Credit Appraisal for Term Loan and Working Capital Financing with special reference to Consortium Banking

SIP project report submitted in partial fulfillment of the requirements for the PGDM Program

By Saket Rathi 2010197

Under the Guidance of: Mr. P.C.Bansal, Chief Manager CD (O), PNB, New Delhi Dr. Gajavelli V S / Prof Anant Ram, IMT - Nagpur

Institute of Management Technology, Nagpur 2010 2012

Acknowledgement
I express my sincere gratitude to Mr. P.C. Bansal, Chief Manager, CD (O), Punjab National Bank, for guiding me through this project, sharing his knowledge and experience and correcting my mistakes. Without his guidance and valuable insights, this project would not have seen the light of day. I also am very thankful to Mr Somshekharan Nair, Assistant General Manager, CD (O), Punjab National Bank, for providing valuable insights on the Top Bottom approach and Bottom Top approach of fund disbursement. I would also like to express my sincere thanks to the library staff for extending their support and resources for completion of this project. A special thanks to my faculty guide, Prof. Dr. Gajavelli V.S. and Prof. Anant Ram who has been the chief facilitator of this project and helped me enhance my knowledge in the field of banking sector.

Regards Saket Rathi 2010197 IMT - Nagpur

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Certificate of Completion

It is to certify that Mr. Saket Rathi (2010197) has successfully completed Summer Project Study titled Credit Appraisal for Term Loan and Working Capital Financing with special reference to Consortium Banking under my guidance. It is his original work, and is fit for evaluation in partial fulfillment for the requirement of the Two Year Post Graduate Diploma in Management (Full-time).

P.C.Bansal Chief Manager, CD (O) Punjab National Bank 7, Bhikaji Cama Place, New Delhi.

Date: June 04, 2011

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1 Table of Contents
1 2 3 4 5 6 Executive Summary ......................................................................................................................... 6 Abbreviations .................................................................................................................................. 8 Introduction .................................................................................................................................. 10 Objectives of the study ................................................................................................................. 11 About Banking industry................................................................................................................. 12 About Punjab National Bank ......................................................................................................... 13 6.1 6.2 6.3 7 8 9 10 10.1 10.2 10.3 11 11.1 Organizational Structure ....................................................................................................... 14 Delivery Channels in PNB: ..................................................................................................... 15 Working of the Credit Administration Department (CD) at PNB .......................................... 15

Bank Lending An Overview ........................................................................................................ 16 Methodology................................................................................................................................. 20 Types of Lending ........................................................................................................................... 21 Term Loan ................................................................................................................................. 23 Features of Term Loan .......................................................................................................... 23 Term Loan Sanction Procedure ............................................................................................. 24 Pre-Sanction Inspection ........................................................................................................ 24 Working Capital......................................................................................................................... 26 Data required for assessment of working capital requirement ............................................ 27 Assessment of Fund Based Working Capital ................................................................. 28 Assessment of Non-Fund Based Working Capital Facility............................................. 30

11.1.1 11.1.2 12 13

Types of Financing..................................................................................................................... 39 Case Study: Term Loan - XYZ Energy Pvt. Ltd. ........................................................................... 41 POWER SECTOR SCENARIO IN INDIA: A PERSPECTIVE ...................................................... 41 Power Supply ................................................................................................................ 41 Peak Demand & Deficit Position ................................................................................... 41 FUTURE OUTLOOK ............................................................................................................ 44 POWER SCENARIO REGION WISE ................................................................................... 50 POWER SCENARIO IN UTTARAKHAND .............................................................................. 54 POWER TRADING IN INDIA................................................................................................ 54

13.1. 13.1.1. 13.1.2. 13.2. 13.3. 13.4. 13.5. 14 15 16

Conclusion and Recommendations........................................................................................... 94 Limitations of the study ............................................................................................................ 96 Scope for future improvements ................................................................................................ 97 4|Page

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Glossary ................................................................................................................................... 100 References .............................................................................................................................. 103

List of Figures
Figure 1: Operating Cycle ...................................................................................................................... 26 Figure 2: Issuing of Credit ..................................................................................................................... 31 Figure 3: Process of Negotiation ........................................................................................................... 32 Figure 4: Process of Settlement under L/C ........................................................................................... 32 Figure 6: Tier System of Approval of Loans at PNB............................................................................... 99

List of Tables
Table 1: Exposure norms for Commercial Banks in India ...................................................................... 19 Table 2: Operating Cycle ........................................................................................................................ 27 Table 3: Assessment of Limit of Letter of Credit .................................................................................... 33 Table 4: Assessment of Limit of Letter of Guarantee ............................................................................ 34 Table 5: The rating and score matrix ..................................................................................................... 37 Table 5-1: Region-wise power situation........................................................................................... 42 Table 5-2: Existing Installed Capacity (MW) as on 31st March, 2010 .......................................... 44 Table 5-3: Long-term Projected Energy Requirement ................................................................... 45 Table 5-4: Total Energy & Peak Load Availability Vs Installed Capacity ..................................... 47 Table 5-5: Projected Demand & Supply Position at the end of XI Five Year Plan ..................... 48 Table 5-6: Projected Demand & Supply Position at the end of XI Five Year Plan ..................... 48 Table 5-7: State-wise Demand-Supply Position for the Period 2009-10 ..................................... 52 Table 5-8: State-wise Demand Forecast for Northern India ......................................................... 52 Table 5-9: Likely capacity Addition During the XI Plan.................................................................. 53 Table 5-10: Demand-Supply Forecast for the Northern Region in 2011-12 ............................... 53 Table 5-11: Installed Capacity as on 31st March, 2010 ................................................................. 54

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1 Executive Summary
Banks play a critical role in the economic development of an economy. They are important not only for economic growth but also financial stability. In an economy banks has three major roles to play i.e. first, they fulfill the financing needs of the corporate sector. Second, they cater to the needs of the vast number of household savers, providing assured returns on their surplus funds while maintaining liquidity and safeguarding them from financial risks. Third, they act as a support for development of financial markets and its participants. This project titled Credit Appraisal for Term Loan and Working Capital Financing with special reference to Consortium Banking studies the credit appraisal methodology at Punjab National Bank for a proposal received either for term loan or working capital financing or both for Rs. 35 crore or more and where the borrower wants to avail the facility from a consortium of banks. Credit appraisal is the process of evaluating a proposals worthiness of bein g provided with the type of credit facility the borrower has asked for. This includes the evaluation of current financial status, appraisal of projected cash flows, fund flows, P&L and Balance sheets, purpose for which the facility is availed, technical and financial feasibility of the project, credit history, managerial competence and past experience, etc. in case for a term loan. As part of the appraisal process, credit rating is done for the proposal and is conducted either by the bank itself or is get done by approves external agencies. The purpose of this project is to explain, in a brief and general way, the manner in which risks are approached by financiers in a project finance transaction. Such risk minimization lies at the heart of project finance. Efficient management of credit portfolio is of utmost importance as it has a tremendous impact on the Banks assets quality & profitability. The ongoing financial reforms have no doubt provided unparallel opportunities to banks for growth, but have simultaneously exposed them to various risks, which need to be effectively managed. The concept of Credit Management is undergoing radical changes. Credit Risk in all exposures calls for precise measuring and monitoring for taking considered credit decisions with suitable risk mitigants, risk premium, etc. Credit portfolio should be well diversified in various promising sectors with a cautious approach to be adopted in risky segments. Also, lending continues to be a primary function in banking. In the liberalized Indian economy, clientele have a wide choice. External Commercial Borrowings and the domestic capital markets
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compete with banks. In another dimension, retail lending- both personal advances and SME advances- competes with corporate lending for funds and for human resources. But lending by nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be competitive without compromising on the basic integrity of lending. The quality of the Bank s credit portfolio has a direct and deep impact on the Banks profitability. The study has been conducted with the purpose of getting in-depth knowledge about the credit appraisal and credit risk management procedure in the organization for the above said first two purposes.

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2 Abbreviations
AGM BG CC CMD CO CRMD CCA CD CARD CASA CRMC DSCR DER DTL DPG DTA BD ED FACR FB GM HO IRMD LCB LC Assistant General Manager Bank Guarantee Cash Credit Chairman and Managing Director Circle Office Circle Risk Management Department Core Current Assets Credit Administration Department Credit Audit Review Division Current Account/Savings Account Credit Risk Management Committee Debt Service Coverage Ratio Debt-Equity Ratio Deferred Tax Liability Deferred Payment Guarantee Deferred Tax Liability Discount of Bills Executive Director Fixed Asset Coverage Ratio Fund Based General Manager Head Office Integrated Risk Management Division Large Corporate Branch Letter of Credit
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LOC MC MPBF MCB NWC NFB PMS PF PNB RBI RMC RMD TEV TL WC CO

Letter of Credit Management Committee Maximum permissible Bank Finance Mid Corporate Branch Net Working Capital Non Fund Based Preventive Monitoring System Provident Fund Punjab National Bank Reserve Bank of India Risk Management Committee Risk Management Division Techno-Economic Valuation Term Loan Working Capital Circle Office

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3 Introduction
Banks are an important cog in the wheel of economic development. One of their main functions is to make available funds, to enterprises / persons which are short of funds, at reasonable cost. The major source of income for banks is interest earned on loans and advances disbursed. To disburse these loans and advances, funds are mobilized by bank through various sources like small savings from numerous account holders, capital contribution etc. (stake holders) and credit creation. Banks stand in a very delicate situation where it has to maximize returns on these funds but at the same time maintain quality of their advances. A bank is approached by many for funds for various uses and it may approach many for availing funds from it. The bank ascertains credit worthiness of project and borrower in order to find eligible borrowers to whom it would like to disburse funds. To ascertain credit worthiness of project and borrower a comprehensive evaluation is done on various parameters for example: past financials, techno economic viability of the project, management competence, future cash and fund flows, actual requirements, etc. This evaluation process is known as credit appraisal. Credit appraisal is one of the steps through which banks safeguard interest of its stake holders. Funds are required for various purposes, at various intervals and thus there are different ways of disbursing funds. The broad objective of credit appraisal is to ascertain the worthiness of the borrower but various methodologies are used for appraising different methods of fund disbursement. The current project is divided in three parts. First part explains about the credit appraisal process for term loan requirements for setting up a project. Second part deals with the credit requirements arising after completion of the project (working capital requirements). The third part deals in different banking arrangements under which a borrower can avail credit facilities and a comparative analysis of the same is done.

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4 Objectives of the study

The primary objective of this study is to ascertain in depth, the process used by PNB for appraisal of Term Loan and / or of Working capital requirements of the borrowers and various criterias on which such appraisal is done before sanctioning of loans. The study intends to look into the intricacies of term loan including risk mitigation for different inherent risks in extending working capital advances to diversified industries. The study involves understanding of usage of various projections and financial techniques for term loan like fund flow / cash flow, profitability schedules, DSCR, sensitivity analysis, Break Even Analysis, rate of return on the basis of various calculation techniques, etc., in arriving at a decision. The study also looks into various ways of ascertaining Working Capital Requirements of a borrower and various ways of disbursing it. Another objective of this project is to study different arrangements under which a borrower can avail funds from PNB and present a comparative analysis of the same.

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5 About Banking industry

The roots of the modern banking industry can be traced from the fourteenth century in medieval Europe. Banking in India originated in the last deCDes of the 18th century. Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, EFT, POS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers. The bank profits from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. Profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. Banks have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.

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6 About Punjab National Bank

The idea of a swadeshi bank with Indian capital and Indian management representing all sections of the Indian community gave birth to Punjab National Bank on May 23, 1894. It was formed with an authorized capital of Rs 2 Lac and started its commercial operations with working capital of Rs 20 thousand on April 12, 1895 in Lahore, Punjab province, now in Pakistan. The bank withstood turbulent economic times of 1913, when 78 other banks failed. Due to its good governance it sailed through various economic crisis during 1926 to 1936 and partition of India and Pakistan. The registered office of the bank was transferred from Lahore to Delhi on June 20, 1947. During partition The Bank was forced to close 92 offices in West Pakistan constituting 33 percent of the total number and having 40% of the total deposits. The Bank, however, continued to maintain a few caretaker branches. The Bank then embarked on its task of rehabilitating the displaced account holders. The migrants from Pakistan were repaid their deposits based upon whatever evidence they could produce. Such gestures cemented their trusts in the bank and PNB became a symbol of Trust and a name you can bank upon. It is ranked as one of India's top service brands. PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card, debit card; bullion business; life and non-life insurance; Gold coins & asset management business, etc. Financial Performance (2010-2011) Total business of the bank crossed Rs.5.55 lakh crore.Net Interest Income (NII) increased by 39.3% while Net Interest Margin (NIM) improved to 3.96%. Net Profit increased by 13.5% to reach Rs.4433 crore. Operating Profit was Rs.9056 crore, 23.6% up from last year. PNB continues to be among leading banks amongst nationalized banks in net profit, operating margins, total business, deposits, advances, CASA deposits and customer base. PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its IT strategy follows the Business strategy so as to arrive at Best Fit. The Bank has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution (CBS) since Dec08, thus covering 100% of its business and providing Anytime Anywhere banking facility to all customers including customers of more than 3000 rural & semi urban
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branches. Towards developing a cost effective alternative channels of delivery, the Bank with more than 3700 ATMs has the largest ATM network amongst Nationalized Banks. Bank continues its selective foray in international markets with presence in 9 countries, with 2 branches at Hongkong, 1 each at Kabul and Dubai; representative offices at Almaty, Dubai, Shanghai and Oslo; a wholly owned subsidiary in UK; a joint venture with Everest Bank Ltd. Nepal and a JV banking subsidiary DRUK PNB Bank Ltd. in Bhutan. Bank is pursuing upgradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney, Australia and taking controlling stake in JSC Dana Bank in Kazakhastan.

6.1 Organizational Structure

The bank has its corporate office at New Delhi and 58 circle office and 4267 branches. The delegation of power is decentralized up to the branch level for quick decision making. The topdown approach at PNB can be classified as follows:Board of directors

CMD

ED

GM (Credit)

GM ( NPA & Weak Account)

GM (Retail & lending)

GM (Treasury )

GM (IRMD)

GM (Deposits)

GM (Audit)

.......

DGM

DGM

DGM

......
......

AGM

AGM

AGM

Funtional Head

Figure 1 Organizational Structure at PNB

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Delivery Channels in PNB:

Corporate Office (HO)

Circle Office (CO)

Circle Office (CO)

Circle office (CO)

Branch Office (BO)

Large Corporate Branches

Mid Corporate Branches

Retail Hub

Specialized branches e.g. Agriculture

Figure 2 Delivery channels in PNB

6.2 Working of the Credit Division (CD) at PNB

CD looks after all proposals for all types of loans which fall within the purview of GMsHO/ED/CMD/MC/Board. A credit appraisal goes through different level of sanctioning to enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of management for action. The bank has introduced committee system in credit sanction process where in every loan proposal falling within vested power is discussed in credit sanction committee. Such committees have been formed both at head office and Zonal levels. The CD is assisted by the Risk Management Department (RMD), Technical Department and the Industry desk for risk analysis and technical feasibility of credit proposals. Credit Risk Management structure at PNB involves: Risk Management division Zonal Risk Management department (ZRMD) Regional Risk Management Department (RRMD) Risk Management committee (RMC) Credit risk management committee (CRMC)

Credit Audit Review Division (CARD)

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7 Bank Lending An Overview

Banks have different ways of extending credit to different types of borrowers for a wide variety of purposes. Lending can be for long term or short term. Long term Principles of Lending and Loan Policy
Principles of Lending

Banks lend from the funds mobilized as deposits from public. A bank acts in the capacity of a custodian of these funds and is responsible for its safety, security but at the same time is also required to deliver justified and assured returns over these borrowings. following aspects before lending: Safety: the first rule of lending is to ascertain the safety of the advances made. This means assessment of the repaying capacity of the borrower and purpose of borrowing. It also includes assessment of contingencies and a fallback plan for the same. This is ensured by taking adequate security (readily marketable and free of encumbrances) by way of guarantee, collateral, charges on property, etc. Liquidity: The second rule of lending is to ascertain how and when the repayment of the advances made would happen and that the repayment is timely. This is to ascertain availability of funds in future and make sure that the funds are not locked up for a long period. This helps in maintaining balance between deposits and advances and to meet depositors obligation. Profitability: The third rule of lending is to lend at higher rate of interest than borrowing rate. This is called as interest spread / margin. One has to strike a balance between profitability and safety of funds. Interest rates must be charged competitively but at the same time spread should be adequate. Risk diversion: An old saying says never put all your eggs in one basket. A lender must lend to a diversified customer base. Diversification must be made in terms of geographical locations, borrowers, industry, sector etc. It is done so as to mitigate adverse financial effects of a business cycle, catastrophe, chain effect etc. Loan Policy A bank looks into

