Professional Documents
Culture Documents
CONTENTS
SECTION — I
• Executive 4-7
Summary
9 -12
• Industrial Profile
SECTION — II
13-21
• Company Profile
SECTION — 111
• Theoretical Background for tbe project work 22- 49
- Introduction to pro]ect fin
aneing Project financing risks
Project Financial Appraisal
• Project in Brief- SL flow contrnls 50-53
SECTION — IV
• financial Analysis 54-74
• Measures taken by SBI when the repayment is not possible 75
SECTION — V
• Analysis 16
• findings 77-78
• Recnmmendatinns
• Limitatiniis
• Conclusions
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STATE F INDIA
Project Financing
Executive Summary
tThiet e of ro e t
As it is rightly said that finance is the life blood of every business so every business
need funds fDr smooth running of its activities and bank is the one of the source through
which the business get funds, before financing the bank appraise the projects and if the
projects meet the requirement of the bank rules than only they will finance.
The core area of this project focuses on the financial appraisal of SL flow controls, who
has started Manufacturing of industrial valves which is financed by SB I
This project has been undertaken at State Bank of India, Hubli branch which is one of
the largest bank in India having vast domestic network of over 9000 branches. SBI
deals with all financial activities which involves all types of deposits, advances
including project financing, mutual funds etc
Financial appraisal which mainly leads to the feasibility study consisting of ratio
analysis and capital budgeting calculations.
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STATE F INDIA
Project Financing
Main Objective_
Sub Objectives
1. To know the projects financed by SB1.
2. To know the policies of SBI towards the project financing.
3. To know the risks involved in projects financing.
4. To appraise the projects using financial tools.
5. To know the measures taken by bank when the clients fail to repay the amount.
Methodology —
Data collection method: The report will be prepared mainly using secondary data viz,
Secondary data
www.sbi.com.
Company manuals.
Commercial Banks Book.
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Analysis:-
This analysis part is related to the financial viability of the project SL Flnw
Cnntrols:-
• Through ratio analysis 1 analyzed that the liquidity position of the firm is
good and it is maintaining the standard ratio..
• Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
• Profitability ratios related to sales and capital employed are in increasing
trend, it shows that the sales are increasing and the firm using its resources
efficiently.
• Debt Service Coverage Ratio is also in increasing trend, it shows that the
firms ability to make the loan repayments on time over the debt life of the
project.
• The payback period is within the debt life of the project.
• The net present value of the project is positive, The positive net present
value will result only if the project generates cash inflows at a rate higher
than the opportunity cost of capital . Since the Net Present Value of the
above project is positive, the proposal can be accepted.
• The internal rate of the return is higher than what accepted so the project is
accepted.
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Recommendations:-
Some of the information are confidential in nature that could not divulged for study.
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Project financing is a comparatively new field for Indian banks,at present scenario
India is becoming developed country so because of that many projects are going on that
may be infrastructure, power generation, mining etc. considering all these the projects
must need finance, to fulfill these objectives the project undertaken companies raise
the funds through capital market, debt market and through banks.
Whenever bank wants to finance these type of projects it must study the feasibility of the
project and then it will go for financing that project
Because of this it is very necessary to study the process of project financed by the bank
so I choose this topic to study how SBI study the projects and the method of financing
the projects.
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Industrial Profile
W ithout a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and
internal factors.
For the past three decades India’s banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. lt is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main
reasons for India’s growth. The government’s regular policy for Indian bank since 1969
has paid rich dividends with the nationalization of 14 major private banks of India.
The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:
Phase I
The General Bank of India was set up in the year 17fi6. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of
Bombay (1d40) and Bank of Madras (1843) as independent units and called it
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Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established which started as private shareholders banks, mostly European
shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and
1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1945. There were approximately 1100 banks, mostly small.
To streamline the functioning and activities of banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation
Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India
was vested with extensive powers fDr the supervision of banking in India as the Central
Banking System.
During those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence.
In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a
large scale specially in rural and semi urban areas. lt formed State Bank of India to act as
the principal agent of RBI and to handle banking transactions of the Union and state
government all over the country.
Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19"
July 1969, major process of nationalisation was carried out. lt was the effort of the then
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Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country
were nationalized. Second phase of nationalisation Indian Banking Sector Reform was
carried out in l9d0 with seven more banks. This step brought 80% of the banking
segment in India under Government ownership.
The follnwing are the steps taken bv the Government of India to Regulate Banking
I tit ti ns in the C t
After the nationalization of banks, the branches of the public sector bank India raised to
approximately 800% in deposits and advances took a huge jump by 11000%. Banking
in the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
This phase has introduced many more products and facilities in the banking sector in
its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name, which worked for the Liberalization of Banking Practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being
put to give a satisfactory service to customers. Phone banking and net banking is
introduced. The entire system became mDre convenient and swift. Time is given more
importance than money.
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The financial system of India has shown a great deal of resilience. lt is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.
