Chap 1: 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 Eurotunnel.

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 hydro-electric projects. Increasingly, project financing is emerging as the preferred

alternative to conventional methods of financing infrastructure and other large-scale

projects worldwide.

Project Financing discipline includes understanding the rationale for project financing,

how to prepare the financial plan, assess the risks, design the financing mix, and raise the

funds. In addition, one must understand the cogent analyses of why some project

financing plans have succeeded while others have failed. A knowledge-base is required

regarding the design of contractual arrangements to support project financing; issues for

the host government legislative provisions, public/private infrastructure partnerships,

public/private financing structures; credit requirements of lenders, and how to determine

the project's borrowing capacity; how to analyze cash flow projections and use them to

measure expected rates of return; tax and accounting considerations; and analytical

techniques to validate the project's feasibility

Project finance is different from traditional forms of finance because 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.

The purpose of this project is to explain, in a brief and general way, the manner in which

risks are approached by financiers in a project finance transaction. Such risk

minimization lies at the heart of project finance.

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

1

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 their advisers, go to substantial efforts to ensure that the risks associated

with the project are reduced or eliminated as far as possible. It 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.

Project finance is the financing of long-term infrastaructure and industrial projects based

upon a complex financial structure where project debt and equity are used to finance the

project. Usually, a project financing scheme involves a number of equity investors,

known as sponsors, as well as a syndicate of banks which provide loans to the operation.

The loans are most commonly non-recourse loans, which are secured by the project itself

and paid entirely from its cash flow, rather than from the general assets or

creditworthiness of the project sponsors. The financing is typically secured by all of the

project assets, including the revenue-producing contracts. Project lenders are given a lien

on all of these assets, and are able to assume control of a project if the project company

has difficulties complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding other

assets owned by a project sponsor from the detrimental effects of a project failure. As a

special purpose entity, the project company has no assets other than the project. Capital

contribution commitments by the owners of the project company are sometimes

necessary to ensure that the project is financially sound. Project finance is often more

complicated than alternative financing methods. It is most commonly used in the mining,

transportation, telecommunication and public utility industries.

Risk identification and allocation is a key component of project finance. A project may be

subject to a number of technical, environmental, economic and political risks, particularly

in developing countries and emerging markets. Financial institutions and project sponsors

may conclude that the risks inherent in project development and operation are

unacceptable (unfinanceable). To cope with these risks, project sponsors in these

2

industries (such as power plants or railway lines) are generally completed by a number of

specialist companies operating in a contractual network with each other that allocates risk

in a way that allows financing to take place. The various patterns of implementation are

sometimes referred to as "project delivery methods." The financing of these projects must

also be distributed among multiple parties, so as to distribute the risk associated with the

project while simultaneously ensuring profits for each party involved.

3

Chap 2: AN OVERVIEW

2.1 Banking Sector

There have been major structural changes in the financial sector since banking sector

reforms were introduced in India in 1992. Since then Banks have been lending

aggressively providing funds towards infrastructure sector. Major policy measures

include phased reductions in statutory pre-emption like cash reserve and statutory

liquidity requirements and deregulation of interest rates on deposits and lending, except

for a select segment. The diversification of ownership of banking institutions is yet

another feature which has enabled private shareholding in the public sector banks,

through listing on the stock exchanges, arising from dilution of the Government

ownership. Foreign direct investment in the private sector banks is now allowed up to 74

per cent.

The co-existence of the public sector, private sector and the foreign banks has generated

competition in the banking sector leading to a significant improvement in efficiency and

customer service. The share of private and foreign banks in total assets increased to 31.5

per cent at end-March 2007 from 27.6 per cent at end-March 2006 and less than 10.0 per

cent at the inception of reforms.

The nationalized banks have more branches than any other types of banks in

India. Now there are about 33,627 Branches in India, as on March 2005.

Investments of scheduled commercial banks (SCBs) also saw an increase from Rs

8,04,199 crore in March 2005 to Rs 8,43,081 crore in the same month of 2006.

India's retail-banking assets are expected to grow at the rate of 18% a year over

the next four years (2006-2010).

Retail loan to drive the growth of retail banking in future. Housing loan account

for major chunk of retail loan.

