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
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
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
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.
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
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.
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
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
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
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
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
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
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 Sheet
If not approved if approved
Preparation of proposal
Submission of Proposal to designated authority
If No queries raised If queries raised
Sanction of proposal on various
Project Rejected Terms & Condition Solve the queries
Communication of Sanction
Terms & Condition
Acknowledgement of Sanction
Sanction of proposal on various
Terms & Condition
Application to comply with
Sanction Terms & Condition &
execution of Loan Documents
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.
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.
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).
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)
Investigates industry concentration (few large producers or many small
Analyzes major competitors.
Explores barriers/ease of entry of competitors into the market or industry.
Determines concentration and competitiveness of input suppliers and
Identifies price competitiveness of product/service.
Will the product be sold into a commodity or differentiated product/service
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
Estimates sales or usage.
Identifies and assess the accuracy of the underlying assumptions in the sales
Projects sales under various assumptions (ie. selling prices, services provided).
Access to Market Outlets.
Identifies the potential buyers of the product/service and the associated marketing
Investigates the product/service distribution system and the costs involved.
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
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 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
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
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,
Identifies limitations or constraints of technology.
Availability and Suitability of Location.
Access to markets.
Access to raw materials.
Access to transportation.
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.
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
Investigates the availability of labor including wage rates, skill level, etc.
Assesses the potential to access and attract qualified management personnel.
Estimate the total capital requirements.
Assesses the capital needs of the business project and how these needs will be
Estimates capital requirements for facilities, equipment and inventories.
Determines replacement capital requirements and timing for facilities and
Estimates working capital needs.
Estimates start-up capital needs until revenues are realized at full capacity.
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
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.
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.
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
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
It is divided in Four Sections:
1. Rating of the Borrower
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.
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,
v)Technology ie, proven Technology- not to be changed in immeditate future,
technology undergo change, outdated technolgy.
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.
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.
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:
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 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:
Financial highlights for immediate previous two audited years and projection for
Nature of Project
Cost of Project
Means of finace
1. Nature of Facility
3. Tennure of Term Loan
4. Interest rate Reset
6. Interest Rate, Commission
Door to Door Tenor ie.the period within which the entire amount I sto be
o Repayment Terms
o Prime Security
o Collateral Security
o Upfront fees ie the charges levied by the bank for processing the
An 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
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,
It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio
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.
* 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
* 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.
* 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
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
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.
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
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
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
* 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
* 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.
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
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.
Chap 4: Analysis of Credit proposals
4.1 Prposal of JKL Ltd.
The company was incorporated on January 5, 2001, however later the name was changed
and the current name is effective from March 23, 2006 with the objective of generation of
power based on coal. The proposed manufacturing facilities are located at Angul district,
Orissa.. The group is already engaged in the business of manufacturing Photographic
goods, Polyester film, BOPP films, Metallized films, Cold rolled steel strips and
Galvanized sheets. The details of associate concerns are as under :-
JPL - Photographic films & equipment.
JPFL - Polyester chips, Polyester film, PVDC film, BOPP film & Metallized film.
The company‟s manufacturing plant at Nasik, Maharashtra is one of the world‟s largest
single location plant for the manufacture of BOPET and BOPP films.
JIL - Steel pipes, cold rolled strips & GP/GC sheets.
Established in 1952, ranks among the major manufacturers of ERW / HFIW and
galvanized steel pipes and tubes in the country. The company commenced business
operations through establishment of a manufacturing facility in Howrah, West Bengal for
manufacture of pipe fittings, bends and sockets. At present, the company has a
manufacturing capacity of 160,000 TPA of steel pipes & tubes, 300,000 TPA of GP/GC
sheets and 350,000 TPA of CR coil / sheets.
Promoter Shareholding (%)
JPL 26 %
Group Investment Companies include: 45%
Consolidated Photo & Finvest Ltd
Rishi Trading Co. Ltd.
Soyuz Trading Co. Ltd.
Non-Group Companies 25%
Budhiya Marketing Pvt. Ltd. (BMPL)
Edward Supply Pvt. Ltd. (ESPL)
EVALUATION OF MANAGEMENT
1) Market reputation on the promoter / management of the company:
2) Hands on experience of the management personnel in the industry / Business
managed by qualified personnel:
The qualified professionals & experienced persons are proposed to be appointed for
managing the overall operation of the company. details of key management personnel of
JKL Pvt. Ltd. Are as under:
Mr Punit Gupta
Mr. Punit Gupta, aged about 41 years, is a B.Sc. and M.B.A. He has work experience of
about 18 years in the field of Project Management and Marketing with the group. He is
presently heading the Project team for setting up of the proposed power project and is
involved in budgeting, costing, financial analysis, sensitivity analysis, project planning,
tendering, bid evaluation, award of contracts, post award activities, coordination with
contractors, finalisation of MOUs, JV Agreements, and various types of studies required
for Power Projects etc.
