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POLICY SECTIONS   SECTION                                         SECTION
                  NUMBERS            PROCEDURE SECTIONS           NUMBERS
                            ADVANCES- ASSESSMENT OF TERM LOAN
                              ASSESSMENT OF TERM LOAN PROPOSALS
        DEPARTMENTAL PROCEDURES MANUAL                        SECTION:P.720.4      PAGE      01
SIB                   Advances – Assessment of Term Loan Proposals
                                                                                   September 11
No.   SS CLK AM MGR                              PROCEDURE NARRATIVE
                         There are six broad aspects of evaluation of term loans viz.,
                                Technical feasibility
                                Commercial feasibility
                                financial feasibility
                                Managerial feasibility
01                              Socio-economic feasibility.
                                Global competence of the Industry/unit
                         Study of the projects thoroughly from these five angles should be done
                         and select only those which will be technically sound, commercially
                         feasible, financially      profitable,   managerially    competent     and
                         economically and socially viable to meet its financial obligations.
                         1.Technical Feasibility :
                         The examination of technical feasibility requires a detailed assessment
                         of the type of technology proposed for the unit.
                         It should be examined:
                              1. Whether the technology is latest or out dated?
                              2. Whether the unit is capital intensive or labour intensive?
                              3. What will be the impact on the firm in case of the change of
                              4. In case of changes in product or shift in consumer preference,
                                  whether the unit will be able to meet the situation by
                                  diversifying its production activities?
                              5. Whether the proposed plant is of the right size based on
                                  capital requirements, cost-benefit analysis and present and future
                                  demand for the product?
                              6. What is the level of optimum capacity utilization and the
                                  capacity at which the plant will operate? Break-even analysis
                                  reveals the required information in this regard.
                              7. The reputation of the machinery supplier and the quality of the
                              8. The location of the project/unit – Whether adequate supply of
                                  raw materials, power, water, labour and other infrastructural
                                  facilities available at reasonable cost?
                              9. Issues of Socio-economic factors, strategic considerations and
                                  Government policies like balanced regional development.
                              10. Fulfillment of the rules and regulations of the Government as far
                                  as the technical and social considerations are concerned.
                         Availability of suitable technical personnel          to implement the
                         project and the facility for training for its personnel on technical side.

         DEPARTMENTAL PROCEDURES MANUAL                        SECTION:P.720.4     PAGE      02
                       Advances – Assessment of Term Loan Proposals                September 11
No.    SS CLK AM MGR                               PROCEDURE NARRATIVE

                          2. Commercial Feasibility
                          Commercial feasibility involves study of the project for analyzing:
                              1. The present and future demand for the product to be produced
                              2. Share of the product in total market (present and future)
                              3. Any possible fluctuations in demand due to             changes in
                                 consumer preferences or change in technology.
                          Mere production will not complete the cycle and the products should be
                          sold in the market. The propensity and capacity to repay the loan
03                        amount is entirely dependent on sales revenue of the project.
                          The demand for the commodity should be estimated on the basis of
                          macro and micro analysis of the data available through    market
                          surveys and other methods.
                          After estimating the present size of the market, projections should be
                          made in respect of seasonal variations and cyclical variations of
                          demand, fluctuations in demand due to changes in technology, prices,
                          consumer taste or preference and availability of substitutes.
                          The present supply position of the same commodity and similar
                          commodities should be assessed because it is an important ingredient to
                          know the acceptability of the product in the market.

                          3. Financial Feasibility :

                          It is necessary for the bankers to study and examine the projected
                          financial statements of the unit to evaluate the project. There are four
03.a                      important techniques of financial evaluation for lending decisions,
                                  Ratio analysis
                                  Break-even analysis
                                  Cash-flow and funds-flow analysis
                                  Return on investment analysis.

         DEPARTMENTAL PROCEDURES MANUAL                        SECTION:P.720.4       PAGE      03
                       Advances – Assessment of Term Loan Proposals                  September 11
No.    SS CLK AM MGR                                PROCEDURE NARRATIVE
                          i) Ratio Analysis :

03.b                      Important ratios have already been covered in the Chapter on the
                          “Analysis of financial statements”. The Leverage or Solvency Ratios
                          gives a measure of the long-term financial stability of the company.

                          ii) Break-even Analysis :
                          Banker is interested in getting his money back from loanees out of
                          the surplus generated. The first question that comes to his mind is :
03.c                      When does this surplus start in the unit? The breakeven point is a
                          level at which the unit is able to raise its output at a total cost which
                          will be equal to the sales revenue of the out-put. Repayment of the
                          term loans granted by banks is generally scheduled to begin after the
                          unit breaks-even.

                          iii)Cash-flow and Funds Flow Analysis
                          Cash-flow estimates are drawn up to indicate the inflow and outflow of
                          funds of the concern year by year covering the entire period of term
03.d                      advance. The cash-flow estimate helps the banker to fix a proper
                          repayment schedule and to grant repayment holidays, if necessary. The
                          appraisal technique should also be helpful to find out how the funds
                          came and how they were applied. If the funds are properly applied,
                          then only the working results will be good and financial position
                          satisfactory to effect timely repayment.

                          iv)Return on Investment:
                          There are four methods to measure return on investment viz. (i) pay-
                          back approach, (ii) Accounting rate of return, (iii) Incremental rate
                          of return and (iv) Discounted cash flow method. By the use of
                          these     techniques the banker can evaluate and rank the projects
03.e                      according to their profitability. Discounted cash-flow method is ideal
                          to be used for the purpose of selection of projects as it takes into account
                          the time value of money and considers net cash flow being recovery of
                          the original investment plus required rate of return on invested
                          capital. This is much useful to the banker since the recovery of
                          original investment with required rate of return on capital reveals the
                          project’s ability to meet the debt obligations to the banks. The
                          repayment capacity of the borrower is most important.

        DEPARTMENTAL PROCEDURES MANUAL                        SECTION:P.720.4       PAGE      04
                      Advances – Assessment of Term Loan Proposals                  September 11
No.   SS CLK AM MGR                               PROCEDURE NARRATIVE
                         4. Managerial Competence :

                         Managerial ability and honesty are the most essential factors which
                         should be considered by the banker while scrutinising the loan
                         applications. Even if the project is technically sound, economically and
                         commercially viable and financially profitable it will not be a
04                       worthwhile venture for financing if the project cannot be managed
                         properly. Nothing can be substituted for efficient management, and a
                         weak management results in failure of even a well conceived project.
                         It is the management that runs a project and it is through the
                         management that a banker can ensure the end-use of the loan and
                         determine the character of the borrowing unit. The past history of the
                         promoters can give some useful hints. Hence it has to be studied.

                         5.Socio-economic Viability :

                         The object of this evaluation is to undertake social cost benefit analysis
05                       of the project under consideration with a view to determining the
                         contribution of the project towards fulfilment of the national
                         objectives and in assessing the social return on the project. The
                         major criteria in this are national objectives, economic life of the project
                         and social cost-benefit analysis.


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