Professional Documents
Culture Documents
SIP project report submitted in partial fulfillment of the requirements for the PGDM
Program
By
Saket Rathi
2010197
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.
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1 Table of Contents
1
Abbreviations .................................................................................................................................. 8
Introduction .................................................................................................................................. 10
6.2
6.3
Methodology................................................................................................................................. 20
10
10.1
10.2
10.3
11
Working Capital......................................................................................................................... 26
11.1
11.1.1
11.1.2
12
Types of Financing..................................................................................................................... 39
13
13.1.
13.1.1.
13.1.2.
13.2.
13.3.
13.4.
13.5.
14
15
16
17
18
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 being 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
6|Page
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 Banks
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
Bank Guarantee
CC
Cash Credit
CMD
CO
Circle Office
CRMD
CCA
CD
CARD
CASA
CRMC
DSCR
DER
Debt-Equity Ratio
DTL
DPG
DTA
BD
Discount of Bills
ED
Executive Director
FACR
FB
Fund Based
GM
General Manager
HO
Head Office
IRMD
LCB
LC
Letter of Credit
8|Page
LOC
Letter of Credit
MC
Management Committee
MPBF
MCB
NWC
NFB
PMS
PF
Provident Fund
PNB
RBI
RMC
RMD
TEV
Techno-Economic Valuation
TL
Term Loan
WC
Working Capital
CO
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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11 | P a g e
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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.
CMD
ED
GM
(Credit)
GM ( NPA
& Weak
Account)
GM
(Retail &
lending)
DGM
AGM
GM
(Treasury
)
DGM
AGM
GM
(IRMD)
GM
(Audit)
.......
......
DGM
AGM
GM
(Deposits)
......
Funtional
Head
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Corporate
Office (HO)
Branch
Office (BO)
Circle Office
(CO)
Circle Office
(CO)
Circle office
(CO)
Large
Corporate
Branches
Mid
Corporate
Branches
Retail Hub
Specialized
branches e.g.
Agriculture
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.
16 | P a g e
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
17 | P a g e
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:
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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%
21 | P a g e
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.
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.
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.
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
24 | P a g e
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
Cash
Account
Recievabl
e
Deliver
Goods
or
Service
Sales
Order
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
III
Finished Goods
Holding period of FG
before being sold
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)
27 | P a g e
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
1st Method
2nd Method
Total CA
370 Total CA
WCG
220
MPBF
Current Ratio
200
20
90
50
10
370
165 MPBF
1.17:1 Current Ratio
3rd Method
370 Total CA
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
370
95
275
69
150
56
1.79:1
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.
29 | P a g e
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.
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
Seller
Applicant
Beneficiary
Sales Contract
(1)
(2)
(4)
Buyers
Advising
Bank
Bank
Issuance of Letter of
Credit
Issuing
Bank
(3)
Confirming
Bank
31 | P a g e
Seller
Beneficiary
Applicant
Payment to Beneficiary (7)
Advising/
Confirming
Bank
Reimbursement (9)
Negotiating
Buyers
Bank
Issuing
Bank
Payment to
Beneficiary (7)
Bank
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
Buyer
Applicant
Payment (11)
Documents (10)
Buyers
Bank
32 | P a g e
Issuing
Bank
Types of Letter of Credit: Letter of credit may be divided in two broad categories as under:
(i)
(ii)
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)
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.
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.
33 | P a g e
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.
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
Management Expertise
Company Policies
Labour Relations
The internal factors within the bank, influencing credit risk for a bank are:
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:
35 | P a g e
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
36 | P a g e
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.
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
Description
Score obtained
Grade
AAA
Minimum risk
Above 80.00
AAA
AA+
AA
AA-
A+
A-
BB+
BB
BB-
B+
B-
AA
BB
Marginal risk
Modest risk
Average risk
Marginally
acceptable risk
37 | P a g e
High risk
Caution risk
Below 30.00
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.
38 | P a g e
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.
39 | P a g e
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.