4

2.2 An Overview on Union Bank Of India

Union Bank of India was inaugurated by the father of the nation – Mohandas

Karamchand Gandhi. It commenced operations in the year 1920.

Union Bank has offered vast and varied services to its entire valuable clientele taking

care of their needs. Today, with its efficient customer service, consistent profitability &

growth, adoption of new technologies and value added services, Union Bank truly lives

up to the image of, “Good People to bank with”. Anticipative banking is an integral

ingredient of value-based services. This ability to gauge the customer's needs long before

he realizes, best reduces the gap between expectance and deliverance

Manpower is the key factor for the success of any organization. Union Bank has a

dedicated family of about 26,000 qualified / skilled employees who will and always will

be delighted to extend their services to the customers with heartfelt efforts

The Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of

India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and

Follow on Public Offer in February 2006. Presently 44.57 % of Share Capital is presently

held by Institutions, Individuals and Others.

The Bank has over the years earned the reputation of being a techno-savvy Bank and is

one of the front runners amongst public sector bank in the field of technology. It is one of

the pioneer public sector banks, which launched Core Banking Solution in 2002. As of

September 2005, more than 719 branches/extension counters of Bank are networked

under Core Banking Solution, powered with the centralized technology platform, the

Bank has launched multiple Electronic Delivery Channels and has installed nearly 469

networked ATMs. Online Tele banking facility is available to all its Core Banking

customers. The multi facility versatile Internet Banking Solution provides extensive

information in addition to the on line transaction facility to both individuals and corporate

banking with the Core Banking branches of the Bank. In addition to regular banking

facilities, today customer can also avail variety of value added services like cash

5

management service, insurance, mutual funds, Demat from the bank. Today there are

more than 26,000 employees in Union Bank of India.

UBI has been ranked at 5th position among the nationalized bank in India.

Overview on banks deposits and advances

Items 2003-04 2004-05 2005-06 2006-07 2007-08

Deposits Investments Advances

2.2.1 Rationale for the study

Offering credit is an operation fraught with risk. Before offering credit to an organization,

its financial health must be analyzed. Credit should be disbursed only after ascertaining

satisfactory financial performance. Based on the financial health of an organization,

banks assign credit ratings. These credit ratings are used to fix the interest rate and

quantum of installment.

This study aims to analyze the credit health of organizations that approach Union Bank of

India for foreign exchange credit facilities. After analyzing credit health, the credit rating

is determined. On the basis of credit rating, the interest rate guidelines circular is

consulted to fix a price for the credit facilities i.e. determine the interest rate.

2.2.2 Credit disbursement at Union Bank of India

This project was undertaken at the Industrial Finance Branch of Union Bank of India, at

the Credit Department. Financial requirements for Project Finance and Working Capital

purposes are taken care of at the Credit Department. Companies that intend to seek credit

facilities approach the bank. Primarily, credit is required for following purposes:-

1. Working capital finance

2. Term loan for mega projects

6

3. non fund based Limits Like Letter of Guarantee, Letter of Credit

Companies present audited balance sheets of the current and previous years. These are

used to determine the financial health, turnover trends and rise and fall of profitability.

Then credit rating is done.

The financial health and credit rating are theoretical methods for determining the right

interest rate. However, in practice, banks consider other factors such as history with

client, market reputation and future benefits with clients. Thus, a difference exists

between theory and practice.

2.2.3 Objectives of the project

To assess the financial health of organizations that approach Union Bank of India for

credit for import export purposes. This would entail undertaking of the following

procedures:

Analysis of past and present financial statements

Analysis of Balance Sheet

Analysis of Cash Flow Statements

Examination of Profitability statements

Examination of projected financial statements

Examination of CMA data

To assess the suitability of the company for disbursement of credit. This would involve

the following actions:

Use of credit rating charts

Evaluation of management risk

Evaluation of financial risk

Evaluation of market-industry risk

Evaluation of the facility

Evaluation of compliance of sanction terms

Calculation of credit rating

7

Determination of interest rate: This would entail the following sequence of actions.

Collect data regarding financial health evaluation

Noting down of credit rating

Referencing the banks’ interest rate guidelines circular

Choosing the interest rate from the circular on the basis of financial health and credit

rating

8

Chap 3 : Term Loan Assesment

3.1 Steps in term loan processing

Submission of Project Report along with the Request Letter.