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Banks are basically a lending institution. Its major chunk of revenue is earned from interest on advances. Each bank has its own credit policy, based on the principles of lending, which outlines lending guidelines and establishes operating procedures in all aspects of credit management. The policy is drafted by the Credit Policy Committee and is approved by the banks board of directors. The credit policy sets standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, portfolio management, loan review mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's lending strategy (both at the macro level and individual borrower level) and have to be in conformity with RBI guidelines. The loan policy typically lays down lending guidelines in the following areas: Credit-deposit ratio: Banks are under an obligation to maintain certain statutory reserves like cash reserve ratio (CRR to be kept as cash or cash equivalents), statutory liquidity ratio (SLR to be kept in cash or cash equivalents and prescribed securities), etc. These reserves are maintained for asset liability management (ALM) and are calculated on the basis of demand and time liabilities (DTL). Banks may further invest in non prescribed securities for the matter of risk diversion. Funds left after providing for these reserves are available for lending. The CPC decides upon the quantum of credit that can be granted by the bank as a percentage of deposits. Targeted portfolio mix: CPC has to strike balance between risk and return. It sets the guiding principles in choosing preferred areas of lending and sectors to avoid. It also takes into account government policies of lending to preferred / avoidable sectors. The bank assesses sectors for future growth and profitability and accordingly decides its exposure limits. Hurdle ratings: A borrower is assessed on various risk aspects to find out its suitability for extending credit to it. Banks uses a comprehensive risk rating system on which each borrower gets a score depending upon its strength and weaknesses. This acts as a single point reference and uses a standardized approach for variety of borrowers. Ratings reveal the overall risk of lending. For new borrowers, a bank usually lays down guidelines regarding minimum rating to be achieved by the borrower to become eligible for the loan. This is also known as the 'hurdle rating' criterion to be achieved by a new borrower. Loan pricing: Risk-return trade-off is a fundamental aspect of risk management. Borrowers with weak financial position and, hence, placed in higher risk category are provided credit facilities at a
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higher price (that is, at higher interest). The higher the credit risk of a borrower the higher would be his cost of borrowing. To price credit risks, bank devises appropriate systems, which usually allow flexibility for revising the price (risk premium) due to changes in rating. In other words, if the risk rating of a borrower deteriorates, his cost of borrowing should rise and vice versa. At the macro level, loan pricing for a bank is dependent upon a number of its cost factors such as cost of raising resources, cost of administration and overheads, cost of reserve assets like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan pricing is also dependent upon competition. Collateral security: As part of a prudent lending policy, bank usually advances loans against some security. The loan policy provides guidelines for this. In the case of term loans and working capital assets, bank takes as 'primary security' the property or goods against which loans are granted. In addition to this, banks often ask for additional security or 'collateral security' in the form of both physical and financial assets to further bind the borrower. This reduces the risk for the bank. Sometimes, loans are extended as 'clean loans' for which only personal guarantee of the borrower is taken Role of RBI The credit policy of a bank should be conformant with RBI guidelines; some of the important guidelines of the RBI relating to bank credit are discussed below. Directed credit stipulations The RBI lays down guidelines regarding minimum advances to be made for priority sector advances, export credit finance, etc. These guidelines need to be kept in mind while formulating credit policies for the Bank. Capital adequacy If a bank creates assets-loans or investment-they are required to be backed up by bank capital; the amount of capital they have to be backed up by depends on the risk of individual assets that the bank acquires. The riskier the asset, the larger would be the capital it has to be backed up by. This is so, because bank capital provides a cushion against unexpected losses of banks and riskier assets would require larger amounts of capital to act as cushion. Credit Exposure Limits
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As a prudential measure aimed at better risk management and avoidance of concentration of credit risks, the Reserve Bank has fixed limits on bank exposure to the capital market as well as to individual and group borrowers with reference to a bank's capital. Limits on inter-bank exposures have also been placed. Banks are further encouraged to place internal caps on their sectoral exposures, their exposure to commercial real estate and to unsecured exposures.
Table 1: Exposure norms for Commercial Banks in India Exposure to Limit 1. Single Borrower 15% of capital fund (Additional 5% on infrastructure exposure) 2. Group Borrower 40% of capital fund (Additional 10% on infrastructure exposure) 3. NBFC 10% of capital fund 4. NBFC AFC 15% of capital fund 5. Indian Joint Venture/ Wholly owned 20% of capital fund subsidiaries abroad/ Overseas step down subsidiaries of Indian corporate 6. Capital Market Exposure (a) Banks holding of shares in any company The lesser of 30% of paid-up share capital of the company or 30% of the paid-up capital of the banks (b) Banks aggregate exposure to capital market 40% of its net worth (solo basis) (c) Banks aggregate exposure to capital market 40% of its consolidated net worth (group basis) (d) Banks direct exposure to capital market (solo 20% of its net worth basis) (e) Banks direct exposure to capital market (group 20% of its consolidated net worth basis) 7. Gross holding of capital among banks/ FIs 10% of capital fund Source: Financial Stability Report, RBI, March 2010

Review of Operations RBI has a policy of reviewing operations of the bank. It conducts inspection every 3 years in Branch Offices and every year at Head office of a Bank. Credit control
RBI through its various mechanisms like policy rates, etc. controls the availability of credit in the economy. It intervenes in the market by changing key policy rates when it finds that there is shortage / excess credit availability.

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8 Methodology
In order to learn and observe the practical applicability and feasibility of various theories and concepts, the following sources are being used: Discussions with the project guide and staff members. Research papers and documents prepared by the bank and its related officials. Banks Credit policy and related circulars and guidelines issued by the bank. Study of proposals and manuals. Website of Punjab national bank and other net sources.

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9 Types of Lending
Lending is broadly classified into two broad categories: fund based lending and non-fund based lending. Fund Based Lending: This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security. The loan can be to provide for financing capital goods and/or working capital requirements. Non-fund Based Lending: In this type of facility, the Bank makes no funds outlay. However, such arrangements may be converted to fund-based advances if the client fails to fulfill the terms of his contract with the counterparty. Such facilities are known as contingent liabilities of the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of nonfund based credit. Let us explain with an example how guarantees work. A company takes a term loan from Bank A and obtains a guarantee from Bank B for its loan from Bank A, for which he pays a fee. By issuing a bank guarantee, the guarantor bank (Bank B) undertakes to repay Bank A, if the company fails to meet its primary responsibility of repaying Bank A.

Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are established in accordance with the process approved by the board of directors. The limits on working capital facilities are primarily secured by inventories and receivables (chargeable current assets). Working capital finance consists mainly of cash credit facilities, short term loan and bill discounting. Under the cash credit facility, a line of credit is provided up to a pre-established amount based on the borrower's projected level of sales inventories, receivables and cash deficits. Up to this pre-established amount, disbursements are made based on the actual level of inventories and receivables. Here the borrower is expected to buy inventory on payments and, thereafter, seek reimbursement from the Bank. In reality, this may not happen. The facility is generally given for a period of up to 12 months and is extended after a review of the credit limit. For clients facing difficulties, the review may be made after a shorter period. One problem faced by banks while extending cash credit facilities, is that customers can draw up to a maximum level or the approved credit limit, but may decide not to. Because of this, liquidity management becomes difficult for a bank in the case of cash credit facility. RBI has been trying to mitigate this problem by encouraging the Indian corporate sector to avail of working capital finance in two ways: a short-term loan component and a cash credit component. The loan component would be fully drawn, while the cash credit component would vary depending upon the borrower's requirements. According to RBI guidelines, in the case of borrowers enjoying working capital credit limits of Rs. 10 crores and above from the banking system, the loan component should normally be 80%
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and cash credit component 20 %. Banks, however, have the freedom to change the composition of working capital finance by increasing the cash credit component beyond 20% or reducing it below 20 %, as the case may be, if they so desire. Bill discounting facility involves the financing of short-term trade receivables through negotiable instruments. These negotiable instruments can then be discounted with other banks, if required, providing financing banks with liquidity.

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10 Term Loan
Term loans also referred as term finance; represent a source of debt finance which is utilized for establishing or expanding a manufacturing unit by the acquisition of fixed assets. These are generally repayable in more than one year but less than 10 years. Such loans are raised for expansion, diversification and modernization of the enterprise. The primary sources of such loans are financial institutions. These are repayable in fixed monthly, quarterly or half yearly installments and secured by term loan agreements between the borrower and the bank. Term loans are generally granted to finance capital expenditure, i.e. acquisition of land, building and plant & machinery, required for setting up a new industrial undertaking or expansion/ diversification of an existing one and also for acquisition of movable fixed assets. Term loans are also given for modernization, renovation etc. to improve the product quality or increase the productivity and profitability. Term loans are normally granted for periods varying from 3-7 years and in exceptional cases beyond 7 years. The exact period for which particular loan is sanctioned depends on the circumstances of the case. The basic difference between short term facilities and tem loans is that short term facilities are granted to meet the gap in the working capital and are intended to be liquidated by realization of assets, whereas term loans are given for acquisition of fixed assets and have to be liquidated from the surplus cash generated out of earning. There are not intended to be paid out of the sale of the fixed assets given as security for the loan. This makes it necessary to adopt a different approach in examining the application of the borrowers for term credit.

10.1 Features of Term Loan

Following are the different features of term loans: Currency: Financial institutions give rupee term loans as well as foreign currency term loans. Security: All loans provided by financial institutions, along with interest, liquidated damages, commitment charges, expenses etc. are secured by way of: (a) First equitable mortgage of all immovable properties of the borrower, both present and future; and (b) Hypothecation of all movable properties of the borrower , both present and future, subject to prior charges in favor of commercial banks for obtaining working capital advance in the normal course of business
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Interest payment and principal repayment: These are definite obligations which are payable irrespective of the financial situation of the firm. Restrictive Covenants: FIs impose restrictive conditions on the borrowers depending upon the nature of the project and financial situation of the borrower.

10.2 Term Loan Sanction Procedure

The procedure associated with a term loan sanction involves the following steps: Submission of loan application: The borrower submits an application form which seeks comprehensive information about the project such as: (a) Promoters background (b) Particulars of industrial concern (c) Cost of project (d) Means of financing (e) Marketing and selling arrangements (f) Economic considerations Initial processing of loan application: The loan application is reviewed to ascertain whether it is complete for processing, if it is incomplete then it is sent back to the borrower for resubmission with all relevant information. Appraisal of the proposed project: The detailed appraisal of the project covers the marketing, technical, managerial, and economic aspects. Issue of letter of sanction: If the project is accepted, a financial letter of sanction is approved to the borrower. Acceptance of terms and conditions by the borrowing unit: On receiving the letter of sanction the borrowing unit convenes its board meeting at which the terms and conditions associated with the letter of sanction are accepted and appropriate resolution is passed to the effect. Execution of loan Agreement: After receiving the letter of acceptance from the borrowers. The FI sends the draft of the agreement to the borrower to be executed by the authorized person Creation of Security: The term loans and the DPG assistance provided by the financial institutions are secured through the first mortgage, by way of deposit of title deeds, of immovable properties and hypothecation of movable properties. Disbursement of loan: Periodically, the borrower is required to submit the information on the physical progress of the projects, financial status of the projects, arrangements made for financing the projects, contribution made by the promoters, projected fund flow statement, compliance with various statutory requirements and fulfillment of disbursement conditions. Monitoring: Monitoring of the project is done at the implementation stage as well at the operational stage.

10.3 Pre-Sanction Inspection

Once the incumbent is satisfied with the information furnished by the borrower that the proposal for the term loan is worth consideration, he should inspect the factory or place of business to check the authenticity of the information supplied. Inspection can bring into
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light certain factors which are not revealed by mere study of financial statements. Even in case of new unit, inspection of factory site is necessary. The assets of the concern which are proposed to be charged should be verified physically and the title of the borrowers on the same should be examined. The books of the accounts and other relevant papers should be verified to see if all liabilities, claims, contingencies, disputes have been admitted by the concern. Such an inspection can focus on the unfavorable aspects or weaknesses of the unit and can help to a large extent in making an assessment of the proposal.

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11

Working Capital

Working capital is defined as the total amount of funds required for day to day operation of a unit. It can also be referred as the current asset holding of an enterprise. It is often classified as gross working capital (GWC) and net working capital (NWC). Working capital finance is utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). This is in contrast to term loans which are utilized for establishing or expanding a manufacturing unit by the acquisition of fixed assets. Gross Working Capital refers to the fund required for financing total current assets of a business unit. Net working capital no other hand is the difference between current assets and current liabilities (including bank borrowings) that is nothing but the surplus of long term sources over long term uses as such it is known as the liquid surplus available in a unit that can be either positive or negative. A positive NWC is always desirable because of the fact that it provides not only margin for the working capital requirement but also improves ability of the borrower to meet its short term liabilities. Operating Cycle Method Every business unit has an operating cycle which indicates that a unit procures raw material from its funds, convert into stock in process which again is converted into finished goods which can be sold for cash and thus transformed into fund. Alternatively it can be sold on credit and on realization thereof gets converted into fund. Thus every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added, after the lapse of a specific period of time. This length of time is known as operating cycle or working capital cycle.
Figure 3: Operating Cycle

AR converted to cash Cash Account Recievabl e

Cash

Sales Order

Goods and Services converted to Account Receivables

Deliver Goods or Service

Produce Goods or Service

Cash converted to Prepaid Expenses nd Inventory 26 | P a g e

In order to keep the operating cycle going on, certain level of current assets are always required, the total of which gives the amount of total working capital required. Thus total working capital can be obtained by assessing the level of various components of current assets. The operating cycle is therefore measured in terms of days of average inventory held for every major category of working capital components.
Table 2: Operating Cycle

Stages Raw Material

Time Holding Period

II

Stock in Process

Time taken in converting RM into FG Holding period of FG before being sold

III

Finished Goods

IV

Receivables

Credit allowed to buyer

Value Value of RM consumed during the period RM + Manufacturing expenses during the period (cost of production) RM + mfg. exp. + adm. Overheads for the period (cost of sales) RM + mfg. exp .+ adm. Exp. + profit for the period (Sales)

11.1 Data required for assessment of working capital requirement

For assessing the working capital needs of an organization, bank follows CMA (Credit Monitoring Arrangement). It is required by banks and other financial institutions, to introspect or study the minutes of balance sheet and other financial statements of a body corporate for financing their projects. In other words it is the detailed explanation of the balance sheet and other financial ratios of the firm or any other corporate. The CMA includes analysis of following six documents: i) ii) iii) iv) v) vi) Existing and proposed banking arrangements Operating statement Analysis of Balance Sheet Buildup of current assets and current liabilities Calculation of MPBF (Maximum Permissible Bank Finance) Fund Flow Statement

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11.1.1 Assessment of Fund Based Working Capital While public sector banks in India are nominally independent entities they are subject to intense regulation by the Reserve Bank of India (RBI). This includes rules about how much the bank should lend to individual borrowersthe so-called maximum permissible bank finance. There are multiple methods as suggested by different committees from time to time. We have discussed following recommendations by three committees: 1. Simplified Turnover Method (Nayak Committee) This method of assessing working capital requirement of a firm is given by Nayak Committee. The committee headed by Mr. P.R. Nayak examined the adequacy of institutional credit to SSI sector and gave its recommendations which are as under: a. Under this method, bank credit for working capital purposes for borrowers requiring fund based limits up to Rs. 5 crore for SSI borrowers and Rs. 2 crore in case of other borrowers, may be assessed at minimum of 25% of the projected annual turnover of which should be provided by the borrower (i.e. minimum margin of 5% of the annual turnover to be provided by the borrower) and balance 4/5th (i.e. 20% of the annual turnover) can be extended by way of working capital finance. b. The projected turnover or output value may be interpreted as projected gross sales which will include excise duty also. c. Since the bank finance is only intended to support the need based requirement of a borrower, if the available NWC (net long term surplus funds) is more than 5%of the turnover the former should be reckoned for assessing the extent of bank finance. 2. Maximum Permissible Banking Finance Method (Tandon Committee ) A committee headed by Mr. P.L. Tandon, ex-chairman of PNB, was constituted with view to suggest improvement in the existing ash credit system. It submitted its report on guidelines for follow up of credit in August 1974, suggesting three methods of lending. These are as follows: 1st Method of Lending: 75% of the working capital gap (WCG = Total current assets Total current liabilities other than bank borrowings) is financed by the bank and the balance 25% of the WCG considered as margin is to come out of long term source i.e. owned funds and term borrowings. This will give rise to a minimum current ratio of 1.17:1. The difference of 0.17 (= 1.17 1) represents the borrowers margin which is known as Net Working Capital (NWC). 2nd Method of Lending: Bank will finance maximum up to 75% of total current assets (TCA) and borrower has to provide a minimum of 25% of total current assets as the margin out of long term sources. This will give a minimum current ratio of 1.33:1. 3rd Method of Lending: This is same as 2nd method of lending, but excluding core current assets from total assets and the core current assets are financed out of long term funds of the company. The term core current assets refers to the absolute minimum level of

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investment in current assets, which is required at all times to carry out minimum level of business activity. The current ratio is further improved to 1.79:1. Examples:
Current Liabilities Creditors for purchase Other current liability Bank Borrowings Current Assets 100 Raw material 50 Stock in process 200 Finished Goods Receivables Other current assets 350

200 20 90 50 10 370

1st Method Total CA Less Total CL Bank Borrowing WCG 25% of WCG from long term sources 370 Total CA

2nd Method 370 Total CA

3rd Method 370 95 275 69 150 56 1.79:1 Less Core CA from long 92 term sources 278 Less 25% from long 150 term sources Less Total CL - Bank Borrowings 128 MPBF 1.33:1 Current Ratio

150 Less 25% of CA 220 Less Total CL 55 Bank Borrowings

MPBF Current Ratio

165 MPBF 1.17:1 Current Ratio

3. Chore Committee The R.B.I constituted, in April 1979, a working group under the chairmanship of Sri K.B Chore, to review the system of cash credit with the particular reference to the gap between sanctioned limit and the extent of their utilization. It was also asked to suggest alternative type of credit facilities which would ensure greater credit discipline and enable the banks to relate the credit limits to increase in output or other productive activities. The committee recommended assessment of working capital requirements have to be mandatorily assessed based on 2nd method of lending suggested by Tandon Committee except for sick/Units under rehabilitation. As such, the banks are presently assessing need based WC financing under 2nd Method of lending. 4. CASH BUDGET SYSTEM In case of tea, sugar, construction companies, film industries and service sector requirement of finance may be at the peak during certain months while the sale proceeds may be realised throughout the year to repay the outstanding in the account. Therefore, credit limits are fixed on the basis of projected monthly cash budgets to be received before beginning of the season.
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Branches should follow the procedure/guidelines issued from time to time through various Circulars for financing tea, sugar, construction companies, film industries and service sector. 11.1.2 Assessment of Non-Fund Based Working Capital Facility The credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities'. These facilities are divided in three broad categories as under: Letters of credit Guarantees Co-acceptance of-bills/deferred payment guarantees.

Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other fund based credit limits. Facilities for co-acceptance of bills/deferred payment guarantees are generally required for acquiring plant and machinery and may, technically be taken as a substitute for term loan which would require detailed appraisal of the borrower's needs and financial position in the same manner as in case of any other term loan proposal. Letter of Credit: Letter of credit (LC) is a method of settlement of payment of a trade transaction and is widely used to finance purchase of raw material, machinery etc. It contains a written undertaking by the bank on behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfillment of all the terms and conditions incorporated therein. Letters of credit thus offers both parties to a trade transaction a degree of security. The seller can look forward to the issuing bank for payment instead of relying on the ability and willingness of the buyer to pay. Parties to a Letter of Credit 1. Applicant/Opener: It is generally the buyer of the goods who gets the letter of credit issued by his banker in favour of the seller. The person on whose behalf and under whose instructions the letter of credit is issued is known as applicant/ opener of the credit. 2. Opening bank/issuing bank: The bank issuing the letter of credit. 3. Beneficiary: The seller of goods in whose favour the letter of credit is issued. 4. Advising Bank: Notification regarding issuing of letter of credit may be directly sent to the beneficiary by the opening bank. It is, however, customary to advise the letter of credit through sane other bank operating at the place/country of seller. The bank which advises the letter of credit to the beneficiary is known as advising bank. 5. Confirming Bank: A letter of credit substitutes the credit worthiness of the buyer with that of the issuing bank. It may sometimes happen especially in import trade that the issuing
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bank itself is not widely known in the exporter's country and exporter is not prepared to rely on the L/C opened by that bank. In such cases the opening bank may request other bank usually in the country of exporter to add its confirmation which amounts to an additional undertaking being given by that bank to the beneficiary. The bank adding its confirmation is known as confirming bank. The confirming bank has the same liabilities towards the beneficiary as that of opening bank. 6. Negotiating Bank: The bank that negotiates the documents drawn under letter of credit and makes payment to beneficiary. The function of advising bank, confirming bank and negotiating bank may be undertaken by a single bank only. Letter of Credit Mechanism Any business/industrial venture will involve purchase transactions relating to machine/other capital goods and raw material etc., and also sale transactions relating to its products. The customer may be an applicant for a letter of credit for his purchases while be the beneficiary under other letter of credit for his sale transaction. The complete mechanism of a letter of credit may be divided in three parts as under: 1. Issuing of Credit: Letter of credit is always issued by the buyer's bank (issuing bank) at the request and on behalf and in accordance with the instructions of the applicant. The letter of credit may either be advised directly or through some other bank. The advising bank is responsible for transmission of credit and verifying the authenticity of signature of issuing bank and is under no commitment to pay the seller. The advising bank may also be required to add confirmation and in that case will assume all the liabilities of issuing bank in relation to the beneficiary as stated already. Refer to diagram given below for complete process of issuance of credit.
Figure 4: Issuing of Credit

Buyer Applicant

Seller Beneficiary

Sales Contract

(1) (2)
Buyers Bank Advising Issuance of Letter of Bank Credit Issuing Bank

(4)

(3)

Confirming Bank 31 | P a g e

2. Negotiation of Documents by beneficiary: On receipt of letter of credit, the beneficiary shall arrange to supply the goods as per the terms of L/C and draw necessary documents as required under L/C. The documents will then be presented to the negotiating bank for payment/acceptance as the case may be. The negotiating bank will make the payment to the beneficiary and obtain reimbursement from the opening bank in terms of credit. The entire process of negotiation is diagrammatically represented as under:
Buyer Applicant Payment to Beneficiary (7) Buyers Bank Supply of Goods (5) Seller

Beneficiary
Documents for Negotiation (6) Documents (8) Advising/ Confirming Bank

Issuing Bank

Reimbursement (9) Payment to Beneficiary (7)

Negotiating Bank

Figure 5: Process of Negotiation

3. Settlement of Bills Drawn under Letter of Credit by the opener: The last step involved in letter
of credit mechanism is retirement of documents received under L/C by the opener. On receipt of documents drawn under L/C, the opening bank is required to closely examine the documents to ensure compliance of the terms and conditions of credit and present the same to the opener for his scrutiny. The opener should then make payment to the opening bank and take delivery of documents so that delivery of goods can be obtained by him. This aspect of L/C transaction is represented as under:
Figure 6: Process of Settlement under L/C

Delivery of Goods (12)

Buyer

Applicant
Payment (11) Buyers Bank Documents (10)

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Issuing Bank

Types of Letter of Credit: Letter of credit may be divided in two broad categories as under: (i) Revocable letter of credit. This may be amended or cancelled without prior warning or notification to the beneficiary. Such letter of credit will not offer any protection and should not be accepted as beneficiary of credit. Irrevocable letter of credit. This cannot be amended or cancelled without the agreement of all parties thereto. This type of letter of credit is mainly in use and offers complete protection to the seller against subsequent development against his interest.

(ii)

Letter of credit may provide drawing of documents on following two bases: (i) Delivery against payment (DP) Sight: In this case documents are delivered against payment. The beneficiary is paid as soon as the paying bank or borrowers bank has determined that all necessary documents are in order. Delivery against acceptance (DA) Usance (time): In this case documents are delivered against acceptance. The borrower pays after certain due date of payment specified.

(ii)

Assessment of Limit of Letter of Credit:

Table 3: Assessment of Limit of Letter of Credit

Assessment of Limit of Letter of Credit Annual Raw Material Consumption Annual Raw Material Procurement through ILC/ FLC Monthly Consumption Usance Lead Time Total Time LC Time Required

A B C D E F=D+E G=F*C

Bank Guarantee

A contract of guarantee can be defined as a contract to perform the promise, or discharge the liability of a third person in case of his default. The contract of guarantee has three principal parties as under: o Principal debtor: The person who has to perform or discharge the liability and for whose default the guarantee is given. o Principal creditor: The person to whom the guarantee for due fulfilment of contract by principal debtor. Principal creditor is also sometimes referred to as beneficiary.
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o Guarantor or Surety: The person who gives the guarantee. Bank provides guarantee facilities to its customers who may require these facilities for various purposes. The guarantees may broadly be divided in two categories as under: o Financial guarantees: Guarantees to discharge financial obligations to the customers. o Performance guarantees: Guarantees for due performance of a contract by customers.
Table 4: Assessment of Limit of Letter of Guarantee

Assessment of Limit of Letter of Guarantee Outstanding Bank Guarantee as per audited balance sheet Add bank guarantee required during the period Less estimated maturity or cancellation of bank guarantee during the period Requirement of bank guarantee

A B C D=A+B-C

Bills Co-Acceptance: It is same as letter of credit. The difference is that the letter of credit is accepted by buyer as well by co-accepting bank. Deferred Payment Guarantee (DPG): A deferred payment guarantee is a contract under which a bank promises to pay the supplier the price of machinery supplied by him on deferred terms, in agreed installments with stipulated interest in the respective due dates, in case of default in payment thereof by the buyer. As far as the buyer of the plant and machinery is concerned, it serves the same purpose as term loan. The advantage to the buyer is that he is benefited to the extent of savings in interest charges accruing on account of opting equipment financing under installment payment system less the guarantee.

Risk Management Risk management is the identification, assessment and prioritization of risks followed by co-ordinate and economical application of resources to minimize, monitor and control the probability or impact of unfortunate events. The risk that a borrower might fail to meet its obligations towards the bank in accordance with the agreed terms and conditions, is the credit risk contracted during sanctioning of loan. It is the risk of default of on the part of borrower, which could be due to either inability or unwillingness to repay his debts. Factors determining credit risk: State of Economy Wide swing in commodity prices Trade restrictions Fluctuations in foreign exchange rates and interest rates Economic sanctions Government policies

Some company specific factors are:

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Management Expertise Company Policies Labour Relations

The internal factors within the bank, influencing credit risk for a bank are: Deficiencies in loan policies/ administration Absence of prudential concentration limits Inadequate defined lending limits for loan officers or credit committees Deficiencies and appraisal of borrowers financial position Excessive dependence on collateral without ascertaining its quality/ reliability Absence of loan review mechanism

The risk management philosophy & policy of the Bank is an embodiment of the Banks approach to understand measure and manage risk and aims at ensuring sustained growth of healthy asset portfolio. This would entail in reducing exposure in high risk areas, emphasizing more on the promising industries, optimizing the return by striking a balance between the risk and the return on assets and striving towards improving market share to maximize shareholders value. Following procedure is followed at PNB, HO for risk rating: The head office of the bank at Bhikaiji Cama place receives the proposals of various organizations demanding loans. They receive a copy of the companys financial results. The branches also send their rating after some initial screening to the head office for vetting. These branches obtain the data from the proposal and the discussions with other banks in the consortium. They can also contact the company for further clarifications The auditors report and notes to accounts serve as a useful guide. The past records of companys transactions with the bank (if any) are also considered. The officials at the HO study and check the financials and the subjective parameters. Then the final rating is done after making suitable amendments.

The credit risk rating tool has been developed with a view to provide a standard system for assigning a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is applicable to all large corporate borrower accounts availing total limits (fund based and non-fund based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore. The Bank has robust credit risk framework and has already placed credit risk rating models on central server based system PNB TRAC, which provides a scientific method for assessing credit risk rating of a client. Taking a step further during the year, the Bank has developed and placed on central server score based rating models in respect of retail banking. These processes have helped the Bank to achieve fast & accurate delivery of credit; bring uniformity in the system and facilitate storage of data & analysis thereof. The analysis also involves analyzing the projections for the future years. This credit risk rating captures risk factors under four areas:
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1. Financial evaluation (40%) 2. Business or industry evaluation (30%) 3. Management evaluation (20%) 4. Conduct of account (10%) Financial evaluation

Under this, various parameters are taken and based on the financial data scores are assigned during the risk rating process. The financial evaluation involves past financials classified based on industry comparison and absolute comparison. Following are some of the parameters, which have been explained in detail: A. Liquidity Parameter a. Current Ratio b. Debt Service Coverage Ratio B. Profitability Parameter a. Return on Investment C. Operating Efficiency Parameter D. Other Parameters a. Future risk expectations b. Cash flow adequacy c. Transparency in financial statements of the company d. Quality of the inventory e. Reliability of the debtors f. Quality of investment / loans and advances to other companies g. Trends in the financial performance over the past few years Business evaluation It involves the evaluation of the operating efficiency of the concerned company under which various factors are considered which is extremely important for risk rating purposes. These could be raw material/ cost of production or it could be credit period availed and allowed. All these factors help in judging the efficiency in operating the business. Market Position Evaluating the market position for the purpose of risk rating is extremely important to judge the competitive position of the company and analyzing the input related risk, product related risk, price competitiveness and other market factors and then giving scores for the purpose of calculating the aggregate market position. Management evaluation
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It is done by comparing the targets set with the targets achieved by the management during the year. Subjective assessment is also done based on the factors risk like track record or sincerity of the management. Conduct of Account Evaluation This evaluation involves PMS rating. PMS is a macro level monitoring tool. In other words, it is a close actions oriented follow up of the health of borrower. It aims to minimize the loan losses by capturing early warning signals of deterioration and taking preventive action. It has a memory of one year and reporting frequently is linked to credit rating.

How to rate The ratios of the company are compared with the benchmark ratios and rating is given to the company up to 2 decimal points based on its position within the benchmark values. Procedure for evaluation at PNB is as follows: 1. Each industry has its own risk and depending on it, a suitable risk factor is chosen and industry risk is adjusted into the score of rating. 2. These areas cover different parameters based on which the past and the future performance of the company are evaluated. 3. The combined scores of these areas are calculated. 4. Then based on the weight age assigned (given in brackets above) the overall score is calculated. 5. This overall score is used to determine the ratings as illustrated in following table:
Table 5: The rating and score matrix

Rating Category AAA

Description Minimum risk

Score obtained Above 80.00 Between 77.50 - 80.00 Between 72.50 77.50 Between 70.00 72.50 Between 67.50 70.00 Between 62.50 67.50 Between 60.00 62.50 Between 57.50 60.00 Between 52.50 57.50 Between 50.00 52.50 Between 47.50 50.00 Between 42.50 47.50 Between 40.00 42.50

Grade AAA AA+ AA AAA+ A ABB+ BB BBB+ B B37 | P a g e

AA

Marginal risk

Modest risk

BB

Average risk

Marginally acceptable risk

C D

High risk Caution risk

Between 30.00 40.00 Below 30.00

C D

Based on the above table rating is done. Once the rating is done, the rate of interest at which the bank will be lending the money is determined. Normally, a company with higher rating is given loan at a lower interest as compared to company with lower ratings. This is because the risk involved with higher rated company is lower.

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12 Types of Financing
Consortium Financing Where the entire credit needs of the borrower is financed by a group of banks by forming a consortium. It promotes collective application of banking resources. Merits: To bank: 1. A single bank carries a disproportionate credit risk when it finances single handedly a huge sum to a large borrower. Consortium financing helps to spread this risk among a number of banks who are members of the consortium. 2. Consortium financing leads to a better credit appraisal in as much as the expertise of all the member banks can be contributed for appraising the proposal. 3. Smaller banks which cannot alone finance huge limits to the large borrowers can still join in financing by becoming the member of consortium. Financing large borrowers being a profitable proposition helps in increasing their profitability. 4. It stops unhealthy practices of snatching good large borrowal accounts by one bank from other by offering unwanted counter offers with respect to interest and service charges. 5. All banks lend on same terms and conditions regarding the security, rate on interest, margin, etc. i.ee no one has superior rights or more favorable propositions. To borrower: 1. A borrower availing credit from a consortium does not suffer from scarcity of credit due to credit squeeze of its sole banker. 2. Internal competition among the participating banks to have larger share in the consortia enables a borrower having good fundamentals to enjoy lower interest and service charges 3. Borrower enjoys same interest and service charges from all the banks normally set at a level below prevailing rates. Demerits: To Bank 1. Bank is under an obligation to share information with other lending institutions. 2. Bank does not have superior rights in case of a default. 3. Bank has to fall in line w.r.t. terms and conditions set out by the lead bank although adequate propositions are made for its reservations.
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4. Bank cannot move out of consortia within first 2 years without approval of other members of the consortia and existing/new member is willing to take its share. 5. In case of a dispute Lead Bank or the bank having 2nd highest share in the consortium will be the final authorities in cases of differences of opinion and their views will prevail in all cases of disputes among the members relating to terms and conditions. To Borrower 1. Borrower cannot negotiate terms and conditions with individual banks depending upon the size of business it is providing to them. 2. All members of the consortium have superior rights than other lenders which affects it borrowing capacity in the open market. Multiple Banking Where the credit requirements of a borrower are met by more than one bank and each bank lends independently on its own terms and conditions, regarding the security, rate of interest, margin etc., this system of financing is called Multiple Banking Arrangements. Advantages: To bank: 1. Bank lends under its own terms and conditions regarding the security, rate of interest, margin, etc. and may ask for superior rights. 2. The bank is independent of other lending institution. 3. The bank is under no obligation to share proprietary data with other lending institution. To Borrower 1. Borrower can decide the level of business it wants to give to a particular bank depending upon the services provided. 2. Borrower has the possibility of getting surplus credit facility from the banks collectively. 3. Borrower can negotiate for terms and condition. Demerits: To Bank 1. There is a possibility of over financing to the borrower. 2. More vigilant and robust monitoring mechanism has to be in place to have better control over excessive financing cases. 3. Bank is unknown to the conduct of the borrower with other lending banks and thus not in the position to take preventive steps.

