STATE BANK OF INDIA
Project Financing.
CONTENTS
SECTION – I
• Executive Summary 4-7
• Industria !r"#ie $ -%&
SECTION – II
• C"m'any !r"#ie %(-&%
SECTION – III
• T)e"retica Bac*+r"und #"r t)e 'r",ect -"r* &&- 4$
- Intr"ducti"n t" 'r",ect #inancin+
- !r",ect #inancin+ ris*s
- !r",ect Financia A''raisa
• !r",ect in Brie#- S. #"- c"ntr"s /0- /(
SECTION – I1
• Financia Anaysis /4-74
• 2easures ta*en 3y SBI -)en t)e re'ayment is n"t '"ssi3e 7/
SECTION – 1
• Anaysis 74
• Findin+s 77 -75
• 6ec"mmendati"ns
• .imitati"ns
• C"ncusi"ns
• Bi3i"+ra')y 7$
BABASAB PATIL
1
STATE BANK OF INDIA
Project Financing.
Executive Summary
Tite "# t)e 'r",ect
7Financia A''raisa O# t)e !r",ect Financed By SBI 8
As a part of curriculum, every student studying MBA has to undertake a project on a
particular subject assigned to him/her. Accordingly I have been assigned the project
ork on the study of project financing in Banking !ector.
As it is rightly said that finance is the life blood of every business so every business
need funds for smooth running of its activities and bank is the one of the source through
hich the business get funds, before financing the bank appraise the projects and if the
projects meet the re"uirement of the bank rules than only they ill finance.
#roject financing is commonly used as a financing method in capital-intensive
industries for projects re"uiring large investments of funds, such as the construction of
poer plants, pipelines, transportation systems, mining facilities, industrial facilities
and heavy manufacturing plants.
$he core area of this project focuses on the financial appraisal of !% flo controls, ho
has started Manufacturing of industrial valves hich is financed by !BI
.
$his project has been undertaken at !tate Bank of India, &ubli branch hich is one of
the largest bank in India having vast domestic netork of over '((( branches. !BI
deals ith all financial activities hich involves all types of deposits, advances
including project financing, mutual funds etc
)inancial appraisal hich mainly leads to the feasibility study consisting of ratio
analysis and capital budgeting calculations.
BABASAB PATIL
2
STATE BANK OF INDIA
Project Financing.
2ain O3,ective
“)inancial appraisal of project*
Su3 O3,ectives -
+. $o kno the projects financed by !BI.
,. $o kno the policies of !BI toards the project financing.
-. $o kno the risks involved in projects financing.
.. $o appraise the projects using financial tools.
/. $o kno the measures taken by bank hen the clients fail to repay the amount.
2et)"d""+y –
0ata collection method1 $he report ill be prepared mainly using secondary data vi2,
Sec"ndary data
.sbi.com.
3ompany manuals.
3ommercial Banks Book.
T)e tec)ni9ues: -)ic) -"ud 3e used #"r t)e study;
+. 0iscussions ith Bank guide and customers.
,. By studying projects reports
.
-. 4sing #roject $echni"ues1
BABASAB PATIL
3
STATE BANK OF INDIA
Project Financing.
Anaysis;-
T)is anaysis 'art is reated t" t)e #inancia via3iity "# t)e 'r",ect S. F"-
C"ntr"s;-
$hrough ratio analysis I analy2ed that the li"uidity position of the firm is
good and it is maintaining the standard ratio..
0ebt 5"uity ratio is in decreasing trend, it shos that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
#rofitability ratios related to sales and capital employed are in increasing
trend, it shos that the sales are increasing and the firm using its resources
efficiently.
0ebt !ervice 3overage 6atio is also in increasing trend, it shos that the
firms ability to make the loan repayments on time over the debt life of the
project.
$he payback period is ithin the debt life of the project.
$he net present value of the project is positive, $he positive net present
value ill result only if the project generates cash inflos at a rate higher
than the opportunity cost of capital . !ince the 7et #resent 8alue of the
above project is positive, the proposal can be accepted.
$he internal rate of the return is higher than hat accepted so the project is
accepted.
BABASAB PATIL
4
STATE BANK OF INDIA
Project Financing.
Findin+s ;- T)ese are reated t" 3an* in +enera
!tate bank of India is strictly folloing the guidelines of 6BI on #roject
)inancing
!anctioning for the projects is approved by 6A!M533 96etailed Assets
!mall And Medium 5nterprises 3redit 3ell:.
$he bank finances the projects only through term loans.
Interest rates are fi;ed depending upon the projects hich is knon as !tate
Bank advance rate.
'
has paid rich dividends ith the nationali2ation of +. major private banks of India.
$he first bank in India, though conservative, as established in +?@>. )rom +?@> till
today, the journey of Indian Banking !ystem can be segregated into three distinct
phases. $hey are as mentioned belo1
5arly phase from +?@> to +'>' of Indian Banks.
7ationali2ation of Indian Banks and up to +''+ prior to Indian.
Banking sector 6eforms.
7e phase of Indian Banking !ystem ith the advent of Indian.
BABASAB PATIL
7
STATE BANK OF INDIA
Project Financing.
)inancial A Banking !ector 6eforms after +''+.
!)ase I
$he Beneral Bank of India as set up in the year +?@>. 7e;t came Bank of &industan
and Bengal Bank. $he 5ast India 3ompany established Bank of Bengal 9+@(':, Bank of
Bombay 9+@.
and Bank of Madras [email protected]: as independent units and called it
#residency Banks. $hese three banks ere amalgamated in +',( and Imperial Bank of
India as established hich started as private shareholders banks, mostly 5uropean
shareholders.
In +@>/ Allahabad Bank as established and first time e;clusively by Indians, #unjab
7ational Bank %td. as set up in +@'. ith head"uarters at %ahore. Beteen +'(> and
+'+-, Bank of India, 3entral Bank of India, Bank of Baroda, 3anara Bank, Indian
Bank, and Bank of Mysore ere set up. 6eserve Bank of India came in +'-/.
0uring the first phase the groth as very slo and banks also e;perienced periodic
failures beteen +'+- and +'.@. $here ere appro;imately ++(( banks, mostly small.
$o streamline the functioning and activities of banks, mostly small. $o streamline the
functioning and activities of commercial banks, the Bovernment of India came up ith
$he Banking 3ompanies Act, +'.' hich as later changed to Banking 6egulation Act
+'.' as per amending Act of +'>/ 9Act 7o. ,- of +'>/:. 6eserve Bank of India as
vested ith e;tensive poers for the supervision of banking in India as the 3entral
Banking !ystem.
0uring those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation as slo. Abreast of it the savings bank facility provided by the #ostal
department as comparatively safer. Moreover, funds ere largely given to traders.
!)ase II
Bovernment took major steps in this Indian Banking !ector 6eform after independence.
In +'//, it nationalised Imperial Bank of India ith e;tensive banking facilities on a
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
large scale specially in rural and semi-urban areas. It formed !tate Bank of India to act
as the principal agent of 6BI and to handle banking transactions of the 4nion and state
government all over the country.
!even banks forming subsidiary of !tate Bank of India as nationalised in +'>( on +'
th
Culy +'>', major process of nationalisation as carried out. It as the effort of the then
#rime Minister of India, Mrs. Indira Bandhi. +. major commercial banks in the country
ere nationali2ed.!econd phase of nationalisation Indian Banking !ector 6eform as
carried out in +'@( ith seven more banks. $his step brought @(D of the banking
segment in India under Bovernment onership.
T)e #""-in+ are t)e ste's ta*en 3y t)e >"vernment "# India t" 6e+uate Ban*in+
Instituti"ns in t)e C"untry;
+. +'.'1 5nactment of Banking 6egulation Act.
,. +'//1 7ationalisation of !tate Bank of India.
-. +'/'1 7ationalisation of !BI subsidiaries.
.. +'>+1 Insurance cover e;tended to deposits.
/. +'>'1 7ationalisation of +. major banks.
>. +'?+1 3reation of credit guarantee corporation.
?. +'?/1 3reation of regional rural banks.
@. +'@(1 7ationalisation of seven banks ith deposits over ,(( crores.
After the nationali2ation of banks, the branches of the public sector bank India raised to
appro;imately @((D in deposits and advances took a huge jump by ++(((D. Banking
in the sunshine of Bovernment onership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
BABASAB PATIL
9
STATE BANK OF INDIA
Project Financing.
!)ase III
$his phase has introduced many more products and facilities in the banking sector in
its reforms measure. In +''+, under the chairmanship of M 7arasimham, a committee
as set up by his name, hich orked for the %iberali2ation of Banking #ractices.
$he country is flooded ith foreign banks and their A$M stations. 5fforts are being put
to give a satisfactory service to customers. #hone banking and net banking is
introduced. $he entire system became more convenient and sift. $ime is given more
importance than money.
$he financial system of India has shon a great deal of resilience. It is sheltered from
any crisis triggered by any e;ternal macroeconomics shock as other 5ast Asian
3ountries suffered. $his is all due to a fle;ible e;change rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign e;change e;posure.