Carrying out due diligence

Preparing Credit Report

Determining Interest Rate

Preparing and submission of Term SheetIf not approved if approved

Preparation of proposal

Submission of Proposal to designated authority

If No queries raised If queries raised

Project Rejected Solve the queries

9

Sanction of proposal on various Terms & Condition

Communication of Sanction Terms & Condition

Acknowledgement of Sanction Terms & Condition

Application to comply with Sanction Terms & Condition & execution of Loan Documents

Disbursement

3.1 CONDUCTING FEASIBILITY STUDY

The success of a feasibility study is based on the careful identification and assessment of

all of the important issues for business success. A detailed Project Report is submitted by

an enterpreneur , prepared by a approved agency or a consultancy organisation. Such

report provides indepth details of the project requesting finance. It includes the technical

aspects, Managerial Aspect, the Market Condition and Projected performance of the

company. It is neccessay for the appraising officer to cross check the information

provided in the report for dtermining the worhiness of the project.

Project Details:

Definition of the project and alternative scenarios and models.

List the type and quality of product(s) or service(s) to be marketed.

Outline the general business model (ie. how the business will make money).

Include the technical processes, size, location, kind of inputs

Specify the time horizon from the time the project is initiated until it is up and

running at capacity.

Relationship to the surrounding geographical area. 

Identifies economic and social impact on local communities.

Identifies environmental impact on the surrounding area.   

MARKET FEASIBILITY

Industry description.

Describes the size and scope of the industry, market and/or market segment(s).

Estimates the future direction of the industry, market and/or market segment(s).

10

Describes the nature of the industry, market and/or market segment(s) (stable or

going through rapid change and restructuring).

Identifies the life-cycle of the industry, market and/or market segment(s)

(emerging, mature)

Industry Competitiveness.

Investigates industry concentration (few large producers or many small

producers).

Analyzes major competitors.

Explores barriers/ease of entry of competitors into the market or industry.

Determines concentration and competitiveness of input suppliers and

product/service buyers.

Identifies price competitiveness of product/service.

Market Potential.

Will the product be sold into a commodity or differentiated product/service

market?

Identifies the demand and usage trends of the market or market segment in which

the proposed product or service will participate.

Examines the potential for emerging, niche or segmented market opportunities.

Explores the opportunity and potential for a "branded product".

Assesses estimated market usage and potential share of the market or market

segment.

Sales Projection.

Estimates sales or usage. 

Identifies and assess the accuracy of the underlying assumptions in the sales

projection.

Projects sales under various assumptions (ie. selling prices, services provided).

11

Access to Market Outlets.

Identifies the potential buyers of the product/service and the associated marketing

costs.

Investigates the product/service distribution system and the costs involved.

ORGANIZATIONAL/MANAGERIAL FEASIBILITY

Business structure.

Outline alternative business model(s) (how the business will make money).

Identify the proposed legal structure of the business.

Identify any potential joint venture partners, alliances or other important

stakeholders.

Identify availability of skilled and experienced business managers.

Identify availability of consultants and service providers with the skills needed to

realize the project, including legal, accounting, industry experts, etc.

Outline the governance, lines of authority and decision making structure.

Managerial Personnel

Managerial Personnel play a key role in directing the working of the company. It is

important for an organisation to have a pool of eficient personnel who bear the capacity

to bail the company out from crisis situation and work towards optimum utlisation of

organisational resources. Such capacity of the personnel can be determined by having

complete details on following key aspects:

Market reputation on the promoter / management of the company

Hands on experience of the management personnel in the industry / Business

managed by qualified personnel

12

Ability of the promoters / management to bail out the company in case of crisis (for

example, this could be derived from a strong group company)

Decision making – Is it concentrated ?

Organisation structure / Succession planning / Labour relations

Is any group company in default / Any Directors on RBI’s negative list / Borrower’s

track-record in honouring financial commitment

Length of relationship with the bank

TECHNICAL FEASIBILITY

Technology plays an important role in maintaining a competitive position in this highly

competitive market conditions. Investing in the proper technology is the key to success it

irrespective of size of business thus for achieving its projected performance, it is

important for it to have sound technological background. Such technical competence of

the project can be determined by having detailed study done on following key aspects:

Determining Facility Needs.