Banking in India originated in the first decade of 18" century with The General Bank
Of India coming into existence in 1786. This was followed by Bank of H industan. Both
these banks are now defunct. The oldest bank in existence in India is the State Bank Of
India being established as “ The Bank Of Calcutta” in Calcutta in June 1S 06. Couple of
Decades later, foreign Banks like HSBC and Credit Lyonnais Started their Calcutta
operations in 1 d 50s. At that point of time, Calcutta was the most active trading port,
mainly due to the trade of British Empire and due to which banking actively took roots
there and prospered. The first fully Indian owned bank was the Allahabad Bank set up
in 1865.
By 1900, the market expanded with the establishment of banks like Punjab National
Bank in 1 895 in Lahore; Bank of India in 1906 in Mumbai-both of which were founded
under private ownership. Indian Banking Sector was formally regulated by Reserve
Bank Of India from 1935. After India’s independence in 1947, the Reserve Bank was
nationalised and given broader powers.
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SBI Group
The Bank of Bengal, which later became the State Bank of India. State Bank of India
with its seven associate banks commands the largest banking resources in India.
Nationalization
The next significant milestone in Indian Banking happened in late 1960s when the then
Indira Gandhi government nationalized on 19' July 1949, 14 major commercial Indian
banks followed by nationalisation of 6 more commercial Indian banks in 1950.
The stated reason fDr the nationalisation was more control of credit delivery. After this,
until 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as
the Hindu growth of the Indian economy.
After the amalgamation of New Bank of India with Punjab National Bank, currently
there are 19 nationalized banks in India.
Liberalizatinn-
In the early 1990’s the then Narasimha rao government embarked a policy of
liberalization and gave licences to a small number of private banks, which came to be
known as New generation tech-savvy banks, which included banks like ICIC1 and
HDFC. This move along with the rapid growth of the economy of India, kick started
the banking sector in India, which has seen rapid growth with strong contribution from
all the sectors of banks, namely Government banks, Private Banks and Foreign banks.
However there had been a few hiccups for these new banks with many either be ing
taken over like Global Trust Bank while others like Centurion Bank have found the
going tough.
The next stage for the Indian Banking has been set up with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in
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Banks may be given voting rights which could exceed the present cap of 10%, at
present it has gone up to 49% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 4-6 4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.
CURRENT SCENARIO
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector, the demand for banking services-especially retail
banking, mortgages and investment services are expected to be strong. M&As, takeovers,
asset sales and much more action (as it is unraveling in China) will happen on this front
in India.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake
in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.
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STATE
Banking in India
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Reserve Bank of India is the regulating body for the Indian Banking Industry. lt is a
mixture of Public sector, Private sector, Co-operative banks and foreign banks. The
private sector banks are further spilt into old banks and new banks.
Scheduled Banks
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Bank Overview
N ot only many financial institution in the world today can claim the antiquity and
majesty of the State Bank Of India founded nearly two centuries ago with primarily
intent of imparting stability to the money market, the bank from its inception mobilized
funds for supporting both the public credit of the companies governments in the three
presidencies of British India and the private credit of the European and India merchants
from about 1860s when the Indian economy book a s ignificant leap forward under the
impulse of quickened world communications and ingenious method of industrial and
agricultural production the Bank became intimately in valued in the financing of
practically and mining activity of the Sub- Continent Although large European and
Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the
small man never ignored loans as low as Rs.100 were disbursed in agricultural districts
against glad ornaments. Added to these the bank till the creation of the Reserve Bank in
1935 carried out numerous Central — Banking functions.
Adaptation world and the needs of the hour has been one of the strengths of the Bank,
ln the post depression exe. For instance — when business opportunities become
extremely restricted, rules laid down in the book of instructions were relined to ensure
that good business did not go post. Yet seldom did the bank contravenes its value as
depart from sound banking principles to retain as expand its business. An innovative
array of office, unknown to the world then, was devised in the form of branches, sub
branches, treasury pay office, pay office, sub pay office and out students to exploit the
opportunities of an expanding economy. New business strategy was also evaded way
back in 1937 to render the best banking service through prompt and courteous attention
to customers.
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Modern day management techniques were also very much evident in the good old days
years before corporate governance had become a puzzled the banks bound functioned
with a high degree of responsibility and concerns for the shareholders. An unbroken
records of profits and a fairly high rate of profit and fairly high rate of dividend all
through ensured satisfaction, prudential management and asset liability management
not only protected the interests of the Bank but also ensured that the obligations to
customers were not met.
The traditions of the past continued to be upheld even to this day as the State Bank
years itself to meet the emerging challenges of the millennium.
ABOUT LOGO
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Togetherness is the theme of this corporate loge of SBI where the world of banking
services meet the ever changing customers needs and establishes a link that is like a
circle, it indicates complete services towards customers. The logo also denotes a bank
that it has prepared to do anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for the
growth and newer, more challenging, more promising direction. The key hole indicates
safety and security.
MlSSlf3N STATEMENT:
To retain the Bank’s position as premiere Indian Financial Service Group, with world
class standards and significant global committed to excellence in customer, shareholder
and employee satisfaction and to play a leading role in expanding and diversifying
financial service sectors while containing emphasis on its development banking rule.
VISION STATEMENT:
VAL UES
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• Team playing
• Learning and renewal
• Integrity
• Transparency and Discipline in policies and systems.