Banking in India originated in the first decade of +@
th
century ith $he Beneral Bank
Ef India coming into e;istence in +?@>. $his as folloed by Bank of &industan. Both
these banks are no defunct. $he oldest bank in e;istence in India is the !tate Bank Ef
India being established as F $he Bank Ef 3alcutta* in 3alcutta in Cune +@(>. 3ouple of
0ecades later, foreign Banks like &!B3 and 3redit %yonnais !tarted their 3alcutta
operations in +@/(s. At that point of time, 3alcutta as the most active trading port,
mainly due to the trade of British 5mpire and due to hich banking actively took roots
there and prospered. $he first fully Indian oned bank as the Allahabad Bank set up
in +@>/.
By +'((, the market e;panded ith the establishment of banks like #unjab 7ational
Bank in +@'/ in %ahoreG Bank of India in +'(> in Mumbai-both of hich ere founded
under private onership. Indian Banking !ector as formally regulated by 6eserve
Bank Ef India from +'-/. After India=s independence in +'.?, the 6eserve Bank as
nationalised and given broader poers.
BABASAB PATIL
10
STATE BANK OF INDIA
Project Financing.
SBI >r"u'
$he Bank of Bengal, hich later became the !tate Bank of India. !tate Bank of India
ith its seven associate banks commands the largest banking resources in India.
Nati"nai?ati"n
$he ne;t significant milestone in Indian Banking happened in late +'>(s hen the then
Indira Bandhi government nationali2ed on +'
th
Culy +'.', +. major commercial Indian
banks folloed by nationalisation of > more commercial Indian banks in +'@(.
$he stated reason for the nationalisation as more control of credit delivery. After this,
until +''(s, the nationali2ed banks gre at a leisurely pace of around .D also called as
the &indu groth of the Indian economy.
After the amalgamation of 7e Bank of India ith #unjab 7ational Bank, currently
there are +' nationali2ed banks in India.
.i3erai?ati"n-
In the early +''(=s the then 7arasimha rao government embarked a policy of
liberali2ation and gave licences to a small number of private banks, hich came to be
knon as 7e generation tech-savvy banks, hich included banks like I3I3I and
&0)3. $his move along ith the rapid groth of the economy of India, kick started the
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
banking sector in India, hich has seen rapid groth ith strong contribution from all
the sectors of banks, namely Bovernment banks, #rivate Banks and )oreign banks.
&oever there had been a fe hiccups for these ne banks ith many either being
taken over like Blobal $rust Bank hile others like 3enturion Bank have found the
going tough.
$he ne;t stage for the Indian Banking has been set up ith the proposed
rela;ation in the norms for )oreign 0irect Investment, here all )oreign Investors in
Banks may be given voting rights hich could e;ceed the present cap of +(D, at
present it has gone up to .'D ith some restrictions.
$he ne policy shook the Banking sector in India completely. Bankers, till this
time, ere used to the .->-. method 9Borro at .DG %end at >DG Bo home at .: of
functioning. $he ne ave ushered in a modern outlook and tech-savvy methods of
orking for traditional banks. All this led to the retail boom in India. #eople not just
demanded more from their banks but also received more.
C@66ENT SCENA6IO
3urrently 9,((?:, overall, banking in India is considered as fairly mature in terms
of supply, product range and reach-even though reach in rural India still remains a
challenge for the private sector and foreign banks. 5ven in terms of "uality of assets
and capital ade"uacy, Indian banks are considered to have clean, strong and transparent
balance sheets-as compared to other banks in comparable economies in its region. $he
6eserve Bank of India is an autonomous body, ith minimal pressure from the
government. $he stated policy of the Bank on the Indian 6upee is to manage volatility-
ithout any stated e;change rate-and this has mostly been true.
E AND OBEECTI1ES-
NON 6ECO@6SE
$he typical project financing involves a loan to enable the sponsor to construct a
project here the loan is completely Lnon-recourseL 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
minimi2e the risks associated ith a non-recourse loan, a lender typically ill re"uire
indirect credit supports in the form of guarantees, arranties and other covenants from
the sponsor, its affiliates and other third parties involved ith the project
2AFI2IGE .E1E6A>E
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
In a project financing, the sponsor typically seeks to finance the costs of
development and construction of the project on a highly leveraged basis. )re"uently,
such costs are financed using @( to +(( percent debt. &igh leverage in a non-recourse
project financing permits a sponsor to put less in funds at risk, permits a sponsor to
finance the project ithout diluting its e"uity investment in the project and, in certain
circumstances, also may permit reductions in the cost of capital by substituting loer-
cost, ta;-deductible interest for higher-cost, ta;able returns on e"uity.
OFF-BA.ANCES. Market study.
+?. Assumptions.
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
TC Existin+ c)ar+es "n assets "# t)e unit-If the company, report on search of charges
ith proposed guarantors.
?. Structure "# #aciities and Terms "# Sancti"n-)i; terms and conditions for
e;posures proposed facility ise and overall1
? %imit for each facility- sub limits.
? !ecurity- #rimary A collateral, Buarantee.
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
? Margins- for each facility as applicable.
? 6ate of interest.
? 6ate of commission/e;change/other fees.
? 3oncessional facilities and value thereof.
? 6epayment terms, here applicable.
? Ether standard covenants.
@C 6evie- "# t)e 'r"'"sa-6evie of the proposal should be done covering !trengths
and eaknesses of the e;posure proposed 6isk factors and steps proposed to mitigate
them0eviations if any, proposed from usual norms of the bank and the reasons thereof.
'. !r"'"sa #"r sancti"n- #repare a draft in prescribed format ith re"uired back-up
details and ith recommendations for sanction.
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
SBI )as 'resenty #inanced t)e #""-in+ !r",ects-
BABASAB PATIL
51
S.CNO Name O# T)e !r",ect
AmtKin cr"resH
+ &escom @,.((
, Manoj Ceellers >.((
- Mahaveer developers. '-.((
. C$H Arihant appliances ,.,/
/ !hreyala;mi properties /.'/
> !hri la;mi trading co. /.@
? !% flo controls +.,/
@ &ubli 3igarette center +.+(
' Mahindrakar Agencies -/
+( !hri gopal industries ,..(
++ Atul agencies ,.(,
+, Hashyap j. Majethia ...(
+- !hree meena;i pharma ,./
+. !hree meena;i medical agency ..(
+/ )ine lab /.(
+> !hree engineers and process /.@
+? !astik inding orks ../
STATE BANK OF INDIA
Project Financing.
T)e #urt)er 'art )as 3een deat -it) res'ect t" t)e 'r",ect "#
S. #"- c"ntr"sC
!r",ect in Brie#
Name 2LS S. F"- C"ntr"
Address $5LA: &A%: Sri .axmi Business )"use near
Air'"rt r"ad >"*u r"ad ,((? ,((@
3urrent assets '+..? +(+.?, ++,.?> +,@.? +./.,/
3urrent liabilities +...-, +,?.>> +,+./' '>.(/ @(.('
3urrent ratio (.>-. (.?>? (.',? +.--' +.@+-.
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
It is an indicator of the e;tent to hich short term creditors are covered
by assets that are e;pected to be converted to cash in a period corresponding to the
maturity of claims. $he ideal current ratio is ,1+. $he firm current ratio indicate that the
firm is in a position to meet its short term obligation because the ratio is in increasing
trend , by observing the above table e can say that though the firm does not maintain
ideal current ratio, it is still in a position to meet its current obligations. After clearing
all the dues the firm is still in a position to maintain li"uidity.
3H Acid test "r 9uic* rati"-
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
It is a measure of li"uidity calculated dividing current assets minus
inventory and prepaid e;penses by current liabilities. !ince inventories among current
assets are not "uite li"uid 9means not "uickly converted into cash:, the "uick ratio
e;cludes it. $he "uick ratio includes only assets, hich can be readily converted into
cash and constitutes a better test of li"uidity. It is often called as "uick "uick ratio
because it is a measurement of a firms ability to convert its assets "uickly into cash in
order to meet its current liabilities.
Inter'retati"n-
BABASAB PATIL
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#articulars ,((. ,((/ ,((> ,((? ,((@
Ouick assets >(..? >?.>/ ?/.,@ @?..? ''.'
3urrent liabilities +...-, +,?.>> +,+./' '>.(/ @(.('
3urrent ratio (./-. (./- (.>, (.'++ +.,.?
STATE BANK OF INDIA
Project Financing.
Acid test ratio is a rigorous measure of firm=s ability to service short term liabilities.
$he usefulness of the ratio lies in the fact that it is idely accepted as the best available
test of li"uidity position of a firm. Benerally an acid test ratio of +1+ is considered
satisfactory as a firm can easily meet all its current claims. In the case of the above firm
the "uick ratio is in increasing trend by year on. !o it shos that firm is capable of
paying its "uick short term obligations
&C Ca'ita structure rati"J
$he long-term lenders/creditors ould 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 ell as repay the installment of the principal on due dates or in one lump sum at the
time of maturity. $he long term solvency of firm can be e;amined by using leverage or
capital structure ratios. $he leverage or capital structure ratio=s may be defined as
financial ratios hich thro light on the long term solvency of a firm as reflected in its
ability to assure the long term lenders ith regard to 9i: periodic payment of interest
during the period of the loan and 9ii: repayment of the principal on maturity or in
predetermined installments at due dates.
aH De3t e9uity rati"- $his ratio measures the long term or total debt to
shareholders e"uity. $his ratio reflects claims of creditors and
shareholders against the assets of the firm. 0ebt 5"uity 6atio is given
by1
."n+ term de3t
De3t E9uity 6ati" M
S)are)"ders e9uity
BABASAB PATIL
57
#articulars ,((. ,((/ ,((> ,((? ,((@
0ebt @,.(( >+./( .+.(( ,(.(/ (.((
5"uity9#romoter contribution: />.-@ /..(? />.@@ >@.'. @...'