Estimates the size and type of production facilities.

Investigates the need for related buildings, equipment, rolling-stock

Suitability of Production Technology.

Investigates and compare technology providers.

Determines reliability and competitiveness of technology (proven or unproven,

state-of-the-art).

Identifies limitations or constraints of technology.

Availability and Suitability of Location.

Access to markets.

Access to raw materials.

Access to transportation.

13

Access to a qualified labor pool.

Access to production inputs (electricity, natural gas, water, etc.).

Investigate emissions potential.

Analyze environmental impact.

Identifies regulatory requirements.

Explores economic development incentives.

Explores community receptiveness to having the business located there.

Raw materials.

Estimates the amount of raw materials needed.

Investigates the current and future availability and access to raw materials.

Assesses the quality and cost of raw materials and markets of easily substituted

inputs.

Other inputs.

Investigates the availability of labor including wage rates, skill level, etc.

Assesses the potential to access and attract qualified management personnel.

FINANCIAL FEASIBILITY

Estimate the total capital requirements.

Assesses the capital needs of the business project and how these needs will be

met.

Estimates capital requirements for facilities, equipment and inventories.

Determines replacement capital requirements and timing for facilities and

equipment.

Estimates working capital needs.

Estimates start-up capital needs until revenues are realized at full capacity.

14

Estimates contingency capital needs (construction delays, technology

malfunction, market access delays, etc.

Estimates other capital needs.

Estimated equity and credit needs.

Identifies alternative equity sources and capital availability -- producers, local

investors, angel investors, venture capitalists, etc.

Identifies and assess alternative credit sources -- banks, government (ie. direct

loans or loan guarantees), grants, local and state economic development incentives.

Assesses expected financing needs and alternative sources -- interest rates, terms,

conditions, covenants, liens, etc.

Establishes debt-to-equity levels.

Budgets expected costs and returns of various alternatives.

Estimates expected costs and revenue.

Estimates the profit margin and expected net profit.

Estimates the sales or usage needed to break-even.

Estimates the returns under various production, price and sales levels.  This may

involve identifying "best case", "typical", and "worst case" scenarios or more

sophisticated analysis like a Monte Carlo simulation.

Assesses the reliability of the underlying assumptions of the financial analysis

(prices, production, efficiencies, market access, market penetration, etc.)

Creates a benchmark against industry averages and/or competitors (cost, margin,

profits, ROI, etc.).

Identifies limitations or constraints of the economic analysis.

Determines project expected cash flow during the start-up period.

Identifies project an expected income statement, balance sheet, etc. when reaching

full operation.

15

Study Conclusions

The study conclusions contain the information you will use for deciding whether to

proceed business.  The major categories this section should include are:

Identify and describe alternative business scenarios and models.

Compare and contrast the alternatives based on their business viability.

Compare and contrast the alternatives based on the goals of the producer group.

Outline criteria for decision making among alternatives.

Next Step

After the feasibility study has been completed and presented, a carefully study and

analysis the conclusions and underlying assumptions.  Next, you will be faced with

deciding which course of action to pursue. 

Potential courses of action include:

Choosing the most viable business model, for investment

Identifying additional scenarios for further study.

Deciding that a viable business opportunity is not available and moving to end the

business assessment process.

16

3.2 CREDIT REPORT AND CREDIT RATING

The credit report is an important determinant of an individual's financial credibility. They

are used by lenders to judge a person's creditworthiness. They also help the person

concerned to narrow down on the financial problem areas.

Credit report is a document, which comprises detailed information about the credit

payment history of an applicant. It is mostly used by the lenders to determine the credit

worthiness of an applicant. The business credit reports provide information on the

background of a company. This assists one to take crucial business related decisions.

People can also assess the amount of business risk associated with a company and then

decide whether they would be comfortable in providing them with credit facilities. The

degree of interest that would be shown by investors in their company can also be gauged

from the business credit reports as they can get an idea of the conception of their

customers regarding themselves. Since these records are updated at regular intervals of

time they enable people to identify the risk levels associated with a business as well as its

future. These reports also allow businesses to get detailed information about the financial

status of business partners and suppliers.

What Is A Corporate Credit Rating?