Mr Umesh Chand Jain
Mr. Umesh Chand Jain is a graduate with work experience of about 33 years in the areas
of Trading, Liaisoning, Business management and implementation of new Projects. He
has been working with the Group for the last seven years. He is on the Board of various
group companies including Consolidated Finvest & Holdings Limited.
Mr S. R. Yadav
Mr. S.R.Yadav is an ex-Executive Director, NCR region, NTPC. He is also a Director on
the board for NTPC-SAIL Power Company (P) Ltd. He will be heading the Engineering
team in JKL Pvt. Ltd. He is a Mechanical engineer from RIT, Jamshedpur and has work
experience of over 35 years in the areas of project planning, erection, commissioning,
operation and maintenance. He has been involved in many green field projects of NTPC
and was posted in Korba, Bokaro, Singrauli etc.
Mr A. K. Sehdev
Mr AK Sehdev is an engineering graduate from Delhi College of Engineering. He has
over 36 years of experience of Navaratna Companies like IOC and NTPC. He is involved
in preparation of action plan, project formulation, project scheduling, FRs and DPRs, cost
estimation and cost control, financial analysis, tariff calculations, budget preparation,
project engineering and finalization of technical specifications of various packages.
Mr P. K. Patnaik
Mr Patnaik has many years of experience in IPP (Industrial Power Projects) He had also
worked in two UK based company as an advisor. He was VP and country Manager with
Kennedy & Donkin Ltd and Head Business Development with Merz & McLellan Ltd. He
worked in Lanco Kondapalli also. Prior to joining JITPL as Sr VP (Corporate affairs), he
was Head (Corporate Affairs) at Egateway, New Delhi.
Mr A C Sarkar
Mr Sarkar is Executive Director (Eastern Region-1), Power Grid Corporation of India Ltd
(PGCIL) and has work experience of about 35 years of experience in Power transmission.
He is an Electrical engineer from Sibpur Engg College. He has been involved in the
establishment of the national transmission grid and has experience in the areas of
planning, coordination, project management, technical and commercial considerations.
He is joining JITPL as Vice-President (Transmission).
Mr J. Ramesh Chandra
Mr Chandra is Master in Applied physics & Instrumentation. He has work experience of
around 33 years in various companies including Desein and BHEL. He has joined JKL
Pvt. Ltd as GM (Control and Instrumentation). He has experience of instrumentation
process for BTG (boiler, turbine & generator) and BOP (balance of plant), project
engineering, design and commissioning.
Mr L. P. Soni
Mr Soni is a Chartered Accountant and Company Secretary with over 25 years
experience in various companies. Mr. Soni‟s areas of expertise include project financing,
working capital management, fund raising through capital market, foreign exchange
management, Company law matters. Mr. Soni has been earlier associated with various
companies including Surya Roshni Ltd., Maharaja Shree Umaid Mills Ltd. in senior
positions prior to joining the group as VP (Finance).
Mr Ashok Kr Kucheria
Mr Kucheria is M Com and Chartered Accountant and has work experience of over 24
years. He was head of Finance of Jamlal Drilling and Industries Ltd for around 14 years
and rose to the post of CFO of the Company. His strengths points are auditing, MIS,
Taxation, project financing, working capital management, fund raising, capital market,
foreign exchange management etc. Presently he is GM (Finance) for power project and
he is involved in resource management and financial closure for the project.
Mr P. Girish
Mr P Girish is Vice President, (Corporate affairs) in charge of govt liaisoning for Delhi.
He has 21 years of experience in corporate affairs, administration in various Companies.
Mr. Girish has started his career with Rolls Royce Industrial Power Ltd in the
Commercial department. He has been associated with the Malaxmi Infra Ventures Pvt
Ltd as General Manager with the major responsibilities of Navabharat Power Pvt Ltd. and
Simhapuri Energy Pvt Ltd Nellore based on Imported Coal. He has also worked for
Lanco Power Pvt Ltd as a Manager Administration.
Mr Naveen Goel
Mr Naveen Goel is Head (State Liaisoning), Orissa. He is B .Com from Delhi University
and inter in CA and ICWA. He started his career with Jindal Photo Limited since 1995.
Mr. B L Dua
Mr Dua is General Manager Project Development and Construction. He has over 38
years of experience on civil construction, especially power plants. He has experience of
construction engineering and has completed a Diploma in civil engineering. He has been
associated with various public sector companies including Central Board of Water,
Central Electricity Authority and NTPC etc.
3) 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)
The experienced directors bear the capacity to bail out the company in case of crisis.
4) Decision making – Is it concentrated?
A committee of directors comprising of qualified & experienced personnel will
professionally manage the company.
5) Organisation structure / Succession planning / Labour relations
The company will be a professionally managed company hence, any threat of succession
planning is not perceived.
6)Is any group company in default / Any Directors on RBI’s negative list /
Borrower’s track-record in honouring financial commitment?
The company has confirmed that none of the Directors of JKL Pvt. Ltd are on RBI‟s
defaulters‟ list in respect of JKL Pvt. Ltd. or any other company in which they are a
7) Length of relationship with the bank
The Group is new to us.
EVALUATION OF INDUSTRY
Thermal power stations constituting over 66% of the aggregate installed generation
capacity and despite being relatively less environment-friendly as compared to hydro-
electric projects (HEPs), thermal power plants offer certain advantages over HEPs as
Lesser implementation time-frame: 2.5-3.5 years as compared to 5-6 years for HEPs;
Ability to function as base load power plants as compared to HEPs which serve as peak-
load power plants;
Standardized generation technology: independent of project site;
Absence of seasonal variations in power generation;
Location flexibility: Can be located either close to load-centre or at fuel pit-head while
HEPs are site-specific and often located in challenging geographical terrain.
Power supply position in the country has worsened over the last few years with growth in
power demand outstripping new capacity addition with peak power deficit being worst
having peak deficit of 13.5% in 2006-07. The energy deficit at the national level has
increased from 7.5% in 2003-04 to 9.9% in 2006-07
Projected Power Requirement beyond 2011-12 till 2021-22
With rapid growth of the economy, power requirement is projected to increase
significantly over the next decade with per capita power consumption expected to
increase from ~612 kWh at present to about 1000 kWh by 2012 (GoI‟s target for
Given the prevalent demand supply deficit scenario and projected growth in
power requirement, huge addition in generation capacity is required in the country
over the coming decade. Consequently, there exists an attractive business and
market opportunity for establishment of power generation plants in the country,
especially in the northern & western regions of the country.
Target States for Power Sale
In view of the adverse power deficit scenario in western and northern region as
mentioned in the previous sections, both these regions have been identified as target
markets for ultimate sale of JKL Pvt. Ltd power.
Projected Balance Sheet Rs. in Crores
Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Mar-09 10 11 12 13 14 15 16 17 18 19 20
Gross Block 33 33 33 2818 2818 2818 2818 2818 2818 2818 2818 2818
CWP 316 816 2188 0 0 0 0 0 0 0 0 0
Depreciation 0 0 0 49 196 343 490 637 784 931 1078 1225
Block 349 849 2221 2769 2622 2475 2328 2181 2034 1887 1740 1593
Assets 0 0 0 187 188 189 190 190 178 179 180 181
Balances 0 0 0 54 106 252 441 639 783 934 1092 1259
DSRA 0 0 0 65 209 229 216 203 190 177 164 151
ASSETS 349 849 2221 3075 3125 3145 3174 3213 3186 3176 3176 3184
' Equity 201 201 444 573 573 573 573 573 573 573 573 573
Surplus 0 0 0 70 276 492 718 954 1132 1319 1515 1719
Net Worth 201 201 444 643 849 1065 1291 1526 1705 1892 2088 2291
Loan 139 608 1666 2148 1987 1772 1558 1343 1128 913 698 483
Sub-Debt 9 41 111 143 140 125 111 97 82 68 54 39
Capital Loan 0 0 0 140 141 142 142 143 134 135 135 136
AAD 0 0 0 0 8 40 72 104 137 169 201 233
ES 349 849 2221 3075 3125 3145 3174 3213 3186 3176 3176 3184
Projected Profit and Loss Account Rs. in Crores
Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
12 13 14 15 16 17 18 19 20
Primary energy sale to GoO 60 188 209 206 202 198 195 192 189
Powe sale PTC 253 758 758 758 758 683 683 683 683
Less AAD 0 8 32 32 32 32 32 32 32
Gross Revenues 313 938 935 932 928 849 845 842 839
O& M exp. 24 74 77 80 83 86 90 94 97
Travel and Fuel Exp. 55 171 178 185 192 200 208 217 225
Secondary Fuel Exp. 8 24 25 26 28 29 30 31 32
6 18 18 18 18 18 18 18 18
Total Operating Exp. 92 287 298 309 321 333 345 359 372
PBDIT 221 651 638 623 607 516 500 484 467
Depreciation 49 147 147 147 147 147 147 147 147
PBIT 172 504 491 476 460 369 353 337 320
Int. on RTL 80 235 211 187 163 139 115 91 66
Int. Sub. Debt 6 19 18 16 14 12 10 8 6
Int. on WC Loan 6 18 18 18 18 17 17 17 17
PBT 79 233 244 255 265 201 211 221 230
Tax 9 26 28 29 30 23 24 25 26
PAT 70 206 216 226 235 178 187 196 204
Scenario Avg. DSCR Min. DSCR Project IRR*
Base Case 1.60 1.38 15.6 %
Increase in Project Cost by 5% 1.54 1.34 14.9 %
Decrease in Power Sale Tariff 1.56 1.33 14.9 %
through PTC by 5% during Year 1-5
Increase in Primary Fuel price by 1.58 1.37 15.3 %
Decrease in PLF by 5% 1.49 1.29 14.2 %
Increase in Interest rate by 1% for 1.54 1.34 15.6 %
both Senior debt & Subordinated
Project is able to withstand the operations at a lower tariff and its debt servicing capacity
(Average DSCR: 1.56, Min DSCR: 1.33) is satisfactory.