0ebt e"uity ratio +../. +.+. (.?,+ (.,'+ (.((
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
$he debt e"uity ratio is an important tool of financial analysis to appraise the financial
structure of the firm. $he ratio reflects the relative contribution of creditors and oners
of the business in its financing. A high ratio shos a large share of financing by the
creditors of the firmG a lo ratio implies the a smaller claim of the creditors. 0ebt J
5"uity ratio indicates the margin of safety to the creditors. $he debt-e"uity ratio is in
decreasing and in ,((@ it become nil, hich implies that the oners are putting up
relatively more money of their on.
(C !r"#ita3iity rati"Js reated t" saes-
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
$hese ratios are based on the premise that a firm should earn sufficient profit on each
rupee of sales. If ade"uate profits are not earned on sales, there ill be difficulty in
meeting the operating e;penses and no returns ill be available to the oners.
AC Net 'r"#it mar+in-
It is also knon as net margin. $his measures the relationship beteen the net
profits and sales of a firm. 0epending on the concept of net profit employed. , this
ratio can be computed as follos-
Earnin+s a#ter tax
Net !r"#it rati" M × %00
Net saes
Inter'retati"n
$he net profit margin is indicative of management=s ability to operate the business ith
sufficient success not only to recover from revenues of the period, the cost of services,
the operating e;penses and the cost of borroed funds, but also to leave a margin of
reasonable compensation to the oners for providing their capital at risk. A high profit
margin ould ensure the ade"uate return to the oners as ell as enable the firm to
ithstand adverse economic conditions. A lo net profit margin has the opposite
implications. ,((? ,((@
5arnings after ta; +(.>@ +?.@, ,?.(/ -/./> .-.?/
7et sales ,>/..' ,',.(. -,+.,. -/-.-> -@@.?
7et profit margin ..(,-D >.+(,D @..,(D +(.(>D ++.,/D
STATE BANK OF INDIA
Project Financing.
it ill sho that the company is in good condition and the demand for the product is
increasing.
4 C !r"#ita3iity rati"s reated t" Investments-
6eturn "n Investments-
6eturn on investments measures the overall effectiveness of management in
generating profits ith its available assets. $here are three different concepts of
investments in financial literature1 assets, capital employed and shareholder=s
e"uity. Based on each of them, there are three broad categories of 6EIs. $hey are
I. 6eturn on assets,
II. 6eturn on total capital employed.
6eturn "n assets-
$he profitability ratio is measured in terms of relationship beteen net profits and
assets. $he 6EA may also be called profit-to-asset ratio. It can be computed as follos-
Net 'r"#it a#ter tax
6eturn "n Assets M × %00
Avera+e t"ta assets
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#articulars ,((. ,((/ ,((> ,((? ,((@
5arnings after ta; +(.>@ +?.@, ,?.(/ -/./> .-.?/
Average total assets ,(@.-' +''./. +'/.' ,((./. ,(@.-.
6EA /.+,/D @.'-D +-.@+D +?.?-D ,(.''D
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
6eturn on assets employed is favorable. $hat means the firm is in a position to employ
its assets in an efficient manner.
6eturn "n Ca'ita Em'"yed-
It is similar to 6EI e;cept in one respect. &ere the profits are related to the total capital
employed. $he term capital employed refers to long term funds supplied by the lenders
and oners of the firm. It is given by the formula-
EBIT
6eturn "n Ca'ita em'"yed M × %00
Avera+e t"ta ca'ita em'"yed
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61
#articulars ,((. ,((/ ,((> ,((? ,((@
5BI$ -..@, .,.,. /,.>> >,.(. ?(.''
total capital employed ,(-.-' +''./. +'/.'( ,((./. ,(@.-.
6E35 +?.,D ,+.+>D ,@.',D -(.'D -..(?D
STATE BANK OF INDIA
Project Financing.
Inter'retati"n;-
$he capital employed basis provides a test of profitability related to the source of long
term funds. $he higher the ratio, the more efficient is the use of capital employed. )rom
the above table e can say that the 6E35 is "uite high. 3ompared to previous years
ratio. It is good for the companyC
6e'ayment !eri"d and de3t service c"vera+e
AH !r",ecti"ns "# 'er#"rmance and 'r"#ita3iity
particulars ,((. ,((/ ,((> ,((? ,((@
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STATE BANK OF INDIA
Project Financing.
A: !ales -((.(( --(.(( ->-.(( -''.-( .-'.,-
%ess1 5;cise -../+ -?.'> .+.?> ./.'. /(./-
7et sales
,>/..' ,',.(. -,+.,. -/-.-> -@@.?(
B: cost of #roduction
+.6a material consumed +@/.@. ,(..., ,,..@? ,.?.-/ ,?,.('
,.#oer A )uel >.(( >.>( ?.,> ?.'' @.?@
-.0irect labor A ages +,.,. +-..> +..@+ +>.,' +?.',
..consumable stores (.>( (.>> (.?- (.@( (.@@
/.6epair A Maintenance +.,( +.-, +.>/ ,..@ -..?
>.Ethermanufacturinge;pences (.?, (.?' +.++ +.// ,.+?
?.0epreciation ,..'? +'.+( +..>> ++.-( @.?/
@.#reliminary e;penses /off ,..( ,..( ,..( ,..( ,..(
$otal 3ost of #roduction
,--..? ,.@.?> ,>?..' ,'(.+> -+>..>
Add1 Epening stock (.(( ../( ..?@ /.+. /./@
%ess1 3losing !tock ../( ..?@ /.+. /./@ >.('
0:3ost of goods sold ,,'..? ,.@.?@ ,>?.+- ,@'.?, -+/.'>
5: Bross #rofit 9B-0: ->.(, .-./> /..++ >-.>. ?,.?.
): Interest on
+: $erm %oan +,.@( +(.(- ?.,> ../( +.?-
,: .?/ >.?/ >.?/ >.?/ >.?/
$otal +'.// +>.?@ +..(+ ++.,/ @..@
B: !elling, administration 5;p +.,( +.-, +../ +.>( +.?>
BABASAB PATIL
63
STATE BANK OF INDIA
Project Financing.
&:#rofit Before $a;ation95-
9)QB::
+/.,? ,/../ -@.>/ /(.@( >,./+
I: #rovision for $a;ation ../@ ?.>. ++./' +/.,. +@.?/
C: #rofit after ta; 9&-I:
+(.>' +?.@, ,?.(/ -/./> .-.?/
H: 0epreciation ,..'? +'.+( +..>> ++.-( @.?/
%: 7et 3ash accruals9 CQH:
-/.>> ->.', .+.?, .>.@> /,./
BH !r",ected Cas) F"- Statement
!%.7E #articulars ,((. ,((/ ,((> ,((? ,((@
A: !ources of funds
+.7et profit before interest and ta; -..@, .,.,. /,.>> >,.(. ?(.''
,. 0epreciation ,..'? +'.+( +..>> ++.-( @.?/
-.#romoters capital /+.-@
..on contribution toards /.((
/.term loan +(,./(
>.orking capital loan /(.((
?.!undry creditior ?.?. (.?? (.@/ (.'. +.(-
@.Amortisationofpreliminarye;pences ,..( ,..( ,..( ,..( ,..(
$otal1 ,?@.@ >../, ?(./@ ?>.>@ @-.+?
BH
Application of funds
+. Buldings ,/.((
BABASAB PATIL
64
STATE BANK OF INDIA
Project Financing.
,. %and ,,.((
-.Macinary @-.-@
..5lectrification >./(
/.5lectricity 0eposit /.((
>.#reliminary 5;penditure
>. Increase in receivables ...,/ ..., ..@? /.-/ /.@'
?.incerase in stock of material -(.'? -.+( -..+ -.?/ ..+,
'.increase in stock of finished goods ../( (.,@ (.-> (... (./+
+(.0raing/ 0ividend -.(( +(.(( +/.(( +/.(( ,(.((
++.interest on loans +'.// +>.?@ +..(+ ++.,/ @..@
+,.income ta; (.(( ../@ ?.>. ++./' +/.,.
+-.6epayment of term loans ,(./ ,(./ ,(./ ,(./ ,(./
$otal ,?>.>/ /'.>? >/.?' >?.@@ ?..?.