Ratings can be assigned to short-term and long-term debt obligations as well as securities,

loans, preferred stock and insurance companies. Long-term credit ratings tend to be more

indicative of a country's investment surroundings and/or a company's ability to honor its

debt responsibilities. . The ratings therefore assess an entity's ability to pay debts.

There are various organization who perform credit rating for various business

organization.

Union Bank of India follows a finely defined Credit Rating Model for assessing the

creditworthiness of the applicant. The credit rating model asses various aspects of the

projects and assigns scores against them thereby determining the risk level involved with

the project.

It is divided in Four Sections:

17

1. Rating of the Borrower

Financial Risk

Management Risk

2. Market Condition/ Demand Situation

3. Rating of the Facility

4. Business Consideration

5. Cash Flow related parameters

1) Rating of the Borrower: This part of credit rating model deals with assessing the

financial and managerial ability of the borrower. The financial ability of the firm is

derived by calculating ratios that determine the short term and long term financial

position of the firm

Short term ratios include Current Ratio, determines the liquidity position of the

company over a period of one year. The current ratio is an indication of a firm's market

liquidity and ability to meet creditor's demands. It is excess of current assets over current

liability. If current liabilities exceed current assets (the current ratio is below 1), then the

company may have problems meeting its short-term obligations. If the current ratio is too

high, then the company may not be efficiently using its current assets.

According to the guidelines given to UBI the ideal level is at 1.33:1 however the

acceptable level is at 1.17:1.

However at times current ratio may not be a true indicator, the current ratio for road

projects is very high but this does not indicate that the company is not using its assets

well but the ratio is high because the activity involves more in dealing with current assets.

Hence it is important for the evaluator to understand the nature of the industry.

Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative

proportion of equity and debt used to finance a company's assets. This ratio is also known

as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as

the company already has aquired high amount of funds from market thereby reducing the

investor share over the securities available, inreasing the risk.

18

It is aslo important for the lender bank to assess the firms debt paying capacity over a

period. Such capacity is derived by calculating ratio like Debt Serice Coverage Ratio

minimum acceptable level is 1.50.

It also necessary for the lender to determine the ability of the firm to achieve the

projected growth by evaluating the projected sales with actuals.However such parameter

remains non applicable if the business is new.

Finacial risk evaluation is oly one of the parameter and not thje only parameter for

determining the risk level. It is important to evaluate the Management Risk also while

evaluating the risk relaing to borrower.

It is the management of the company that acts as guiding force for the firm. The key

managerial personnel should bear the capacity to bail out the company frm crisis

situation. Inorder to remain competitive it is essential to take initiatives. Such skills are

developed over years of experience, thus for better performance it is required to have a

team of well qualified and expirienced personnel.

2) Market potential / Demand Situation

A Company does not operate in isolation there are various market forces that acts in

either favourable or unfavraouble manner towards its performance. Thus the rating would

not give true picture if does take market or demand situation in consideration.

The demand supply situation / market Potential plays an important role in determining

the growth level of the company like

i) Level of competition : monolpoly , favourable , unfavourable

ii) seasonality in demand : affected by short term seasonality, long term seasonality or

may not be affected by seasonality in demand.

iii)Raw Material Availablity:

iv)Locational Issues like proximity to market, inputs, infratstructure: Favourable,

neutral, unfavourable.

v)Technology ie, proven Technology- not to be changed in immeditate future,

technology undergo change, outdated technolgy.

vi)Capacity utilisation

19

3)Rating of the Facility:

The company can start functioning only after completing statutary obligations laid down

by the governing authority. Such statutary obligation involves obtaining licenses, permits

for ensuring smooth operations. Perparation and Submission of Finacial Statements,

Stock statements in the standard format within the given time schedule.

4)Business Consideration:

The length of relationship with the bank enables the lender to assess the previous

performance of the account holder. A good track record acts in the favour of the

applicant, however a under perfomance make the lender more vigiliant.

The income value to the bank also given due consideration.

Thus Credit Rating of the Business takes into consideration various aspects that directly

or indiretly bears an effects the performance of the business.

After evaluating the risk level involved the lender bank decided on lending Interest Rate.

In UBI they are catagorised in 9 segements

1. lowest Risk CR-1

2. Low Risk CR-2

3. Medium Risk CR- 3

4. Moderate/ Satisfatory Risk CR- 4

5. Fair Risk CR- 5

6. High Risk CR- 6

7. Higher Risk CR- 7

8. highest risk CR- 8

9. NPA CR- 9

In UBI, a business receiving Credit Rating above level 6 are not considered good from

point of investment and thus are avoided.

20

3.3 DETERMINATION OF INTEREST RATE

The interest rate is determined from the interest rate guidelines circular. This

circular is regularly updated to reflect the bank’s latest credit policies. The rupee

credit is based on BPLR and the foreign exchange loans are based on LIBOR.

The guidelines define how much interest rate is to be assigned for a particular credit

rating and credit duration. However, credit rating and its use in determining interest

rate is a theoretical concept and the bank may allow a reduction in interest rate

under the following conditions:

Good Client

The organization is a long term client and brings good business to the bank.

The organization’s actions show that it intends to become a long term customer of

the bank

Banking Consortium

The organization is seeking credit from a consortium of banks. In some cases like

this, the lead bank might decide the interest rate and all the member banks of the

consortium follow this interest rate.

3.4 TERM SHEET Following a favrouable feasibility check, credit rating the next step is preparing term

sheet . A Term Sheet is breif document that provides details on aspects like:

Account Details

Financial highlights for immediate previous two audited years and projection for

proceeding year

Nature of Project

Cost of Project

Means of finace

1. Nature of Facility

2. Purpose

21

3. Tennure of Term Loan

4. Interest rate Reset

5. Margin

6. Interest Rate, Commission

Door to Door Tenor ie.the period within which the entire amount I sto be

disbursed.

o Repayment Terms

o Prime Security

o Collateral Security

o Upfront fees ie the charges levied by the bank for processing the

documents.

3.5 PROPOSALAn approved term sheet leads to preparation proposal. A proposal is prepared in standard

format, this enables the bank to keep a proper track record and also facilitates proper

comparision. A proposal a full fledged document providing details on project submitted

and requesting finance from bank. A proposal contains information on following aspects:

* Details of Account: It includes name of the Account Holder, Date of incorporation,

Line of Activity, Internal Credit Rating level, Address of the Registered Office, Name of

Directors, Share Holding Pattern, Asset Classification, Purpose of the Loan.

* Securities:Lenders often feel more confident about a loan if they are given a security

interest in the assets of a business. Then, if the borrower does not repay the loan as

promised, the lender can take the property the borrower pledged, sell it and use the

proceeds to repay (or partially repay) the borrowed amount.it provides detailed

information on nature of securities given in lieu of the Loan.they are of two types Prime

securities, Collateral Secuties

22

Prime Securities: Pari Passu is a term used in banking transactions which means that the

charge to be created is in continuation of an earlier charge which might be held by the

same institution or by an other institution.

Collateral Securities: In lending agreements, collateral is a borrower's asset that is

forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the

principal and interest on the loan. When insolvent, the borrower is said to default on the

loan, in which case the lender becomes the owner of the collateral. It includes details on

Nature / Description of collateral security indicating area & location of property

Value in Rupees.

Date of valuation along with name of Valuer

Insurance Amount & Date of Expiry

Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor,

Value of Guarantee.

* Financial Highlights:

It povides details of important financial elements over a period of years. It includes

Details on Paid capital, Tangible Networth, Net working Cpaital,Current Assets, Current

Liabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Asstes, Long Term

Liailities, Fixed Assets, Investments, Non current Assets like guarantees , Cash Accruals,

Capital employed.

It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio

and so.

The interpretation of the financial data presented provides information on the perfomance

trend of the company also of the Projections made. Such financial highlight play an

important role in assesing the financial strenghts and weakness of the business.

23

* Status of the project:

A brief of Project

In this part of proposal a brief about the project is explained, it includes information on

nature, type of project, purpose of the project, commencement details, the promoters and

related details of the project. If it is a on-goin project it also gives details on progress and

status of progress

* Evaluation of Industry :

This Section gives brief details on the

1. Scope of the industry

2. Growth level and overall performance of the industry

3. Recent Developments and Trend Evaluation

* Conduct of the Account:

This section provides details on :

Regularity in Submission of—

Stock Statements / Book Debt Statement

QPR Statements / Half Yearly Statement

Financial Statements

CMA Data

* Compliance to Terms of Sanction

It furnishes information on following aspect:

Completion of Mortgage formalities

Registration of Charges with RoC

Whether documents valid and in force

Compliance of RBI guidelines

Whether consortium meetings held at prescribed periodic intervals where the

Bank is the leader.