40 | P a g e
(9252)
(9945)
(9508)
(10254)
(11463)
(13897)
(18073)
(13124)
(15747)
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
Peak Deficit
(Source: CEA)
41 | P a g e
(83807)
800000
(66092)
700000
(MU)
600000
(39187)
(48093)
(39866)
(43258)
(73338)
(85303)
(52938)
500000
400000
300000
200000
100000
0
9TH PLAN 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
END
Energy Availability
Energy Deficit
(Source: CEA)
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
Peak
Demand
(MW)
37159
Gap
(MW)
Shortage
(%)
-5720
-15.4%
Energy
Requirement
(MU)
253803
Western
39609
-7023
-17.7%
258551
-35398
-13.7%
Southern
32082
-3029
-9.4%
220557
-14032
-6.4%
Eastern
13963
-1078
-7.7%
88040
-3986
-4.5%
N Eastern
1760
-315
-17.9%
9349
-1034
-11.1%
Gap (MU)
Shortage
(%)
-29356
-11.6%
(Source: CEA)
42 | P a g e
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
75.27 MW
42189.33 MW
21319.46 MW
Northern
Western
Southern
Eastern
N.Eastern
Islands
43300.50 MW
50225.03 MW
Source: CEA
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:
43 | P a g e
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.
44 | P a g e
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
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
80,000
60,000
40,000
20,000
0
8th Plan
9th Plan
Target (MW)
10th Plan
Achievement (MW)
Percentage Achievement
(Source: CEA)
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
Peak Load ( MW )
2011-12
2016-17
Energy Requirement ( MU )
2021-22
2011-12
2016-17
2021-22
Northern
48,137
66,583
89,913
2,94,841
4,11,513
5,56,768
Western
47,108
64,349
84,778
2,94,860
4,09,805
5,50,022
Southern
40,367
60,433
80,485
2,53,443
3,80,068
5,11,659
Eastern
19,088
28,401
42,712
1,11,802
1,68,942
2,58,216
2,537
3,760
6,180
13,329
21,143
36,997
1,52,746
2,18,209
2,98,253
9,68,659
13,92,066
19,14,508
North Eastern
All India
(Source: 17th EPS)
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
Nuclear, 3,380 , 4%
RES
0%
Hydro
Hydro,
15,627 ,
20%
Thermal
59,693
76% Diesel, - , 0%
Coal,
52,850 ,
67%
Nuclear
RES
Coal
Gas
Diesel
Gas, 6,843 , 9%
(Source: CEA)
25,000
20,210
20,000
15,000
14,060
13,000
Hydro
10,886
10,000
Thermal
7,488
Nuclear
5,000
440
1,170
1,094
2,940
3,151
0
2,724
1,537
0
Northern
Western
Southern
Eastern
North Eastern
(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
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Installed Capacity
CAGR (%)
(MW)
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
Feb 10
1,57,229
61,207
81.54%
1,01,287
64.42%
Jan 10
1,56,784
64,854
80.06%
99,636
63.55%
Dec 09
1,56,092
63,417
78.91%
98,166
62.89%
Nov 09
1,55,859
59,416
75.47%
1,00,856
64.71%
Oct 09
1,53,694
64,815
74.88%
1,00,255
65.23%
Sep '09
1,52,360
62,201
71.71%
1,01,852
66.85%
Aug '09
1,52,148
65,287
71.74%
99,277
65.25%
July '09
1,51,073
62,685
71.83%
96,282
63.73%
June '09
1,50,323
62,126
77.17%
96,871
64.44%
May '09
1,49,392
62,477
79.19%
95,033
63.61%
Apr '09
1,48,265
60,377
82.53%
97,355
65.66%
(Source: CEA)
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
Region
Peak
Demand
All India
1,52,746
(Source: CEA)
(in MW)
Peak
Supply
1,25,684
Deficit
-27,062
%
-17.72%
Energy
Demand
9,68,659
(in MU)
Energy
Supply
9,43,709
Deficit
-24,949
-2.64%
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
48 | P a g e
All India
1,52,746
1,25,684
-27,062
-17.72%
9,68,659
9,43,709
-24,949
Northern
48,137
34,357
-13,780
-28.63%
2,94,841
2,57,974
-36,867
Western
47,108
36,312
-10,796
-22.92%
2,94,860
2,72,649
-22,210
-2.64%
14.29%
-8.15%
Southern
40,367
32,419
-7,948 -16.69%
*Data for Eastern & North-eastern states not depicted.
(Source: CEA)
2,53,443
2,43,421
-10,021
-4.12%
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.
49 | P a g e
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%
Gas, 8.45%
Source: CEA
50 | P a g e
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
(1854)
(2203)
(1546)
9TH PLAN
END
2003
2004
(2709)
(2954)
2005
2006
Peak Supply
(MW)
(4872)
(2967)
(3530)
2007
2008
2009
(5720)
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
(29356)
250000
200000
150000
(7973)
(12392)
(8852)
9TH PLAN
END
2003
2004
(16140)
(20183)
(22139)
2005
2006
2007
(23650)
(24290)
2008
2009
100000
50000
0
Energy Supply
(MU)
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
Chandigarh
Delhi
Haryana
Himachal Pradesh
Jammu and Kashmir
Punjab
Rajasthan
Uttar Pradesh
Uttarakhand
Peak
Demand
(MW)
Peak
Gap
(MW)
Peak
Gap
(%)
308
4502
6133
1118
2247
5795
6859
10856
1247
0
-8
-455
40
-726
-708
0
-2293
-250
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%
(Source: CEA)
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
Uttarankhand
Chandigarh
Total
(Source: 17th EPS)
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
Thermal
Coal
Gas
Diesel
Total
Nuclear
Wind
Total
964
5,870
1,720
7,590
8,554
Private
1,792
2,680
225
2,905
4,697
Central
4,732
2,730
2,730
440
7,902
Total
7,488
(Source: CEA)
11,280
1,945
13,225
440
21,153
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.
53 | P a g e
Sector
Hydro
State
Thermal
Nuclear
R.E.S.
Total
0.00
0.00
132.92
1385.07
0.00
0.00
0.00
0.00
400.00
261.26
69.35
0.00
22.28
0.00
619.92
261.26
69.35
0.00
22.28
132.92
2404.99
Coal
Gas
Diesel
1252.15
0.00
0.00
Private
400.00
0.00
Central
267.03
Total
1919.18
(Source: CEA)
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
1000
500
0
-500
-1000
Punjab
Haryana
Rajasthan
Delhi
Uttarakhand
Hp
J&K
Chandigarh
UP
(Source: CERC)
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%
4.00%
5.00%
6.00%
% of Generation
UI
Exchange
Bilateral
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
8
6
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
4
2
0
2007
2008
2009
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
56 | P a g e
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.
Branch Office:
Controlling Office:
Rs.845.00 crore
Total Debt
Rs.633.75 crore
Promoters contribution
Rs.211.25 crore
Proposed
share)
DER
TL
3:1
57 | P a g e
Repayment Period
10.25 years
Existing
TL
NA
Upfront Fee
NA
0.25% +ST
1.25%+ST
Other
charges, if
any
NA
As Applicable
As Applicable
Rate of
interest
Proposed
Whether fresh/renewal/
enhancement
Applicable rate
Nil
Fresh
Rating Date of
Rating
Score
ABS
Present BB-
27.12.10 50.35
July10
Prev
Sept09
Aug09
48.06
Reasons for
degradation
NA
External
external
Facility
Rating
Date of
Rating
Remarks
58 | P a g e
rated
rating
Agency
Whether Agriculture/
Retail/ SME/ Others
a)Whether
Sensitive No
Sector
Real Estate/
Capital Market
b) Applicable Risk weight
100%
Consortium/Multiple
Banking
Consortium banking
Lead Bank/Lender
PNBs Share %
Date of application
27.09.2010
Date of receipt of
proposal at BO/ CO/HO
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.
New
New
PART I
2.
Borrowers Profile
59 | P a g e
1.
Group Name
2.
b.
Works/Factory
13.1.1.1.1.1 Confedential
Near Kashipur, Uddham Singh Nagar
District, Uttarakhand
c.
Constitution
New Account
d.
Date of incorporation/Establishment
06.04.2009
e.
f.
Industry/Sector
Power Sector
g.
3.
XYZ PL
Directors (S/Shri)
Whether Promoter/
Professional/
Nominee
Mr. ABC
Confedential
Chairman
Mr. DEF
Confedential
Director
Mrs. GHI
Confedential
Director
Not applicable
feature is observed.