!urplus/deficit ,.+/ ..@/ ..?' @.@( @..-
Epening Balance (.(( ,,+/ ?.(( ++.@( ,(.>
Add1 surplus/ deficit ,.+/ ..@/ ..?' @.@( @..-
3losing Balance ,.+/ ?.(( ++.@( ,(.> ,'.(-
!r",ectd Baance S)eet
!%.7E #articulars ,((. ,((/ ,((> ,((? ,((@
A 3aptial A %iability
BABASAB PATIL
65
STATE BANK OF INDIA
Project Financing.
#romoter captial (.(( >..(? ?+.@@ @-.'. +(...'
En contribution />.-@ (.(( (.(( (.(( (.((
%ess 0raings -,(( +(.(( +/.(( +/.(( ,(.((
5"uity /-.-@ /..(? />.@@ >@,'. @...'
6etained 5arning +(.>' +?.@, ,?.(/ -/./> .-.?/
>..(? ?+.@@ @-.'. +(...' +,@.,/
$erm loan90ebt: @,.(( >+./( .+.(( ,(./( (.((
!undry creditors ?.?. @./, '.-? +(.-+ ++.-.
. ++./' +/.,. +@.?/
Brand $otal ,(-.-' +''./. +'/.'( ,((./. ,(@.-.
Assets;
)i;ed assets @'.'+ ?(.@+ />.+. ...@. ->.('
land ,,.(( ,,.(( ,,.(( ,,.(( ,,.((
5lectricity deposit /.(( /.(( /.(( /.(( /.((
3ash A Bank Balances ,.+/ ?.(( ++.@( ,(.> ,'.(-
6eceivables ...,/ .@.>? /-./. /@.@' >..?@
!tock of material -(.'? -..(? -?..@ .+.,- ./.-/
!tock of finished goods ../( ..?@ /.+. /./@ >.('
#reliminary e;pences not /off '.>( ?.,( ..@( ,..( (.((
Brand $otal ,(@.-' +''./. +'/.' ,((./. ,(@.-.
BABASAB PATIL
66
STATE BANK OF INDIA
Project Financing.
De3t Service C"vera+e 6ati";KDSC6H
It is considered a more comprehensive and apt measure to compute debt service
capacity of firm. It provides the value in terms of the number of times the total debt
service obligations consisting of interest and repayment of principal in installments are
covered by the operating funds available after the payment of ta; 1 earnings after ta;es,
5A$QinterestQ0epreciationQEther non cash e;penditure like amorti2ation.
5A$QinterestQ0epreciationQEther 7on cash e;penditure
0!36 R
Installments
BABASAB PATIL
67
#articulars ,((. ,((/ ,((> ,((? ,((@
7et 3ash Accruals
-/.>>
->.', .+.?, .>.@> /,./(
Instalment ,(./ ,(./ ,(./ ,(./ ,(./
0!36 +.?. +.@( ,.(- ,.,' ,./>
STATE BANK OF INDIA
Project Financing.
Inter'retati"n;-
BABASAB PATIL
68
year 7et profit for the year Interest on term loan 6epayment of term loan
,((. -/.>> +'.// ,(./
,((/ ->.', +>.?@ ,(./
,((> .+.?, +..(+ ,(./
,((? .>.@> ++.,/ ,(./
,((@ /,./( @..@ ,(./
STATE BANK OF INDIA
Project Financing.
$he 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 ,1+ as
satisfactory ratio.
In this project 0!36 is in increasing trend it shos that firm is able to meet its debt
obligation.
Ca'ita investment evauati"n met)"ds
!uccessful completion of a project mainly depends on the selection criteria adopted
hile choosing the project in the initial phases itself and the choice of a project must be
based on a sound Pfinancial assessment= and not based on Pimpressions=. Among the
several criteria available for financial assessment of projects, 0iscounted 3ash )lo
903): techni"ues are being idely used in both public and private sectors. 4sually the
basic criterion used in project appraisal is Internal 6ate of 6eturns 9I66:, hich is the
most popular 03) techni"ue used in the country. &oever, in most of the projects of
the projects , the actual returns are vastly different from the e;pected returns based on
I66, necessitating looking for alternative project appraisal criteria. $herefore, an
attempt is made to analyse other alternative project appraisal methods available for
catering to the re"uirements of vivid circumstances. 5mphasis is given for 03)
techni"ues as they ere proved to be the best techni"ues for project appraisal all over
the orldC
%H !ay Bac* !eri"d K!B!H 2et)"d;
#ay back period is the minimum period re"uired to cover the initial cost and a
project ith minimum #B# is acceptable in this model. $his is a very useful tool to
decide rapidly if it is orth 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 #B#
method are not as reliable as the other methods like 7#8 etc. $he most important
draback of #> -/.>>
,((/ ->.', ?,./@
,((> .+.?, ++..-
,((? .>.@> +>+.+>
,((@ /,./( ,+-.>>
STATE BANK OF INDIA
Project Financing.
$he average rate of return 9A66: method of evaluating proposed capital
e;penditure is also knon as the accounting rate of return method. It is also knon as
6eturn on Investment, as it uses the information revealed by financial statements, to
measure the profitability of an investment. $he accounting rate of return can be found
out by dividing the average after-ta; profit by the average investment. It is given by the
formula-
Avera+e annua 'r"#it a#ter tax
Avera+e rate "# return M N %00
Avera+e investment
,+-.>>/ /
Average rate of return R S +((
+/,.// ,
.,.?-,
Average rate of return R S +((
?>.,/
Average rate of return R />.(.D.
BABASAB PATIL
71
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
&ere the A66 is more consistent as the A66 is "uite higher 9 more than average: and
the project can be accepted.
(C Net !resent vaue-
It is calculated by discounting the future cash flos of the project to the present value
ith the re"uired rate of return to finance the cost of capital. A project is acceptable if
the capital value of the project is less than or e"ual to the net present value of cash
flos over the operating life cycle of the project. $his method is highly useful hen
selection has to be made among many projects, hich are mutually e;clusive, and there
are no budgetary constraints. !election of projects ith the largest positive 7#8 ill
yield highest returns. But this method is useful only to determine hether a project is
acceptable or not but doesn=t indicate hich project is best under budgetary constraints.
It is difficult to rank different compatible projects ith 7#8 as there is no account for
Pscale= of investment hile calculating 7#8.
Iear 3ash )los9lakhs: #8 factor T+(D $otal present value
+ -/.>> (.'(' -,..+.
, ->.', (.@,> -(..'/
- .+.?, (.?/+ -+.,'(
. .>.@> (.>@- -,.((/
/ /,./( (.>,+ -,.>(-
$otal #8 - +/@.@(?
%ess- Initial outlay +/,./
7et #resent 8alue - - >.-(?
BABASAB PATIL
72
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
$he acceptance rule using 7#8 method is to accept the investment proposal if its net
present value is positive 97#8 U and to reject it if the 7#8 is negative 97#8V.
#ositive 7#8=s contribute to the net ealth of the shareholders hich should result in
the increased price of a firm=s share. $he positive net present value ill result only if
the project generates cash inflos at a rate higher than the opportunity cost of capital .
!ince the 7et #resent 8alue of the above project is positive, the proposal can be
accepted.
4 C !r"#ita3iity Index-
It is also knon as Benefit J3ost 6atio. It is similar to 7#8 approach. $he
profitability inde; approach measures the present value of returns per rupee invested,
@
- .+.?, - +,/.+>
. .>.@> , '-.?,
/ /,./( + /,./
$otal +/ /'?.->
BABASAB PATIL
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STATE BANK OF INDIA
Project Financing.
/'?.->
>
(.@'- -+.@.
, ->.',
(.?'? ,'..-
BABASAB PATIL
75
Iear 3ash)los9lakhs: #8 factor T+(D present value
+ -/.>> (.'(' -,..+.
, ->.', (.@,> -(..'/
- .+.?, (.?/+ -+.,'(
. .>.@> (.>@- -,.((/
/ /,./( (.>,+ -,.>(-
$otal #8 - +/@.@(?
%ess- Initial outlay +/,./
7et #resent 8alue - - >.-(?
STATE BANK OF INDIA
Project Financing.
- .+.?,
(.?+, ,'.?(
. .>.@>
(.>-> ,'.@(
/ /,./(
(./>? ,'.?>
$otal #8
+/(./-
%ess- Initial outlay
+/,./-
7et #resent 8alue -
-+.'?
A
Interna rate "# return M .O × P.-(?
Internal rate of return R +( Q × 9+,-+
>.-(?-+.'?
>.-(?
Internal rate of return R +(Q × W,X
..--?
Internal rate of return R +( Q ,.'(@
Internal rate of return R +,.'+D
Inter'retati"n-
!ince the e;pected rate of return is +(D so the project is said to be accepted.
2easures ta*en 3y SBI -)en t)e re'ayment is n"t '"ssi3e
BABASAB PATIL
76
STATE BANK OF INDIA
Project Financing.
,: )irstly they send a notice to the clients stating therein to pay their dues.
-:
Project Financing.
