OBJECTIVE

The objective is to study the bases adopted by the scheduled Commercial Banks in determining the financial and technical suitability of projects to be financed. The study addresses to the approaches followed, criteria adopted and the processes of evaluation which the Commercial Banks undertake in determining the feasibility and justification of such projects before providing the appropriate quantum of finance. This study will help all the concerned, in preparing the project proposals to avail the finance facilities from the scheduled commercial banks. The Commercial Banks now days, offers full range of financial products and banking services, giving the customers a one-stop window for all their banking requirements. The study covers the finance facilities in terms of Term Loan and the Working Capital requirements of the large scale enterprises.

MEANING OF THE PROJECT

The word project has a great importance in the development of new things or idea or techniques. The importance of this work becomes specific for the academic purposes. When the study is about management then it becomes more specific. Even the single alphabet of this represents the phase of management.

P - This implies for Planning. Planning gives the framework of future. How will it take
steps in future? It is a predetermined procedure about the future work.

R - This implies for the Resources or the available means through which we will go ahead.
Resources have their own role in the development of any organization.

O - It implies for the Operation or the existing or adopted sequential procedure. J - This gives Joint Effort which directly indicated towards the coordination or teamwork. E - It means Effectiveness. Every aspect of the project should be effective. C - It means to Collect. That is to bring together all the relevant things which are necessary
to make any project effective.

T - This implies for Technique. Without a new or developed technique an organization

cant compete in this highly changing environment. So, if we want to complete the project successfully we, should keep all the meanings of the project in our mind.

INTRODUCTION
Finance is the lifeblood of every business. It is assumed that the business has perpetual existence. Assessment of optimum finance is required to make the project successful. There are various Sources of Investments to finance the project. It may be Owners Fund. Debt. Owners Fund consists of the amount of money contributed by the owners as well as the internal accruals. It is also known as Owners Capital or Owned Capital. There are businesses which are owned by single person, same are termed as Sole Proprietorship. The business enterprises owned by more than one person and not exceeding 20 persons can be formed as Partnership firms. The third type of constitution may be Joint Stock Company popularly known as Corporate Entity. In corporate Entity, the capital is introduced in the form Share Capital. The Share Capital can be of two types Equity Share Capital. Preference Share Capital. The Equity Share Capital is the ordinary share capital. The Preference share capital carries preferential right to receive dividend over ordinary share capital. The Preference Shares can be Cumulative and Non Cumulative Preference Shares. Participating and Non Participating Preference Shares. Convertible and Non Convertible Preference Shares. Debt also known as Borrowed Funds consists of the amount raised by way of loans or credit. It is also known as borrowed capital. Debt can be raised in the following forms Debentures. Term Loan (Indian Rupee Loan or Foreign Currency Loan). Private Borrowings. Deferred credits. Public Deposits.

The Debentures can be Secured and Unsecured Debentures. Convertible and Non Convertible Debentures. The Loans can be Secured or Unsecured. The loans given by the bank, which are backed by some sort of financial security are called as Secured loans and the loans given without any financial security are called as Unsecured loans. The loans can be in the form of Term Loan and Working Capital Loan. Term Loan is the amount of money borrowed for a fixed period of time for the purchase of fixed assets for the business. Working Capital Loan is the amount of money borrowed to meet the working capital requirements of the business. Working Capital is the amount of money required for meeting the day to day expenses of the business like purchase of raw material etc. The Project Financing (term loan and working capital loan) can be availed as a financial facility from the commercial banks. The Project Financing incorporates methodologies through which the promoter of a project attracts finances to a proposed project on the basis of its revenues, rather than only on the general assets. Project Evaluation, therefore, is a systematic exercise based upon the above methodologies to establish that the proposed project is economically viable. There are number of critical factors for mobilizing finance required which have to be adequately addressed so that the competitiveness of the project is maintained right from its conception stage to its ultimate implementation. So, before giving any financial facility to the borrower, be it loan for working capital requirement or long term loan for project financing, banks generally undertake a detailed Project Evaluation procedure to determine the feasibility and justification of such projects to be financed.

COMMERCIAL BANKS INTRODUCTION

COMMERCIAL BANKS
INTRODUCTION
Finance is the life blood of commerce and industry. Every business concern needs funds to meet out its various types of requirements. Some funds are required for long periods while some funds are required for short period in order to carry on day-to-day work. Short term finance is provided by banks. Banks occupy an important place in the modern business world. No country can make industrial and commercial progress without a well-organized banking system. Banks offer opportunities of investment and safe custody of deposits. They encourage habit of saving and thrift among the public. Banks deal in money and credit. They mobilize small savings and channelise them to more productive uses. They organize and control the issue and circulation of credit instruments. They enable the financial and managerial resources to join hands in the generation of further wealth for the good of the society. They facilitate settlement of debts and transfer of money from one place to another. According to the Banking Regulation Act, 1949, Banking means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Hence, bank is an institution which deals in money and credit. The banking system is the most dominant force in the Indian money market. The banks can broadly be divided into two categories: (i) (ii) Scheduled banks, and Non-scheduled banks.

The scheduled banks are those which are entered in the Second Schedule of the RBI Act, 1934. Banks with a paid up capital and reserves aggregating not less than Rs.5 lakh and banks which satisfy the RBI that their activities are carried out in the interest of their depositors, should be termed as scheduled banks. All commercial banks Indian and foreign, regional rural banks, etc. are scheduled banks. The banks, which have not been included in the Second Schedule of the

RBI Act, 1934 are called as non scheduled banks. The Scheduled Banks can be State Co operative Banks, The State Bank of India (SBI) and its subsidiaries, Scheduled nationalized commercial banks, Regional Rural Banks, Land Development Banks, Scheduled commercial banks in the private sector and Foreign Banks. In July, 1969, fourteen commercial banks, each with deposits worth Rs.50 crore or more, were nationalized. Before nationalization, they were controlled and operated by private entrepreneurs. After nationalization, they came under the direct control of the RBI and began to work according to the national priorities rather than the profit motive of private entrepreneurs. Thus, during the post nationalization period, the banking structure became an instrument of economic development in the country. Another six commercial banks, which were privately owned, were also nationalized in April, 1980 to promote the objectives of the planned economic development. In 1993, however, one of the nationalized banks, viz., the New Bank of India, was merged with the Punjab National Bank. As a result, the number of nationalized commercial banks, except the SBI and its associates, became nineteen. The number of branches of these nationalized commercial banks increased from 4,553 in 1969 to 31,440 in 1997. The business of commercial banks is primarily to accept deposits and make loans to industry, trade and consumers. Banks render a number of valuable services to the entire community. These are 1. Accepting Deposits The primary function of commercial banks is to accept deposits from

people. In Indian banks, there are mainly three types of deposits: fixed deposit, current deposit and saving deposit. Fixed deposits are taken for specified time periods. These deposits carry interest at relatively higher rates. Of course, the rate varies according to the maturity period. If the deposit is withdrawn before the expiry of the specified period, no interest is usually given. Interest rates on the current account are very low. Sometimes no interest is given on them. But current deposits can be withdrawn at any time. Interest rates on savings deposits are higher than those on current deposits but lower than those on fixed deposits. These deposits cannot be withdrawn without notice but the rules in this respect are less strict than those for fixed deposits. 2. Giving credit The second function of a commercial bank is to give credit. Business firms go

to banks for loans. However, manufacturing firms get loans more easily than trading firms. Of course, banks want mortgages. Gold, company shares, business assets, etc., can be offered as mortgages or security. 3. Discounting bills of exchange Bills of exchange are frequently used in business. Discounting bills of exchange is the third function of banks. Suppose a seller in Calcutta sells something to a purchaser in Delhi. The purchaser made the payment by bill. He has signed the bill stating that he will make the payment after 90 days. But if the seller needs the money before the expiry of the term, he can take it to a bank. The bank will make the payment to the seller and keep the bill. When the time comes, the bank will realize the amount from the purchaser in Delhi. For this service rendered, the bank demands a commission. It pays to the seller an amount which is a little less than the amount mentioned in the bill. This is called as discounting a bill of exchange. 4. Creation of money There was a time when commercial banks issued their own paper notes. These were called bank notes. These are used to circulate in the market as money. The people had greater reliance on the notes issued by the banks and were more acceptable in the market. Nowadays, the right to issue notes has been taken away from the banks and the right is exclusively enjoyed by the central bank of the country. Even now, however, banks do create money. Money is created by giving credit. Cheques drawn on bank deposits are used as money in the market. When a businessman approaches a bank for a loan, the bank creates an imaginary deposit in his name. He can draw cheques on this deposit. This is how bank create money nowadays. 5. Agency functions These are the functions rendered by the banks as the agents of his customers. They include collection of cheques, bills, dividends, interest, rent; payments of cheques, bills, rent, interest, insurance premium, subscriptions; purchase and sale of shares and securities on behalf of the customers. They also act as a trustee or executor and agent on behalf of the customers. 6. General Utility Services The utility services include- Issue of circular notes, drafts and travellers cheques to the tourists ; Receiving valuables, securities, etc., for safe custody ; Underwriting of shares, debentures, etc. ; Acting as a referee to its customers thereby strengthening

their reputation ; Supplying trade information useful to customer ; Assisting in financing foreign trade by purchasing and selling foreign exchange, subject to the provisions of the Foreign Exchange Regulation Act. The economic system as a whole benefits because of these activities of commercial banks. It is seen that, people residing in areas which do not have branches of commercial banks, do not have a well-developed savings habit. It is not always safe to keep deposits with indigenous banks. It is banks which give the impetus to personal savings. Again, even if people do save, there is no guarantee that the savings will go to support the industrialization programmes of the country. It is not possible for industrialists to keep track of individual savings. It is the banks which perform the function of collecting the deposits from the individuals and making them available to the industrialists as loans. In other words, it is the bank that links saving to investment. Moreover, it is not just the industrialists of the region in which bank is located that benefit. If investment opportunities in the region are limited, the bank can lend the money to industrialists of other regions. Thus, banks serve to increase the mobility of capital in the country. Again, we know that increasing the rates of saving and investment is essential for boosting the rate of economic growth. Hence, we can say that, in a broad sense, commercial banks play an important role in the economic development of a country.

PROJECT EVALUATION

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PROJECT EVALUATION
Project finance transactions in developing countries like India are generally characterized by several basic structural elements, viz., (a) varying forms of investment, (b) diverse participants including governments, and (c) an array of benefits and risks. In addition, these transactions frequently involve various mechanisms designed to reallocate risks among the participants. In general terms Project Finance refers to a structure through which a project sponsors attracts financiers to a proposed individually distinct project on the basis of the proposed projects revenues, rather than the general assets of the sponsor. From the financial evaluation point of view every project goes through a number of stages from conceptualizations to post disbursement of financial assistance. Generally a project would have the following stages: (i) (ii) (iii) (iv) (v) (vi) Conceptualization Application Processing Sanction Disbursement Post-disbursement Conceptualization is the first stage where the promoter goes in for the selection of the product/project. The promoter may consult the financial institutions or consultants to analyse the setting up of a particular project. The next step is the preparation of a detailed project report and submitting a detailed application to a lending institution which is called as the processing stage. At this stage, the detailed procedure of evaluation of the project is initiated by the institutions as per the practice adopted by them. It is at this stage that the promoter starts negotiating with the financial institutions for the sanction of the necessary financial assistance. The evaluation techniques adopted by the various commercial banks are almost the same. The various stages involved in the evaluation of a project are as under: (i) (ii) (iii) Preliminary scrutiny of the Loan application Appraisal of the project - Site inspection. Detailed appraisal of the project - Preliminaries.

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(iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii)

Detailed appraisal of the project - Managerial competence. Detailed appraisal of the project - Technical feasibility. Detailed appraisal of the project - Commercial viability. Detailed appraisal of the project - Financial soundness. Time Schedule Evaluation Sanction Documentation Disbursement Follow up The above categorization is done with a view to help the promoter/borrowing entity to

know exactly the stage at which their project stands and what is the likelihood of emphasis on particular aspects related to the project. This would enable the promoter/ borrowing entity to keep the particular details ready or arrange for compiling the same for submitting to the institution well in time so that the processing continues and does not stop abruptly in between leading to avoidable delays. The above mentioned stages are discussed below in detail. The terms evaluation and appraisal are used interchangeably here.

PRELIMINERY SCRUTINY OF THE LOAN APPLICATION

The various Commercial Banks require the promoter to submit detailed information about each and every aspect of the project. The following items are broadly scanned. (1) (2) The Promoter Their experience and background. The Project (i) (ii) (iii) (iv) (v) (vi) The product to be manufactured. Capacity to be installed. Technical process to be adopted. Technical collaboration arrangements, if any. Management set up. Location of the project. 12

(vii) (viii) (ix) (x) (xi) (xii)

Specification of buildings. Particulars of plant and machinery. Arrangements for procuring raw material etc: Utilities and other facilities. Labour requirement and availability. Effluent disposal scheme/Status of NOC from Pollution Control Boards.

(xiii) Implementation schedule. (3) Cost of project Detailed cost of (i) (ii) (iii) (iv) (v) (vi) (vii) (ix) Land and site development Building and civil works. Plant and machinery; Other fixed assets. Technical know-how fees. Interest during construction period. Escalation and contingencies. Margin money for working capital.

(viii) Preliminary and preoperative expenses.

Detailed break-ups of the above have to be shown separately in rupee costs and foreign currency costs wherever applicable. (4) Means of financing (i) (ii) (iii) (iv) (v) (vi) (5) Share capital Rupee term loans. Foreign currency loans. Debentures. Internal accruals. Promoter's contribution contemplated and already brought in.

Marketing and sel ling arrangements for th e product proposed to be

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manufactured. (i) (ii) (iii) (6) Existing and potential demand. Existing and potential supply. Demand and supply gap analysis.

Profitability and cash flows (i) (ii) (iii) Projected 'cost of production' and 'profitability' and projected cash flow. Break-even point. Internal Rate of Return

(7)

Economic consider ation (i) (ii) Socio-economic benefits. Other economic analysis. This may not necessarily be incorporated in the application and is normally done by the

commercial banks themselves. All the details required in the application must be provided; otherwise it may lead to avoidable correspondence requiring the promoter to concretize the idea leading to a lot of delays and inconveniences. If there is any additional details required due to the special feature of the particular industry in which the project is envisaged (like hotels, textile, jute, sugar) additional forms are normally incorporated by the commercial banks and are given as Annexures to the application form. It is quite possible that the information asked for in the application form may not be adequate for processing the case. Hence the bank will send a list of additional information required for the project/case. Some of the information may already have been provided in the main application hence the remaining points may also be covered simultaneously with the submission of the application in standard form as far as possible.

CRITERIA OF SCRUTINY AND ACCEPTANCE/ REJECTION OF

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PROPOSAL
Preliminary scrutiny of application Some commercial banks adopt the practice of 'Registration' of the case or the project after it is found that all the required basic information is available in the application. The Registration Committee also takes into consideration the Government guidelines with respect to location and type of the industry proposed and other criterion like eligibility of seed capital and refinanciability etc. If the case falls within the purview of the Zonal / Regional office, the application in the standard form is to be submitted to the Zonal Office. The sanctioning limits are different for different commercial banks. Normally projects costing in Lakhs are entertained by the Regional Offices and the projects costing in Crores are entertained directly by the Zonal Offices. Detailed exercise is not required to be done for dealing with these commercial banks individually as the application forms are common. Immediately after the project is cleared by the 'Registration Committee' the following actions are normally taken: (i) Allotment of the case to an appraising officer within 7 days to 15 days. The appraising officer will check the following (a) (b) (c) Whether the promoter has obtained the necessary letter of intent. Financial data has been provided in the application. The proposed industrial concern has obtained the necessary capital goods clearance, if required. (ii) If the. details contained in the application is inadequate the promoter has to submit the required additional information. (iii) If the application is complete, further processing begins. If it is a case of Zonal Office, the other Regional Offices are also provided with a copy of application and a small profile is prepared for the consideration of Senior Executive Meeting (SEM). The format of Flash report, as is normally called, is standardized by the Bank. Many details given in the application are checked and deficiencies, if any, are removed by 15

informal discussions instead of issuing a letter seeking clarifications. The entrepreneurs/consultants should provide the following important details without fail: (i) (ii) (iii) (iv) Background of the promoters. Financial and non-financial performance and other achievements of sister concerns in which promoters are interested. Organizational set-up, existing/proposed for the project. Section-wise capacities of the plant when there are some processes involved in the project. (v) Considerations which have gone in for the selection of technology/particular process proposed for the project. (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) Detailed technical flow-chart for the process. Technical Specifications of the major equipments. Reasons for opting for particular collaborator/consultant. Particulars of the collaborator/consultant. Basis of estimates of raw material. Arrangements made for the procurement of raw material. Power requirement and the arrangements made. Estimates of water requirement and arrangements proposed. Basis of the estimates of the buildings/specifications. Detailed market survey report. Arrangements made for selling the output.

(xvii) PERT chart for the implementation of the project. (xviii) Basis of assumption of profitability. (xix) (xx) Status of various Government consents/approvals. Sources from where the promoter's contribution would come.

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Acceptance of proposal The proposal is likely to get favourable consideration of the Registration Committee (Regional or Zonal Office) if (i) (ii) (iii) (iv) (v) (vi) (vii) The product has a distinct market 'potential. The project cost is not unreasonably high and is comparable with similar projects earlier financed by the bank. The promoters inspire confidence (subjective assessment). The promoter's contribution is satisfactory. The project has some priority according to Government's policy. The technology to be adopted is well-proven. The profitability estimates are conservative and indicate that the repayment is intended to be made to institutions within 10 years or less. Rejection of proposal The proposal is likely to be rejected if some of the following features are observed (i) (ii) (iii) (iv) (v) (vi) (vii) Product does not have adequate market potential Cost of the project is unduly high. Financial position of the company is not satisfactory i.e. the means of financing indicate that the cash accruals may not be generated to the extent as envisaged in the application. Promoters hail from a group which has failed to run successfully the other units assisted by bank. Promoters are economic offenders. Bankers report about promoter is not satisfactory. Promoter's contribution is low and promoters don't agree to increase it.

(viii) Collaborators have inadequate experience. (ix) (x) (xi) (xii) Process technology proposed to be adopted is not proven on a commercial scale. Process know-how has become obsolete. Debt Equity Ratio is adverse (say 3.5: 1 instead of normal 2:1). Past experience of bank with consultant is not satisfactory.

(xiii) Second hand equipment as proposed to be installed is too old and is not likely to work

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satisfactorily. (xiv) (xv) (xvi) Availability of raw material is inadequate. The product belongs to low-priority sector. Setting up of the unit would adversely affect the existing units. properly. Preference to some projects Preference is given to the following projects (i) (ii) (iii) (iv) (v) Export oriented - import substitution items. Project with a proposal to utilize agricultural surplus as raw material. Employment oriented. Located in specified backward districts especially 'No-industry' districts which are declared by Central/State Government(s). Projects which would promote ancillary units etc.

(xvii) Equipments already supplied by the proposed machinery suppliers are not working

APPRAISAL OF THE PROJECT SITE INSPECTION

The site inspection is conducted after the issuance of the letter seeking additional information. The inspection date will be finalized in consultation with the concerned appraising officer. This inspection is conducted by a team of officers comprising technical and financial experts. As soon as the date is finalized the other participating offices would also be informed to take part in the inspection. If other commercial banks are likely to participate, the concerned lead bank would also be informed or the banker from whom the working capital assistance is sought would be informed. The underlying idea being that the banker should also have thorough knowledge of the project so as to expedite the processing of the application for the sanction of working capital facilities. The overall team does not exceed 6-8 members and as far as possible the inspection should not be got deferred or postponed. During the site inspection, the following details will be assessed: (i) (ii) Suitability of the site. Distance from nearest railway station, national highway/state highway etc. 18

(iii) (iv) (v)

Distance from sources of raw material and the market for the end product, etc. Availability of power. Effluent disposal scheme, careful examination of getting the Government approvals in time in this regard.

(vi) (vii)

Availability of social infrastructure-residential accommodation, school, college, hospital, post-office, banks etc. Availability of skilled and unskilled labour. Depending upon the nature of some specific projects some additional details will also be

assessed during the site inspection. For example in case of cement units the visit to quarries is also undertaken, similarly in case of paper units the requirement of water is enormous and the same is closely examined. The inspection team then proceeds to fix the cost of project on the basis of the information available in the application form and normally-avoids lavish expenditure. For instance expenditure on five star type' guest house is normally not permitted. However, the expenditure on housing/residential accommodation which is necessary if the project is coming up in the specified backward district of a State. Discussions regarding all aspects of the project are normally completed during the site visits. Deficiencies, if any, are intimated to the promoter at the time of site visit. The promoter will be requested to submit the remaining information and on the supporting documents which are normally not available at the time of site inspection as soon as possible.

DETAILED APPRAISAL OF THE PROJECT - PRELIMINARIES

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A project can be considered as an exercise in the future projections on the basis of certain assumptions. The promoter makes these assumptions and projects the future in the form of cashflows etc. This is cross-checked by the Zonal Office. Appraisal by the bank is thus a second look by another independent person who has not involved in making those assumptions. This removes the subjective element while making these projections. The appraisal by the bank helps to remove certain deficiencies and in no guarantees the achievement of the 'cash-flows' which depend on external factors which are dynamic and uncontrollable by the promoter. Zonal Office thus provides its expertise and tries to assess the project in a slightly different fashion if not in a better fashion. The appraisal of the project and its clearance by the commercial bank does not guarantee any success of the venture. The banks stress for sufficient security yet in true sense the security of the bank is the surplus or the profit which the project is required to generate. Thus, though, the bank has the recourse to force the sale of the assets, yet it is not the objective of any bank to get it involved in this tragic process. It is for this reason that the banks carry out detailed appraisal to establish that the project would have surplus after repayments due to them.

EVALUATION METHODOLOGY
Evaluating team of the institution relies on its own knowledge and experience and the experience of the other participating offices etc. An evaluation is a systematic exercise to establish that the proposed project is a viable proposition. The various details submitted by the promoter are checked by the appraising officers and they may not take the entire information on its face value. They give due weightage to the new entrepreneurs or the technocrat who are setting up the project for the first time and have no experience of running their own enterprise. A project to be eligible for the financial assistance should have following features. (i) (ii) (iii) (iv) (v) Managerial competence. Technical competence Commercial viability Financial soundness Economic justification It is only the central financial institutions which analyse the project on the basis of economic parameters like economic rate of return, economic rate of projection and domestic

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resource costs. These parameters are of national importance and the promoter or consultant may not have any expertise in evaluating these and interpreting a suitable meaning. This exercise is not done by the state level institutions.

DETAILED

APPRAISAL

OF

THE

PROJECT

MANAGERIAL

COMPETENCE
Every project has an inclination of one feature like expertise in the marketing or finance or acquisition of raw material. While in the process of evaluation many factors like technology, process, plant layout, etc. can be analysed with the help of some analytical tools, still the managerial competence of the promoter is the single factor which makes the entire difference between a successful and an unsuccessful project. It is the most important factor for the entire project but still cannot be determined by any test. The projects' completion and success depends upon the management. The strengths and weaknesses of the management will be a crucial factor for the success of the project. Though the banks are aware of this, yet, there has been no direct tool to find out the managerial competence. The process of the assessment of the competence of the management is not the job of the individual officer or for that matter the prerogative of the appraising officer. In fact when a particular promoter is selected to set up a project, it indirectly becomes the responsibility of the chief executive who is expected to have tested this particular factor. The banks do not possess any yardstick to measure the managerial competence. Even if reliance is placed on the various indirect devices such as the track record of other companies in the promoters group it does not guarantee that the management would be strong enough to implement the project successfully. The major reliance is made by the banks on the 'Banker's Report' particularly in cases where the promoters are in business already. Though there is a possibility that the report by the bankers is non committal still, they serve one important purpose i.e. to bring out undesirable features of the management if any. The banks, however, in the circumstances mentioned above, are required to place heavy reliance only on the bankers report. Further, the additional information should be submitted in detail to the Office so as to convince the bank about the managerial competence of the promoter. The other relevant details required by the institutions in this regard are as follows:(i) Proposed organizational set-up.

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(ii)

Board of Directors (existing/proposed). The composition of the Board of Directors is seen by the appraising bank and a suitable

condition is imposed about the broad-basing of the Board. In most of the cases the organization set up defines the hierarchy and degree of professionalization. The experience and qualification of the executives are analysed thoroughly. Further the banks normally reserve the right of appointing nominee Directors on the Board.

DETAILED

APPRAISAL

OF

THE

PROJECT

TECHNICAL

FEASIBILITY
The next stage in the evaluation of the project is the analysis of the technical feasibility and scanning of the various facilities including infrastructure available at the proposed site. Technical appraisal of the project is one of the major parameter which defines not only the capacity of the project but also the technology, the process, raw material, and other allied aspects like the availability of technical know-how and technical consultancy. The technical feasibility deals with whether the project or the various items of project can be produced by adopting the particular process. There may be many ways to produce a product. Nevertheless a particular technology which has been proposed to be adopted for the project still requires evaluation. As has been mentioned earlier, it is the responsibility of the entrepreneur to mention the advantages/superiority of the selected technology over the other available technologies. The background of the technical collaborator or the technical consultant is to be given in detail to avoid delays. The balancing of the line of production is quite important. The other factors which also determine the suitability of the particular technology are as under: (i) Whether the technology is well proven/well tried in India? If it is not tried in India it must have been tried somewhere else in the world. The working results, though difficult, may be obtained and submitted to the satisfaction of the lending institutions. (ii) Whether the technology is labour-oriented and suitable to India and utilizes the locally available raw materials? (iii) Over all impact on process parameters as can be seen from cash flow.

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(iv)

Cost savings, if any, in selecting the particular technology. These factors along with hosts of other factors determine the adoption of the particular

technology. Other factors which are normally covered in the technical feasibility are discussed in the following paragraphs.

MANUFACTURING PROCESS
If a product can be manufactured by using various raw materials using different process routes a comparative study is made by the bank to evaluate the more suitable process. There is a natural preference given to a process which is dependable and has been well tested. However, if the new process is more economical, its feasibility on pilot plant basis needs to be tested. In projects involving adoption of new process, lending bank may prefer equity stakes by the technology suppliers. A process from foreign country should not be adopted without giving due consideration to conditions prevailing in our country. If, however, the promoters have entered into foreign collaboration agreement, its terms and conditions are studied carefully. The agreement should cover the following aspects clearly(i) (ii) (iii) (iv) (v) (vi) Nature of assistance to be provided at planning stage. Selection and procurement of equipments. Installation of the equipment. Training of the personnel. Amount of fees payable to the-collaborator. Production parameters and guarantees.

Reports of the performance of the similar plants setup by the collaborator elsewhere in the world have to be submitted to the bank as a proof of their ability and expertise in this regard.

SIZE OF THE PLANT

Size of the plant normally depends on capital investment needed, market potential, and the availability of raw material. Generally large sized plants are economical as compared to the small

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plants but if the setting up of large sized plant requires heavy investment and the raw material is scarce, one should go in for smaller sized project. However, it should be ensured that the capacity of the plant should not go below the minimum economical size. Nevertheless provisions can be made to increase the capacity in phased manner.

LOCATION OF THE PROJECT

The banks evaluate the location of the project by analyzing the various requirements of the production factors like, land, raw material, utilities, effluent disposal, transportation and labour. It may not be possible to have all the facilities at one place. Yet the relative importance of one may be higher over the other. Land The requirement of land is assessed from plant layout and the building layout. If the machinery is heavy, the load bearing capacity of the land is analysed. Provisions should be made for future expansion. Raw Material If the raw material are bulky and heavy it is preferable to locate the project near the source of raw material e.g. cement, steel, paper plants, etc. Similarly if the quality of raw material is likely to deteriorate during transportation it would be better to set up the project near the source of raw material. If imported raw materials are required, the Government's policy is studied by the bank. This is likely to have an effect on the cost of the project due to the increased requirement of the margin money for working capital because in the case of imported raw materials, the project may be required to have large inventory. Utilities A power intensive project like steel plant, aluminium, caustic soda should be located where the power supply is adequate at reasonable power tariff. If the power failure is likely to cause loss in the manufacturing process, provision of the standby generator is justified. The requirements for other utilities are also assessed carefully. Effluent Disposal Government has become more anxious to control industrial pollution. In certain areas

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industries are totally banned. The appraising team normally studies the various regulations and checks whether the concerned pollution board has given 'NOC'. Further the expertise of the agency putting up the effluent disposal machineries is studied in detail. Transport If the raw materials and/or the end product are to be transported over long distance the cost of the same is increased due to the transportation cost. If the raw materials are heavy and may cause problems in internal material handling, the inclusion of the railway siding can be made in the project. Similarly, if the project is export oriented it would be better if it is located near a suitable port. Labour The project report should certain details of assessment of the labour, both skilled and semi-skilled. If the project is labour oriented, especially requiring skilled labour, it is advisable to locate the project near a developed industrial area where the basic social infrastructure is already available. Hence the labour becomes an important determinent for projects requiring skilled manpower.

SELECTION OF PLANT AND MACHINERY

The selection of plant and machinery is done after the technology has been selected and the process of manufacture has been well defined. Before going in for selection of the plant and machinery it is preferable to prepare a process flow-chart / products flow-chart / components flowchart and is discussed with the technical consultants. It is also advisable to visit another project where the plant and machinery, which are intended to be purchased, are installed, to evaluate their working. In most of the cases such kind of visits are made by the appraising officers of the bank. Needless to mention that they are generalists as their main experience is in appraisal. Even if one has experience in manufacturing line it shall be too much to expect from the bank to help in selecting the plant and machinery. The major decision is only on the promoter who has to finalize the same in consultation with the technical consultants. There are many consultancy organizations which are available in our country who can assist organizations not only to select the equipments but produce detailed specifications of the

25

equipments and subsequently carryout detailed engineering and design and have a strict quality control over the capital equipments when they are being manufactured/produced at the site of the manufacturer of the plant and machinery which has been finalized for installing. This is the distinct advantage of employing a consultancy organization which has got specialists for different industries on its roll. However, there are consultants who operate in individual capacity and have specialized in only one particular line. Before availing the services of consultants the promoters has to check their competence by referring from the plants where they have earlier provided similar kind of technical services. There may be instances where the consultant himself is a supplier of the equipments. Such consultants should not be engaged normally as their motive would be clubbed and at any point of time one motive of increasing the sale may outweigh the other i.e. of supplying technical consultancy. This may result in over-loading the project with expensive items which have only normal requirements and can be completely done away with. Thus once the choice has been made about the plant and equipments the same should be listed in the following order. (i) (ii) Standard equipments. Non-standard or custom built equipments. Standard equipments are those which are available from the suppliers of repute like Crompton Greaves, Kirloskar, Thermax Boiler, Greaves Cotton, Nestler Boiler, and the promoter can rely upon the quality and workmanship of the equipments supplied by them. The best way is to collect the quotations from these suppliers and prepare a comparative quotation chart. Normally the banks do not press for the equipment with the lowest price. The price of the equipment which is kept in the appraisal is normally the equipment which the promoter may require as far as the standard equipments are concerned. Hence the provision can be got made of the equipment which the promoter insists for, at the time of appraisal. In the case of non-standard equipments, particularly the equipments which are fabricated by a supplier, the promoters should try to collect the credentials of the manufacturer and the details of the similar jobs/works executed by the supplier. The operational results can be obtained where the similar equipments are already installed at other project sites. The evaluation of the price of the non-standard equipments should be done on the basis of estimation of the total material to be used

26

for the fabrication of the equipments and the standard bought out items to be used in the equipments to be fabricated. Normally the fabricator keeps a project margin of 50-100 per cent over the basic material cost of the raw material like steel etc. required for the product. The price may, therefore, be negotiated once the actual cost of the raw material which has to go into the fabrication of the equipment has been established. The equipments can also be looked from two angles: (i) (ii) Indigenous equipments. Imported equipments. If there is a requirement for imported equipments, the same should be identified and the requirement of the foreign exchange loan should be quantified separately and the request for the separate component of loan equivalent to foreign currency should be made. If the equipment is under OGL the payment is required to be made in rupees hence there is no need for the separate request for foreign currency loans.

IMPLEMENTATION SCHEDULE
The implementation schedule of the project and its fixation is very crucial. This helps conceptualizing the project in totality. The various steps involve in arriving at most optimistic and most permissible implementation schedule is as follows:(i) (ii) (iii) Land-Date of negotiation till the date of receipt of final application. Building-Commencement of civil work-expected date of completion of the building. Plant and machinery and miscellaneous fixed assets. (a) (b) (c) (d) (e) Date of placement of order Date of despatch Date of delivery Date of erection Date of commencement of production

The most critical item on which the overall implementation of the project depends would be certain items of plant and machinery which are normally termed as the most critical equipment. This equipment may either be imported or be indigenous. This may be requiring the longest delivery time. Hence a control or check is to be kept on the timely receipt and commissioning of the equipment. There may be some other activities which may be important for the project than the 27

receipt of one particular plant e.g. in some cases the receipt of the equipments may not be very important or may be relatively easier as compared to the timely completion of the building which requires central air-conditioning. Thus it is important to prepare a project implementation schedule. A suggested format of the same is as under: (i) Acquisition of land. (ii) Development of land (iii) Civil works Factory building Machinery foundation Auxiliary building Miscellaneous building (iv) Plant and machinery Imported - placement of order - delivery at site Indigenous - placement of order - delivery at site (v) Arrangement of power (vi) Arrangement of water (vii) Erection of equipment (viii) Commissioning (ix) Procurement of raw material and chemicals (x) Training of Personnel (xi) Trail runs (xii) Commercial production.

DETAILED VIABILITY

APPRAISAL

OF

THE

PROJECT

COMMERCIAL

28

The banks normally carry out detailed appraisal about the commercial viability when the promoter has not carried out detailed assessment of the market and has not found the demand and supply gap. There is possibility that a promoter might have relied on the demand in the local region only where the project is proposed to be set up. Therefore, the appraising bank goes into the details of demand, supply, distribution and pricing etc. at this stage. It is advisable that the promoter carry out detailed survey to justify the establishment of the project. An usual methodology or technique which can be used by the promoters/appraising officers to asses the market is as follows: The overall demand of the product is assessed as available or projected by the Government or other agencies. Similarly the existing supply position of the product is studied based on the statistical details published/provided by trade bodies or government agencies. Estimation of the product which can be used for the same use is also made and the demand supply gap is suitably evaluated. If the demand supply gap justifies the establishment of the project even after giving suitable increase in the capacity utilization or expansion of the existing factories, it is fairly established that there is a demand for the product.

DETAILED SOUNDNESS

APPRAISAL

OF

THE

PROJECT

FINANCIAL

MEANS OF FINANCING
After firming up the cost of the project, the process of fixation of the means of finance commences. The usual ways of raising funds are as under: Share Capital

29

Share capital is mainly of two types viz, equity capital and preference capital. Based on the nature of the project, banks may stipulate a preference share capital and equity share capital ratio. They may also insist on institutional underwriting and is conditional subject to the shares being listed at on two or three stock exchanges for easy transferability and liquidity. In some cases, where the issue is small say Rs. 50 lakhs the banks may arrange private placement or directly subscribe to the share capital. Debentures and bonds Debentures are broadly of two types (i) (ii) Convertible. Non-convertible

Certain institutions like UTI normally subscribe to private placement of non-convertible debentures. However companies with good track record may go in for public issue of convertible debentures. Bonds are similar to non-convertible debentures which are normally issued by public sector undertakings, statutory corporations etc. Deferred payments Deferred payments also constitute as a source of funding the project and the amount to be repaid during the construction period should not be taken in the means of financing. Other sources Unsecured loans from promoters, public deposits, subsidies from the Government, constitute other important sources of finance.

FINANCIAL PROJECTIONS
Financial projections include the following: (i) Cost of production and profitability statements. (ii) Cash-flow projections (iii) Projected balance sheets These statements are helpful in the calculation of various ratios which help in overall evaluation of the project from the point of view of financial analysis. These are interrelated

30

statements and are prepared on the basis of the assumption like: (i) (ii) (iii) (iv) (v) (vi) (vii) (ix) (x) Capacity utilization Consumption norms of raw material & consumable Direct Expenses such as wages, fuel, power etc. Interest on term loans Interest on working capital finance Depreciation Administrative expenses Managerial remunerations. Preliminary expenses written-off.

(viii) Selling and distribution expenses

After preparing the cost of production and profitability statement, the projected cash flow statement is prepared. Similarly tax calculations are made before finalizing the cash-flow statement and projected cash-flow. The cash-flow statement is a statement of the sources and application of funds: The sources of funds include(i) (ii) Share capital. Term loan (a) Rupees loans. (b) Foreign currency loan. (iii) (iv) (v) (vi) Debentures Net profit Depreciation Preliminary expenses written-off (Depreciation and preliminary expenses are notional expenses. There is no actual cash outflow due to these items. Although they constitute charge to profits still they are taken as sources of cash and cash equivalents.) (vii) (viii) (ix) (x) Deferred credits Trade credits Bank borrowings Central/State subsidies

31

(xi) (xii) (xiii) (i)

Development subsidy on power, if applicable Sales-tax loan Public Deposits Capital expenditure (a) During construction period. (b) Routine capital expenditure during operational period

The application of funds

(ii) (iii) (iv) (v) (vi) (vii) (viii)

Preliminary expenses Increase in current assets Repayment of term loans Redemption of debentures. Repayment of deferred credits. Repayment of bank borrowings, if the cash-flow permits. Payment of interest on: (a) (b) (c) Term loans. Unsecured loans Bank borrowings

(ix) (x) (xi)

Taxes Miscellaneous & others Dividends etc. The preparation of cash flow statement is an important tool in not only matching the

inflow and outflow of cash but also serves an important function of fixing the repayments of the various term loans and the evaluation of debt service coverage ratio which is one of the important parameters which reflects the inherent capacity of the project to service the debt in time. It also provides various parameters which are flexible and need monitoring. e.g. in some cases there may be heavy tax liability requiring efficient tax planning. Although the preparation of cash flow statement during the stage of appraisal serves only limited purpose, yet it presents a lucid picture of the parameters which can be controlled to achieve the objective of increasing the owner's worth i.e. net worth (share capital plus reserves minus fictitious assets.)

FINANCIAL SOUNDNESS OF THE PROJECT

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Financial soundness of the project is judged by the bank by having recourse to a number of ratios which are derived from the financial statements like cost of production and cash flow projections etc. The following ratios are normally considered by the project appraising officers. Category 1. Capital / output ratio Importance High ratio shows capital intensive project. Low ratio indicates labour intensive project. 2. 3. 4. Percentage of operating profit to sales Percentage of gross profit to sales Gross profit as percentage of total assets 5. Percent of profit after tax to networth 6. Reflects the profitability and how effectively the assets are utilized. This indicates the earnings on the owner funds. Indicate profitability to Sales. Indicate profitability to Sales.

Investment per worker: Indicate the capital needed for employing one worker. It will be high in capital intensive projects and low in labour intensive projects.

These ratios are fairly indicative and a comparison can be made with those ratios of the industry to which the project belongs. Then effort is made to find out the average ratio of the similar project. If the average ratio over the projected period is the same or near the average ratio, the project can be treated as satisfactory so far as these ratios are concerned. The above ratios indicate the various parameters of the project broadly. These should match with the parameters to the extent possible to the various indicators of the industry category. If there is a sharp deviation, the same needs an analysis or even there may be some thing which needs revaluation of assumptions or preparing the "Cost of production and profitability 33

projections". 7. Break even point (B.E.P.) Breakeven point may be defined as that point of operation of the project where the project neither incurs any loss nor makes any profit. It is over and above this percentage of the capacity utilization that the project starts earning profit. The break -even point is normally expressed as percentage of the capacity utilization. Lower the breakeven point higher the "margin of safety" built-in in the project. Break even point Contribution per unit Example: If fixed cost is Variable Cost is Selling Price is Contribution is Rs. 5, 00,000 Rs. 200/unit Rs. 300/unit Rs. 300-200 BEP = 5, 00,000/100 = 5000 units. It is at this level of production that the project would breakeven. If the capacity of the project is 10000 units, it is said that BEP is at 50 percent of the capacity utilization. When the actual sales exceed the break even point, the difference is called margin of safety. Margin of safety will increase when actual sales are more than the break even point. Margin of safety = Units sold BEP The existing level of the profit can be ascertained as follows:Units sold X Contribution per unit Fixed Expenses. As the financial appraisal and its soundness is judged from the various ratios it would be = 100 per unit = = Fixed cost / Contribution per unit Selling Price per unit Variable Cost per unit

34

appropriate to have indepth knowledge on the Ratio Analysis.

FINANCIAL EVALUATION AND RATIO ANALYSIS

Financial statements are prepared primarily for decision making. The statements are not an end in them but are useful in decision making context. The term financial statements cover two important statements viz., balance sheet and income statement. The balance sheet may be

35

described as financial cross sections taken at certain intervals and the earning statement as a condensed history of the growth and decay between the cross sections. Financial statements are very helpful in giving various indicators if the help of techniques such as 'Ratio Analysis' is employed. The technique is also called as Analysis and Interpretation of Financial Statements. The utility of this technique is that a forecast may be made of the prospects of future earnings ability to pay interest and debt maturities (both current and long-term) and probability of sound dividend policy. Analysis of financial statements consists of segregating data according to parameters of desired spectrum and presenting them in a fashion that the above objective is achieved. The analysis and interpretation bridges the gap between the art of recording and the art of using information. Analysis is basically an exercise to find facts from the given set of complex figures and datas. Commercial Banks lay heavy emphasis on the analysis of financial statements with the help of ratio analysis.

RATIO ANALYSIS
Ratio analysis is the systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of an organization as well as its historical performance and current financial condition can be determined. It is calculated by dividing one value by another. The ratios are customarily expressed in three ways. It may be quotient obtained by dividing one value by another. This expression is known as 'times' when the above 'quotient' is multiplied by 100 the expression becomes 'percentage' which is the second way of expressing the ratio. The third way is to express as 'proportion' between figures.

ADVANTAGES OF RATIO ANALYSIS

The various advantages of ratio analysis are enumerated below(i) (ii) The details and cumbersome set of numbers are reduced to easily interpretable numbers. It becomes easier to analyse (a) liquidity (b) solvency (c) profitability (d) efficiency and (e) the structural composition of the capital.

36

(iii)

The various ratios especially profitability ratios and the turnover ratios enable inter-firm comparison of the enterprise. It any. ratio is adverse, the reason for the same can be analysed and timely corrective measures can be taken to check the situation.

(iv)

It helps the management in evaluation of the present health and the future planning of the enterprise.

(v)

The ratio analysis helps in decision making process.

TYPES OF ACCOUNTING RATIOS

Some ratios can be derived from the balance sheet and the other ratios can be derived from the income statement. There are other ways of classifying the ratios which are discussed in the following paragraphs. The various ratios are defined and discussed below.

Current ratio
It is an indicator of current liquidity of an organization. It could be adopted only for companies which have commenced commercial operations and whose detailed annual accounts have been prepared. This ratio may not be helpful for new projects. It is calculated as:Current Ratio = Current assets Current liabilities

The current assets are :(i) (ii) (iii) (iv) (v) Cash Bank balance Bills / accounts receivable Sundry debtors Short term investments 37

(vi)

Inventories Raw materials Work in progress Finished goods

(vii)

Prepaid Expenses.

The current liabilities are :(i) (ii) (iii) (iv) Sundry creditors Bills payable Bank overdraft Outstanding expenses. The above ratio is an indirect measure of the liquidity of the company indicating the companys ability to meet it short-term liabilities. No standard norm has been laid for this ratio as it may vary from industry to industry. This ratio indicates the cover which the current assets provide over the current liabilities. It also expresses how much current assets have been financed out of current liabilities. Many experts have suggested that a ratio of 2 : 1 is a satisfactory level of current assets i.e. current assets should be at least 2 times of the current liabilities or only upto 50% of the current assets should have been financed out of the current liabilities. Some may feel higher this ratio more satisfactory is the liquidity position of the concern which may not be true. A ratio in the range of 1.5 to 2 may be considered ideal.

Quick ratio or Acid test ratio

Current ratio may not indicate the exact liquidity position of a company as certain items of current assets are not exactly liquid i.e. equivalent to cash such as inventory, prepaid expenses, though included as current assets. But quick ratio indicates the relationship between the quick assets and the current liabilities. The ratio is calculated as under:-

38

Quick Ratio = Liquid assets Current liabilities Quick assets include: (i) (ii) (iii) (iv) Cash and bank balances, Marketable securities, Short term investments, Account receivables. Inventories and prepaid expenses are excluded from the category of liquid assets. There is no change in the current liabilities. However, one argument can be put to exclude the bankoverdraft from the current liabilities as this is a sort of permanent feature or at least a regular feature in the operation of an organization. Nevertheless it may be kept in mind that the overdraft can be asked to be liquidated immediately at any time by the banker. In view of this it is advisable to treat the bank overdraft as a current liability. A quick ratio of 1 : 1 is supposed to be the most appropriate ratio which means that in case of need, all the current liabilities can be liquidated by the most liquid current assets. There is hardly any need of keeping the funds idle.

Debt Equity Ratio

The relationship between owners capital and borrowed capital is a popular measure of the long-term financial solvency of a company. The Debt-Equity Ratio is an important tool of financial analysis to evaluate the financial structure of a company. The ratio reflects the relative contribution of lenders and owners of the company in its financing. This ratio also indicates the margin of safety available to the lenders. Generally this ratio is calculated as under : Debt-Equity Ratio = Long Term Debt Shareholders Funds For example if the D/E ratio is 1: 2, it implies that for every rupee of outside liability, the firm has two rupees of owners capital. Therefore, there is a safety margin of 50% available to the lenders of the firm.

Debt Service Coverage Ratio

39

This ratio reveals the ability of a company to make prompt payment of interest and principal amounts due to the financial institution/other lenders in time. This ratio is calculated as under: Debt Service Coverage Ratio = Net profit before interest and tax (Interest + Principal payment Instalment) / Income Tax Rate

Earning Per Share

This ratio measures the profit available to the shareholders on a per share basis i.e. the amount they get on every share held. This ratio is calculated by dividing the net profit after interest and tax and preference dividend by the total number of equity shares. This would give the return on individual equity share and this should be as high as possible.

Turnover Ratios
The turnover ratios indicate the efficiency with which the capital employed is rotated in the business. Here turnover refers the speed at which the capital employed in the business rotates. Higher the rate of rotation, the greater will be the profitability. Different turnover ratios are calculated in order to find out which part of capital is effectively employed and which part is not.

TIME SCHEDULE
Most of the Banks attempt to monitor the time required for appraisal, sanction and disbursement, of each project proposal. The appraisal phase is generally deemed to commence when the project proposal is submitted complete in all respects. This compliance relates to data as per the questionnaire including all supplementary information and attachments pertaining to approvals and permission for the legal sanction and functioning of the project.

40

It is found that frequently promoters initially submit insufficient or inappropriate data and the banks, very correctly, do not begin a detail evaluation until all the information is forthcoming. Similarly obtaining and presenting the necessary sanctions and approvals is essential as failure to obtain these can halt or delay implementation of the project. The Banks maintain that if all the details are submitted promptly, the evaluation and the approval of a project can be completed within reasonable time. Similarly documentation and disbursement can be expedited if agreement on sanction stipulations and the legal formalities for security of loans are expedited by the promoter. The review of some cases revealed a variety of reasons for delays, which sometimes were significant. Some of these reasons are : inadequate and/or inappropriate submission of data; changes in scope of work leading to changes in cost estimates and consequently in financing pattern; failure to obtain in time requisite government and other approvals; delay by the promoters in agreeing to stipulations considered essential by the bank, delay in providing the requisite finance by the promoter and in providing documents evidencing title to security offered; internal problems in the bank causing delay in processing, evaluation, sanction and disbursement. The appendices contain information indicating the time lapse for evaluation, sanction and disbursement of funds.

EVALUATIONS
The Banks as agencies for development are interested in projects bearing the following characteristics:(i) They are financially viable i.e., their micro-economic returns are commensurate with the required investment and a financing pattern can be determined within established norms. (ii) They are economically desirable in the socio-economic context.

41

(iii) They are technically feasible and sound and the production process is acceptable. (iv) Their marketing strategy is in consonance with the prevailing and expected environment. (v) Adequate managerial resources would be available during all stages of the project. Most of the data required for evaluating whether projects have these characteristics would be included in the details submitted by the promoter in accordance with the prescribed application form. Further data is gathered during the appraisal process. Details of the reviews - financial, economic, technical, marketing and managerial - made by the Bank are already mentioned above.

SANCTIONS
Sanctions for project assistance are approved by the respective sanctioning authority of the bank depending on the levels to which such sanctioning powers are delegated. Disbursements do not require separate sanctioning from the Boards, but are authorized by Senior Executives on the basis of prior Board approvals. In case of over-runs (which are frequent), approvals for increased contributions, as deemed appropriate, are to be obtained from the Board.

DOCUMENTATION
Documentation includes Heads of Agreement, agreement for loan and legal documents for security of loans. Uniform agreement forms containing standard terms and conditions are adopted and the agreement signed by the Bank is binding on all the participants of the consortium. The concerned department reviews the Heads of Agreement, and major issues pertaining to the agreement are decided. Thereafter discussions ensue to get the promoter to agree to the major points. Sanction conditions are those considered essential for implementation and operation

42

of the project and these are not varied. Other terms and conditions may be deleted or changed but such variations require approval from the Board of Directors. Variations sometimes effected in certain terms and conditions originally accepted by the promoter also require Board or concerned authority approval.

DISBURSEMENT
Disbursements are always preceded by signing of Heads of Agreement and fulfillment of certain minimum conditions. These conditions relate to, say, injection of promoter's contribution fully or at least proportionally to Banks contribution requested, satisfactory progress of project such as, placement of orders, manning by acceptable personnel of the key areas of the project organization, etc. The Banks require certificates from the Auditors of the promoter confirming moneys expended by the promoter and the due recording of moneys received, expenses incurred and assets procured. In the case of underwriting of share capital by the Bank, Auditors certificate is required (a) that the money payable on application has been duly received and recorded, (b) that promoter's application and money, as agreed, has been duly received and recorded. Performa of the Certificates so required are appended with the detailed study data presented for Leading Bank. Disbursements are staggered depending upon the progress of the project. Certificates from approved engineers may also be required on the status of work completion before funds are released. Pending complete documentation, needed rupee finance is provided as bridging loans. These are usually more expensive than regular loan finance. They are preceded by the promoter's agreement to stipulated terms of the Heads of Agreement and production of satisfactory evidence of security including promoter's personal guarantees. Disbursements are made by each Bank generally according to the proportions agreed in consortia financing. The participating certificate scheme provides for a single major financing bank to be the disbursing agency for all the finance as agreed. However, repayments have to be made by the promoter to each bank separately.

43

FOLLOW UP
Procedures subsequent to sanction of the project proposal are dealt with by the Follow up Department. Such procedures essentially include (i) Documentation (ii) Disbursement (iii) Monitoring of project fulfilment (iv) Collection of institutional dues - interest and scheduled repayment of loans. Broad details of documentation and disbursement are discussed earlier. Monitoring of project fulfilment project expenditure, physical progress and the financial/operational well-being during and after implementation is exercised with varying intensity in two stages: implementation stage and operational stage. In the implementation stage, the Banks actively monitor through:(i) Regular reports from promoters on implementation e.g. orders placed, payments, receipt of machinery/equipment, installation, trial/commercial production, etc. (ii) (iii) Periodic site visits and reports. Discussions with promoters, bankers, suppliers and creditors connected with the project. (iv) (v) (vi) Progress reports from nominee Directors on implementation, problems, etc. Published accounts of the company. General study of the industry.

With the increasing number of projects at various stages of implementation, Banks are experiencing difficulty in effective and timely monitoring. In the operational stage, banks adopt the following procedures for monitoring :-

44

(i) Obtainin g quarterly dat a on pr ogress of the project and some visits site and r egular follo w up inspection . (ii) Receiving reports from nominee Directors. (iii) Occasionally relating performance with promise.

to

This stage of monitoring also suffers from various constraints in the banks such as, problems of manpower; time constraints as priority is given to project implementation and disbursement of funds which is linked to successive stages of performance; insufficient or untimely receipt of data requested from the promoter. These and other constraints lead to delay/ deferment of remedial action and therefore call for very active attention by the bank. Follow up or monitoring effort is dependent on the quality and effectiveness of the appraisal systems initially adopted in dealing with project assistance. If these systems are well conceived and meticulously followed in consonance with accepted norms and evaluation techniques the sieving process for acceptable projects will be effective and monitoring would become less onerous. However, often factors internal and external to the project greatly influence both implementation and operation phases vis--vis projections agreed. Consequently, monitoring of projects often assumes greater importance than presanction appraisal, and the effective implementation of monitoring systems needs added emphasis by the banks. The collection of dues interest and repayment instalments is often dependent on successful monitoring of the operational stage. Problem cases often lead to monetary and legal actions. Under the norms for providing finance, the promoters are generally required to provide 25% as Seed Money of the total project cost. This quantum of promoters money is required to be provided irrespective of whether the project is in an existing company or is conceived as a completely new venture. In some cases even this Seed Money is often advanced by banks.

45

EVALUATION PROCEDURE FOLLOWED BY COMMERCIAL BANKS

All the Commercial Banks have the same process of Project Evaluation. They follow the same procedure across the nation but may vary on some terms. In all the Commercial Banks, each level (authority) officer has its sanctioning limits of the loan proposals. Over and above that limit the project is carried forward to the higher authority. The Project Evaluation procedure is as follows-

46

1. The Application in the prescribed form is to be submitted to the bank by the applicant alongwith the Project Report along with the following documents

(a) Income Tax Return of all Applicant(s) and Guarantor(s). (b) Photo and Address Proof of Applicant(s). (c) Statement of Bank Account for last one year of Applicant as well as
Guarantor(s).

(d) Statement of Assets and Liabilities alongwith Documentary Proof of Assets. (e) Audited Final Accounts for last three years of existing business. (f) Copy of Approved Building Plan. (g) Provisional Balance Sheet as on date. (h) Power Sanction, (i) NOC from Pollution Control Board. (j) Quotation of Plant and machinery and other fixed assets. (k) Sales Tax Assessment, (l) Sales Tax, CST Registration & DIC Registration. (m) Estimation of Construction cost. (n) Memorandum of Association (MOA) & Article of Association (AOA) /
Partnership Deed.

(o) Details of Collateral Security. (p) Share Holding pattern & shares held by directors / other or profit sharing ratio &
capital contributed by partners.

(q) Letter from existing banker for facilities being availed and conduct of Account. (r) Valuation of Immovable Property of business. (s) Detailed Search Report from Registrar of Companies. (t) Marketing Arrangements. (u) Certificate of Incorporation and Certificate of Commencement of business. (v) List of directors.

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2.

The Appraisal of Loan Proposal by the bank. This includes-

(a) Preliminary scrutiny of the Loan application. (b) Preparation of Confidential Report on Applicant(s) and Guarantor(s). (c) Site inspection. (d) Detailed Appraisal of the Project which includes
Preliminaries. Managerial competence. Technical feasibility. Commercial viability. Financial soundness.

3. The Time Schedule for the sanctioning of loan application depends upon the amount
of finances needed which also varies from bank to bank.

4. The Power Chart is the chart of the sanctioning limits of the various authorities which
also varies from bank to bank.

5. Security Norms which includes Primary and Collateral Security which also varies
from bank to bank.

6. Legal Documentation which includes(a) Term Loan Agreement and Working Capital Agreement. (b) Agreement of Guarantee. (c) Hypothecation Agreement for Term Loan and Working Capital. (d) Letter of Intent to mortgage Immovable Property.

48

7. Disbursement of loan is in stages. In case of term loan, is released alongwith Margin

Money to be contributed by borrower and payment is made to the supplier directly.

8. Post Follow Up of the Project. This includes(a) Ensuring that the account is running properly. (b) Money borrowed, has been utilized for the purpose it has been given.

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RESEARCH METHODOLOGY

STATEMENT OF THE PROBLEM:

The role of Commercial Banks as a source of long term finance to industry is now more important than ever. If one looks at the recent published accounts of enterprises, he would find that in most cases, a large chunk of long term funds is provided by the Commercial Banks in various forms. Considering the scarcity of funds and the risk involved in extending term loans, the Commercial Banks make an indepth study of the proposals submitted to them by intending borrowers, and insist that fullest possible information is provided to them to avoid delays as well as enable them to make a complete and reliable assessment.

50

Credit is one of the two major functions of any bank. Return on investment being very low, banks have no choice but to make advances for their survival. However making a good advance is no kidding. It requires special skill and knowledge. It is more so because banks deal with public money. After introduction of NPA (Non Performing Assets) and Capital adequacy norms, Banks have to take extra precaution while parting with the Depositors money. Preparation of loan proposal is an art. It is the reflection of your knowledge and efficiency. By compiling a loan proposal with a bit of care may avoid unnecessary correspondence with the higher authorities. It also makes the proposal get through with least time period. The problem Project Evaluation is an attempt to find out, that what all are the eligibility criteria and other documentation procedures of various scheduled commercial banks for project financing.

SCOPE
This study is directly related to the Project Evaluation of Commercial Banks. The case Project Evaluation in Commercial Banks is an attempt which provides information and guidance regarding certain aspects of long term financing by commercial banks in our country. Many of the members of the bank are now being associated in developing project proposals to be submitted by promoters to the commercial banks alongwith the applications for grant of long term finance in the form of term loans, equity participation, equity and debenture underwriting, etc. To provide adequate guidance in this regard, the Research Committee decided to study the approaches and criteria adopted and the process of evaluation followed by the commercial banks in determining the possibility and justification for such projects, before committing funds.