Promoters Holding
% Holding
156.32
74%
54.93
26%
NRIs/OCBs
0.00
----
Public
0.00
----
Total
211.25
g)
h)
Brief history:
100%
No
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
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
Existing
Proposed
Fund Based
Fund Based Ceiling
NA
--
NA
--
Term Loan
NA
75.00
TOTAL COMMITMENT
NA
75.00
Secured/Unsecured
along with the basis
thereof
4.B
Secured
Company
Nil
75.00
0.28%
15%
Group
Nil
75.00
0.28%
15%
Nil
(New
(Rs. In Crore)
Name of the Bank/FI
Facility
Sanctioned
Balance
O/s
Sanctioned
300*
0.00
NA
12%
100
0.00
NA
12%
50
0.00
NA
12%
175*
0.00
NA
12%
Axis Bank
IFCI
- Sanctioned
Overdue Rate of
,
Interest
* 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.
As at
31.03.09
Audited
Audited
Estimated
Audited
Projections
for the
current year
63 | P a g e
(31.03.11)
Gross Sales
- Domestic
- Export
% growth
Other Income
Operating Profit/Loss
Depreciation/
EBIDTA/PBIDTA
0.01
163.00
Reserves
and
Surplus
excluding
revaluation reserves
0.47
Accumulated losses
32.09*
163.00
Amortization
expenses
of
of
Paid up capital
b) Investment in allied
concerns & amount of
cross holdings
64 | P a g e
0.00
0.00
32.09
163.00
32.55
0.00
Total Borrowings
475.00
Secured
475.00
Unsecured
Investments
Total Assets
32.56
638.00
4.53
638.00
28.03
Share
money
application
Current Ratio
Term
liability/
Adjusted TNW
TOL/Adjusted TNW
Operating Profit/Sales
32.56
638.00
4.53
638.00
Surplus/ Deficit
28.03
0.00
0.00
0.00
28.03
0.00
Surplus/ Deficit **
(28.03)
0.00
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.
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:
66 | P a g e
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.
S
.
N
Name of
Guarantor
Relationsh
ip with
Net Worth
Immovable
property
Date of CR
67 | P a g e
borrower
1
.
Sh. ABC
2
.
Smt. GHI
Pre
v
Present
As at
31.07.10
Prev
.
Present
As at
31.07.10
Name of
Guarantor
NA
14.39
NA
6.88
NA
22.11.10
Promoter
NA
2.87
NA
2.76
NA
22.11.10
(Rs. In crores)
Relationship
with
borrower
Net Worth
Prev.
Present
Immovable
property
Prev.
As at
31.03.10
1.
XYZ IPL
Present
Promoter
Corporate Guarantee
S
No
Prev
.
Promoter
NA
0.80
Present
Date of CR
Prev.
Present
NA
22.11.10
As at
31.03.10
NA
Nil
iv)
NA
v)
Not applicable
8. C
Nature
Primary
Book value
NA
Proposed
FACR
Book Value
FACR on project
completion
731.34
1.17
(hard cost)
Collateral
NA
Total
9.
731.34
Position of Account:
1.17
New Account
68 | P a g e
10. A Conduct of the Account including details of terms & conditions not
complied with:
New Account
10.B i)
New Account
NA
2.
NA
3.
NA
4.
Yes
5.
Yes
6.
Yes
7.
NA
8.
Yes
9.
Yes
NA as it is a new relationship
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)
1.
b)
c)
70 | P a g e
(i)
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.
G
H
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
8.6%
1.3%
845.00
100.00%
71 | P a g e
MEANS OF FINANCE
(Rs in Crores)
Source
Amount
%age
Equity/Promoters
contribution
211.25
25%
Term Debt
633.75
75%
Total
845.00
100%
(Rs. In Crores)
Name
Pvt. Promoters
IFCI
Total
Amount
Already
bought in
Amount to
be bought
Total
118.31
38.01
156.32
--
54.93*
54.93*
118.31
92.94
211.25
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.
Pre-operative Expenses
73 | P a g e
Contingency
A brief summary of EPC Contract for GTG signed with GE Energy, France
is as given below:
Zero Date
08-Mar-10
74 | P a g e
Scope of work
Plant
Equipment
&
Value
Contract
of
Euro 34,200,000
Parameters
Guaranteed
Level
Performance
Damages
Output
76.111 MW
per GTG
Heat Rate
10066
KJ/Kwh
Exhaust
Temperature
596.6
468.1GJ/ hr
Exhaust Energy
Liquidated
A brief summary of EPC Contract for STG signed with HTC, China is as
given below:
Contract Date
19-May-2010
Name
Address
Scope
Value
US 5,100,000
Effective Date
8-May-2010
75 | P a g e
Purchaser's Account
Delivery
14 months
Parameters
Guaranteed Performance
Level
Damages
Steam
Output
Turbine
72 MW
Liquidated
A brief summary of EPC Contract for HRSG signed with M/s Greens Power
Equipment (China) Co. Ltd is as given below.
Contract Date
25-May-2010
Name
Address
Scope
Value
USD 7,400,000
Parameters
Guaranteed
Level
Steam
HP/ LP
output
Performance
Damages
Liquidated
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.
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
77 | P a g e
Gas Price
Transmission Charges
Marketing Margin
Quantity
The gas is available from Vasai East field of ONGC and shall be
transported and delivered at Kashipur.
Phase 2:
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.
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)
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
The upside shall be shared in the ratio of 90:10 i.e. 90 per cent to
SEPL and 10 per cent to TPTCL
Liability
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
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
Human Resources:
80 | P a g e
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.
(Rs. In crores)
Particulars
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Energy sale to
trader
114
273
273
273
273
279
284
290
296
302
308
314
320
327
333
Merchant Power
133
320
320
320
320
327
333
340
347
354
361
368
375
383
390
Total Revenue
247
594
594
594
594
605
618
630
643
655
668
682
695
709
724
Primary Fuel
Cost
131
324
334
344
355
366
377
388
400
412
425
438
451
465
479
O&M Expenses
16
39
42
44
47
50
53
56
59
63
67
71
75
79
84
Total Expenses
147
364
376
389
402
416
430
444
459
475
492
509
526
544
563
PBDIT
101
230
218
205
192
190
188
186
183
180
177
173
169
165
160
40.7
38.7
36.7
34.5
32.3
31.4
30.4
29.5
28.5
27.5
26.5
25.4
24.3
23.3
22.1
Depreciation
21
42
42
42
42
42
42
42
42
42
42
42
42
42
42
Interest on TL
19
74
66
57
48
39
30
21
12
Interest on WCL
59
108
104
101
96
103
110
117
123
129
129
125
121
116
111
Current Tax
12
22
21
20
19
21
22
23
24
26
26
25
24
23
22
47
87
84
81
77
83
88
93
98
103
103
100
97
93
89
PAT margin %
19.0
14.6
14.1
13.6
13.0
13.7
14.3
14.8
15.3
15.7
15.4
14.7
13.9
13.1
12.3
sale
EBITDA margin%
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
81 | P a g e
134
217
298
375
458
546
640
738
841
944
258
345
428
509
586
669
757
851
949
Secured Loans
634
578
503
429
354
280
205
130
56
-0
-0
-0
-0
-0
-0
WC Loans
32
44
44
44
45
46
47
48
50
51
53
54
56
57
59
Total liabilities
924
966
976
982
985
995
Land
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
803
761
719
678
636
594
552
510
468
426
385
343
301
259
217
Working Capital
43
58
59
59
60
61
63
65
66
68
70
72
74
76
79
25
68
121
173
222
276
336
400
470
599
743
885
DSRA
43
69
67
62
58
53
49
45
40
Total assets
924
966
976
982
985
995
2012
2013
2014
2015
2016
2017
47
87
84
81
77
83
Add: Interest
Expense
21
80
71
62
53
Add: Depreciation
21
42
42
42
Less: Changes in
WC
-32
-15
-1
Cash from
Operating
Activities
57
193
196
2018
2019
2020
2021
2022
2023
2024
2025
2026
88
93
98
103
103
100
97
93
89
45
36
27
18
42
42
42
42
42
42
42
42
42
42
42
-1
-1
-2
-2
-2
-2
-2
-2
-2
-2
-2
-2
184
172
168
164
161
157
153
149
146
143
140
136
Increase in Capital
-156
Expenditure
Cash from
Investing
Activities
-156
Increase in Share
Capital
48
Interest Expense
-72
-80
-71
-62
-53
-45
-36
-27
-18
-9
-6
-6
-7
-7
-7
Change in DSRA
-43
-26
40
Add/(Repay)
Secured Loans
158
-56
-75
-75
-75
-75
-75
-75
-75
-56
82 | P a g e
Add/(Repay) Wkg.
Capital Loans
32
11
Cash from
Financing
Activities
124
-151
-143
-132
-123
Net Cash
Generation
25
43
53
52
Opening Balance
25
68
Addition
25
43
Closing Balance
25
68
-114 -105
-96
-87
-24
-5
-5
-5
-5
-5
49
54
60
65
70
129
144
141
138
134
130
121
173
222
276
336
400
470
599
743
885
1,023 1,157
53
52
49
54
60
65
70
129
144
141
138
134
121
173
222
276
336
400
470
599
743
885
DSCR
Particulars
2012
2013
2014
2015
Projections
2016
2017
2018
2019
2020
2021
Principal
Repayment
0.0
55.9
74.6
74.6
74.6
74.6
74.6
74.6
74.6
55.9
Interest on TL
19.2
74.4
66.0
57.0
48.1
39.1
30.2
21.2
12.3
3.4
Total Debt
Servicing
19.2
130.3
140.5
131.6
122.6
113.7
104.8
95.8
86.9
59.3
PBDIT
100.7
229.8
217.6
204.9
191.7
190.0
187.9
185.6
183.0
180.1
Less: WC
Interest
1.9
5.2
5.3
5.3
5.4
5.5
5.7
5.8
6.0
6.1
Less: Taxation
11.7
21.6
20.8
20.1
19.2
20.6
22.0
23.3
24.5
25.7
Net cash
87.1
203.0
191.5
179.5
167.1
163.8
160.3
156.6
152.6
148.3
DSCR
4.52
1.56
1.36
1.36
1.36
1.44
1.53
1.63
1.76
2.50
Average DSCR
1.60
Company as a whole
83 | P a g e
130
Debt-Equity Ratio
75 : 25
Average DSCR
1.60
Minimum DSCR
1.36
19.78%
Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix
VII
Installed Capacity
225 MW
80%
1660.5 kcal/kWh
Gross Generation
1577 MU
2.5%
Net Generation
1537 MU
Capital
Structure
Debt
75%
Equity
25%
Interest Rate
12%
12%
12.02 Rs./SCM
3%
TPTCL
100 MW
Selling Price
2%
Merchant Power
125 MW
Selling Price
Operations
Off-take
84 | P a g e
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)
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
Project IRR
Minimum
85 | P a g e
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
1.36
19.78%
1.90
1.31
1.58
1.11
23.64%
15.46%
1.83
1.37
1.54
1.17
22.79%
16.60%
1.58
1.63
1.34
1.38
19.93%
19.66%
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.
Civil Aviation Clearance: NOC has been obtained from Airport Authority
of India (AAI) for chimney height clearance on 21-04-2010.
86 | P a g e
1.
Sr
Name of Component
Quantity Completed
1.
Piling
2.
3.
Water Reservoir
4.
Area Grading
75% complete
5.
Workshop
Excavation started
6.
Construction Power
Completed
7.
Site Office
8.
Store
Completed
9.
Mechanical Works
10.
Electrical Works
Financial Progress:
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
Description
Planned Date
May 15, 2010
Actual/Anticip
ated Date
April 30, 2010
Status
Achieved
Consent for
Establishment
Achieved
July 1, 2010
Achieved
Achieved
On schedule
On schedule
Open Cycle
Commissioning
On schedule
Combined Cycle
Commissioning
On schedule
Project C.O.D
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.
4.
88 | P a g e
December 2011
31 December 2011
18 months
34 EQI
34 quarterly
instalments
Starting Date
01.10.2021
10.25 years
13.
Pricing
Facility
Existing
TL
NA
BR+3.50+TP
13.00%
Upfront Fee
NA
0.25% +ST
1.25%+ ST
Other
charges, if
any
NA
As Applicable
As Applicable
Rate of
interest
Proposed
Applicable rate
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.
89 | P a g e
14.
15.
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.
90 | P a g e
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 BB- 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
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.
2) Loan Policy : Compliance of policy guidelines for Term Loans above 5 years:
Ceiling on TLs with
remaining maturity
period of 5 years
Outstanding as on
30.9.10
Status of compliance
3)
Industry
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.
92 | P a g e
9913.67
5.26%
No ceiling stipulated
11.85
0.05%
93 | P a g e
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.
94 | P a g e
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 .
95 | P a g e
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)
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.
96 | P a g e
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.
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.
=
97 | P a g e
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.
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Circle Office
Officer
Manager
Chief Manager
Officer
Manager
Circle Head
Branch Office
Chief Manager
Deupty General
Manager
General Manager
Head Office
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
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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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