CONTENTS
SECTION – I
• Executive Summary 4-7
• Industria !r"#ie $ -%&
SECTION – II
• C"m'any !r"#ie %(-&%
SECTION – III
• T)e"retica Bac*+r"und #"r t)e 'r",ect -"r* &&- 4$
- Intr"ducti"n t" 'r",ect #inancin+
- !r",ect #inancin+ ris*s
- !r",ect Financia A''raisa
• !r",ect in Brie#- S. #"- c"ntr"s /0- /(
SECTION – I1
• Financia Anaysis /4-74
• 2easures ta*en 3y SBI -)en t)e re'ayment is n"t '"ssi3e 7/
SECTION – 1
• Anaysis 74
• Findin+s 77 -75
• 6ec"mmendati"ns
• .imitati"ns
• C"ncusi"ns
• Bi3i"+ra')y 7$
BABASAB PATIL
1
STATE BANK OF INDIA
Project Financing.
Executive Summary
Tite "# t)e 'r",ect
7Financia A''raisa O# t)e !r",ect Financed By SBI 8
As a part of curriculum, every student studying MBA has to undertake a project on a
particular subject assigned to him/her. Accordingly I have been assigned the project
ork on the study of project financing in Banking !ector.
As it is rightly said that finance is the life blood of every business so every business
need funds for smooth running of its activities and bank is the one of the source through
hich the business get funds, before financing the bank appraise the projects and if the
projects meet the re"uirement of the bank rules than only they ill finance.
#roject financing is commonly used as a financing method in capital-intensive
industries for projects re"uiring large investments of funds, such as the construction of
poer plants, pipelines, transportation systems, mining facilities, industrial facilities
and heavy manufacturing plants.
$he core area of this project focuses on the financial appraisal of !% flo controls, ho
has started Manufacturing of industrial valves hich is financed by !BI
.
$his project has been undertaken at !tate Bank of India, &ubli branch hich is one of
the largest bank in India having vast domestic netork of over '((( branches. !BI
deals ith all financial activities hich involves all types of deposits, advances
including project financing, mutual funds etc
)inancial appraisal hich mainly leads to the feasibility study consisting of ratio
analysis and capital budgeting calculations.
BABASAB PATIL
2
STATE BANK OF INDIA
Project Financing.
2ain O3,ective
“)inancial appraisal of project*
Su3 O3,ectives -
+. $o kno the projects financed by !BI.
,. $o kno the policies of !BI toards the project financing.
-. $o kno the risks involved in projects financing.
.. $o appraise the projects using financial tools.
/. $o kno the measures taken by bank hen the clients fail to repay the amount.
2et)"d""+y –
0ata collection method1 $he report ill be prepared mainly using secondary data vi2,
Sec"ndary data
.sbi.com.
3ompany manuals.
3ommercial Banks Book.
T)e tec)ni9ues: -)ic) -"ud 3e used #"r t)e study;
+. 0iscussions ith Bank guide and customers.
,. By studying projects reports
.
-. 4sing #roject $echni"ues1
BABASAB PATIL
3
STATE BANK OF INDIA
Project Financing.
Anaysis;-
T)is anaysis 'art is reated t" t)e #inancia via3iity "# t)e 'r",ect S. F"-
C"ntr"s;-
$hrough ratio analysis I analy2ed that the li"uidity position of the firm is
good and it is maintaining the standard ratio..
0ebt 5"uity ratio is in decreasing trend, it shos that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
#rofitability ratios related to sales and capital employed are in increasing
trend, it shos that the sales are increasing and the firm using its resources
efficiently.
0ebt !ervice 3overage 6atio is also in increasing trend, it shos that the
firms ability to make the loan repayments on time over the debt life of the
project.
$he payback period is ithin the debt life of the project.
$he net present value of the project is positive, $he positive net present
value ill result only if the project generates cash inflos at a rate higher
than the opportunity cost of capital . !ince the 7et #resent 8alue of the
above project is positive, the proposal can be accepted.
$he internal rate of the return is higher than hat accepted so the project is
accepted.
BABASAB PATIL
4
STATE BANK OF INDIA
Project Financing.
Findin+s ;- T)ese are reated t" 3an* in +enera
!tate bank of India is strictly folloing the guidelines of 6BI on #roject
)inancing
!anctioning for the projects is approved by 6A!M533 96etailed Assets
!mall And Medium 5nterprises 3redit 3ell:.
$he bank finances the projects only through term loans.
Interest rates are fi;ed depending upon the projects hich is knon as !tate
Bank advance rate.
'
has paid rich dividends ith the nationali2ation of +. major private banks of India.
$he first bank in India, though conservative, as established in +?@>. )rom +?@> till
today, the journey of Indian Banking !ystem can be segregated into three distinct
phases. $hey are as mentioned belo1
5arly phase from +?@> to +'>' of Indian Banks.
7ationali2ation of Indian Banks and up to +''+ prior to Indian.
Banking sector 6eforms.
7e phase of Indian Banking !ystem ith the advent of Indian.
BABASAB PATIL
7
STATE BANK OF INDIA
Project Financing.
)inancial A Banking !ector 6eforms after +''+.
!)ase I
$he Beneral Bank of India as set up in the year +?@>. 7e;t came Bank of &industan
and Bengal Bank. $he 5ast India 3ompany established Bank of Bengal 9+@(':, Bank of
Bombay 9+@.
and Bank of Madras [email protected]: as independent units and called it#residency Banks. $hese three banks ere amalgamated in +',( and Imperial Bank of
India as established hich started as private shareholders banks, mostly 5uropean
shareholders.
In +@>/ Allahabad Bank as established and first time e;clusively by Indians, #unjab
7ational Bank %td. as set up in +@'. ith head"uarters at %ahore. Beteen +'(> and
+'+-, Bank of India, 3entral Bank of India, Bank of Baroda, 3anara Bank, Indian
Bank, and Bank of Mysore ere set up. 6eserve Bank of India came in +'-/.
0uring the first phase the groth as very slo and banks also e;perienced periodic
failures beteen +'+- and +'.@. $here ere appro;imately ++(( banks, mostly small.
$o streamline the functioning and activities of banks, mostly small. $o streamline the
functioning and activities of commercial banks, the Bovernment of India came up ith
$he Banking 3ompanies Act, +'.' hich as later changed to Banking 6egulation Act
+'.' as per amending Act of +'>/ 9Act 7o. ,- of +'>/:. 6eserve Bank of India as
vested ith e;tensive poers for the supervision of banking in India as the 3entral
Banking !ystem.
0uring those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation as slo. Abreast of it the savings bank facility provided by the #ostal
department as comparatively safer. Moreover, funds ere largely given to traders.
!)ase II
Bovernment took major steps in this Indian Banking !ector 6eform after independence.
In +'//, it nationalised Imperial Bank of India ith e;tensive banking facilities on a
BABASAB PATIL
8
STATE BANK OF INDIA
Project Financing.
large scale specially in rural and semi-urban areas. It formed !tate Bank of India to act
as the principal agent of 6BI and to handle banking transactions of the 4nion and state
government all over the country.
!even banks forming subsidiary of !tate Bank of India as nationalised in +'>( on +'
th
Culy +'>', major process of nationalisation as carried out. It as the effort of the then
#rime Minister of India, Mrs. Indira Bandhi. +. major commercial banks in the country
ere nationali2ed.!econd phase of nationalisation Indian Banking !ector 6eform as
carried out in +'@( ith seven more banks. $his step brought @(D of the banking
segment in India under Bovernment onership.
T)e #""-in+ are t)e ste's ta*en 3y t)e >"vernment "# India t" 6e+uate Ban*in+
Instituti"ns in t)e C"untry;
+. +'.'1 5nactment of Banking 6egulation Act.
,. +'//1 7ationalisation of !tate Bank of India.
-. +'/'1 7ationalisation of !BI subsidiaries.
.. +'>+1 Insurance cover e;tended to deposits.
/. +'>'1 7ationalisation of +. major banks.
>. +'?+1 3reation of credit guarantee corporation.
?. +'?/1 3reation of regional rural banks.
@. +'@(1 7ationalisation of seven banks ith deposits over ,(( crores.
After the nationali2ation of banks, the branches of the public sector bank India raised to
appro;imately @((D in deposits and advances took a huge jump by ++(((D. Banking
in the sunshine of Bovernment onership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
BABASAB PATIL
9
STATE BANK OF INDIA
Project Financing.
!)ase III
$his phase has introduced many more products and facilities in the banking sector in
its reforms measure. In +''+, under the chairmanship of M 7arasimham, a committee
as set up by his name, hich orked for the %iberali2ation of Banking #ractices.
$he country is flooded ith foreign banks and their A$M stations. 5fforts are being put
to give a satisfactory service to customers. #hone banking and net banking is
introduced. $he entire system became more convenient and sift. $ime is given more
importance than money.
$he financial system of India has shon a great deal of resilience. It is sheltered from
any crisis triggered by any e;ternal macroeconomics shock as other 5ast Asian
3ountries suffered. $his is all due to a fle;ible e;change rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign e;change e;posure.
Banking in India originated in the first decade of +@
th
century ith $he Beneral Bank
Ef India coming into e;istence in +?@>. $his as folloed by Bank of &industan. Both
these banks are no defunct. $he oldest bank in e;istence in India is the !tate Bank Ef
India being established as F $he Bank Ef 3alcutta* in 3alcutta in Cune +@(>. 3ouple of
0ecades later, foreign Banks like &!B3 and 3redit %yonnais !tarted their 3alcutta
operations in +@/(s. At that point of time, 3alcutta as the most active trading port,
mainly due to the trade of British 5mpire and due to hich banking actively took roots
there and prospered. $he first fully Indian oned bank as the Allahabad Bank set up
in +@>/.