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Therefore, the study is having such scope as follows: (a) It can give an insight about what is the procedure followed for project evaluation by commercial banks. (b) It can lead to an increased understanding and improvement in project loan proposal preparation for the borrower. (c) This review is meant to acquaint members of the profession and others with the requirements of the commercial banks in the formulation of the acceptable project proposals and the norms which they adopt for assessing the various aspects of the project.

RESEARCH DESIGN:
Research Design can be Exploratory or Descriptive. Exploratory Research study are also termed as Formulative Research studies. The main motive of such studies is that of formulating the problems for more precise investigation or of developing the working hypothesis from an operational point of view whereas, Descriptive Research studies are those which are concerned with describing the characteristics of a particular job. In this project we have gone for Descriptive Research study.

RESEARCH APPROACH:
The approach used for study was survey method and for this, literature and diagnostic survey was carried out.

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LITERATURE SURVEY
Primary survey: Primary sources were referred to get the basic culture and working pattern of Commercial Banks. The required information was collected by personally interacting with the managers of the banks and other related sources.

DIAGNOSTIC SURVEY
The problem was diagnosed with the help of interaction and personal interviews with the managers to deduct the loopholes in the system. For this, the following schedule was followed: Sample unit: Commercial Banks (Managers)

A decision has to be taken concerning a Sample Unit, before selecting sample. Sample unit may be Geographical one such as state, district, village etc. or a Constructive unit such as house, flat etc. or a Social unit such as family, club school etc. or it may be an individual. The researcher will have to decide one or more of such units that he has to select for his study.

Sample size:

This refers to a number of banks to be selected from the whole, to constitute a sample. This is the major problem before a researcher. The size should neither be excessively large nor too small. It should be optimum, so that it fulfills the requirement of efficiency, representativeness, reliability and flexibility. Sample location: Punjab National Bank, Zonal Office, Dehradun. State Bank of India, Regional Office, Dehradun. Oriental Bank of Commerce, Zonal Office, Dehradun. Union Bank of India, Zonal Office, Dehradun. Sampling technique: Random Sampling.

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RESEARCH INSTRUMENT:
PERSONAL INTERVIEW: There was a personal interaction with the managers of the commercial banks individually. The feedback so collected was analysed for evaluating procedure followed for project financing by commercial banks. An analysis is followed by personal discussion and interviewing the different level of employees for project financing which leads to competence mapping.

STATISTICAL ANALYSIS:
Different Tables have been used for the statistical analysis of the study of the various commercial banks.

LIMITATIONS OF THE STUDY

As with any study this study too had its own limitations, which are detailed below: Due to hectic schedule of the Managers in Commercials Banks sometimes it was difficult to get adequate time for the interview. An effort had been made to get the appointment and extract right information from the managers in spite of their busy schedule. The assignment being very challenging and have exhausting nature requires appreciable time to carry out survey and compile recommendations. The time being limited had restricted us to go in more detailed work.

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As the number of commercial banks is very large, only a sample is drawn among all the banks, which may or may not be true representative of all the scheduled commercial banks.

Sometimes, the bank managers were not willing and were reluctant to provide the information, as it was suppose to be collected for the banks personal use.

ANALYSIS AND
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INTERPRETATION

PUNJAB NATIONAL BANK

The specific stipulations of Punjab National Bank are -

COMPONENTS
1. Margin Money 2. Gestation Period 3. Repayment Period 4. Accounts 5. Rate of Interest 6. Security (a) Primary (b) Collateral

TERM LOAN
25% 3 12 months 3 10 yrs. Fixed BPLR + Term Premium (0.50%) 100% Depends upon the case

WORKING CAPITAL
25% ____ On demand Running BPLR

Hypothecation of stock Mortgage

POWER CHART
(SANTIONING LIMITS)

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LEVELS
Junior Management Grade I Middle Management Grade II Middle Management Grade III Chief Manager Assistant General Manager Deputy General Manager General Manager Executive Director Chief Managing Director

POWER (Lakhs)
12 25 80 400 1000 2000 3500 7500 10000

TIME SCHEDULE
Upto Rs. 25000/- : 2 weeks; Over Rs. 25000/- upto 5 lakhs : 3 weeks; Over Rs. 5 lakhs: BM power: 4 weeks; HO/ZO/RO power: 6-7 weeks; For SSI upto 2 lakhs: 2 weeks.

INTEREST RATES
The rates of interest are decided by the risk rating of the borrowing concern. It is normally done by the banks rating by itself for credit limit of and upto Rs. 10crore. Over and above this limit, the risk rating is done by Indian Credit Rating Agency (ICRA). The rating of the borrower deciding the interest rate now days is primarily done through the Credit Rating Modules which are available for banks both online and offline. But the cases in which the modules are not applicable, the rating is done on the basis of 7 broad parameters. The said parameters and the maximum score assigned to each of these parameters is as under: PARAMETER (i) (ii) (iii) (iv) Current Ratio, Debt Equity Ratio, Submission of QMS and other financial data, Submission of data for review/renewal, 10 10 MAXIMUM SCORE 15 10

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(v) (vi) (vii)

Achievement of sales projections, Achievement of profit projections and Conduct of Account. TOTAL 10

10 35 ----100 -----

Conduct of Account parameter consists of three sub-parameters: (a) (b) (c) Regularity/irregularity of WC & TL, Compliance of terms and conditions of sanction and Value of the account. 15 10 10

In order to ascertain the level of compliance, each broad parameter has been further divided into four levels and assigned different scores. The details of the same are PARAMETERS 1. Current Ratio - 1.33 and above - Below 1.33 and upto 1.25 - Below 1.25 and upto 1.10 - Below 1.10 - 1.00 and above - Below 1.00 and upto 0.94 (1.00/1.33 x1.25 = 0.94) - Below 0.94 and upto 0.83 (1.00/1.33 x1.10 = 0.83) - Below 0.83 2. Debt Equity Ratio - 2.0 and below - Above 2.0 and upto 3.0 - Above 3.0 and upto 4.0 10 7 4 15 10 5 0 15 10 5 0 SCORE

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- Above 4.0 3. Submission of QMS & other Financial Data - Timely submission - Delayed submission upto 2 occasions - Delayed submission upto 4 occasions - Delayed submission above 4 occasions 4. Submission of Data for Review/Renewal of Accounts Timely submission Delayed submission upto 30 days Delayed submission beyond 30 days & upto 45 days 10

10 7 4 0

7 4 0

- Delayed submission beyond 45 days 5. Achievement of Sales Projections - 95% and above - Below 95% and upto 90% - Below 90% and upto 75% - Below 75% 6. Achievement of Profit Projections 7. 95% and above Below 95% and upto 90% Below 90% and upto 75% Below 75% 0

10 7 4

10 7 4 0

Conduct of Account a) Working Capital & Term Loans Accounts running regular or where irregularity occurs due to levy of interest, but the same is regularized upto 15 days from the due date 15

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Accounts continuously irregular for more than 15 days but upto 30 days

10 5 0

- Accounts continuously irregular for more than 30 days but upto 45 days - Accounts continuously irregular for more than 45 days b) Compliance of terms & conditions of sanction - All terms & conditions complied with - Non-compliance of terms & conditions, other than Security Creation,' due to the reasons beyond the control of the borrower - Non-compliance of terms & conditions, other than Security Creation' - Non-compliance of terms & conditions, including Security Creation' c) Value of the account Score to be assigned based on the ancillary, non fund based, group account business provided; interest/ income earned; deposits etc. RATING ON THE BASIS OF THE SCORE 10

4 0 0 - 10

The rating of the borrowers and the resultant interest rates shall be determined on the basis of the aggregate score obtained by them as follows: AGGREGATE SCORE 90 and above 80 to 89 70 to 79 Below 70 A+ A B RATING AA

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There may be instances when all parameters are not applicable to a particular borrower. In such cases for the purpose of calculating aggregate score, the marks obtained shall be grossed up to determine their rating as under: Marks obtained ------------------------------------------------------- X 100 Total marks of the scoring parameters

However, DGMs can permit reduction upto 2% in rate of interest thereby resulting in lower rates for the existing borrowers (e.g. SSI borrower having AA credit risk rating carries applicable rate of BPLR + 0.50% and DGMs can permit reduction upto 2% below the applicable rate i.e. upto BPLR minus 1.50% in case of existing borrower whereas now in case of new/takeover of account, he will be able to permit upto BPLR minus 1% as against BPLR minus 2% earlier). As such, there may be chances that after sanction of the limits within the reduced powers, DGMs may also exercise the powers as applicable in case of existing accounts in case of new/takeover of accounts. According to the Punjab National Bank, BPLR stands for Banks Prime Lending Rate which is 12.50% for Term Loan and Working Capital financing, if the loan is given for less than 3 years and if the loan is disbursed for more than 3 years than the BPLR is 13%. The Total Advances of Punjab National Bank (PNB) as on 31st March, 2007 were 95244 Crores and as on 31st March, 2008 are 118081 Crores.

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UNION BANK OF INDIA

The specific stipulations of Union Bank of India are -

COMPONENTS
1. Margin Money (a) Machinery (b) Construction 2. Security (a) Primary (b) Collateral 3. Repayment Period 4. Gestation Period 5. Rate of Interest 6. Accounts

TERM LOAN
25% 50% 100% Depends upon the case 7 yrs. (max.) 6 18 months BPLR + 3.5% + .05% Fixed

WORKING CAPITAL
25% 50% Hypothecation of stock Mortgage On demand ______ BPLR + Credit Rating [CR 3.5% (max.)] Running

POWER CHART
(Crores)

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LEVELS
Assistant Manager Branch Manager Senior Manager Chief Manager Assistant General Manager Deputy General Manager General Manager Executive Director Chief Managing Director

TERM LOAN
.03 .05 .10 .50 1.50 4.00

WC (Secured)
.03 .15 .40 1.50 4.00 10.00 25 75 100

WC ( Unsecured)
.01 .02 .06 .25 .75 2.00

INTEREST RATES

For financing of large enterprises above Rs.2 lacs to 5 Crores, the following Interest Chart is applicable

RATING
CR - 1 CR - 2 CR - 3 CR - 4 CR - 5 CR - 6 CR - 7 CR - 8

SCORE
> 90 86 90 81 85 76 80 71 75 61 70 51 - 60 50 & below

TERM LOAN
BPLR - 0.25% BPLR BPLR + 0.50% BPLR + 0.75% BPLR + 1.00% BPLR + 1.50% BPLR + 3.25% BPLR + 3.25%

WORKING CAPITAL
BPLR - 0.75% BPLR - 0.50% BPLR BPLR + 0.25% BPLR + 0.50% BPLR + 1.00% BPLR + 2.75% BPLR + 2.75%

TIME SCHEDULE
Normally in Union Bank of India, it takes around 8 9 weeks for the disbursement of the loan to the borrower of big projects. According to the Union Bank of India, BPLR stands for Banks Prime Lending Rate which is 12.75% for Term Loan and Working Capital financing at present.

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The Total Advances of Union Bank of India (UBI) is 75,000 crores till March 2008.

ORIENTAL BANK OF COMMERCE

The specific stipulations of Oriental Bank of Commerce are -

COMPONENTS
1. Margin Money 2. Gestation Period 3. Repayment Period 4. Accounts 5. Security (a) Primary (c) Collateral

TERM LOAN
25% 6 18 months 5 7 yrs. Fixed 100% 100% or without any security also.

WORKING CAPITAL
25% ____ On demand Running Hypothecation of stock Mortgage

INTEREST RATES

In Oriental Bank of Commerce (OBC), the Interest Rate is based upon the Credit Rating of the Borrower.

RATING

INTEREST RATE

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A++ A+ A B+ B C&D

PLR PLR + 0.5% PLR + 1.0% PLR + 2% PLR + 3% PLR + 3%

Interest Rate for Medium Enterprise AMOUNT

Upto Rs. 25 lacs

CREDIT RATING
A++ A+ A B+ B A++ A+ A B+ B A++ A+ A B+ B

INTEREST
PLR 1.50% PLR 1.25% PLR 1% PLR 0.75% PLR 0.50% PLR 1.25% PLR 1% PLR PLR + 1% PLR + 1.50% PLR 1.25% PLR 1% PLR PLR + 1.50% PLR + 2%

Above 25 lacs to 1 crore

Above 1 crore

TIME SCHEDULE
Loan amount upto Rs. 5 lacs 4 weeks

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(weeks of reporting of duly completed loan application) The loan amount above Rs. 5 lacs and advances * Fresh Loan * Renewal of credit limit * Sanction of adhoc credit facilities 45days 30 days 15 days

POWER CHART
(SANTIONING LIMITS) (Crores)

LEVELS
Asst. Manager Branch Manager Senior Manager Chief Manager AGM DGM GM ED CMD

SINGLE
0.15 0.25 0.75 1.50 7.50 10 25 45 60

GROUP
0.15 0.25 0.75 3 10 15 40 90 120

According to Oriental Bank of Commerce (OBC), the Small Scale Industries should have an investment of upto Rs.5 crores in Plant and Machinery. The Small and Medium Enterprises should have an investment of more than 5 crores in Plant and Machinery. The OBC have the Small and Medium Enterprise (SME) Bank Exposure Module for upto Rs.5 crore and the Credit Rating Management (CRM) Bank Exposure Module for more than Rs.5 crore. The CRM Module is given by National Institute of Business Management (NIBM). The OBC have the same Power Chart for both the Term Loan and the Working Capital as they do not have any demarcation between the two. According to the OBC, PLR stands for Prime Lending Rate which is 13.25% for both Term Loan and Working Capital financing at present. The bank can go for financing the Term Loan without any Collateral Security if the Primary Security if good enough. The Total Advances of Oriental Bank of Commerce (OBC) are 55334 lacs till March 2008. 66

STATE BANK OF INDIA

The specific stipulations of State Bank of India are -

COMPONENTS
1. Margin Money 2. Gestation Period 3. Repayment Period 4. Accounts 5. Security (a) Primary (b) Collateral

TERM LOAN
15% (below 25 lacs) 25% ( above 25 lacs) 6 months to 1 year 7 8 yrs. Fixed

WORKING CAPITAL
25% ____ On demand Running

100% 40%

Hypothecation of stock 40%

TIME SCHEDULE
Branch Pre Sanctioning Survey Data Collection Sanction Documentation Disbursement 2 days 2 days 3 days 2 days 2 days 3 days

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TOTAL

14 DAYS

The State Bank of India does the Credit Rating for the Financial risk, Management risk and Industry/Business Risk. The bank has the Interest Chart for the SIB (Small Scale Industries & Small Business Finance) and the C&I (Commerce and Institutions). The Government charges 0.50% less to SIBs as compared to C&I.

INTEREST RATES ( C&I )

CREDIT RATING
SB 1 &2 SB 3, 4 & 5 SB 6 & 7 SB 8 to 16

TERM LOAN
SBAR + 1. 25% SBAR + 2% SBAR + 2. 5% SBAR + 3%

CASH CREDIT
SBAR + 0.75% SBAR + 1. 5% SBAR + 2% SBAR + 2. 5%

INTEREST RATES ( SIB )

CREDIT RATING
SB 1 &2 SB 3, 4 & 5 SB 6 & 7 SB 8 to 16

TERM LOAN
SBAR + 0.75% SBAR + 1. 5% SBAR + 2% SBAR + 2. 5%

CASH CREDIT
SBAR + 0. 25% SBAR + 1% SBAR + 1. 5% SBAR + 2%

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POWER CHART
(SANTIONING LIMITS)

LEVELS
Asst. Manager Branch Manager Senior Manager Chief Manager

TERM LOAN
1 Lacs 5 Lacs 10 Lacs 1 Crores (Corporate) 1 Crores (Non Corporate)

CASH CREDIT

20 Lacs 1 Crores (Corporate) 40 Lacs (Non Corporate) 40 Lacs 3. 5 Crores 3. 5 Crores

Asst. General Manager (AGM) ZCC (Zonal Credit Commission) SMECCC (Small & Medium Enterprise City Cr. Center) CCC II (Circle Credit Commission) CCC I / MCCC (Mid Corporate Cr. Comm.) COC II (Credit Office Commission) COC I / COCC (Corporate Office Cr. Comm.)

1 Crores 2. 5 Crores (SB1/2) 2 Crores (Others) 2. 5 Crores (SB1/2) 2 Crores (Others) 9 Crores (SB1/2) 7.5 Crores (Others) 20 Crores (SB1/2) 15 Crores (Others) 55 Crores (SB1/2) 50 Crores (Others) 105 Crores (SB1/2) 100 Crores (Others)

6 Crores 10 Crores 25 Crores 13 Crores

According to the State Bank of India, SBAR stands for State Banks Advance Rating which is 12.75% (as on June 26, 2008) for Term Loan and Working Capital financing at present. Upto Rs.5 lacs, bank takes no security. When the loan is for more than Rs.5 lacs, bank takes 100% primary security. The Total Advances of State Bank of India (SBI) is 422181 crores till March 2008.

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CONCLUSION AND RECOMMENDATIONS

CONCLUSION

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The Banking system in India has undergone a major phase of metamorphosis in the recent past. There has been a paradigm shift in the concept, percept & outlook, and the banking sector became more complex and sophisticated. This transformation is marked by the several factors: Globalization, New technology and Market liberalization, greater competition, tighter profit margins and increasingly sophisticated customers. In the process of adjusting themselves to the new era of market economy and functional autonomy, the complexion of the banking sector has undergone a significant change in terms of products and services. The Project Evaluation strategies of banks have been fall out of this distinct paradigm shift from conventional banking, forcing banks to become one-stop financial supermarkets. Commercial Banks provides a full range of financial products and banking services to its target market customers, giving the customer a one stop window for all his/her banking requirements. The products are backed by world class service and delivered to the customers through the growing branch network. The programs have been designed keeping in mind needs of customers who seek distinct financial solutions and information. From the study undertaken by me on Project Evaluation for Term Loan and Working Capital Financing by different Commercial Banks, the following points appear to be of great importance (a) (b) The requirements of all the Commercial Banks are similar. The Project Evaluation Procedure of all the banks is also similar. However, there are certain points on which the Banks differ from each other 1) 2) 3) 4) The Margin money requirement of the different Banks varies from 15% to 50%. The rate of interest charged by the different banks also varies. The rating parameters of the banks are also different. The Gestation Period of the banks varies from 3 18 months.

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5) 6)

The Repayment Period of the banks varies from 3 10 years. The Security Norms of the banks varies from charging no security to charging 100% security.

7) 8)

The Time Schedule of the disbursement of loan by the banks varies from 2 9 weeks. The Power Chart (sanctioning limits) of the various authorities of the bank also varies.

RECOMMENDATIONS
After undertaking this study on Project Evaluation for Term Loan and Working Capital Financing by different Commercial Banks, it could be suggested that - all the parameters which vary from bank to bank as detailed above should be the same. This will facilitate the borrower in preparation of its project and getting the finances from Commercial Banks. Under the present circumstances the project may be considered viable by one bank and on the other hand it may not be approved by the other bank. If the parameters of all the banks are similar than the project would be considered viable or otherwise by all the banks at the same time.

BIBLIOGRAPHY

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Project Evaluation in the context Of Requirements of Indian Financial Institutions Project Evaluation

Research Committee of the Institute of Chartered Accountants of India (ICAI). Continuing Professional Education Directorate (ICAI). Journal of PNB. ISC Commerce (R.P. Maheshwari), Elementary Economics (A. Banerjee & D. Mazumdar).

Preparation of Loan Proposal Books considered

: :

Sites considered

Google.com; www.obcindia.com ; www.pnbindia.com ; www.ubi.com ; www.sbi.com .

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