O ni St t e
G.M G.M
Functio al Heads
Zonal off
Regional officers
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Theo eti al B k o n fo t e o e t wo k
P o ect Financ n
INTRODUCTION —
Project financing is an innovative and timely financing technique that has been used on
many high-profile corporate projects, including Euro Disneyland and the Euro tunnel.
Employing a carefully engineered financing mix, it has long been used to fund large-
scale natural resource projects, from pipelines and refineries to electric-generating
facilities and hydroelectric projects. Increasingly, project financing is emerging as the
preferred alternative to conventional methods of financing infrastructure and other large-
scale projects worldwide.
MEAN ING—
RATIONALE—
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NON RECOURSE
The typical project financing involves a loan to enable the sponsor to construct a
project where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor has
no obligation to make payments on the project loan if revenues generated by the project
are insufficient to cover the principal and interest payments on the loan. In order to
minimize the risks associated with a non-recourse loan, a lender typically will require
indirect credit supports in the form of guarantees, warranties and other covenants from
the sponsor, its affiliates and other third parties involved with the project
MAXIMIZE LEVERAGE
OFF-BALANCESHEET TREATMENT
Depending upon the structure of a project financing, the project sponsor may not
be required to report any of the project debt on its balance sheet because such debt is
non-recourse or of limited recourse to the sponsor. Off-balance-sheet treatment can
have the added practical benefit of helping the sponsor comply with covenants and
restrictions relating to borrowing funds contained in other indentures and credit
agreements to which the sponsor is a party.
MAXIMIZE TAX-BENEFITS
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Project financings should be structured to maximize tax benefits and to assure that all
available tax benefits are used by the sponsor or transferred, to the extent permissible,
to another party through a partnership, lease or other vehicle.
• DISADVANTAGES-
Project financings are extremely complex. lt may take a much longer period of time to
structure, negotiate and document a project financing than a traditional financing, and
the legal fees and related costs associated with a project financing can be very high.
Because the risks assumed by lenders may be greater in a non-recourse project
financing than in a more traditional financing, the cost Df capital may be greater than
with a traditional financing.
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F a ibilit St d
As one of the first steps in a project financing is hiring of a technical consultant and he
will prepare a feasibility study showing the financial viability of the project.
Frequently, a prospective lender will hire its own independent consultants to prepare an
independent feasibility study before the lender will commit to lend funds for the
project.
Cnntents
The feas ib ility study should analyze every technical, financial and other aspect of the
project, including the time-frame for completion of the various phases of the project
development, and should clearly set forth all of the financial and other assumptions
upon which the conclusions of the study are based, Among the more important items
contained in a feasibility study are:
1. Description of project
2. Description of sponsor(s).
3. Sponsors’ Agreements.
4. Project site.
5. Governmental arrangements.
6. Source of funds.
7. Feedstock Agreements.
fi. Off take Agreements.
9. Construction Contract.
10. Management of project.
11. Capital costs.
12. Working capital.
13. Equity sourcing.
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Legal Fnrm
Sponsors of projects adopt many different legal forms for the ownership of the
project. The specific form adopted for any particular project will depend upon many
factors, including:
1. Corporatiniis-
2. General Partnerships-
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3. Limited Partnerships-
CPoAe e e
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Ownership interests.
Capitalization and capital calls.
Allocation of profits and losses.
Distributions.
Accounting.
Governing body and voting.
Day-to-day management.
Budgets.
Transfer of ownership interests.
Admission of new participants.
Default.
Termination and dissolution.
in i A e cFi
1. Construction Contract-
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schedule and useful monitoring points for the owner and the
lender.
Completion Date- The construction completion date, together
with any time extensions resulting from an event of force
majeure, must be consistent with the parties’ obligations under
the other project documents. lf construction is not finished by the
completion date, the contractor typically is required to pay
liquidated damages to cover debt service for each day until the
project is completed. If construction is completed early, the
contractor frequently is entitled to an early completion bonus.
Performance Guarantees- The contractor typically will
guarantee that the project will be able to meet certain
performance standards when completed. Such standards must
be set at levels to assure that the project will generate sufficient
revenues for debt service, operating costs and a return on equity.
Such guarantees are measured by performance tests conducted
by the contractor at the end of construction. If the project does
not meet the guaranteed levels of performance, the contractor
typically is required to make liquidated damages payments to the
sponsor. If project performance exceeds the guaranteed
minimum levels, the contractor may be entitled to bonus
payments.
2. Feedstock Supply Agreements.
The project company will enter into one or more feedstock supply
agreements for the supply of raw materials, energy or other resources over
the life of the project. Frequently, feedstock supply agreements are
structured on a "put-or-pay" basis, which means that the supplier must either
supply the feedstock or pay the project company the difference in costs
incurred in obtaining the feedstock from another source. The price
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provisions of feedstock supply agreements must assure that the cost of the
feedstock is fixed within an acceptable range and consistent with the
financial projections of the project.