By +'((, the market e;panded ith the establishment of banks like #unjab 7ational
Bank in +@'/ in %ahoreG Bank of India in +'(> in Mumbai-both of hich ere founded
under private onership. Indian Banking !ector as formally regulated by 6eserve
Bank Ef India from +'-/. After India=s independence in +'.?, the 6eserve Bank as
nationalised and given broader poers.
BABASAB PATIL
10
STATE BANK OF INDIA
Project Financing.
SBI >r"u'
$he Bank of Bengal, hich later became the !tate Bank of India. !tate Bank of India
ith its seven associate banks commands the largest banking resources in India.
Nati"nai?ati"n
$he ne;t significant milestone in Indian Banking happened in late +'>(s hen the then
Indira Bandhi government nationali2ed on +'
th
Culy +'.', +. major commercial Indian
banks folloed by nationalisation of > more commercial Indian banks in +'@(.
$he stated reason for the nationalisation as more control of credit delivery. After this,
until +''(s, the nationali2ed banks gre at a leisurely pace of around .D also called as
the &indu groth of the Indian economy.
After the amalgamation of 7e Bank of India ith #unjab 7ational Bank, currently
there are +' nationali2ed banks in India.
.i3erai?ati"n-
In the early +''(=s the then 7arasimha rao government embarked a policy of
liberali2ation and gave licences to a small number of private banks, hich came to be
knon as 7e generation tech-savvy banks, hich included banks like I3I3I and
&0)3. $his move along ith the rapid groth of the economy of India, kick started the
BABASAB PATIL
11
STATE BANK OF INDIA
Project Financing.
banking sector in India, hich has seen rapid groth ith strong contribution from all
the sectors of banks, namely Bovernment banks, #rivate Banks and )oreign banks.
&oever there had been a fe hiccups for these ne banks ith many either being
taken over like Blobal $rust Bank hile others like 3enturion Bank have found the
going tough.
$he ne;t stage for the Indian Banking has been set up ith the proposed
rela;ation in the norms for )oreign 0irect Investment, here all )oreign Investors in
Banks may be given voting rights hich could e;ceed the present cap of +(D, at
present it has gone up to .'D ith some restrictions.
$he ne policy shook the Banking sector in India completely. Bankers, till this
time, ere used to the .->-. method 9Borro at .DG %end at >DG Bo home at .: of
functioning. $he ne ave ushered in a modern outlook and tech-savvy methods of
orking for traditional banks. All this led to the retail boom in India. #eople not just
demanded more from their banks but also received more.
C@66ENT SCENA6IO
3urrently 9,((?:, overall, banking in India is considered as fairly mature in terms
of supply, product range and reach-even though reach in rural India still remains a
challenge for the private sector and foreign banks. 5ven in terms of "uality of assets
and capital ade"uacy, Indian banks are considered to have clean, strong and transparent
balance sheets-as compared to other banks in comparable economies in its region. $he
6eserve Bank of India is an autonomous body, ith minimal pressure from the
government. $he stated policy of the Bank on the Indian 6upee is to manage volatility-
ithout any stated e;change rate-and this has mostly been true.
E AND OBEECTI1ES-
NON 6ECO@6SE
$he typical project financing involves a loan to enable the sponsor to construct a
project here the loan is completely Lnon-recourseL 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
minimi2e the risks associated ith a non-recourse loan, a lender typically ill re"uire
indirect credit supports in the form of guarantees, arranties and other covenants from
the sponsor, its affiliates and other third parties involved ith the project
2AFI2IGE .E1E6A>E
BABASAB PATIL
21
STATE BANK OF INDIA
Project Financing.
In a project financing, the sponsor typically seeks to finance the costs of
development and construction of the project on a highly leveraged basis. )re"uently,
such costs are financed using @( to +(( percent debt. &igh leverage in a non-recourse
project financing permits a sponsor to put less in funds at risk, permits a sponsor to
finance the project ithout diluting its e"uity investment in the project and, in certain
circumstances, also may permit reductions in the cost of capital by substituting loer-
cost, ta;-deductible interest for higher-cost, ta;able returns on e"uity.
OFF-BA.ANCES. Market study.
+?. Assumptions.
BABASAB PATIL
24
STATE BANK OF INDIA
Project Financing.
TC Existin+ c)ar+es "n assets "# t)e unit-If the company, report on search of charges
ith proposed guarantors.
?. Structure "# #aciities and Terms "# Sancti"n-)i; terms and conditions for
e;posures proposed facility ise and overall1
? %imit for each facility- sub limits.
? !ecurity- #rimary A collateral, Buarantee.
BABASAB PATIL
49
STATE BANK OF INDIA
Project Financing.
? Margins- for each facility as applicable.
? 6ate of interest.
? 6ate of commission/e;change/other fees.
? 3oncessional facilities and value thereof.
? 6epayment terms, here applicable.
? Ether standard covenants.
@C 6evie- "# t)e 'r"'"sa-6evie of the proposal should be done covering !trengths
and eaknesses of the e;posure proposed 6isk factors and steps proposed to mitigate
them0eviations if any, proposed from usual norms of the bank and the reasons thereof.
'. !r"'"sa #"r sancti"n- #repare a draft in prescribed format ith re"uired back-up
details and ith recommendations for sanction.
BABASAB PATIL
50
STATE BANK OF INDIA
Project Financing.
SBI )as 'resenty #inanced t)e #""-in+ !r",ects-
BABASAB PATIL
51
S.CNO Name O# T)e !r",ect
AmtKin cr"resH
+ &escom @,.((
, Manoj Ceellers >.((
- Mahaveer developers. '-.((
. C$H Arihant appliances ,.,/
/ !hreyala;mi properties /.'/
> !hri la;mi trading co. /.@
? !% flo controls +.,/
@ &ubli 3igarette center +.+(
' Mahindrakar Agencies -/
+( !hri gopal industries ,..(
++ Atul agencies ,.(,
+, Hashyap j. Majethia ...(
+- !hree meena;i pharma ,./
+. !hree meena;i medical agency ..(
+/ )ine lab /.(
+> !hree engineers and process /.@
+? !astik inding orks ../
STATE BANK OF INDIA
Project Financing.
T)e #urt)er 'art )as 3een deat -it) res'ect t" t)e 'r",ect "#
S. #"- c"ntr"sC
!r",ect in Brie#
Name 2LS S. F"- C"ntr"
Address $5LA: &A%: Sri .axmi Business )"use near
Air'"rt r"ad >"*u r"ad ,((? ,((@
3urrent assets '+..? +(+.?, ++,.?> +,@.? +./.,/
3urrent liabilities +...-, +,?.>> +,+./' '>.(/ @(.('
3urrent ratio (.>-. (.?>? (.',? +.--' +.@+-.
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
It is an indicator of the e;tent to hich short term creditors are covered
by assets that are e;pected to be converted to cash in a period corresponding to the
maturity of claims. $he ideal current ratio is ,1+. $he firm current ratio indicate that the
firm is in a position to meet its short term obligation because the ratio is in increasing
trend , by observing the above table e can say that though the firm does not maintain
ideal current ratio, it is still in a position to meet its current obligations. After clearing
all the dues the firm is still in a position to maintain li"uidity.
3H Acid test "r 9uic* rati"-
BABASAB PATIL
55
STATE BANK OF INDIA
Project Financing.
It is a measure of li"uidity calculated dividing current assets minus
inventory and prepaid e;penses by current liabilities. !ince inventories among current
assets are not "uite li"uid 9means not "uickly converted into cash:, the "uick ratio
e;cludes it. $he "uick ratio includes only assets, hich can be readily converted into
cash and constitutes a better test of li"uidity. It is often called as "uick "uick ratio
because it is a measurement of a firms ability to convert its assets "uickly into cash in
order to meet its current liabilities.
Inter'retati"n-
BABASAB PATIL
56
#articulars ,((. ,((/ ,((> ,((? ,((@
Ouick assets >(..? >?.>/ ?/.,@ @?..? ''.'
3urrent liabilities +...-, +,?.>> +,+./' '>.(/ @(.('
3urrent ratio (./-. (./- (.>, (.'++ +.,.?
STATE BANK OF INDIA
Project Financing.
Acid test ratio is a rigorous measure of firm=s ability to service short term liabilities.