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13 Case Study: Term Loan - XYZ Energy Pvt. Ltd.

13.1. POWER SECTOR SCENARIO IN INDIA: A PERSPECTIVE 13.1.1. Power Supply Despite significant growth in electricity generation over the years, the shortage of power continues to exist primarily on account of growth in demand for power outstripping the capacity additions in generation. The problem is further exacerbated during peak hours leading to heavy load shedding by utilities. The power supply position is characterized by acute shortages both in terms of the demand met during peak time and overall energy supply. 13.1.2. Peak Demand & Deficit Position

The historic demand-supply scenario for Peak Capacity in India is as follows:

Graph 13-1: Peak Supply & Deficit Position as of March 31, 2010 140000 120000 100000 80000 MW 60000 40000 20000 0 9TH PLAN 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 END Peak Supply (Source: CEA) Peak Deficit (9252) (9945) (9508) (10254) (11463) (13897) (18073) (13124) (15747)

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13.1.3. Total Energy Requirement & Deficit Position The historic total Energy requirement and the growing deficit therein is as follows:
Graph 13-2: Total Energy Availability & Deficit Position as of March 31, 2010 900000 800000 (66092) (73338) (85303) (83807)

700000
600000 (MU) 500000 400000 300000 200000 100000 0

(39187)

(48093)

(39866)

(43258)

(52938)

9TH PLAN 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 END Energy Availability (Source: CEA) Energy Deficit

The energy shortage has increased from 7.5 % in 2001-02 to 10.1 % during 2009-10; the peaking shortage has grown from 11.8 % in 2001-02 to 13.3 % in 2009-10 mainly due to increase in industrial and commercial demand and shortage of coal and natural gas for power generation. 13.1.4. Region wise Peak Demand and Energy Requirement & Shortages The region wise power situation for the five regions in India is given below:
Table 13-1: Region-wise power situation

Northern Western Southern Eastern N Eastern

Peak Demand (MW) 37159 39609 32082 13963 1760

Gap (MW) -5720 -7023 -3029 -1078 -315

Shortage (%) -15.4% -17.7% -9.4% -7.7% -17.9%

Energy Requirement (MU) 253803 258551 220557 88040 9349

Gap (MU) -29356 -35398 -14032 -3986 -1034

Shortage (%) -11.6% -13.7% -6.4% -4.5% -11.1%

(Source: CEA)

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Major shortage in terms of energy and peak power is observed in Western Region and Nothern Regions. 13.1.5. Installed Capacity The Indian power sector has grown significantly since 1947 and the power generating capacity has increased from 1,362 MW in 1947 to about 1,56,000 MW as on March 31, 2010. 13.1.6. Region wise installed capacity (MW) Existing region wise installed capacity (MW) as on 31st March, 2010 is depicted below:
Graph 13-3: Existing Installed Capacity (MW) as on March 31, 2010: Region-wise 2288.90 MW 21319.46 MW 75.27 MW 42189.33 MW Northern Western Southern Eastern N.Eastern 43300.50 MW 50225.03 MW Source: CEA Islands

The Western, Southern and Northern regions have the major concentration of the electrical loads and hence the highest generating capacities. 13.1.7. Fuel wise installed capacity (MW) The fuel wise installed capacity (MW) as on 31st March, 2010 is depicted below:

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Graph 13-4: Existing Installed Capacity (MW) as on 31st March, 2010: Fuel-wise Hydro Nuclear R.E.S. Gas Diesel Coal

R.E.S., 10% Nuclear, 3% Coal, 53%

Thermal, 64%
Hydro, 23%

Diesel, 1%

Gas, 10%

Coal based thermal power still continues to be the backbone of the power supply in India. GoI is contemplating to increase capacity addition in gas, hydro, nuclear power and other Renewable energy sources by 2030 so as to reduce carbon emission and to reduce dependability on coal as the reserve would be depleting. 13.1.8. Region wise and Fuel wise installed capacity (MW) The region wise and fuel wise installed capacity is given below:
Table 13-2: Existing Installed Capacity (MW) as on 31st March, 2010 Thermal Region Nuclear Hydro R.E.S. Total Coal Gas DSL Total Northern 21275.00 3563.26 12.99 24851.25 1620.00 13310.75 2407.33 42189.33 Western 28145.50 8143.81 17.48 36306.79 1840.00 7447.50 4630.74 50225.03 Southern 17822.50 4392.78 939.32 23154.60 1100.00 11107.03 7938.87 43300.50 Eastern 16895.38 190.00 17.20 17102.58 0.00 3882.12 334.76 21319.46 N.East 60.00 766.00 142.74 968.74 0.00 1116.00 204.16 2288.90 Islands 0.00 0.00 70.02 70.02 0.00 0.00 5.25 75.27 (Source: CEA)

The Northern region is largely dependent on coal based Thermal power and Hydro Power to meet its electricity demand. 13.2. FUTURE OUTLOOK 13.2.1. Capacity Addition Program Historically, India has achieved about 50% of the capacity addition envisaged through its various Five Year Plans.

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13.2.1.1. Actual capacity addition vis-a-vis the target in last 5 year plans The actual capacity addition vis-a-vis the target in last four 5 year plans is as under:
Graph 13-5: Actual Capacity Addition Vs Target Capacity Addition 1,00,000 80,000 60,000 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 8th Plan Target (MW) (Source: CEA) 9th Plan Achievement (MW) 10th Plan 11th Plan (underway) Percentage Achievement

40,000
20,000 0

A number of Eleventh Plan projects are already behind schedule; CEA has revised the capacity addition in Eleventh Plan to 62,488 MW as against the Planning Commission target of 78,700 MW. 13.2.2. Demand Forecast (All India 17th EPS) CEA in its 17th EPS has given detailed estimates of the growth in power demand, regionwise and for the country as a whole. The summary is given below:
Table 13-3: Long-term Projected Energy Requirement Region Northern Western Southern Eastern North Eastern All India (Source: 17th EPS) Peak Load ( MW ) 2011-12 48,137 47,108 40,367 19,088 2,537 1,52,746 2016-17 66,583 64,349 60,433 28,401 3,760 2,18,209 2021-22 89,913 84,778 80,485 42,712 6,180 2,98,253 Energy Requirement ( MU ) 2011-12 2,94,841 2,94,860 2,53,443 1,11,802 13,329 9,68,659 2016-17 4,11,513 4,09,805 3,80,068 1,68,942 21,143 13,92,066 2021-22 5,56,768 5,50,022 5,11,659 2,58,216 36,997 19,14,508

According to the 17th EPS, India's peak demand will reach 152,746 MW with an energy requirement of 968 billion units (BUs) by the year 2012. By the year 2016-17, the peak demand will reach 218,209 MW and energy requirement will touch nearly 1,392 BUs.

45 | P a g e

13.2.3. Supply Forecast for All India at the end of the XI Plan To cater to this demand, huge capacity addition is being planned. As of now, nearly 78,700 MW of new power plants are under various stages of implementation / conceptualisation. 13.2.3.1. Planned capacity additions during the XI plan period (2007-12) The planned capacity additions during the XI plan period (2007-12) is given below:
Graph 13-6: Likely capacity additions during the XI plan - Fuel wise RES 0% Coal, 52,850 , 67%

Nuclear, 3,380 , 4%

Hydro Nuclear RES Coal Gas Diesel

Hydro, 15,627 , 20%

Thermal 59,693 76% Diesel, - , 0%

Gas, 6,843 , 9% (Source: CEA)

13.2.3.2. Region-wise, Fuel-wise capacity addition in the XI Plan The Region-wise, Fuel-wise capacity addition in the XI Plan is as follows:
Graph 13-7: Likely capacity additions during the XI plan - Region wise

25,000
20,210 20,000 15,000 10,000 5,000 440 Northern Western Southern Eastern North Eastern 13,000 10,886 7,488 1,170 1,094 2,940 3,151 0 2,724 1,537 0 14,060 Hydro Thermal Nuclear 0

(Source: CEA)

In case all of the above planned capacity additions come up as per the envisaged schedule, the total installed capacity of the country will nearly reach 2,11,029 MW at the end of XI plan.
46 | P a g e

13.2.3.3. Growth rates in installed capacity (MW) Growth rates in installed capacity are depicted in the following graph:
Graph 13-8: Historical Growth in Installed Capacity 180000.00 160000.00 140000.00 120000.00 100000.00 80000.00 60000.00 40000.00 20000.00 0.00 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

Installed Capacity

CAGR

From the above graph, it is observed that in the recent, past generating capacity has been growing at a pace much below the required levels. However, during the last 2-3 years due to some focused efforts in the power sector, there have been some improvements in the growth rates and the sector is expecting major initiatives in terms of capacity additions. Historically, India has met about 50% of the targets envisaged by the five year plans. As shown above, the capacity additions have picked up in recent years and based on implementation on the ground as on date, experts predict India achieving 60% of the target during the XI Plan. Based on the above, it is expected that the total capacity addition during the XI five year plan would be 47,220 MW. Accordingly, the total available capacity at the end of FY 2012 would be 179,549 MW. 13.2.3.4. Capacity Utilization of existing Installed Capacity Total available Energy and available Peak Load against installed capacity for the period Apr09 to Mar10 has been tabulated below:
Table 13-4: Total Energy & Peak Load Availability Vs Installed Capacity Month Installed Capacity (MW) Energy Availability (MU) PLF (Thermal) Peak Load Availability (MW) Peak Load Availability

Mar 10

1,59,398

70,099

81.41%

1,02,097

64.56% 47 | P a g e

CAGR (%)

(MW)

Feb 10 Jan 10 Dec 09 Nov 09 Oct 09 Sep '09 Aug '09 July '09 June '09 May '09 Apr '09
(Source: CEA)

1,57,229 1,56,784 1,56,092 1,55,859 1,53,694 1,52,360 1,52,148 1,51,073 1,50,323 1,49,392 1,48,265

61,207 64,854 63,417 59,416 64,815 62,201 65,287 62,685 62,126 62,477 60,377

81.54% 80.06% 78.91% 75.47% 74.88% 71.71% 71.74% 71.83% 77.17% 79.19% 82.53%

1,01,287 99,636 98,166 1,00,856 1,00,255 1,01,852 99,277 96,282 96,871 95,033 97,355

64.42% 63.55% 62.89% 64.71% 65.23% 66.85% 65.25% 63.73% 64.44% 63.61% 65.66%

Based on above data, it is evident that the total available Energy and total available Peak Power is 64.57% and 64.58% of the installed capacity. However, considering GoI impetus on improving operation and maintenance, reduction in Transmission and Distribution loss and encouragement to Private players in Power sector, available Energy and available Peak Power considered for arriving at supply position by the end of XI plan is 60% and 70% of the installed capacity respectively. 13.2.3.5. Projected demand and supply at the end of XI five year plan (2012) Taking into consideration the above, the projected demand and supply position at the end of eleventh five year plan (2011-12) after factoring available Energy and available Peak Power at 60% and 70% of the installed capacity respectively is given below:
Table 13-5: Projected Demand & Supply Position at the end of XI Five Year Plan Peak Demand All India 1,52,746 (Source: CEA) Region (in MW) Peak Supply 1,25,684 % -17.72% Energy Demand 9,68,659 (in MU) Energy Supply 9,43,709 % -2.64%

Deficit -27,062

Deficit -24,949

The country shall face a peak power deficit of 27,000 MW and 72,536 million units in terms of energy supply at the end of XI five year plan. 13.2.3.6. Region-wise demand and supply at the end of the XI five year plan The region-wise demand and supply position at the end of the XI five year plan:
Table 13-6: Projected Demand & Supply Position at the end of XI Five Year Plan Region Peak Demand (in MW) Peak Supply Deficit % Energy Demand (in MU) Energy Supply Deficit %

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All India Northern Western

1,52,746 48,137 47,108

1,25,684 34,357 36,312

-27,062 -13,780 -10,796

-17.72% -28.63% -22.92%

9,68,659 2,94,841 2,94,860 2,53,443

9,43,709 2,57,974 2,72,649 2,43,421

-24,949 -36,867 -22,210 -10,021

-2.64% 14.29% -8.15% -4.12%

Southern 40,367 32,419 -7,948 -16.69% *Data for Eastern & North-eastern states not depicted. (Source: CEA)

The northern region together with the western region would have deficit of approximately 24,000 MW and 88,000 million units by the end of XI Plan. While the total energy shortage is acute in the northern region at 14.29%, the peak shortage at 28.63% is staggering. Gas power plants, with their flexible operations are fully capable of fulfilling such peaking load requirements.

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13.3. POWER SCENARIO REGION WISE 13.3.1. Power Scenario in Northern India 13.3.1.1. Installed capacity-Sector Wise The total installed capacity in the northern region as on 31st March, 2010 is 42,189 MW. Details of the installed capacity in Northern region are given below:
Graph 13-9: Installed Capacity as on 31st March, 2010: Sector-wise

CENTRAL, 17459.26 MW, 41%

STATE,21984.52 MW, 52%

PRIVATE, 2745.55 MW, 7% Source: CEA

Most of the generating capacity is in the State Sector tied up under long term supply of electricity and the Private sector comprises only 7% of the total installed capacity. There is hence limited availability of merchant power for short term purposes in northern region. 13.3.1.2. Installed capacity- Fuel Wise
Graph 13-10: Installed Capacity as on 31st March, 2010: Fuel-wise R.E.S. 5.71% Nuclear, 3.84% Coal, 50.43% Hydro, 31.55% Thermal, 58.90%

Diesel, 0.03% Source: CEA

Gas, 8.45%

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Most of the generating capacity in the northern region is based on Thermal Power Plants, which comprises 50% of coal and gas comprises 9%, followed by Hydro (33%). 13.3.1.3. Demand-supply position of peak power The demand-supply position of peak power in Northern India over the last nine years is given below:
Graph 13-11: Historical Demand-Supply of Peak Power 40000 35000 30000 25000 20000 15000 10000 5000 0 (4872) (2967) (3530) (5720)

(1854)

(2203)

(1546)

(2709)

(2954)

9TH PLAN END

2003

2004

2005 Peak Supply (MW)

2006

2007

2008

2009

2010

Peak Deficit (MW)

The peak power requirement in March, 2010 was 37,159 MW and the deficit was 5,720 MW representing a 15.4% gap in peaking capacities. 13.3.1.4. Demand-supply position of peak power The demand-supply position of total energy in Northern India over the last nine years is given below:
Graph 13-12: Historical Demand-Supply of Total Energy 300000 250000 (29356) (8852) (16140) (20183) (22139) (23650) (24290)

200000
150000 100000 50000 0 9TH PLAN END 2003 (7973) (12392)

2004

2005 Energy Supply (MU)

2006

2007

2008

2009

2010

Energy Deficit (MU)

51 | P a g e

The energy requirement in 2009-10 was 253803 MU and the deficit was 29356 MU 13.3.1.5. State-wise demand-supply position in Northern Region The state-wise demand-supply position in Northern Region is shown below:
Table 13-7: State-wise Demand-Supply Position for the Period 2009-10

Peak Demand (MW) Chandigarh Delhi Haryana Himachal Pradesh Jammu and Kashmir Punjab Rajasthan Uttar Pradesh Uttarakhand
(Source: CEA)

Peak Gap (MW) 0 -8 -455 40 -726 -708 0 -2293 -250

Peak Gap (%) 0.0% -0.2% -7.4% 3.6% -32.3% -12.2% 0.0% -21.1% -20.0%

Energy Gap Requirement Gap (MU) (%) (MU) 1570 24271 33520 7009 12907 3496 44031 75822 749 -49 -183 -1514 -247 -2978 -391 -1048 -16432 -86 -3.1% -0.8% -4.5% -3.5% -23.1% -11.2% -2.4% -21.7% -11.5%

308 4502 6133 1118 2247 5795 6859 10856 1247

The northern region is facing peak power deficit of 2293 MW while the peak energy shortage was 75822 MU. The States where the shortfall is occurring are Haryana, J&K, Punjab, Uttarakhand and Uttar Pradesh. The reason is due to industrialization and extensive use of power in agriculture. In addition there is a demand for peaking power especially in the off-season when the hydro generation is minimal. 13.3.1.6. The demand forecast for Nothern Region as per 17th EPS As per 17th EPS, in 2011-12 Northern Region will have a peak demand of 48,137 MW while the energy requirement is expected to touch 2,94,892 MU. The State-wise demand forecast for Northern India is given below:
Table 13-8: State-wise Demand Forecast for Northern India

Delhi Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Uttar Pradesh

Peak Load (MW) 2011-12 2016-17 6,092 8,729 6,839 9,375 1,611 2,194 2,063 2,790 11,000 14,441 8,482 11,404 13,947 19,623

Energy Requirement (MU) 2011-12 2016-17 36,293 52,762 38,417 54,305 9,504 13,136 11,202 15,272 60,489 82,572 48,916 67,767 79,268 1,10,665 52 | P a g e

Uttarankhand Chandigarh Total

(Source: 17th EPS)

Peak Load (MW) 2011-12 2016-17 1,533 2,085 420 602 48,137 66,583

Energy Requirement (MU) 2011-12 2016-17 8,445 11,668 2,308 3,367 2,94,842 4,11,514

The State of Uttar Pradesh, Punjab and Haryana would be the demand centres for peak power as well as energy. 13.3.1.7. Capacity Addition during the XI five year plan: Likely capacity addition sector-wise and state-wise in the northern region during the XI five year plan is given below:
Table 13-9: Likely capacity Addition During the XI Plan Hydro State Private Central 964 1,792 4,732 Thermal Coal 5,870 2,680 2,730 11,280 Gas 1,720 225 0 1,945 Diesel 0 0 0 0 Total 7,590 2,905 2,730 13,225 Nuclear 0 0 440 440 Wind 0 0 0 0 Total 8,554 4,697 7,902 21,153

Total 7,488 (Source: CEA)

The likely capacity addition during XI Plan in Northern Region would be mainly in hydro and coal and the most of the additions would be in the State and Central Sector. Demand supply forecast is based on a 60% success rate of the envisaged capacity addition in XI Plan as explained in the foregoing section. 13.3.1.8. Demand-supply forecast for the Northern Region in 2011-12 The demand-supply forecast for the Northern Region in 2011-12 is depicted below:
Table 13-10: Demand-Supply Forecast for the Northern Region in 2011-12 Region Northern (Source: CEA) Peak Demand (MW) 48,137 Peak Supply (MW) 34,357 Deficit -13,780 % -28.63% Energy Need (MU) 2,94,841 Energy Supply (MU) 2,57,974 Deficit -36,867 % -14.29%

It may be observed from table above that Northern Region will have deficit in peak power as well as energy requirements at the end of eleventh five year plan (2012) to the tune of 28.87% and 17.16% respectively.
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13.4. POWER SCENARIO IN UTTARAKHAND 13.4.1. The installed capacity in Uttarakhand The installed capacity in Uttarakhand was 2404.99 MW as on 31 st March, 2010. The break-up of the same is given below:

Table 13-11: Installed Capacity as on 31st March, 2010

Sector State Private Central Total

(Source: CEA)

Hydro 1252.15 400.00 267.03 1919.18

Thermal Coal 0.00 0.00 261.26 261.26 Gas 0.00 0.00 69.35 69.35 Diesel 0.00 0.00 0.00 0.00

Nuclear 0.00 0.00 22.28 22.28

R.E.S. 132.92 0.00 0.00 132.92

Total 1385.07 400.00 619.92 2404.99

Uttarakhand has a installed capacity of 2404.99 MW majority of which is in the State and Central Sector as of now and number of projects are being developed by private sector players which is likely to be commissioned in XI Plan. As can be seen, the majority of the capacity is hydro electric which is seasonal in nature.Hence the power generation trend in the State indicates that Uttarakhand is a net exporter from April October and net importer during November - March on account of low generation of hydro in winter and increase in demand of power for heating during winter. 13.5. POWER TRADING IN INDIA The power requirement of a region can be gauged from the power transactions done through bilateral trading, energy exchange and unscheduled interchange. The power transactions done by the various regions are depicted below:
(million units) Graph 13-13: Actual Net Power Position in North - Export (-) / Import (+)

54 | P a g e

1500 MUs Exported (-), Imported (+) 1000 500 0 -500 -1000

Punjab
Uttarakhand (Source: CERC)

Haryana
Hp

Rajasthan
J&K

Delhi
Chandigarh

UP

From the graph above it emerges that Uttarakhand imports power during the winter and is exporting during the summers. The northern states are mostly power deficient and hence there is a market for any power plant installed in the north. 13.5.1. Sale of Power The power generated from the project is proposed to be sold as merchant power, i.e. through short-term PPA. The power trading done under short term PPA is through Bilateral trade (3.78%), Unscheduled Interchanges (3.05%) and through newly established Power Exchanges (0.59%). The graphical representation of power traded through various options available under short term agreements for the period Aug 08 to June 09 is depicted below:
Graph 13-14: Power traded through various options under short-term agreements

55 | P a g e

Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 0.00% 1.00% 2.00% 3.00% % of Generation UI Exchange Bilateral 4.00% 5.00% 6.00%

The average weighted price for power traded through short term agreements works out to Rs. 5.71 per unit. The average weighted price for transaction through Bilateral Trade, Energy Exchanges and UI works out to Rs.6.41, Rs.5.73 and Rs. 4.99 respectively. The average prices for various forms of short term transactions executed from 2007 to 2009 are shown below
Graph 13-15: Power traded through various options under short-term agreements 7.04 7.57 6.89 6.41 5.73 4.99 4.16

8 6 4 2 0

2007

2008 Price of Electricity Transacted Through Bilateral Trade (Rs/kWh)

2009

Price of Electricity Transacted Through Power Exchanges (Rs./kWh) Price of Electricity Transacted Through UI (Rs./kWh) Graph 6-23:

The detailed graphical presentation for the per-unit rate for short-term transactions for the year 2009 is depicted below:
Graph 13-16: Per-unit rate for short-term transactions

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12.00 10.00 8.00 6.00 4.00 2.00 0.00

Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10
Price of Bilateral Transactions (Rs./kWh) Price of Exchange Transactions (Rs./kWh) Price of UI transactions New Grid (Rs./kWh) Price of UI transactions SR Grid (Rs./kWh)

It is evident from the graph above that the weighted average price is in the range of Rs. 5.00 to Rs. 9.00 per unit. Thus, considering the energy deficit market of India, particularly the Northern, Western Regions and Southern Region the power generated from the project can be easily traded at a minimum weighted price of Rs. 5.00 per unit.

1.

Name of the Borrower: Branch Office: Controlling Office:

M/s XYZ Energy Private Ltd. MCB, New Delhi Circle Office (South Delhi) (Rs. in crores)

GIST OF THE PROPOSAL 1. For sanction of fresh Term Loan of Rs.75.00 crore Purpose To part finance setting up of Combined Cycle Gas based Thermal Power Plant for power generation Cost of Project Total Debt Promoters contribution Proposed share) DER TL Rs.845.00 crore Rs.633.75 crore Rs.211.25 crore

(our Rs.75.00 crore

3:1
57 | P a g e

Repayment Period Door to door tenor

34 equal quarterly instalments 10.25 years

2. Approval of ROI/ Service charges as under:Facility Existing Proposed Applicable rate

Rate of interest Upfront Fee Other charges, if any

TL

NA

BR+3.50+TP i.e. B.R+5.00+TP i.e. 13.00% 14.50% 0.25% +ST As Applicable 1.25%+ST As Applicable

NA NA

3. Approval of other Issues, if any:

Nil

Whether fresh/renewal/ enhancement

Fresh

Asset Classification as on NA fresh account 31.10.2010 and last PMS score Credit Risk Rating by Bank is BB- under New Project Rating Model. Rating Date of Rating Present BBPrev B Score ABS July10 Aug09 Reasons for degradation NA

27.12.10 50.35 Sept09 48.06

In terms of RMD note, the earlier rating was assessed when the Co. approached our bank in Sept 2009 for sanction of Specific Letter of Guarantee for the project (165 MW CCPP), which was not availed. Current rating has been conducted for a 225 MW combined cycle power plant and revised COP & projections. As such, the two ratings are not strictly comparable. Rating from Agency (The External external Facility Rating Date of Rating Remarks

58 | P a g e

rating should be mapped to the internal rating)

rated

rating

Agency

Not done. Project is under implementation. A stipulation is made that it should be got done within 6 months after completion of the project.

Whether Agriculture/ Retail/ SME/ Others

Large (Power Sector)

a)Whether Sensitive No Sector Real Estate/ Capital Market b) Applicable Risk weight Consortium/Multiple Banking Lead Bank/Lender PNBs Share % Date of application Date of receipt of proposal at BO/ CO/HO 100% Consortium banking

Will be decided at the time of documentation Will be decided at the time of documentation 27.09.2010

21.12.2010

Date of clarifications, if any, received at CO/HO 04.01.2010 Date of last sanction & NBG in principle approval dated 05.10.2010 authority/ In Principle Consent Customer ID No. Activity code (as per ladder) New New

PART I 2. Borrowers Profile

59 | P a g e

1. 2. b.

Group Name Address of Regd./Corporate Office Works/Factory

XYZ PL 13.1.1.1.1.1 Confedential Near Kashipur, Uddham Singh Nagar District, Uttarakhand Private Limited Company New Account 06.04.2009 New account fresh dealing Power Sector

c.

Constitution Constitution code as per ladder

d. e. f. g.

Date of incorporation/Establishment Dealing with PNB since Industry/Sector

Business Activity (Product)/Installed 13.1.1.1.1.2 Power Generation Capacity. 225MW

3.

Directors (S/Shri) Whether Promoter/ Professional/ Nominee Chairman Director Director

Name and Designation Address/Mobile No/e-mail address of Main Directors/Guarantor Directors/Key persons Mr. ABC Mr. DEF Mrs. GHI Confedential Confedential Confedential

1. If any of them, in the list of Caution Advices circulated by the No Bank from time to time/RBI's/Wilful defaulters' list/Caution List of ECGC 2. If any one of them connected in the past with any NPA/OTS/ No Compromise/unscrupulous defaulters 3. If any of them, related to Directors/Senior Officers of PNB: No 4. i) Management Change since last sanction, if any Not applicable

5. i) Report on due diligence carried out in terms of L&A Yes Circular No. 170 dated 25.10.2008 and comments on adverse features, if any ii) Confirmation that CRs have been compiled/reviewed as Yes per extant guidelines iii) Confirmation that CRs have been drawn from CIBIL Yes and no adverse
60 | P a g e

Database and comments on adverse features, if any:

feature is observed.

f) Proposed Share Holding Pattern: Name of the Promoters/Major Share holders Promoters Holding FIs/ Mutual Funds/UTI/Banks/FIIs-IFCI NRIs/OCBs Public Total

Amt. in Rs. Crores.

% Holding

156.32 54.93 0.00 0.00 211.25

74% 26% ------100%

g)

Whether Shares pledged to any Bank/FI/others

No

h)

Brief history:

XYZ Energy Private Ltd (XYZ EPL) is a Special Purpose Vehicle (SPV) established by the XYZ Group to implement a 225 MW combined cycle gas based power plant (CCPP). The XYZ Group is an emerging player in the Power Sector promoted by Mr. ABC, a first generation entrepreneur with more than 22 years of experience in the power sector. Mr. ABC is former Joint Managing Director of the Lanco Group and has been instrumental in building up the power portfolio of more than 12,000 MW for the Lanco Group. Except that he was former JMD of Lanco group, Lanco has no roll in this company and therefore it is not forming part of the Lanco group The XYZ Group is conceptualized as an integrated power developer and operator with capabilities across feasibility studies, implementation and operation of power projects. The group has a separate entity for undertaking independent Engineering, Procurement and Construction (EPC) activities for Power projects. Currently the group is actively engaged in development of several power projects through separate SPVs Hydro Power projects of various sizes ranging from 5 MW to 25 MW with an aggregate capacity of 105 MW in Himachal Pradesh and Uttarakhand 100 MW wind farm in Ratlam in the state of Madhya Pradesh 225 MW of Gas based power project under development

XYZ Group (through its SPV CDE private Ltd.) has implemented a 100% export oriented 10,000 tonne per annum (tpa) capacity Fruit/Pulp processing plant in Chittoor District,
61 | P a g e

Andhra Pradesh with a capital outlay of Rs.16 Cr and with an annual turnover of Rs.40 Cr. CDE plans to expand its activities by forward and backward integrations over the next 2 to 3 years. The group also has plans to venture into the business of power trading, power transmission and distribution of gas. 4.A Facilities Recommended : (Rs. in Crore) Nature Fund Based Fund Based Ceiling Non Fund Based Non Fund Based Ceiling Term Loan TOTAL COMMITMENT NA NA NA -75.00 75.00 Secured NA --

Existing

Proposed

Secured/Unsecured along with the basis thereof

4.B

Our Commitment and Maximum Permissible Exposure Norms Existing Proposed %age of Banks Capital Exposure Funds as on 31.03.2010 Norms in %age 0.28% 0.28% 15% 15%

Company Group

Nil Nil

75.00 75.00

4. C Short Term Loans sanctioned by PNB in last 12 months, if any Account)

Nil

(New

4.D Details of facilities provided outside consortium including exposure on account of derivatives, if any Not applicable 5. A Facilities from PNB Subsidiaries/Exposure by way of investment in Equity/ Debentures/Derivatives/Foreign Exchange etc. : Nil 5.B Term Loans from other Banks/Financial Institutions/Other Institutions (including Lease, ICDs, Corporate Loans, Debentures etc.)
62 | P a g e

(Rs. In Crore) Name of the Bank/FI Facility Sanctioned Balance O/s Overdue Rate of , Interest

Axis Bank

Sanctioned

300* 100 50 175*

0.00 0.00 0.00 0.00

NA NA NA NA

12% 12% 12% 12%

State Bank of Patiala Sanctioned State Bank of Mysore Sanctioned IFCI - Sanctioned

* IFCI & Axis bank have underwritten as well as are syndicating the debt requirement for Rs.333.75 cr and Rs.300 crore respectively with the right to hold on Minimum Rs.100.00 cr each. Axis bank has sanctioned TL Rs.300 crore including TL share of Canara Bank. Similarly IFCI has sanctioned TL of Rs.175.00 crore including our (PNB) proposed share of TL i.e. Rs.75.00 crore with proposal to down sell part share to CB and PNB as above.

5. C Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such rating. No risk rating has been done by external agency as project is under implementation. 5. D Details of Working Capital Limits from the Consortium/Multiple Banking NA. 6. Details of Group /Allied/Associate firms and the facilities sanctioned to them along with conduct of these accounts with our Bank/ other Banks and comments on adverse indicators, if any: As per Appendix II 7.A(i) Financial Position of the Company as on close of financial year for last three years and estimated for last year and projected for the next year (Rs. in Crore) As at 31.03.08 Audited As at 31.03.09 Audited Previous year (31.3.10) Projections for the current year

Estimated

Audited

63 | P a g e

(31.03.11)

Gross Sales - Domestic - Export

% growth

of -

Net sales (net excise duty etc.) Other Income

of

Operating Profit/Loss Profit before tax Profit after tax Depreciation/ Amortization expenses Cash profit/ (Loss) EBIDTA/PBIDTA Paid up capital Reserves and Surplus excluding revaluation reserves Misc. expenditure not written off Accumulated losses Deferred Tax Liability/ Asset a) Tangible Net Worth b) Investment in allied concerns & amount of cross holdings

0.01 -

163.00 -

0.47

32.09*

163.00

64 | P a g e

c) Net owned funds/ Adjusted TNW

0.00

0.00

32.09 Share money application 32.55

163.00 0.00

Total Borrowings Secured Unsecured Investments Total Assets Out of which net fixed assets Net Working Capital Current Ratio Debt Equity Ratio Term liability/ Adjusted TNW TOL/Adjusted TNW Operating Profit/Sales Long Term Sources Long Term Uses Surplus/ Deficit Short Term Sources Short Term Uses Surplus/ Deficit ** *Including share application money.

32.56 4.53

475.00 475.00 638.00 638.00

28.03 -

32.56 4.53 28.03 0.00 28.03 (28.03)

638.00 638.00 0.00 0.00 0.00 0.00

65 | P a g e

7A (ii) Key Financials upto last quarter The company is not a listed company. 7B. Brief discussion on Financial Indicators

The company is in the initial stage of implementing the project and therefore no worthwhile analysis of past financial can be done. Present financials are discussed elsewhere. 7.C Capital Market Perception The company is not listed on any stock exchange. 7.D Details of investment in Shares, Debentures, Units or investment of funds outside the business etc. (Along with comments in case of increase): None 7.E Details of Liabilities not accounted for/Contingent liabilities: None Details of derivatives transactions None so far. 7.F Position of assessment of income tax/sales tax/wealth tax of the borrowing concern/partners/proprietor/promoter directors/guarantors: The ITRs of Co. XYZ EPL and Promoters/guarantors- Mr. ABC, Mrs. GHI and XYZ IPL have been filed for A.Y. 2010-11 7.G Information on litigation initiated by other banks/FIs against the borrower as per latest Audited Balance Sheet, if any: Nil 7.H Overall likely impact of (7.C to 7.G) on the financial position of the borrowing unit The company is presently implementing the project and in view of nil information, no impact is envisaged. 8. SECURITY

A.