In a project financing, the product off take agreements represent the source
of revenue for the project .Such agreements must be structured in a
manner to provide the project company with sufficient revenue to pay its
project debt obligations and all other costs of operating, maintaining and
owning the project .Frequently,offtake agreements are structured on a "take-
or-pay" bas is, which means that the offtaker is obligated to pay for product
on a regular basis whether or not the offlaker actually takes the product
unless the product is unavailable due to a default by the project
company. Like feedstock supply arrangements, offtake agreements
frequently are on a fixed or scheduled price basis during the term of the
project debt financing.
The project company typically will enter into a long-term agreement for
the day-to-day operation and maintenance of the project facilities with a
company having the technical and financial expertise to operate the project
in accordance with the cost and production specifications for the project. The
operator may be an independent company, or it may be one of the sponsors .
The operator typically will be paid a fixed compensation and may be entitled
to bonus payments for extraordinary project performance and be required to
pay liquidated damages for project performance below specified levels.
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6 Site Lease Agreement. The project company typically enters into long-
term lease for the life of the project relating to the real property on which
the project is to be located. Rental payments may be set in advance at a
fixed rate or may be tied to project performance.
Business Interruption.
Performance Bonds.
Cost Overrun/Delayed Opening.
Design Errors and Omissions
System Performance (Efficiency).
Pollution Liability.
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Project Risks
Project finance is finance for a particular project, such as a mine, toll road, railway,
pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of
that project. Project finance is different from traditional forms of finance because the
financier principally looks to the assets and revenue of the project in order to secure
and service the loan. In contrast to an ordinary borrowing situation, in a project
financing the financier usually has little or no recourse to the non-project assets of the
borrower or the sponsors of the project. In this situation, the credit risk associated with
the borrower is not as important as in an ordinary loan transaction; what is most
important is the identification, analysis, allocation and management of every risk
associated with the project.
In a no recourse or limited recourse project financing, the risks for a financier are
great. Since the loan can only be repaid when the project is operational, if a major part
of the project fails, the financiers are likely to lose a substantial amount of money. The
assets that remain are usually highly specialized and possibly in a remote location. If
saleable, they may have little value outside the project. Therefore, it is not surprising
that financiers, and the ir advisers, go to substantial efforts to ensure that the risks
associated with the project are reduced or eliminated as far as poss ible. lt is also not
surprising that because of the risks involved, the cost of such finance is generally
higher and it is more time consuming for such finance to be provided.
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F inanciers are concerned with minimizing the dangers of any events which could have
a negative impact on the financial performance of the project, in particular, events
which could result in:
1) The first step requires the identification and analysis of all the risks that may
bear upon the project.
2) The second step is the allocation of those risks among the parties.
3) The last step involves the creation of mechanisms to manage the risks.
lf a risk to the financiers cannot be minimized, the financiers will need to build it into
the interest rate margin for the loan.
The project sponsors will usually prepare a feasibility study, e.g. as tD the construction
and operation of a mine or pipeline. The financiers will carefully review the study and
may engage independent expert consultants to supplement it. The matters of particular
focus will be whether the costs of the project have been properly assessed and whether
the cash-flow streams from the project are properly calculated. Some risks are analysed
using financial models to determine the project’s cash-flow and hence the ability of the
project to meet repayment schedules. Different scenarios will be examined by adjusting
economic variables such as inflation, interest rates, exchange rates and prices for the
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inputs and output of the project. Various classes of risk that may be identified in a
project financing will be discussed below.
Once the risks are identified and analyzed, they are allocated by the parties through
negotiation of the contractual framework. Ideally a risk should be allocated to the party
who is the most appropriate to bear it (i.e. who is in the best position to manage, control
and insure against i1) and who has the financial capacity to bear it. lt has been observed
that financiers attempt to allocate uncontrollable risks widely and to ensure that each
party has an interest in fixing such risks. Generally, commercial risks are sought to be
allocated to the private sector and political risks to the state sector.
Risks must be also managed in order to minimise the possibility of the risk event
occurring and to minimise its consequences if it does occur. Financiers need to ensure
that the greater the risks that they bear, the more informed they are and the greater their
control over the project. Since they take security over the entire project and must be
prepared to step in and take it over if the borrower defaults. This requires the financiers
to be involved in and monitor the project closely. Such risk management is facilitated
by imposing reporting obligations on the borrower and controls over project accounts.
Such measures may lead to tension between the flexibility desired by borrower and risk
management mechanisms required by the financier.
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oTff e s s
Basically different types of projects are posed to different risks. Similarly the risks
mentioned below are related to this particular project.
1) Completion Risk-
Completion risk allocation is a vital part of the risk allocation of any project. This phase
carries the greatest risk for the financier. Construction carries the danger that the project
will not be completed on time, on budget or at all because of technical, labour, and
Dther construction difficulties. Such delays or cost increases may delay loan repayments
and cause interest and debt to accumulate. They may also jeopardize contracts for the
sale of the project's output and supply contacts for raw materials.
Commonly employed mechanisms for minimizing completion risk before lending takes
place include:
(a) Obtaining completion guarantees requiring the sponsors to pay all debts and
liquidated damages if completion does not occur by the required date;
(b) Ensuring that sponsors have a significant financial interest in the success of the
project so that they remain committed to it by insisting that sponsors inject equity into
the project;
(d) Obtaining independent experts’ repDrts on the design and construction of the project.
Completion risk is managed during the loan period by methods such as making pre-
completion phase draw downs of further funds conditional on certificates being issued
by independent experts to confirm that the construction is progressing as planned.
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2) Operating Risk-
These are general risks that may affect the cash-flow of the project by increasing the
operating costs or affecting the project’s capacity to continue to generate the quantity
and quality of the planned output over the life of the project. Operating risks include,
for example, the level of experience and resources of the operator, inefficiencies in
operations or shortages in the supply of skilled labour. The usual way for minimising
operating risks before lending takes place is to require the project to be operated by a
reputable and financially sound operator whose performance is secured by performance
bonds. Operating risks are managed during the loan period by requiring the provision of
detailed reports on the operations of the project and by controlling cash-flows by
requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds
account to ensure that funds are used for approved operating costs only.
3) M zrket Risk-
Obviously, the loan can only be repaid if the product that is generated can be turned into
cash. Market risk is the risk that a buyer cannot be found for the product at a price
sufficient to provide adequate cash-flow to service the debt. The best mechanism for
minimising market risk before lending takes place is an acceptable forward sales contact
entered into with a financially sound purchaser.
4) Credit Risk-
These are the risks associated with the sponsors or the borrowers themselves. The
question is whether they have sufficient resources to manage the construction and
operation of the project and to efficiently resolve any problems which may arise. Of
course, credit risk is also important for the sponsors’ completion guarantees. To
minimise these risks, the financiers need to satisfy themselves that the participants in
the project have the necessary human resources, experience in past projects of this
nature and are financially strong (e.g. so that they can inject funds into an ailing project
to save it).
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5) Technical Risk.-
This is the risk of technical difficulties in the construction and operation of the project’s
plant and equipment, including latent defects. Financiers usually minimise this risk by
preferring tried and tested technologies to new unproven technologies. Technical risk is
also minimized before lending takes place by obtaining experts reports as to the
proposed technology. Technical risks are managed during the loan period by requiring
a maintenance retention account to be maintained to receive a proportion of cash-flows
to cover future maintenance expenditure.
These are risks that government licenses and approvals required to construct or operate
the project will not be issued (or will only be issued subject to onerous conditions), or
that the project will be subject to excessive taxation, royalty payments, or rigid
requirements as to local supply or distribution. Such risks may be reduced by obtaining
legal opinions confirming compliance with applicable laws and ensuring that any
necessary approvals are a condition precedent to the draw down of funds.
• Appraisal
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Project Financing-
The SB1 has formed a dedicated Project Finance Strategic Business Unit to assess
credit proposals from and extend term loans for large industrial and infrastructure
projects. Apart from this, project term loans ior medium sized projects and smaller
clients are delivered through the CAG and the NBG.
Project finance is quite often chaiineled through special purpose vehicles and arranged
against the future cash streams to eirierge from the project.The loans are approved on
the basis of strong in-house appraisal of the cost and viability of the ventures as well as
the credit standing of promoters.
Expertise
•t• Being India's largest bank and with the rich experience gained over gencration, SBI
brings considerable expertise its engineering financial packages that address
complex financial requirements.
•t• Project Finance SB U is well equipped to provide a bouquet of structured financial
solutions with the support of the largest Treasury in India (i.e. SBl's), International
Division of SB I and SB1 Capital Markets Limited.
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Project
•t• The global presence as also the well spread domestic branch network of SBI ensures
that the delivery of your project specific financial needs are totally taken care ot.
4• Lead role in many projects
4• Allied roles such as security agent, monitoring/TRA agent etc.
4• Synergy with SBI caps (exchange of leads, joint attempt in b idding for projects,
joint syndication etc.). In a way, the two institutions are complimentary to each
other. We have in house expertise (in appraising projects) in infrastructure sector as
well as non-infrastructure sector. Some of the areas are as follows: Infrastructure
sector:
Infrastructure sector-
Nun-Infrastructure seetor-
Expertise
Since its inception in 1995 the Project Finance SB U has built-up a strong reputation for
it's in-depth understanding of the infrastructure sector as well as non-infrastructure
sector in India and we have the ability to provide tailor made financial solutions to meet
the growing & diversified requirement for different levels of the project. The recent
transactions undertaken by PF-SB U include a wide range of projects undertaken by the
Indian corporate.
Eligibility-
The infrastructure wing of PF SB U deals with projects wherein:
the project cost is more than Rs 100 Crores. The proposed share of SBI in the term loan
is more than Rs.50 crores. In case of projects in Road sector alone, the cut off will be
project cost of Rs.50 crores and SBI Term Loan Rs. 25 crores, respectively.
Process of sanctioning-
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1) Proposal- The bank usually asks the firm to give the following details Nature of
the proposal The purpose for which the term loan is required ( whether for
expansion, modernization, diversification etc..)
2) Brief History- ln case of an existing company essential particulars about its
promoters, its incorporation, subsequent corporate growth to date, major
developments or changes in management.