$he usefulness of the ratio lies in the fact that it is idely accepted as the best available
test of li"uidity position of a firm. Benerally an acid test ratio of +1+ is considered
satisfactory as a firm can easily meet all its current claims. In the case of the above firm
the "uick ratio is in increasing trend by year on. !o it shos that firm is capable of
paying its "uick short term obligations
&C Ca'ita structure rati"J
$he long-term lenders/creditors ould 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 ell as repay the installment of the principal on due dates or in one lump sum at the
time of maturity. $he long term solvency of firm can be e;amined by using leverage or
capital structure ratios. $he leverage or capital structure ratio=s may be defined as
financial ratios hich thro light on the long term solvency of a firm as reflected in its
ability to assure the long term lenders ith regard to 9i: periodic payment of interest
during the period of the loan and 9ii: repayment of the principal on maturity or in
predetermined installments at due dates.
aH De3t e9uity rati"- $his ratio measures the long term or total debt to
shareholders e"uity. $his ratio reflects claims of creditors and
shareholders against the assets of the firm. 0ebt 5"uity 6atio is given
by1
."n+ term de3t
De3t E9uity 6ati" M
S)are)"ders e9uity
BABASAB PATIL
57
#articulars ,((. ,((/ ,((> ,((? ,((@
0ebt @,.(( >+./( .+.(( ,(.(/ (.((
5"uity9#romoter contribution: />.-@ /..(? />.@@ >@.'. @...'
0ebt e"uity ratio +../. +.+. (.?,+ (.,'+ (.((
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
$he debt e"uity ratio is an important tool of financial analysis to appraise the financial
structure of the firm. $he ratio reflects the relative contribution of creditors and oners
of the business in its financing. A high ratio shos a large share of financing by the
creditors of the firmG a lo ratio implies the a smaller claim of the creditors. 0ebt J
5"uity ratio indicates the margin of safety to the creditors. $he debt-e"uity ratio is in
decreasing and in ,((@ it become nil, hich implies that the oners are putting up
relatively more money of their on.
(C !r"#ita3iity rati"Js reated t" saes-
BABASAB PATIL
58
STATE BANK OF INDIA
Project Financing.
$hese ratios are based on the premise that a firm should earn sufficient profit on each
rupee of sales. If ade"uate profits are not earned on sales, there ill be difficulty in
meeting the operating e;penses and no returns ill be available to the oners.
AC Net 'r"#it mar+in-
It is also knon as net margin. $his measures the relationship beteen the net
profits and sales of a firm. 0epending on the concept of net profit employed. , this
ratio can be computed as follos-
Earnin+s a#ter tax
Net !r"#it rati" M × %00
Net saes
Inter'retati"n
$he net profit margin is indicative of management=s ability to operate the business ith
sufficient success not only to recover from revenues of the period, the cost of services,
the operating e;penses and the cost of borroed funds, but also to leave a margin of
reasonable compensation to the oners for providing their capital at risk. A high profit
margin ould ensure the ade"uate return to the oners as ell as enable the firm to
ithstand adverse economic conditions. A lo net profit margin has the opposite
implications. ,((? ,((@
5arnings after ta; +(.>@ +?.@, ,?.(/ -/./> .-.?/
7et sales ,>/..' ,',.(. -,+.,. -/-.-> -@@.?
7et profit margin ..(,-D >.+(,D @..,(D +(.(>D ++.,/D
STATE BANK OF INDIA
Project Financing.
it ill sho that the company is in good condition and the demand for the product is
increasing.
4 C !r"#ita3iity rati"s reated t" Investments-
6eturn "n Investments-
6eturn on investments measures the overall effectiveness of management in
generating profits ith its available assets. $here are three different concepts of
investments in financial literature1 assets, capital employed and shareholder=s
e"uity. Based on each of them, there are three broad categories of 6EIs. $hey are
I. 6eturn on assets,
II. 6eturn on total capital employed.
6eturn "n assets-
$he profitability ratio is measured in terms of relationship beteen net profits and
assets. $he 6EA may also be called profit-to-asset ratio. It can be computed as follos-
Net 'r"#it a#ter tax
6eturn "n Assets M × %00
Avera+e t"ta assets
BABASAB PATIL
60
#articulars ,((. ,((/ ,((> ,((? ,((@
5arnings after ta; +(.>@ +?.@, ,?.(/ -/./> .-.?/
Average total assets ,(@.-' +''./. +'/.' ,((./. ,(@.-.
6EA /.+,/D @.'-D +-.@+D +?.?-D ,(.''D
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
6eturn on assets employed is favorable. $hat means the firm is in a position to employ
its assets in an efficient manner.
6eturn "n Ca'ita Em'"yed-
It is similar to 6EI e;cept in one respect. &ere the profits are related to the total capital
employed. $he term capital employed refers to long term funds supplied by the lenders
and oners of the firm. It is given by the formula-
EBIT
6eturn "n Ca'ita em'"yed M × %00
Avera+e t"ta ca'ita em'"yed
BABASAB PATIL
61
#articulars ,((. ,((/ ,((> ,((? ,((@
5BI$ -..@, .,.,. /,.>> >,.(. ?(.''
total capital employed ,(-.-' +''./. +'/.'( ,((./. ,(@.-.
6E35 +?.,D ,+.+>D ,@.',D -(.'D -..(?D
STATE BANK OF INDIA
Project Financing.
Inter'retati"n;-
$he capital employed basis provides a test of profitability related to the source of long
term funds. $he higher the ratio, the more efficient is the use of capital employed. )rom
the above table e can say that the 6E35 is "uite high. 3ompared to previous years
ratio. It is good for the companyC
6e'ayment !eri"d and de3t service c"vera+e
AH !r",ecti"ns "# 'er#"rmance and 'r"#ita3iity
particulars ,((. ,((/ ,((> ,((? ,((@
BABASAB PATIL
62
STATE BANK OF INDIA
Project Financing.
A: !ales -((.(( --(.(( ->-.(( -''.-( .-'.,-
%ess1 5;cise -../+ -?.'> .+.?> ./.'. /(./-
7et sales
,>/..' ,',.(. -,+.,. -/-.-> -@@.?(
B: cost of #roduction
+.6a material consumed +@/.@. ,(..., ,,..@? ,.?.-/ ,?,.('
,.#oer A )uel >.(( >.>( ?.,> ?.'' @.?@
-.0irect labor A ages +,.,. +-..> +..@+ +>.,' +?.',
..consumable stores (.>( (.>> (.?- (.@( (.@@
/.6epair A Maintenance +.,( +.-, +.>/ ,..@ -..?
>.Ethermanufacturinge;pences (.?, (.?' +.++ +.// ,.+?
?.0epreciation ,..'? +'.+( +..>> ++.-( @.?/
@.#reliminary e;penses /off ,..( ,..( ,..( ,..( ,..(
$otal 3ost of #roduction
,--..? ,.@.?> ,>?..' ,'(.+> -+>..>
Add1 Epening stock (.(( ../( ..?@ /.+. /./@
%ess1 3losing !tock ../( ..?@ /.+. /./@ >.('
0:3ost of goods sold ,,'..? ,.@.?@ ,>?.+- ,@'.?, -+/.'>
5: Bross #rofit 9B-0: ->.(, .-./> /..++ >-.>. ?,.?.
): Interest on
+: $erm %oan +,.@( +(.(- ?.,> ../( +.?-
,: .?/ >.?/ >.?/ >.?/ >.?/
$otal +'.// +>.?@ +..(+ ++.,/ @..@
B: !elling, administration 5;p +.,( +.-, +../ +.>( +.?>
BABASAB PATIL
63
STATE BANK OF INDIA
Project Financing.
&:#rofit Before $a;ation95-
9)QB::
+/.,? ,/../ -@.>/ /(.@( >,./+
I: #rovision for $a;ation ../@ ?.>. ++./' +/.,. +@.?/
C: #rofit after ta; 9&-I:
+(.>' +?.@, ,?.(/ -/./> .-.?/
H: 0epreciation ,..'? +'.+( +..>> ++.-( @.?/
%: 7et 3ash accruals9 CQH:
-/.>> ->.', .+.?, .>.@> /,./
BH !r",ected Cas) F"- Statement
!%.7E #articulars ,((. ,((/ ,((> ,((? ,((@
A: !ources of funds
+.7et profit before interest and ta; -..@, .,.,. /,.>> >,.(. ?(.''
,. 0epreciation ,..'? +'.+( +..>> ++.-( @.?/
-.#romoters capital /+.-@
..on contribution toards /.((
/.term loan +(,./(
>.orking capital loan /(.((
?.!undry creditior ?.?. (.?? (.@/ (.'. +.(-
@.Amortisationofpreliminarye;pences ,..( ,..( ,..( ,..( ,..(
$otal1 ,?@.@ >../, ?(./@ ?>.>@ @-.+?
BH
Application of funds
+. Buldings ,/.((
BABASAB PATIL
64
STATE BANK OF INDIA
Project Financing.
,. %and ,,.((
-.Macinary @-.-@
..5lectrification >./(
/.5lectricity 0eposit /.((
>.#reliminary 5;penditure
>. Increase in receivables ...,/ ..., ..@? /.-/ /.@'
?.incerase in stock of material -(.'? -.+( -..+ -.?/ ..+,
'.increase in stock of finished goods ../( (.,@ (.-> (... (./+
+(.0raing/ 0ividend -.(( +(.(( +/.(( +/.(( ,(.((
++.interest on loans +'.// +>.?@ +..(+ ++.,/ @..@
+,.income ta; (.(( ../@ ?.>. ++./' +/.,.
+-.6epayment of term loans ,(./ ,(./ ,(./ ,(./ ,(./
$otal ,?>.>/ /'.>? >/.?' >?.@@ ?..?.