Primary 1. For working capital limits: NA

2. For Term Loan: The Senior Rupee Debt together with interest, costs, expenses and all other monies whatsoever shall be secured on first pari passu basis with other lenders by:

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a) A first mortgage and charge in favour of the Lenders in a form satisfactory to the Lenders of all the Company's immovable properties (including the immovable properties pertaining to the Project), present and future; b) A first charge by way of hypothecation in favour of the Lenders of all the Company's movables, including movable plant and machinery, machinery spares, tools and accessories, furniture, fixtures, vehicles and all other movable assets, present and future; c) A first charge on Companys book debts, operating cash flows, receivables, commissions, revenues of whatsoever nature and wherever arising, present and future, d) A first charge on Companys all intangibles including but not limited to goodwill, uncalled capital, present and future; e) A first charge by way of assignment or creation of charge in favour of the Lenders of (i) all the right, title, interest, benefits, claims and demands whatsoever of the Company in the Project Documents, duly acknowledged and consented to by the relevant counter-parties to such Project Documents, all as amended, varied or supplemented from time to time; (ii) all the rights, title, interest, benefits, claims and demands whatsoever of the Company in the Clearances; (iii) all the right title, interest, benefits, claims and demands whatsoever of the Company in any letter of credit, guarantee, performance bond provided by any party to the Project Documents, (iv) all Insurance Contracts/Insurance Proceeds; and (v) any Payment Security Mechanism provided under the sale arrangements / PPA; f) A first charge on the Trust and Retention Account, Debt Service Reserve Account and other reserves and any other bank accounts of the Company, wherever maintained. g) Pledge of shares representing 51% of the total paid up equity share capital of the company held by the Sponsors subject to Banking Regulation Act. The shares to be pledged shall be free from any restrictive covenants/lien or other encumbrance under any contract/arrangement including shareholder agreement/joint venture agreement/ financing arrangement with regard to pledge/transfer of the shares including transfer upon enforcement of the pledge. h) Security Interest set out above from (a) to (g) shall rank pari-passu amongst all the senior lenders of the Project. As relevant, Security Interest set out from (c) to (d) above shall rank pari passu with the security interest created in favour of working capital lenders. B. Collateral (Information in respect of mortgage of IP to be given only in the following format: Nil i) Hypothecation/ Mortgage of Block Assets Immovable Properties ii) First/Second/Third charge/Pari passu charge iii) Personal Guarantee (Rs. In crores) S . N Name of Guarantor Relationsh ip with Net Worth Immovable property Date of CR

67 | P a g e

borrower

Pre v

Present As at 31.07.10 14.39

Prev .

Present As at 31.07.10 6.88

Prev .

Present

1 . 2 .

Sh. ABC

Promoter

NA

NA

NA

22.11.10

Smt. GHI

Promoter

NA

2.87

NA

2.76

NA

22.11.10

Corporate Guarantee S No Name of Guarantor Relationship with borrower Net Worth Immovable property Prev. Present As at 31.03.10 NA Nil

(Rs. In crores) Date of CR

Prev.

Present As at 31.03.10

Prev.

Present

1.

XYZ IPL

Promoter

NA

0.80

NA

22.11.10

iv) v) 8. C

Comments on changes, if any: Status of creation of charge:

NA Not applicable

Security Margin (Fixed Asset Coverage Ratio for term loans) Existing Proposed FACR Book Value FACR on project completion 1.17

Nature

Book value

Primary

NA

731.34 (hard cost)

Collateral Total

NA 731.34 1.17

9.

Position of Account:

New Account

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10. A Conduct of the Account including details of terms & conditions not complied with: New Account 10.B i) Value of the Account New Account

10.B ii) Deposits including Escrow/TRA account with details Nil 10.C Review of the Account and Summary of serious irregularities pointed out by Banks Inspectors, Concurrent Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors, Statutory Auditors, observations of Stock Audit Report, Comment on Preventive Monitoring Score Trends, (and status of rectification of these irregularities) None new account 10.D(i) CONFIRMATION 1. 2. 3. 4. Compliance of last sanctioned terms Security documents are valid/duly vetted/enforceable Proper charge on securities created Confirm that company/directors are not under bank/RBI/ECGC/CIBIL defaulters/caution list Confirm that payment of statutory liabilities is not in arrears Confirm that no litigation against/by the company is pending Corporate governance practices are being followed as per Auditors report Confirm that no deviations are made from usual norms/policy guidelines Confirm that Exposure is within banks internal ceilings/RBI prudential norms NA NA NA Yes

5. 6. 7.

Yes Yes NA

8. 9.

Yes Yes

10. D (ii) AUDIT/INSPECTION/MEETINGS

NA as it is a new relationship

10. E In case of audit conducted by RBI Whether commented/special mentioned account NA as it is a new relationship PART II

69 | P a g e

11.A (i) Industry Rating as per RMD Marginally Favourable as per RMD L & A Cir No. 133/10 dated 11.12.2010. A.(ii) Detailed Industry Scenario and Comments on management, production and marketing as well as Borrowers' diversification, expansion, modernisation programme As per Appendix IV 12. Present Proposal:

This proposal is for sanction of term loan of Rs.75.00 crores to part finance 225 MW gas based Combined Cycle thermal Power Project (CCPP) near Kaikhera village, Kashipur, Uddhamsingh District in the State of Uttarakhand. The project is being implemented at a cost of Rs.845.00 crore, to be funded term debt [75%] of Rs.633.75 crore and equity of Rs.211.25 crore [25%]. In a combined cycle power plant (CCPP) a gas turbine generator generates electricity and the waste heat is used to make steam to generate additional electricity via a steam turbine; this last step enhances the efficiency of electricity generation. By combining both gas and steam cycles, high input temperatures and low output temperatures can be achieved. The NBG in its meeting held on 05.10.2010 had given in principle approval for term loan of Rs.75 crore to the company @ BR+3.50%+TP presently 13.00% and upfront fee of 0.25% The promoters have already infused their share of the equity besides commitment from IFCI Ltd for the remaining balance. Sh. ABC, the promoter director and his team of professionals sourced from Lanco Group have sufficient experience in setting up and running of thermal power station with their past experience of having worked with Lanco Group in similar functions and capacities. Keeping in view the above present proposal is for consideration of term loan facility of Rs.75 crore. a) Justification for working capital sanction Not applicable

1. b)

Justification for Fund based working capital limits proposed: NA Justification for Non Fund based limits: NA

c)

Justification for term loan/DPG

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(i)

Purpose: To Finance setting up of Combined Cycle Gas based Thermal Power Plant for power generation

1.

A. Appraising agency: The DPR of the project is prepared by TATA Consultancy Engineers Limited. B. Whether vetted by any Technical Officer/ Other Official of Bank IFCI has vetted the project financials and other technical aspects and has prepared Information Memorandum (IM) found the project technically feasible and and financially viable. As the IFCI has vetted the project financials and technical aspects and IFCI is recognised as appraising agency, no seprate vetting is done by our bank. Besides that DPR is prepared by Tatas & loan is approved by Axis bank.

1.

Summary of cost of project and means of finance PROJECT COST The total project cost has been estimated at Rs.845 crore. The break-up of the project cost is given below: (Rs. crore) Sr A B C D E F Particulars Land and Site Development EPC Works Non EPC Works Pre-operative Expenses Sub-total (Hard Cost) Physical Contingency (2.7% of Hard Cost) Financing Expenses (1.2% of Hard Cost) Sub-total (Overheads) Sub-total (Hard Cost + Overheads) IDC Margin Money for Working Capital TOTAL PROJECT COST (A+B+C+D+E+F+G+H) Amount % of

Cost 10.00 Total 1.2% 678.00 80.2% 20.00 2.4% 23.74 2.8% 731.74 88.9% 19.65 2.3% 10.14 1.2% 29.79 3.5% 761.53 90.1% 72.65 10.82 845.00 8.6% 1.3% 100.00%

G H

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MEANS OF FINANCE
(Rs in Crores)

Source Equity/Promoters contribution Term Debt Total

Amount

%age

211.25 633.75 845.00

25% 75% 100%

It is stipulated that entire equity is tied up before disbursement. 2. Sources of Promoters Contribution and the time schedule as to when the funds will be brought. The promoters have already infused funds aggregating Rs.118.31 (as on 31st July 2010) (sponsor equity contribution) on the project. As already mentioned balance equity of Rs. 92.94 crores is to be tied up as under:

(Rs. In Crores) Name Amount Already bought in 118.31 -118.31 Amount to be bought Total

Pvt. Promoters IFCI Total

38.01 54.93* 92.94

156.32 54.93* 211.25

*of which Rs.40.00 crore was inducted in Aug2010. 3. Status of tie-up of loans: Total requirement of term loan for the project is Rs. 633.75 crores. IFCI & Axis bank have underwritten as well as are syndicating the debt requirement for Rs.333.75 cr and Rs.300 crore respectively with the right to hold on Minimum Rs.100.00 cr each. The company has got sanction from Axis Bank for Rs.300 crore, State Bank of Patiala for Rs.100 crore, State Bank of Mysore for Rs.50 crore, IFCI Limited for Rs.100 crore. After receiving sanction from our bank, financial closure is expected to be
72 | P a g e

achieved.

4.

Brief explanation for each major individual item of cost of Project with present status along with comments on the reasonableness/ competitiveness Land and Site Development

SEPL has obtained the Government approval for the acquisition of 46.75 acres of land in village Kaikhera near Kashipur town and has completed the acquisition of about 36.92 acres of land, sufficient for installation of 225 MW CCPP and has spent a total of Rs.8.13 crore towards land and site development as on 31st July 2010. Notification for industrial use of land: Issued vide notification dated 04 November 2009 by Industrial Development Department, Govt. of Uttarakhand.

EPC Works

The cost estimate for EPC Works is Rs.678.00 crore as per contracts executed with the EPC contractor, XYZ Infrastructure Private Limited (SIPL).. A detailed breakup of the major packages executed with SIPL viz. Civil and Construction Works, Offshore and Onshore Supply and Services is given in annexure. SIPL has further sub-contracted the work to various reputed vendors such as ABB India Ltd., GEI India Ltd., T&R India Ltd., and Areva, France, who are well experienced in executing similar projects.

Non EPC Works

Non EPC works include infrastructure works as well as administrative building, workshop, store, canteen, compound wall etc. The breakup of cost of Non EPC works is given in annexure:

Pre-operative Expenses

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Pre-operative expenses of Rs.23.74 crore comprise energy and fuel charges for trial runs, insurance, etc. during commissioning of the station and various overheads viz. salaries & wages, travel, bank charges, legal costs, etc. A breakup of Pre-operative expenses is given in annexure:

Contingency

Provision for contingencies has been considered equivalent to 2.7% of Hard Costs which include cost of land and site development, EPC works, Non EPC works and pre-operative expenses.

Interest during Construction

Interest during Construction for the implementation period of 18 months has been computed based on the proposed phasing as per companys estimates of expenditure & debt drawdown schedule at interest rate of 12% p.a.

Margin Money for Working Capital

Working capital margin requirement of the Project has been estimated during the first year of operation. The margin money requirement represents 25% of the total working capital requirement for the Project

GTG(Gas Turbine Generator) Contract

A brief summary of EPC Contract for GTG signed with GE Energy, France is as given below:

Zero Date

08-Mar-10

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Scope of work Plant Equipment Value Contract Parameters &

Supply of two (2) new model PG 6111 FA Turbines with its associated Generators Gas Turbine Generator (2 nos.)

of

Euro 34,200,000 Guaranteed Level 76.111 MW per GTG 10066 KJ/Kwh 596.6 Performance Damages Liquidated

Output

410 EURO per each KW below the guaranteed output 20,000 EURO per each KJ/Kwh above the guaranteed heat Rate Euro 1,03,000 per each Deg C below the exhaust temperature Euro 80,000 per each GJ/ hr below the guaranteed exhaust energy

Heat Rate Exhaust Temperature

Exhaust Energy

468.1GJ/ hr

STG(Steam Turbine Generator) Contract

A brief summary of EPC Contract for STG signed with HTC, China is as given below:

Contract Date Name Address

19-May-2010 Hangzhou Steam Turbine Co. Ltd 357, Shi Qiao Road, Hangzhou, People Republic of China Design, Manufacture, Test, Deliver 1X 75MW Steam Turbine Generator (STG) US 5,100,000 8-May-2010

Scope Value Effective Date

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Taxes & Duties Delivery Parameters

Purchaser's Account 14 months Guaranteed Performance Level Damages Liquidated

Steam Output

Turbine

72 MW

USD 2600 for every 1 KW shortfall in power output from the guaranteed value

(HRSG) Heat Recovery Steam Generator Contract

A brief summary of EPC Contract for HRSG signed with M/s Greens Power Equipment (China) Co. Ltd is as given below.

Contract Date Name

25-May-2010 Greens Power Equipment (China) Co. Ltd 17F, Shanghai Overseas Chinese Mansion, No. 129, Yan An Road (West), Shangai - 200 040, China Design, Manufacture, Test, Deliver two numbers Unfired Dual pressure type Natural Circulation Horizontal Gas Flow Heat Recovery Steam Generator (HRSG) USD 7,400,000 Guaranteed Level Performance Damages Liquidated

Address

Scope

Value Parameters Steam HP/ LP output

296 USD for every kg subject to max 10% of contract value

All these contacts to be got vetted by Local Legal Council(LLC), who should confirm in writing that they are in order & binding on the suppliers adequately.

1.

Comments on all major technical aspects like locational advantage, Technology/manufacturing process, power, man power, utilities,
76 | P a g e

transportation, etc. Locational advantage:

The project site is located about 6 km from Kashipur town at Udham Singh Nagar District in Uttarakhand state. The nearest Highway is NH-74 which is about 6 km from project site. The nearest railway station is at Kashipur.

The proposed site has been selected being suitable on following counts: 1. Availability of adequate habitation-free land. No forest land is involved. 2. Land being almost flat would entail lower land development work. 3. Adequate availability of ground water to run the proposed power plant. 4. As the location of the selected site is close the alignment of GAILs gas supply route, gas transmission charges are minimised. 11.1.1.1 FUEL (Gas Supply) ARRANGEMENT EGoM in its meeting on January 8, 2009 has decided that firm allocation should be made to power projects in the pipeline as and when they are ready to commence production. Priority is also given to projects in advanced state of execution located in power deficit states which do not have access to other sources of fossil fuels. The project is in the priority list of Ministry of Petroleum and Natural Gas (MPNG) for allocation of gas from D6 field of KG Basin for power projects to be commissioned in the XI Plan. SEPL is the only gas power project that has reached an advanced stage of execution and is expected to be commissioned in the XI Plan. Considering the above, it is SEPL will be allocated requisite gas from KG D6 gas field. As an alternative arrangement and keeping in view potential for future expansion, SEPL has signed a term sheet with GAIL India Ltd. for supplying gas for 225 MW CCPP. The Gas Supply Agreement and Gas Transportation Agreement are expected to be executed with GAIL India Ltd for a period of 8 years. Key provisions of the Gas Supply Term sheet between GAIL and SEPL are as follows:
GAIL Term Sheet

Particulars Tenor of contract 8 years

Terms & Conditions

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Gas Price

US $ 5.5/MMBTU on NCV basis till 01.08.2010. The price in US $/MMBTU shall be converted to India Rupees per 1000 SCM at NCV of 10,000 kcal/SCM by multiplying with the average exchange rate and the constant "39.68254". Rs. 1069/1000 SCM linked to 8600 kcal (NCV). The transmission charges shall be escalated by 3% annually. Rs. 8.82/MMBTU. The marketing margin shall be escalated @ 5% per annum The Daily Contracted Quantity of gas during the Term will be 0.6 MMSCMD. Provided further Seller agrees to supply an additional quantity of 0.3 MMSCMD on Reasonable Endeavour basis subject to mutually agreed terms and conditions. The gas is available from Vasai East field of ONGC and shall be transported and delivered at Kashipur.