24

* Exposure details from banking system (existing) (Incl. Our Bank)

The sharing pattern of the banks is mentioned in this section of proposal. It includes

Name of the bank

Percentage of share for the fund based and non Fund based Limits

Amount in Rs.

Non Fund based credit are in form of gaurantees like Letter of Credit (L/c), Letter of

gaurantee (L/g)

Letter of Credit

A ‘Letter of credit’ also known as documentary credit is the most commonly accepted

instrument of settling international trade payments. A letter of credit is an arrangement

whereby a bank, acting at the request of a customer, undertakes to pay a third party by a

given date, on documents being presented in compliance with the conditions laid down.

Letter of Guarantee

A letter from a bank stating that a customer owns a particular security and that the bank

will guarantee delivery of the security. A letter of guarantee is used by an investor who is

writing call options when the underlying stock is not in his or her brokerage account. A

Call Option is an agreement that gives an investor the right (but not the obligation) to buy

a stock, bond, commodity, or other instrument at a specified price within a specific time

period.

Financial Guarantee:

A non-cancelable indemnity bond guaranteeing the timely payment of principal and

interest due on securities by the maturity date.  If the issuer defaults, the insurer will

pay a fixed sum of money to holders of the securities.  Financial guarantees are

similar to a Standby Letter of Credit, but are issued by an insurance company.  A

Standby Letter of Credit is a form of insurance on an underlying agreement or

obligation (contract), insuring all parties to the contract against failure to perform or

pay on the part of one or another party to the contract.  Standbys are issued by banks.

25

Assessment of Non Fund Based Limit

1. Non Fund Based Limits are normally to be sanctioned for exixting customer only

who already enjoy fund based limits

2. If new borrower full processing as applicable to Fund Based Limits to be carried.

3. Borrower’s background and experience of meeting commitments to be examined

in details.

4. L/c limit to be considered as per terms of Purchase or contract, lead period and

minimum econmical quantity of supply of stocks

5. Non Fundabsed Limits are to be supported by necessary fund based limits.

6. Past experience of payment of billsunder L/c to be verified before considering

new request.

7. While Assessing the L/g Limit contract or agreement which is the base for L/g,

should be examined in details for any ambigious clauses.

8. Any request for financial Guarantee to be critically examined before takin

decision.

* Details of Sister/ Allied Concerns:

This section provides information about the Sister/ Allied Concerns aspects like the

performance, promoters, share holding pattern, operation exposure and experience from

various banks.

* Terms and Condition:

It is important both for the bankand the applicant to safegaurd its interest, this could be

achieved by settling at mutually acceptable terms and condition inorder to ensure that

both the parties the lender and borrower perform their part of obligation thereby not

putting other party at loss. All loans are subject to regulations and conditions. The legal

information relating to these regulations and conditions can be viewed in this section. It is

advisable for both the parties to read this information carefully before approval.

26

3.6 DISBURSEMENT:

After submission Proposal to Designated/ Sanctioning Authortiy for sanctioning the Term

Loan. the authorities may raise querries, if any relating to projects and thereby convey it

to the processing officer the processing officer inturn addresses them to the borrower for

necessary step to be taken, such querries are required to be solved to the earliest by the

applicant for further proceesing of the proposal.

If the authoritiees are satisfied and have no further querries with respect to proposal,the

Loan gets sanctioned and the disbursement would be released in as per the terms

decided.

3.7 FOLLOW-UP:

This is most cruicial stage in process of term loan assesment. Since amount of credit

required is usually high, such amounts are disbursed in one installment, they are paid in

installments.this helps the lender bank to understand and assess the utilisation of funds

disbursed by the lender Bank. Such evualtion is done by obtaining Lender’s Engineer

Report, it is report that provides complete details of the status of the project. It is prepared

on monthly basis. It also provides CA Report, it verifies the Finacial details furnished to

bank for further disbursement.this is known as renewal of account.

27