!urplus/deficit ,.+/ ..@/ ..?' @.@( @..-
Epening Balance (.(( ,,+/ ?.(( ++.@( ,(.>
Add1 surplus/ deficit ,.+/ ..@/ ..?' @.@( @..-
3losing Balance ,.+/ ?.(( ++.@( ,(.> ,'.(-
!r",ectd Baance S)eet
!%.7E #articulars ,((. ,((/ ,((> ,((? ,((@
A 3aptial A %iability
BABASAB PATIL
65
STATE BANK OF INDIA
Project Financing.
#romoter captial (.(( >..(? ?+.@@ @-.'. +(...'
En contribution />.-@ (.(( (.(( (.(( (.((
%ess 0raings -,(( +(.(( +/.(( +/.(( ,(.((
5"uity /-.-@ /..(? />.@@ >@,'. @...'
6etained 5arning +(.>' +?.@, ,?.(/ -/./> .-.?/
>..(? ?+.@@ @-.'. +(...' +,@.,/
$erm loan90ebt: @,.(( >+./( .+.(( ,(./( (.((
!undry creditors ?.?. @./, '.-? +(.-+ ++.-.
. ++./' +/.,. +@.?/
Brand $otal ,(-.-' +''./. +'/.'( ,((./. ,(@.-.
Assets;
)i;ed assets @'.'+ ?(.@+ />.+. ...@. ->.('
land ,,.(( ,,.(( ,,.(( ,,.(( ,,.((
5lectricity deposit /.(( /.(( /.(( /.(( /.((
3ash A Bank Balances ,.+/ ?.(( ++.@( ,(.> ,'.(-
6eceivables ...,/ .@.>? /-./. /@.@' >..?@
!tock of material -(.'? -..(? -?..@ .+.,- ./.-/
!tock of finished goods ../( ..?@ /.+. /./@ >.('
#reliminary e;pences not /off '.>( ?.,( ..@( ,..( (.((
Brand $otal ,(@.-' +''./. +'/.' ,((./. ,(@.-.
BABASAB PATIL
66
STATE BANK OF INDIA
Project Financing.
De3t Service C"vera+e 6ati";KDSC6H
It is considered a more comprehensive and apt measure to compute debt service
capacity of firm. It provides the value in terms of the number of times the total debt
service obligations consisting of interest and repayment of principal in installments are
covered by the operating funds available after the payment of ta; 1 earnings after ta;es,
5A$QinterestQ0epreciationQEther non cash e;penditure like amorti2ation.
5A$QinterestQ0epreciationQEther 7on cash e;penditure
0!36 R
Installments
BABASAB PATIL
67
#articulars ,((. ,((/ ,((> ,((? ,((@
7et 3ash Accruals
-/.>>
->.', .+.?, .>.@> /,./(
Instalment ,(./ ,(./ ,(./ ,(./ ,(./
0!36 +.?. +.@( ,.(- ,.,' ,./>
STATE BANK OF INDIA
Project Financing.
Inter'retati"n;-
BABASAB PATIL
68
year 7et profit for the year Interest on term loan 6epayment of term loan
,((. -/.>> +'.// ,(./
,((/ ->.', +>.?@ ,(./
,((> .+.?, +..(+ ,(./
,((? .>.@> ++.,/ ,(./
,((@ /,./( @..@ ,(./
STATE BANK OF INDIA
Project Financing.
$he 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 ,1+ as
satisfactory ratio.
In this project 0!36 is in increasing trend it shos that firm is able to meet its debt
obligation.
Ca'ita investment evauati"n met)"ds
!uccessful completion of a project mainly depends on the selection criteria adopted
hile choosing the project in the initial phases itself and the choice of a project must be
based on a sound Pfinancial assessment= and not based on Pimpressions=. Among the
several criteria available for financial assessment of projects, 0iscounted 3ash )lo
903): techni"ues are being idely used in both public and private sectors. 4sually the
basic criterion used in project appraisal is Internal 6ate of 6eturns 9I66:, hich is the
most popular 03) techni"ue used in the country. &oever, in most of the projects of
the projects , the actual returns are vastly different from the e;pected returns based on
I66, necessitating looking for alternative project appraisal criteria. $herefore, an
attempt is made to analyse other alternative project appraisal methods available for
catering to the re"uirements of vivid circumstances. 5mphasis is given for 03)
techni"ues as they ere proved to be the best techni"ues for project appraisal all over
the orldC
%H !ay Bac* !eri"d K!B!H 2et)"d;
#ay back period is the minimum period re"uired to cover the initial cost and a
project ith minimum #B# is acceptable in this model. $his is a very useful tool to
decide rapidly if it is orth 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 #B#
method are not as reliable as the other methods like 7#8 etc. $he most important
draback of #> -/.>>
,((/ ->.', ?,./@
,((> .+.?, ++..-
,((? .>.@> +>+.+>
,((@ /,./( ,+-.>>
STATE BANK OF INDIA
Project Financing.
$he average rate of return 9A66: method of evaluating proposed capital
e;penditure is also knon as the accounting rate of return method. It is also knon as
6eturn on Investment, as it uses the information revealed by financial statements, to
measure the profitability of an investment. $he accounting rate of return can be found
out by dividing the average after-ta; profit by the average investment. It is given by the
formula-
Avera+e annua 'r"#it a#ter tax
Avera+e rate "# return M N %00
Avera+e investment
,+-.>>/ /
Average rate of return R S +((
+/,.// ,
.,.?-,
Average rate of return R S +((
?>.,/
Average rate of return R />.(.D.
BABASAB PATIL
71
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
&ere the A66 is more consistent as the A66 is "uite higher 9 more than average: and
the project can be accepted.
(C Net !resent vaue-
It is calculated by discounting the future cash flos of the project to the present value
ith the re"uired rate of return to finance the cost of capital. A project is acceptable if
the capital value of the project is less than or e"ual to the net present value of cash
flos over the operating life cycle of the project. $his method is highly useful hen
selection has to be made among many projects, hich are mutually e;clusive, and there
are no budgetary constraints. !election of projects ith the largest positive 7#8 ill
yield highest returns. But this method is useful only to determine hether a project is
acceptable or not but doesn=t indicate hich project is best under budgetary constraints.
It is difficult to rank different compatible projects ith 7#8 as there is no account for
Pscale= of investment hile calculating 7#8.
Iear 3ash )los9lakhs: #8 factor T+(D $otal present value
+ -/.>> (.'(' -,..+.
, ->.', (.@,> -(..'/
- .+.?, (.?/+ -+.,'(
. .>.@> (.>@- -,.((/
/ /,./( (.>,+ -,.>(-
$otal #8 - +/@.@(?
%ess- Initial outlay +/,./
7et #resent 8alue - - >.-(?
BABASAB PATIL
72
STATE BANK OF INDIA
Project Financing.
Inter'retati"n-
$he acceptance rule using 7#8 method is to accept the investment proposal if its net
present value is positive 97#8 U
and to reject it if the 7#8 is negative 97#8V.#ositive 7#8=s contribute to the net ealth of the shareholders hich should result in
the increased price of a firm=s share. $he positive net present value ill result only if
the project generates cash inflos at a rate higher than the opportunity cost of capital .
!ince the 7et #resent 8alue of the above project is positive, the proposal can be
accepted.
4 C !r"#ita3iity Index-
It is also knon as Benefit J3ost 6atio. It is similar to 7#8 approach. $he
profitability inde; approach measures the present value of returns per rupee invested,
@
- .+.?, - +,/.+>
. .>.@> , '-.?,
/ /,./( + /,./
$otal +/ /'?.->
BABASAB PATIL
74
STATE BANK OF INDIA
Project Financing.
/'?.->
>
(.@'- -+.@.
, ->.',
(.?'? ,'..-
BABASAB PATIL
75
Iear 3ash)los9lakhs: #8 factor T+(D present value
+ -/.>> (.'(' -,..+.
, ->.', (.@,> -(..'/
- .+.?, (.?/+ -+.,'(
. .>.@> (.>@- -,.((/
/ /,./( (.>,+ -,.>(-
$otal #8 - +/@.@(?
%ess- Initial outlay +/,./
7et #resent 8alue - - >.-(?
STATE BANK OF INDIA
Project Financing.
- .+.?,
(.?+, ,'.?(
. .>.@>
(.>-> ,'.@(
/ /,./(
(./>? ,'.?>
$otal #8
+/(./-
%ess- Initial outlay
+/,./-
7et #resent 8alue -
-+.'?
A
Interna rate "# return M .O × P.-(?
Internal rate of return R +( Q × 9+,-+
>.-(?-+.'?
>.-(?
Internal rate of return R +(Q × W,X
..--?
Internal rate of return R +( Q ,.'(@
Internal rate of return R +,.'+D
Inter'retati"n-
!ince the e;pected rate of return is +(D so the project is said to be accepted.
2easures ta*en 3y SBI -)en t)e re'ayment is n"t '"ssi3e
BABASAB PATIL
76
STATE BANK OF INDIA
Project Financing.
,: )irstly they send a notice to the clients stating therein to pay their dues.
-: