

Particulars No.
Banks 100
NBFCs 0

0%

Banks
NBFCs

100%

All the respondents opted for banks rather than NBFC for project financing for their
future projects. The Banks have majority of mind share among the borrowers. Also the
lenders feel that if they borrow from banks they will not face any problem regarding
availability of finance and also that the banks will keep upto their word, in short the
will not face a problem with regard to working capital when it comes to banks. But the
same they do not feel regarding the NBFC.

Further the borrowers are not aware about various NBFC existing within the city, this
shows that the marketing efforts carried on by these firms is not enough. As a result
they are loosing out to the banks. Also they need to improve upon their image regarding
the NBFC being not a safe option.
Q15 Factors responsible for choosing a lender (Bank/NBFC)

Particulars No.
Documentation process 29
Security 48
Brand name 39
Rate of involvement 12
Project approval time 8
Others 1

47
50
39
40
28
30
20 11
7
10 1
0
involvement

approval time
Brand name
Documetation

Security

Others
Rate of

Project
process

The respondents choose bank over NBFC because they thought banks provided more
security, 47 respondents felt the same, for 39 respondents brand name was a deciding
factor, for 28 respondents documentation process was of importance, for 11 respondents
rate of involvement affected their decision, 7 respondents gave importance to project
approval time.

As said earlier the NBFC firms need to make their presence felt among the borrowers.
They need to market themselves to borrowers differently than the banks and improve
their image. The major reason for choosing a bank is the security aspect, NBFC need to
prove to the lenders that they are as secure as any bank and also develop their brand
name. This will take few years but the first and foremost thing that they can do is to
market themselves and make their presence felt in the market.

Findings and Recommendations

 Project finance is not that popular among the CAs. They prefer taking bank
loans over project finance. This due to the fact that the lenders have not made
much effort in creating awareness regarding the same.

 The documentation process involved in financing a project is very lengthy and

also that approval time for funding is long. Also the borrowers have other
options

 None of the respondents had taken project finance from NBFCs, all of them had
opted for Banks as there is more security and also it is backed by strong brand
name.

 The lenders have taken care to see that the borrowers can easily access the
officers and also the interaction between the lender and borrowers is pleasant.

 Majority of the banks get customers for project finance through reference that is
either they are existing customers are they have been recommended by others.

 Also documentation process should be shortened as this affect the decision of

choosing a lender.

 The major competitor of project finance is the loans provided by the banks.

 Project Finance is usually preferred for new unit set up

 According to the lenders before giving finance to any project, the feasibility of
the project, credit worthiness of the project and availability of documents are
given foremost importance.

 Banks have a majority of mind share among the respondents. The awareness
regarding NBFCs is very less among all the respondents.

 All the respondents opted for banks rather than NBFC for project financing for
their future projects.

 The major reason for choosing a bank over NBFC is the security aspect and also
the brand name that a bank enjoys.
 Recommendation

 The lenders should promote project finance facility to all its existing
customers

 The lenders should try and educate the customers regarding the benefits of
taking project finance over other options like loan, deposits etc. in order to
meet competition.

 Also the NBFCs should market themselves as the easiest option available
for entrepreneurs and this is the only way they can sustain the competition.

 The borrowers should be made aware regarding the aspects considered by

the lender before providing project finance.

 The awareness regarding the NBFCs in this field is very low. Hence strong
marketing strategies should be adopted by these firms to stay in competition.

 The NBFCs should make their presence felt in the market by organizing
financial fares, sponsoring financial events and other effective marketing
tools.

 The NBFC firms should try to inculcate in the minds of the borrowers that
NBFC is as safe as any bank and should try and develop a feeling of security
among borrowers with regard to NBFC.

 The NBFC firms need to develop their brand. Thi will definitely take a few
years but efforts need to made now so as to sustain competition
 Bibliography

Books

1) Malhotra, Naresh. The Marketing Research. Delhi: Pearson Education, 2005.

2) Kothari, C. Research Methodology. New Delhi:Wishwa Prakashan,1990

3) Research Guides. Luis Gonzalez. August 2002. 31 May 2007

Magazines

Websites

http://www.thehindu.com

http://www.rbi.org

http://www.sbi.com

http://www.icici.com

http://bankofindia.com

http://bankofbaroda.com

http://idbi.com

http://axis.com

http://ibez.com