3) Past Performance- A summary of past performance in terms of
licensed/installed or operating capacities, sales, operating capacities, and sales
and net profit for the three years should be analyzed. The figures relating to
sales and profitability should be analyzed to ascertain the trend during the 3
years. In sum, the company's past performance has to be assessed to study if
there has been a steady improvement and growth record has been satisfactory.
4) Present financial pnsition- The Company’s audited balance sheets and profit
and loss account have to be analyzed. If the latest audited balance sheet has
more than 6 months old, a pro-forma balance sheet as on a recent date should be
obtained and analysed.
5) Project- Here the technical feasibility and the financial feas ib ility of the project
is studied.
6) Project inn plementation schedule- Examine the project implementation
schedule with reference to Bar Chart or PERT/CPM chart(if proposed to be
used by the company for monitoring the implementation of the project) and in
the light of actual implementation schedules of similar project
41
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Appraisal —
1. ei i
After undertaking the preliminary examination of the proposal, the branch will arrive at
a decis ion whether to support the request or not. lf the branch finds the proposal
acceptable, it will call for from the applicants, a comprehensive application in the
prescribed pro forma, along with a copy of project report, covering specific credit
requirements of the company and other essential data/ information. The information
among other things should include-
42
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Appraisal report from any other bank/financial institution in case appraisal has been
done by them,
‘NO Objection Certificate’ from term lenders if already financed by them and
Report from Merchant bankers in case the company plans to access capital market,
wherever necessary.
In respect of existing concerns, in addition to the above particulars regarding the history
of the concern, its past performance, present financial position, etc. Should also be
called for. This data should be supplemented by supporting statements such as:
4• Audited profit and loss account and balance sheet for the past three years
•t• Details of ex isting borrowing arrangements, if any,
fi• Credit information reports from the existing bankers on the applicant company
4• Financial statements and borrowing relationship of associate firms/group
companies.
2. Detailed Appraisal-
The appraisal of the new project cnuld be brnadly divided into the fnllowing sub
heads-
• Marketability
• Production process
• Management
• Time schedule
• Cost of project
• Sources of finance
• Commercial Profitability;
• Security and Margin
• Repayment period and debt service coverage;
• Funds Flows statement ;and
• Rates of return.
If the propnsal involves tinancing of a new project, the commercial, economic and
financial viability and nther aspects are tn be examined as indicated below-
Also examine and comment on the status of approvals from other term lenders, project
implementation schedule. A pre-sanction inspection of the project site or the factory
should be carried out in the case of existing units.
The banks also take into consideration the relationship of the firm or the customer with the
banks. It takes into account the following aspects-
6. Existing charges on assets of the unit-lf the company, report on search of charges
with proposed guarantors.
Rate of interest.
Rate of commission/exchange/other fees.
Concessional facilities and value thereof.
Repayment terms, where applicable.
’+ Other standard covenants.
9. Proposal for sanctinn- Prepare a draft in prescribed format with required back-up
details and with recommendations for sanction.
Hescom d2.0t1
Manoj Jewellers 6.00
3 Mahaveer developers. 93.00
4 JTK Arihant appliances 2.25
5 Shreyalaxmi properties 5.95
6 Shri laxmi trading co. 5.S
7 SL flow controls 1.25
Hubli Cigarette center 1.10
9 Mahindrakar Agencies 35
IU Shri gopal industries 2.40
I\ Atul agencies 2.02
12 Kashvap j. Majethia 4.40
13 Shree meenaxi pharma 2.5
14 Shree meenaxi medical agency 4.0
15 Fine lab 5.0
16 Shree engineers and process 5. b
17 Swastik winding works 4.5
STAT IND
Projc•ct
The further part has been dealt with respect to the project of
SL flow controls.
• Project in Brief
$ A«3ts«a e«rrz
STAT IND
Projc•ct
$ A«3ts«a e«rrz
5O
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Project
Means of finance
Amounts in lakhs
Financial analysis
• Ratio Analysis:-
An integral aspect of financial appraisal is financial analysis, which takes into account
the financial features of a project, especially source of finance. Financial analysis helps
to determine smooth operation of the project over its entire life cycle.
The two major aspects of financial analysis are liquidity analysis and capital
structure. For this purpose ratios are employed which reveal existing strengths and
weakness of the project.
51
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Project
The current ratio is defined as the ratio of total current assets to total current
liabilities. lt is computed by,
Current assets
Current ratio
Current liabilities
52
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Project
Current ratio
2
1.8
1.6
1.4
1J39
0.927
D6 0.4
02
0
1 2
Years
Interpretation-
cash and constitutes a better test of liquidity. It is often called as quick quick ratio
because it is a measurement of a firms ability to convert its assets quickly into cash in
order to meet its current liabilities.
Quic k ratio
#0
u 0
Years
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teInrpraint o-et
Acid test ratio is a rigorous measure of firm’s ability to service short term liabilities.
The usefulness of the ratio lies in the fact that it is widely accepted as the best available
test of liquidity position of a firm. Generally an acid test ratio of 1: I is considered
satisfactory as a firm can easily meet all its current claims. In the case of the above firm
the quick ratio is in increasing trend by year on. So it shows that firm is capable of
paying its quick short term obligations
The long-term lenders/creditors would judge the soundness of a firm on the basis of the
long term financial strength measured in terms of its ability to pay the interest regularly
as well as repay the installment of the principal on due dates or in one lump sum at the
time of maturity. The long term solvency of firm can be examined by using leverage or
capital structure ratios. The leverage or capital structure ratio’s may be defined as
financial ratios which throw light on the long term solvency of a firm as reflected in its
ability to assure the long term lenders with regard to (i) periodic payment of interest
during the period of the loan and (ii) repayment of the principal on maturity or in
predetermined installments at due dates.
a) Debt equity ratin- This ratio measures the long term or total debt to
shareholders equity. This ratio reflects claims of creditors and
shareholders against the assets of the firm. Debt Equity Ratio is given
by:
teInrpraiotn-et
The debt equity ratio is an important tool of financial analysis to appraise the financial
structure of the firm. The ratio reflects the relative contribution of creditors and owners
of the business in its financing. A high ratio shows a large share of financing by the
creditors of the firm; a low ratio implies the a smaller claim of the creditors. Debt —
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Project
Equity ratio indicates the margin of safety to the creditors. The debt-equity ratio is in
decreasing and in 2008 it become nil, which implies that the owners are putting up
relatively more money of their own.
rofit bi i elate to e
These ratios are based on the premise that a firm should earn sufficient profit on each
rupee of sales. If adequate profits are not earned on sales, there will be difficulty in
meeting the Dperating expenses and no returns will be available to the owners.
It is also known as net margin. This measures the relationship between the net
profits and sales of a firm. Depending on the concept of net profit employed. , this
ratio can be computed as follows-
Net sales
te ett
The net profit margin is indicative of management’s ability to operate the business with
sufficient success not only to recover from revenues of the period, the cost of services,
the operating expenses and the cost of borrowed funds, but also to leave a margin of
reasonable compensation to the owners for providing their capital at risk. A high profit
margin would ensure the adequate return to the owners as well as enable the firm to
withstand adverse economic conditions. A low net profit margin has the opposite
implications. With respect to the above firm the net profit margin is increasing trend so
it will show that the company is in good condition and the demand for the product is
increasing.
Returnon Investments-
I. Return on assets,
II. Return on total capital employed.
Return on assets-
The profitability ratio is measured in terms of relationship between net profits and
assets. The ROA may also be called profit-to-asset ratio. lt can be computed as follows-
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Project
17.73%
teInrpraint o-et
Return on assets employed is favorable. That means the firm is in a position to employ
its assets in an efficient manner.
lt is similar to ROI except in one respect. Here the profits are related to the total capital
employed. The term capital employed refers to long term funds supplied by the lenders
and owners of the firm. lt is given by the formula-
EBIT
ROCE
3S.00°/
30.00°/
00%
20.00°A
15.00°A
S.00°/ 0.00°4
tento t
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Project
The capital employed basis provides a test of profitability related to the source of long
term funds. The higher the ratio, the more efficient is the use of capital employed. From
the above table we can say that the ROC E is quite high. Compared to previous years
ratio. lt is good for the company.
P o e tio of e r e n ro tab I
61
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Project
(F+G))
1) Provision for Taxation 4.5 h 7.64 1 1.59 15.24 1 d.75
1) Profit after tax (H-I) 10.69 17.52 27.05 35.56 43.75
K) Depreciation 24.97 19.10 14.66 I 1.30 5.75
L) Net Cash accruals( I+K) 35.66 36.92 41.72 46.d6 52.5
62
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ereabt Se i e Co e R t o DSCR
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Project
DSCR
Installments
6 2 6
Instalment 20.5 20.5 20.5 20.5 20.5
DSCR 1.74 1. b0 2.03 2.29 2.56
STATE
year Net profit for the Interest on term loan Repayment of term loan
year
200 35.66 19.55 20.5
4
200 36.92 16.7S 20.5
25
0.5
DSCR
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Project
tento t
The higher the ratio, the better it is, A ratio of less than one may be taken as a sign of
long term solvency problem as it indicates that the firm does not generate enough cash
internally to service debt. in general, lending financial institution consider 2:1 as
satisfactory ratio.
In this project DSCR is in increasing trend it shows that firm is able to meet its debt
obligation.
Pay back period is the minimum period required to cover the initial cost and a
project with minimum PBP is acceptable in this model. This is a very useful tool to
decide rapidly if it is worth to do a small investment by a local manager and also helps
to reduce the risk of bad choices. But the basic economic principles involved in PBP
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Project
method are not as reliable as the other methods like NPV etc. The most important
drawback of PWP method is, it is insensitive to changes in timing with in the payback
periDd and ignores the cash flows beyond the PBP. This method also lacks a ‘natural’
bench mark against which comparisons can be made among various projects.
Discounted PBP method gives a more accurate period to cover the initial cost but
doesn’t overcome the above drawbacks. However this is a very good method to use in
combination with other methods.
Pay Year
Back Period = (in lakhs)
C ash Flows Cumulative cash flows
200 35.66 35.66
4 Annual cash inflow
200 36.92 72.5S
The recovery of the
5 investment is in the 3" year and 0.64 month.
200 41.72 1 14.3
ten t t 6
200 46.B6 161.16
The Pay back period is a measure of liquidity of investments rather than their
200 52.50 213.66
profitability. Since8 the period within which the total cost of the period is less than the
completion period, the project can be accepted. It means that the firm will be able to
pay the dues out of their inflows. Therefore the project is said to be feasible.
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Average investment
213.66/ 5
152.5/ 2
42.732
telnrpraiotn-et
Here the ARR is more consistent as the ARR is quite higher ( more than average) and
the project can be accepted.
lt is calculated by discounting the future cash flows of the project to the present value
with the required rate of return to finance the cost of capital. A project is acceptable if
the capital value of the project is less than or equal to the net present value of cash flows
over the operating life cycle of the project. This method is highly useful when selection
has to be made among many projects, which are mutually exclusive, and there are no
budgetary constraints. Selection of projects with the largest positive N P V will yield
highest returns. But this method is useful only to determine whether a project is
acceptable or not but doesn’t indicate which project is best under budgetary constraints. lt
is difficult to rank different compatible projects with N PV as there is no account for
‘scale’ of investment while calculating N PV.
teInrpraint o-et
Year Cash Flows(lakhs) PV factor I I 0% Total present value
Positive NPV’s contribute to the net wealth of the shareholders which should result in the
increased price of a firm's share. The positive net present value will result only if the
project generates cash inflows at a rate higher than the opportunity cost of capital . Since
the Net Present Value of the above project is positive, the proposal can be accepted.
4 . Profitability Index-
Prnfitabillity Index =
158.807
Profitabillity Index
152.5
ten t t
Using the profitability index, a project will qualify for acceptance if its Pl exceeds one
(Plc1). When PI is greater than or equal to or less than 1, the net present value is
STAT F
Project
greater than or equal to or less than zero respectively. Since the Profitability Index of
the above project shows the Pl greater than 1 and hence the project should be accepted.
lt is the rate of return at which the Net Present Value (NPV) of a project becomes zero.
A project is acceptable if the IRR exceeds the cost of capital. lt is possible to rank
various compatible projects with IRR method and a project with highest IRR can be
selected. However, this method is not useful when selection has to be made among
mutually exclusive projects. This method assumes that the net cash flows from a project
are first negative and then pos itive for the rest of the project life and vice versa. But
this condition is not always fulfilled resulting in multiple IRRs for the same project.
Due to ambiguous results, project selection becomes difficult. Further, selection of a
project based on highest IRR alone, without taking project specific risk factors into
consideration, may be often misleading.
39.824
Initial Investment
Pay Back Period =
Weighted average cost
?'
STATE
152.5
Pay Back Period
39.824
A)
7
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Project
6.307
Internal rate of return = 10 +
x (12—10)
6.307— 1.97
6.307
Internal rate of return = 10+ x (2}
4.357
teInrpraint o-et
Since the expected rate of return is 10% so the project is said to be accepted.
2) Firstly they send a notice to the clients stating therein to pay the ir dues.
3) When there no improvements in the repayments even after the notice being sent
then the bank will forward the legal notice stating the clients to make
payments
4) Third is the compromise dealing wheiein both the parties sit together and
decide what measures has to be taken which means whether the clients make
the payments, or whether to file a suit or decide to sell the Properties etc..
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Project
This analysis part is related to the financial viability of the project SL Flnw
Cnntrols:-
• Through ratio analysis 1 analyzed that the liquidity position of the firm is
good and it is maintaining the standard ratio..
• Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
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Project
• Interest rates are fixed depending upon the projects which is known as State
Bank advance rate.
• When the clients fail to pay the interest, 3 months from the due date the term
loan granted will be treated as Non Performing Assets.
• If the interest is due further 3 more months then it will be treated as doubtful
assets and interest rates becomes zero.
• Again for further 3 months it goes as loss assets and the bank write off the
account.
• Every firm starting up a new project should make an insurance policy with
the same bank itself.
Recommendations:-
Some of the information are confidential in nature that could not divulged for study.
Conclusion:-
The project undertaken has helped a lot in understanding the concept of prDject
financing in nationalized bank with reference to state bank of India. The project
financing is an important aspect which helps in increasing the profit of the banks.
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Project
Project financing is a vast subject and it is very difficult to apply all the aspect in all
type of project when bank want to finance, and it is very difficult to cover all aspect in
this project.
To sum up it would not be out of way to mention here that the state bank of India has
given a special impetus on “Project Financing” .the concerted efforts of the
management and staff of state bank of India has helped the bank in achieving
remarkable progress in almost all important aspects.
Finally the success of project financing would HlDstly depend on the proper analysis of
the projects before financing.
Biblio a h
The data is collected from the list of books and web site given below
• www.sbi.com.
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Project
• www.Cioog1e.com
• Company manuals.
• Commercial Banks Book.
• Project financing by — Machiraju
• Financial management by — Khan and Jain.