Transmission Charges

Marketing Margin

Quantity

Source and Delivery

11.1.1.2 GAS TRANSMISSION ARRANGEMENTS GAIL India Ltd is laying a 12 NB x 105 km pipeline from Karanpur to Kashipur IGL Tap off point via Moradabad in Phase-I for transporting of 2.5mmscmd Natural Gas/R-LNG for various consumers in Moradabad, Kashipur and other locations along the pipeline. This shall be an extension to the existing HBJ gas pipeline network. The proposed gas pipeline of GAIL is planned from Karanpur to Rudrapur via Moradabad and Kashipur. Laying and Construction of the proposed pipeline shall be completed in 2 phases. Details of Construction activity shall be as follows:Phase 1: Phase 2: Karanpur-Moradabad-Kashipur (105km of pipeline) Kashipur-Rudrapur

GAIL has floated the tender for the work of Phase 1 of the pipeline through the Open International Competitive Bidding in the month of February 2010 with a plan to complete the pipeline within 7-8 months which is well before the commissioning of the Project. SEPL intends to sign a GTA with GAIL. We are stipulating that before disbursement of our loan, Gas supply and transmission agreement as proposed above be got executed and got vetted from LLC.

11.1 POWER EVACUATION

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SEPL has approached Power Transmission Corporation of Uttarakhand Ltd. (PTCUL) for granting open access and evacuation of power. Power generated from the proposed power plant will be stepped up to 220 kV and will be linked to PTCULs proposed 220 kV line of Mahuakheda ganj and Kashipur through Loop in Loop Out (LILO) and same will be fed to PGCIL grid at Bareilly. PTCUL has already commenced work on the above proposed transmission line and the same is expected to be on stream by December 2010. The company also proposes to apply to Power Grid Corporation of India Ltd. (PGCIL) for long term open access. 11.2 OFF-TAKE AGREEMENT
a) Tata Power Trading Company Limited: SEPL has entered into MoU with Tata Power Trading Company Limited (TPTCL) for sale of 100 MW of power for a period of 5 years. The Company is in the process of finalising a PPA with a tariff of Rs 5.50 per kWh. The salient features of the MoU are as stated below:
MoU between TPTCL and SEPL

Particulars Tenor of contract Annual Average Base Tariff (AABT)

Terms & Conditions 5 years from the COD of the plant Rs. 5.50 per kWh realization to SEPL at the Delivery point which shall be 220 KV metering point of power plant switchyard

Trading Margin

Adverse Market Situation (AMS) Upside

2% of the sale price, if realisation to SEPL is less than Rs. 5.50 per kWh. However if the AABT is <= Rs. 3.00/unit, the trading margin shall be 4 paisa/unit. 3% of sale price, if the realisation to SEPL is >=Rs. 5.50/unit TPTCL shall be entitled to share the upside (>Rs. 5.50/unit + margin) During AMS, TPTCL shall consult SEPL and sell power in market/power exchanges only after obtaining written consent from SEPL. The upside shall be shared in the ratio of 90:10 i.e. 90 per cent to SEPL and 10 per cent to TPTCL TPTCL and SEPL have agreed that there shall be no liabilities on either side on account of deficit in supply or deficit off-take of power

Liability

Merchant Power: The balance 125 MW of power is proposed to be sold as merchant power on short term /or medium term basis.

79 | P a g e

We are stipulating that before disbursement of our loan, MoU/PPA with TPTCL, as proposed above, be got executed and got vetted from LLC.

Site Conditions:

Topography The terrain of the proposed plant site is generally flat at an elevation of 221 m above Moderate Sea Level. The land is suitable to locate major heavy structures and buildings. There are no settlements/habitation in the proposed plant area.

Seismology The power plant is located in seismic zone IV as per IS: 1893-2002. The structures are designed to take care of seismicity condition of the area.

Geotechnical Specifications Geotechnical investigation at the proposed plant site has been carried out by M/s. CENGRS Geotechnica Pvt. Ltd, New Delhi. Expected load bearing capacity of the soil is about 15 tons/m2

Power Generation Process In a combined cycle power plant (CCPP) a gas turbine generator generates electricity and the waste heat is used to make steam to generate additional electricity via a steam turbine; this last step enhances the efficiency of electricity generation. By combining both gas and steam cycles, high input temperatures and low output temperatures can be achieved. The efficiency of the cycles add, because they are powered by the same fuel source

Human Resources:

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The proposed organization set up required for Operation and Maintenance of the plant has been estimated at 52 persons. Adequate experienced manpower to monitor the activities during the construction of the project is available.

2.

Summary of profitability, Break-Even, DSCR and IRR with comments thereon including Assumptions underlying profitability projections:
(Rs. In crores)
2017 279 2018 284 2019 290 2020 296 2021 302 2022 308 2023 314 2024 320 2025 327 2026 333

Projected Profitability Statement

Particulars Energy sale to trader Merchant Power sale Total Revenue Primary Fuel Cost O&M Expenses Total Expenses PBDIT EBITDA margin% Depreciation Interest on TL Interest on WCL Profit before tax Current Tax Profit after tax PAT margin % 247 131 594 324 594 334 594 344 594 355 605 366 618 377 630 388 643 400 655 412 2012 114 2013 273 2014 273 2015 273 2016 273

133

320

320

320

320

327

333

340

347

354

361

368

375

383

390

668 425

682 438

695 451

709 465

724 479

16 147 101 40.7 21 19 2 59 12 47 19.0

39 364 230 38.7 42 74 5 108 22 87 14.6

42 376 218 36.7 42 66 5 104 21 84 14.1

44 389 205 34.5 42 57 5 101 20 81 13.6

47 402 192 32.3 42 48 5 96 19 77 13.0

50 416 190 31.4 42 39 6 103 21 83 13.7

53 430 188 30.4 42 30 6 110 22 88 14.3

56 444 186 29.5 42 21 6 117 23 93 14.8

59 459 183 28.5 42 12 6 123 24 98 15.3

63 475 180 27.5 42 3 6 129 26 103 15.7

67 492 177 26.5 42 0 6 129 26 103 15.4

71 509 173 25.4 42 0 6 125 25 100 14.7

75 526 169 24.3 42 0 7 121 24 97 13.9

79 544 165 23.3 42 0 7 116 23 93 13.1

84 563 160 22.1 42 0 7 111 22 89 12.3

Projected Balance Sheet (Rs. In crores)

Particulars Equity Share Capital 2012 211 2013 211 2014 211 2015 211 2016 211 2017 211 2018 211 2019 211 2020 211 2021 211 2022 211 2023 211 2024 211 2025 211 2026 211

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Reserves & Surplus 47 Tangible Net Worth Secured Loans WC Loans Total liabilities Land Net Fixed Assets Working Capital Cash & Bank Balance DSRA Total assets 258 634 32 924 10 803 43 25

134 345 578 44 966 10 761 58 68

217 428 503 44 976 10 719 59 121

298 509 429 44 982 10 678 59 173

375 586 354 45 985 10 636 60 222

458 669 280 46 995 10 594 61 276

546 757 205 47

640 851 130 48

738 949 56 50

841

944

1,044 1,141 1,234 1,323

1,052 1,155 1,255 1,352 1,445 1,534 -0 51 -0 53 -0 54 -0 56 -0 57 -0 59

1,010 1,030 1,055 1,103 1,208 1,309 1,408 1,502 1,593 10 552 63 336 10 510 65 400 10 468 66 470 10 426 68 599 10 385 70 743 10 343 72 885 10 301 74 10 259 76 10 217 79

1,023 1,157 1,288

43 924

69 966

67 976

62 982

58 985

53 995

49

45

40

1,010 1,030 1,055 1,103 1,208 1,309 1,408 1,502 1,593

Projected Cash Flow Statement (Rs. In crores)

Particulars Profit after tax Add: Interest Expense Add: Depreciation Less: Changes in WC Cash from Operating Activities 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

47 21 21 -32

87 80 42 -15

84 71 42 -1

81 62 42 -1

77 53 42 -1

83 45 42 -2

88 36 42 -2

93 27 42 -2

98 18 42 -2

103 9 42 -2

103 6 42 -2

100 6 42 -2

97 7 42 -2

93 7 42 -2

89 7 42 -2

57

193

196

184

172

168

164

161

157

153

149

146

143

140

136

Increase in Capital -156 Expenditure Cash from Investing Activities Increase in Share Capital Interest Expense Change in DSRA Add/(Repay) Secured Loans

-156

48 -72 -43 158 -80 -26 -56

-71 2 -75

-62 4 -75

-53 4 -75

-45 4 -75

-36 4 -75

-27 4 -75

-18 4 -75

-9 40 -56

-6 0 0

-6 0 0

-7 0 0

-7 0 0

-7 0 0

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Add/(Repay) Wkg. Capital Loans Cash from Financing Activities Net Cash Generation Opening Balance Addition Closing Balance

32

11

124

-151

-143

-132

-123

-114 -105

-96

-87

-24

-5

-5

-5

-5

-5

25 0 25 25

43 25 43 68

53 68 53 121

52 121 52 173

49 173 49 222

54 222 54 276

60 276 60 336

65 336 65 400

70 400 70 470

129 470 129 599

144 599 144 743

141 743 141 885

138 885 138

134

130

1,023 1,157 134 130

1,023 1,157 1,288

DSCR
Particulars 2012 Principal Repayment Interest on TL Total Debt Servicing PBDIT Less: WC Interest Less: Taxation Net cash DSCR Average DSCR 0.0 19.2 19.2 100.7 1.9 11.7 87.1 4.52 2013 55.9 74.4 130.3 229.8 5.2 21.6 203.0 1.56 2014 74.6 66.0 140.5 217.6 5.3 20.8 191.5 1.36 2015 74.6 57.0 131.6 204.9 5.3 20.1 179.5 1.36 Projections 2016 2017 74.6 48.1 122.6 191.7 5.4 19.2 167.1 1.36 1.60 74.6 39.1 113.7 190.0 5.5 20.6 163.8 1.44 2018 74.6 30.2 104.8 187.9 5.7 22.0 160.3 1.53 2019 74.6 21.2 95.8 185.6 5.8 23.3 156.6 1.63 2020 74.6 12.3 86.9 183.0 6.0 24.5 152.6 1.76 2021 55.9 3.4 59.3 180.1 6.1 25.7 148.3 2.50

Brief of the financials are as under:-

Company as a whole

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Debt-Equity Ratio Average DSCR Minimum DSCR Internal Rate of Return (Pre Tax)

75 : 25 1.60 1.36 19.78%

Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix VII

Comments on Revenue Assumptions: The major assumptions are tabulated below: Project Installed Capacity Plant Load Factor Station Heat Rate Gross Generation Auxiliary Energy Consumption Net Generation Capital Structure Interest Rate Debt Equity Interest rate on Long Term Debt Interest rate on Working Capital Loan Operations Landed Fuel cost Annual Escalation (6th year onwards) Off-take TPTCL Selling Price Annual Escalation (6th year onwards) Merchant Power Selling Price 225 MW 80% 1660.5 kcal/kWh 1577 MU 2.5% 1537 MU 75% 25% 12% 12% 12.02 Rs./SCM 3% 100 MW Rs. 4.00 /unit 2% 125 MW Rs. 3.75 /unit
84 | P a g e

Annual Escalation (6th year onwards)

2%

Sales: The revenue for SEPL has been estimated considering sale of energy generated to two different categories of buyers viz.

1. Tata Power Trading Company Ltd.: Under MoU with TPTCL a tariff of Rs.

5.5/kWh has been indicated for 100 MW. Taking a conservative view on tariffs based on the long term power demand-supply scenario, a tariff of Rs. 4.0/kWh (after adjusting for trading margins) has been assumed for the first five years during the length of the contract with TPTCL. Thereafter, an annual escalation of 2% is built in the tariff. 2. Merchant Power Sale: The balance 125 MW is proposed to be sold under Merchant sale at a tariff of Rs. 3.75/kWh for the first five years of operation. Thereafter, an annual escalation of 2% is built in the tariff. Company should tie up total sale of power on long term basis within six months of release of TL. Fuel Cost: The project is in the priority list of Ministry of Petroleum and Natural Gas (MPNG) for allocation of gas from D6 field of KG Basin for power projects to be commissioned in the XI Plan. SEPL is the only gas power project that has reached an advanced stage of execution and is expected to be commissioned in the XI Plan. Considering the above, it is SEPL will be allocated requisite gas from KG D6 gas field. The company is executing gas supply and transmission agreement with GAIL as mentioned in the Gas Supply arrangement above. Based on these, SEPL has made the assumption that fuel i.e. gas will reach their site at the cost: Rs.12.02 /SCM. ix) Detailed Sensitivity Analysis:

The sensitivity analysis has been carried out for various vital parameters of the project such as tariff, PLF and long term interest rate to ascertain the average DSCR and minimum DSCR. Sensitivity DSCR Average Minimum
85 | P a g e

Project IRR

Base Case Change in Tariff Tariffs increase by Rs0.25/unit Tariffs drop by Rs 0.25/unit Change in PLF PLF at 90% PLF at 70% Change in Interest Rate Interest rate >50 bps Interest rate <50 bps

1.60 1.90 1.31 1.83 1.37 1.58 1.63

1.36 1.58 1.11 1.54 1.17 1.34 1.38

19.78% 23.64% 15.46% 22.79% 16.60% 19.93% 19.66%

Status of various statutory approvals and clearances Land acquisition (36.92 acres) is complete for the Project. The following Clearances/ Approvals as per the Indian Environmental Legislations are applicable to the project:

Clearance from the Divisional Forest Officer: The Company has obtained clearance from the Divisional Forest Officer for setting up the power plant.

Water Usage and its availability: The Company has received approval from Central Ground Water Board for usage of water of 4585 cubic meters (cum.) per day on permanent basis.

Environmental Clearance: SEPL has obtained Environmental Clearance from Ministry of Environment and Forest (MoEF), Govt. of India on 09.03.2010.

Consent for Establishment from State Pollution Control Board: SEPL has received CFE from State Pollution Control Board of Uttarakhand on 1006-2010.

Civil Aviation Clearance: NOC has been obtained from Airport Authority of India (AAI) for chimney height clearance on 21-04-2010.

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Notification for industrial use of land: Issued vide notification dated 04 November 2009 by Industrial Development Department, Govt. of Uttarakhand.

NOC from ASI: Letter of NOC from Archaeological Survey of India on 08.01.2010.

1.

Present physical & financial status of project: Physical Progress: The progress of work on various critical fronts at the project site as on 31 st July 2010 is as follows:

Sr 1. 2. 3. 4. 5. 6. 7. 8. 9.

Name of Component Piling Roads and Drains Water Reservoir Area Grading Workshop Construction Power Site Office Store Mechanical Works

Quantity Completed GTG- 1 completed and GTG-2 under progress Stage 1 of plant roads are 90% complete Excavation has been completed 75% complete Excavation started Completed Completed and functional Completed Fire fighting works started. Structural works are in progress Plant permanent lighting works in progress

10.

Electrical Works

Financial Progress:

As on 31.07.2010, SEPL has infused Rs.118.31 crore which is contributed by way of share capital (Rs.46.01 crore) and share application money (Rs.72.30
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crore). Since than IFCI has also contributed Rs.40.00 crore out of their share for capital. 2. Implementation schedule
Project site works commenced in April, 2010 while NTP for the EPC contract was May 12, 2010. The COD for the project is September 30, 2011. Indicative timelines for achievement of key project implementation milestones are as follows:

Sr 1 2

Description EPC Contract Award Consent for Establishment Major Package Award Civil Work Start Date Open Cycle Civil Work Completion Combined Cycle Civil Work Completion Open Cycle Commissioning Combined Cycle Commissioning Project C.O.D

Planned Date May 15, 2010 June 01, 2010

Actual/Anticip ated Date April 30, 2010 June 10, 2010

Status Achieved Achieved

3 4 5

Aug 01, 2010 June 10, 2010 Nov 30, 2010

July 1, 2010 June 15, 2010 Nov 30, 2010

Achieved Achieved On schedule

Dec 31, 2010

Dec 31, 2010

On schedule

Sept 30, 2011

Sept 30, 2011

On schedule

Dec 31, 2011

Dec 31, 2011

On schedule

Dec 31, 2011

Dec 31, 2011

On schedule

Remarks : As financial closure is yet to be achieved, the schedule is tentative. The actual schedule with COD will be firmed at the time of documentation/financial closure.

3.

Draw Down Schedule Quarter-wise it will be decided by the lead bank of the consortium in consultation with the company depending upon the progress of the project at the time of documentation. Proposed repayment schedule

4.

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Scheduled date of Completion of Project Commercial Operations Date (COD) Implementation period (in months) Moratorium (in months) Repayment period in months/quarters/Half year No. of instalment

December 2011 31 December 2011 18 months 6 months from CoD 34 EQI 34 quarterly instalments 6 months from CoD 01.10.2021 10.25 years

Starting Date End Date (Last instalment) Door to door tenor

The above is tentative and will be finalised at the time of documentation.

13.

Pricing

Facility

Existing

Proposed

Applicable rate

Rate of interest Upfront Fee

TL

NA

BR+3.50+TP 13.00% 0.25% +ST

i.e. B.R+5.00+TP i.e. 14.50% 1.25%+ ST

NA

Other charges, if any

NA

As Applicable

As Applicable

1. Justification The appraising institution IFCI has stipulated ROI of 12%linked to respective BR of banks and FI. The ROI is attractive considering that this is an infrastructure project and there is bulk offtake. The ROI is already approved by NBG and CH has recommended for the same.

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2. ROI/other charges stipulated by other participating banks, if applicable All lenders will sanction in line with the charges and ROI of appraising institution. The upfront fee stipulated is 0.25% of loan amount and stands approved by NBG. Sanction are received from other lenders.

14.

Other Issues not discussed elsewhere: NIL

15.

Strengths & Weakness with mitigants:

Strengths:

a) Combined cycle gas based power projects have short gestation period in comparison with coal based or hydro electric power plants. The COD for the project is Dec 2011 hence allowing quick access to the power deficit markets b) SEPL is on the priority list of the MPNG for allocation of gas from Reliance KG Basin on account of the considerable progress in the project and its location in Uttarakhand which is priority state for gas allocations due to non availability of other fossil fuels. c) Gas is the cleanest of all fossil fuels, emits low NO2, SO2 and no particulate matter. Further CO2 emission is half of a comparable coal based project. SEPL will also use air cooling technology in order to minimize consumption of water. It is hence an ecologically harmonious project. On account of ecological reason, gas based Thermal Power Plants are approved for hilly areas like Uttrakhand. Weakness: a) The Government exercising its sovereign right over Gas produced from the KG Basin has mandated that the gas shall be utilized in accordance with the Gas Utilization Policy. Accordingly all firm allocations shall be made to power projects as and when they are ready to commence production.

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Mitigants:

IFCI, appraising agency has submitted that the project is in the priority list of Ministry of Petroleum and Natural Gas (MPNG) for allocation of gas from D6 field of KG Basin for power projects to be commissioned in the XI Plan. As an alternative arrangement and keeping in view potential of future expansion, SEPL has signed a term sheet with GAIL for supply of 0.9 mmscmd (0.6mmscmd on firm basis and 0.3mmscmd on reasonable endeavour basis) of gas (NCV of 8600 kcal/SCM). Hence, the gas supply risk involved is minimal.

16.

Recommendations:

In view of above CH has recommended for sanction of term loan of Rs.75.00 crores on proposed ROI of BR+2.50%+TP presently 12.00% and on detailed Terms and Conditions are as per Appendix I.

CH has certified that the stipulated terms and conditions have been duly discussed with the borrower.

PART III Based on the projections, the company has been rated as PNB B B- with score of 50.35%, under New Project Rating Model- Upto Implementation, signifying Average Risk The other key areas of risk identified along with observations/ suggested mitigants are as follows:

RISKS 1.

MITIGANTS/OBSERVATIONS The promoters have already infused funds to the tune of ` 118.31 Crs. ` 54.93 Crs has been proposed to be infused by IFCI as equity contribution. 91 | P a g e

The cost of the project has been estimated at ` 845 Crs which has been proposed to be funded through Equity of ` 211.25 Crs & Debt funds

of ` 633.75 Crs.
Any delay in induction of Promoters Contribution & tie-up of debt funds may result in time & cost overruns and may impact in achieving projected financials. Also, Co. has approached Axis Bank for TL of ` 200 Crs, State Bank of Patiala for ` 100 Crs, State Bank of Mysore for Rs. 50 Crs, IFCI Ltd. for ` 175 Crs, Canara Bank for ` 50 Crs and our bank for ` 75 Crs. MCB to monitor and ensure timely induction of Promoters contribution and tie-up of remaining debt funds for completion of the project as per schedule within the given cost estimates. AGM Branch to release the TL only after financial closure of the

2) Loan Policy : Compliance of policy guidelines for Term Loans above 5 years: Ceiling on TLs with remaining maturity period of 5 years The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend, as is being done for ALM. As per the ALM statement of structural liquidity, as on 30.9.2010 deposit with residual maturity over 5 years are to the tune of Rs.59335.59 crore and term loans with residual maturity of over 5 years are Rs.22319.38 crore, which works out to 37.62% of term deposits. Thus this stipulation is complied with.

Outstanding as on 30.9.10

Compliance of DER policy: Guidelines Status of compliance Deviation No deviation. However in view of size of the project and the experience of the promoters in this industry, we may relax the DER to 3:1.

DER for Power-independent DER of the project is 3:1 power producing plant is 2.33:1 However GM (HO) may relax the same upto 3:1, ED/CMD may relax the same upto 4.00:1 & MC has full powers.

3) Industry

Industry Exposure as on 31.3.2010 Infrastructure-Power

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Outstanding ( Rs. in Crore) % of Gross Credit in the Industry Ceiling in terms of outstanding as per current loan policy Amount of NPA in industry % to total advances in --------industry

9913.67 5.26% No ceiling stipulated

11.85 0.05%

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14 Conclusion and Recommendations

Risk rating: Broadly there are two rating grades: Investment grade with rating B or more Non investment grade with rating below B These grades are further bifurcated into eight grades already mentioned in the credit risk rating section. In the given case, the company has risk rating of B+ with marginally acceptable risk (investment grade). Hence it can be financed by the bank. Debt-Equity Ratio (DER): Ideal DER should be 2:1 except for infrastructure project

having long gestation period or having huge capital investment projects, indicating debt paying capacity of the company with respect to its long term liability. The company has a DER of 3:1 which can be accepted as project being a long term infrastructure project. Debt Service Coverage Ratio (DSCR): The minimum DSCR of borrowing company

should be greater than or equal to 1.25 and the average DSCR of the same should be greater than or equal to 1.5:1 In the given case, the company has minimum DSCR of 1.36:1, where as its average is 1.60:1, which indicates that the company is able enough to service its debts. The ratio of 1.60:1 is indicating that the company is having a margin of safety of 60%. Sensitivity Analysis of DSCR: Value of DSCR in sensitivity analysis should never be less

than 1.10. The values of DSCR which are less than 1 are indicating that the company will not be able to honour its commitment. For this purpose, the bank goes for the credit enhancement i.e. demanding collateral security, corporate and personal guarantee on behalf of the borrower. Current Ratio: This ratio shows the short-term financial position of the business. It

measures the ability of the business to pay its current liabilities. Current ratio as per second method of lending should be at least 1.33:1.

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On the basis of above factors I conclude that the given company is eligible for term loan financing and working capital demand loan. Hence bank has sanctioned the term loan proposal of Rs. 75 crore .

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15 Limitations of the study

The data availability is proprietary, not readily shared for dissemination and is highly confidential. Assumptions and projections are based on current market conditions and have not taken into account the price volatility. Financial statements of the proposed project are subject to risks and uncertainties that could cause actual results to differ materially from those mentioned in the report. The risks and uncertainties include, but are not limited to, the following: (i) (ii) (iii) (iv) Changes in Indian laws Changes in Indian in global economic conditions Changes in government regulations Introduction of new technologies

The staff although are very helpful but are not able to give much of their time due to their own work constraints. The study is being done keeping in mind the policies of the Head Office.

Due to the ongoing process of globalization and increasing competition, no single model or
method will suffice over a long period of time and constant up gradation will be required.

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16 Scope for future improvements

Sensitivity analysis: This should be done on the basis of the Industry average values. For eg: if the profit margin for an industry is 2% and if the sensitivity base (on parameters like raw materials, sales etc) is 5 % , then it will give the wrong picture. And also the price volatility should be taken into account during sensitivity analysis. Social cost benefit analysis: In SCBA the focus is on the social cost and benefits of the project. These tend to differ from the monetary cost and benefits of the project. SCBA helps in evaluating the individual project within the planning frameworks which spells out national economic objectives and broad allocation of resources. The social cost is quantified in terms of employment generation, railways, road, forex etc. It is done by certain banks like World Bank etc.* (This is more discussed in glossary section) Economic rate of return: Some term lending FIs appraise project proposals primarily from the financial point of view. However, they also scrutinize projects from the larger social point of view. IDBI introduced a method to calculate a rate of return at which the costs and benefits of a project, discounted over its life, are equal. ERR differs from the financial rate of return in that it takes into account the effects of factors such as price control, subsidies, and tax breaks to compute the actual cost of the project to the economy. Partial seasonality: In CMA, the holding levels of inventory should be of monthly closing average instead of valuing the inventory on the last day of financial year. This will help in dealing with partial seasonality if any. Hence it will provide more accurate position of the same. Internal Rate of Return: The bank should analyze the internal rate of return (IRR) to verify the exact financial soundness of the company. IRR should be greater than inflation rate, cost of debt and cost of equity to the company. Comparison with peers: Companys operating cycle and other key financials should be compared with that of competitors and peers in the same industry. This is to check inefficiency on the part of company if any. For eg: the borrower company has operating cycle of 5 months but peer companies have that of 3 months. This shows the inefficiency of the borrower company which can only be highlighted if we compare it with peers. Similarly Cost comparison should be done with peers. ROCE in consideration: ROCE should be taken into consideration along with the PBT and Other Income. Timely measurement of ROCE indicates if any diversion of funds from the project (for which financing has been done) to any other project or company. It gives a better picture of the profitability of the company and the shareholders share in profit making. =

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ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowings will reduce shareholders earnings. NWC/ Sales Ratio: For working capital assessment, NWC/ Sales ratio can be added. = Ideally this ratio should be around 8% - 12%. If this ratio is low, it indicates that the business is growing too fast without building an adequate cushion in the form of NWC. It indicates symptom of overtrading and undue reliance on borrowed short term funds. Falling ratio is indicative of overtrading and serious liquidity problems and it needs to be investigated. PBF vs Sales: Bank should also keep a track of the movement of PBF as the sales changes. Working capital loan financing along with term loan financing: Bank should also finance working capital requirements of the company if it is lending the term loan to the same. This is required to monitor the cash flows, operating income etc. on a monthly basis which is not possible to track in case of term financing only. If the borrower company does not take working capital loan fund from the same bank, then the company should maintain an Escrow account with the bank so that the bank can charge its timely interest on term loan. Standardization of rating process: There should be a standard rating process to remove the subjectivity and different perceptions of the rater (person who does credit rating process for a borrower company). It will remove the human biasness in the process. Personal Guarantee: Personal guarantee does not give any physical asset to the bank. It is for the moral binding on the part of borrower. Hence, bank should prefer to use this type of guarantee as this will reduce the default rate on the part of borrower. CMA and Real Growth Index: CMA does not give real growth index. So it is better to compare the quantitative production, capacity utilization to ascertain real growth productivity rather than sales volume alone as sales growth can only be on account of inflation during the review period. Reduction of tier system for process: Faster dispersion of credit is of paramount importance. A proposal has to pass through three channels and none touch points, which lead to delay in the dispersal of credit.

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Circle Office
Officer Manager Chief Manager Officer Manager Circle Head Chief Manager Deupty General Manager General Manager

Branch Office

Head Office

Figure 7: Tier System of Approval of Loans at PNB

Thus there is a need of drastic reduction in these channels for faster decision making. This will curtail avoidable delays, improved efficiency besides reducing appraisal time as well as cost.

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17 Glossary
Borrowing Entity: It is the entity that borrows money. For instance Videocon, Reliance borrowed money against their share of future production of oil from another company owned by them as a joint venture. Commercial Lenders: Providers of debt both foreign and local. Arranging bank: Bank that syndicates loan from various lenders as single bank cannot provide the entire loan. Lead Bank: Coordinator for all banks for credit administration and compliance of covenants. Rating Agency: Provide credit rating services for public debt (CRISIL, ICRA). Technical Consultant: Consultants to the projects on technical matters such as energy, environment etc. Also analyses all technical aspects of the project. Credit Enhancement: Improvement of rating through structuring extra collateral, guarantees from sponsor, debt service reserve fund etc. Escrow A/C: Channeling of funds through a special account with a third party to be utilized in consultation with the lender. Force Majeure: Occurrence of a type of risk outside the control of the participants like cyclone war etc. Loan Amortization/ Loan Tenor: The repayment schedule of loans. Pari Passu: A legal term that denotes equality of payment and security for all senior lenders. Loan Agreement: Agreement entered into between the lenders and the project company. Cost overruns: Unplanned cost incurred over the budgeted cost. Cash Credit (CC) system: Cash credit method of delivery allows drawings by a borrowing enterprise to the extent of value chargeable assets less margin. This system dominates the scenario of credit dispensation by Indian banks. Consortium System of credit delivery: In consortium lending, several banks pool together their banking resources and expertise in credit management and provide to a single borrower with a common appraisal, common documentation and a system of joint supervision and follow up. The consortium selects a leader which is called lead bank. Lead bank takes maximum exposure and carries out certain task like appraising the various aspects of credit proposal, convenes the consortium meeting etc. Multiple Banking system: In multiple banking system, a company can arrange multiple finances through multiple banking arrangements. Under this system every bank has its own procedures, norms and different sets of documentation which the borrowing company has to follow. Unlike consortium system of financing there is no lead bank framing policies and procedures for other banks. Syndication of credit: A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. At the most basic level, arrangers serve the investment-banking role of raising investor funding for a company in need of credit. The
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company pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. This is a preferred mode of credit delivery especially when the amount of credit is large and is ling term in nature. Thus, syndication of credit is most suitable for long term cross border financing and long gestation period infrastructure projects. Social Cost Benefit Analysis (SCBA) In SCBA the focus is on the social cost and benefits of the project. These tend to differ from the monetary cost and benefits of the project. SCBA helps in evaluating the individual project within the planning frameworks which spells out national economic objectives and broad allocation of resources. In SCBA the focus is on the social costs and benefits of the project. These often tend to differ from the monetary costs and benefits of the project. The principal sources of differences are: Market Imperfections Externalities Taxes and subsidies Concern for savings Concern for redistribution Merit wants

One principal approach for SCBA is UNIDO approach. It provides a comprehensive framework for SCBA in developing countries. This method of project appraisal involves 5 stages: 1. Calculation of the financial profitability of the project measured at market prices. 2. Obtaining the net benefit of the project measured in terms of economic (efficiency) prices. 3. Adjustment for the impact of the project on savings and investment. 4. Adjustment for the impact of the project on income distribution. 5. Adjustment for the impact of the project on merit goods and demerit goods whose social values differ from their economic values. Pledge: It is delivery of goods by a borrower to a lender as security for the payment of a debt or the performance of a promise. The ownership remains with the borrower but the possession of the goods is with the lender until the debt is paid. Hypothecation: It is a mode of creating an equitable charge on a property to secure the payment of a debt in which the property itself continues to be in the possession of the debtor. It is a legal transaction whereby a merge charge is given on the goods for the amount of the debt but the hypothecated goods remain in the actual possession of the borrower. And neither possession nor ownership passes to the lender. The instrument which creates a charge is known as Letter of Hypothecation. Lien: It is the right of one person to retain the goods or a security belonging to another person until a debt due from the latter is paid to the former. After a lien has been obtained the debtor remains the legal owner of the property although he loses his right to sell.

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Mortgage: It is the creation or transfer of a legal or a equitable interest in property by the borrower to the lender as security for the payment of a debt or the discharge of some other obligation. Moratorium: It is an agreement between a creditor and a debtor to allow additional time for the settlement of a debt.

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18 References
Books 1. Mukherjee, DD (2010), Credit Appraisal Risk Analysis & Decision Making, Jain Book Depot 2. Ganguin, B. and Bilardello,J (2005), Fundamentals of Corporate Credit Analysis, McGraw-Hill 3. Dash, S. K.(2006),Tit Bits of General Advances & Financial Services, Bank House 4. Martin, J. P. and Cendrowski, H. (2010), Financial Statement Fraud and the Lending Decision, COMMERCIAL LENDING REVIEW 5. Kiehnau, L. and Budyak, J. T. (2009),The Valuation of Collateral, THDE SECURED LENDER 6. Gunjan,M; Vikram,S. and Soumyadeep,S.(2010), Indian Banks' Methods for Assessing Working Capital, Advances In Management, Vol. 3 (12) Dec. (2010) pp7-16 7. Bidani,S.N. and Sahay,B. (1988), How Bank Credit is Administered: Supervision and Follow-up, Vision Books, Delhi 8. Hale, Roger H.H. (1983), Credit Analysis-A Completer Guide, John Wiley & Sons Inc., NewYork 9. Donaldson, T.H. (1983), Understanding Corporate Credit, Macmillan 10. Chatterjee, A. (1978), Bank Credit Management (How to Lend Effectively), Suneja Publishing Corporation, Delhi PNB journal (Internal Circulation) 11. PNB, Annual Report ( 2009-2010) 12. PNB, Ready Reckoner 2010 13. PNB, Book of Instruction 2010, Chapter 03, 04, 12. 14. Gist of operative circulars on loans and advances 15. Internal files of PNB Internet Websites 16. www.investopedia.com accessed on 25 April 2011 17. www.rbi.org.in accessed on 01 June 2011 18. www.pnbindia.com accessed on 02 June 2011
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