Increase in Primary Fuel price by 5%
Sensitivity has also been carried out for increase in the fuel prices by 5% over the base
case numbers. The Project is able to sustain the increased fuel cost and its debt servicing
capacity remains satisfactory with an average DSCR of 1.58 and minimum DSCR of
1.37. The impact of any fuel price escalation on the projected financials is partly
mitigated on account of the pass-through effect in the power sale tariff applicable to
Gridco. It may however be noted that since most of the coal requirement for the Project
will be met from the captive coal block allotted to the company, the company will be able
to have a better control over the coal price thereby reducing it exposure to any escalations
in coal price.
Decrease in Plant PLF by 5%
Under the base case projections, the operations of the project have been projected at a
PLF of 80%. Sensitivity has been carried out for the scenario of the Project running at a
lower PLF i.e. 75%. It has been observed that the Project is able to withstand the
operations at a lower PLF and its debt servicing capacity (Average DSCR: 1.49, Min
DSCR: 1.29) is satisfactory. Considering the better operational performance of existing
IPPs in the country vis a vis state sector projects, the situation of a PLF lower than 80%
Increase in RTL Interest Rate by 1%
Sensitivity has also been carried out for increase in the RTL interest rate by 1% over the
base case interest rate of 11.5% for Senior debt and 13.5% for Subordinated Debt. It is
observed that the Project is able to sustain the increased interest costs comfortably and its
debt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory.
As can be seen above, the debt serviceability of the project is comfortable adverse
sensitivities considered. Hence, it can be concluded that the proposed power project will
be able to withstand adverse circumstances and the debt serviceability is satisfactory,
even under adverse circumstances.
Decrease in Power Sale Tariff through PTC by 5% during Year 1-5
Under the base case projections, tariff for power sale to PTC has been maintained at Rs.
2.60 per kWh for Year 1-5 and Rs 2.34 per kWh for subsequent years. Sensitivity has
been carried out for the scenario of the power being sold at 5% lower than the base case
tariff i.e. Rs. 2.47 per kWh. As seen above, the Project is able to withstand the operations
at a lower tariff and its debt servicing capacity (Average DSCR: 1.56, Min DSCR: 1.33)
Increase in Project cost by 5%
A sensitivity has been carried out for 5% increase in the works cost which have estimated
at Rs. 2294 crore in the base case. The Project is able to sustain a 5% escalation in capital
cost comfortably and its debt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34)
1. Sensitivity analysis was done. The results of which are as follows:-
When the power sale tariff to “PTC” (PTC India Ltd) are decreased by 5% the
Average DSCR: 1.56, Min DSCR: 1.33 . This is above the benchmark level.
When project cost is increased by 5% Average DSCR: 1.54, Min DSCR: 1.34.
This is above benchmark levels and is considered favourable.
In case of increase in RTL Interest Rate by 1% the Average DSCR: 1.54, Min
DSCR: 1.34) remains satisfactory
When the primary fuel prices increase by 5% the Average DSCR of 1.58 and
Minimum DSCR of 1.37 remains satisfactory.
As can be seen above, the debt serviceability of the project is comfortable when adverse
sensitivities considered. Hence, it can be concluded that the proposed power project will
be able to withstand adverse circumstances.
2. The profitability estimates are sensitive to fluctuation in sales.
3. The projected Debt Equity ratio and Current Ratio are at satisfactory level. As the
project implementation is yet to commence, offering any comments on financial
indicators would not be relevant at this juncture as the same would go on
4. According to internal credit rating, the company has been rated as CR-3.
5. Primary fuel requirements for the Project will be met with from the Coal linkage
from Mahanadi Coalfields Ltd (MCL) and Captive Mandakini coal block in
Talcher coalfields, Orissa .JKL Pvt. Ltd. will enter into separate long-term Fuel
Supply Agreements with the Mining JVC and MCL for supply of coal from the
captive block and coal linkage respectively, taken together would be adequate for
requirement of proposed 600 MW for its entire project life.
6. The company has already into Power Purchase Agreements (PPA) with Gridco
for sale of 25% of the power.
Company has also entered into HOA(Heads of Agreement) with PTC for sale of
balance 75% power at reasonably attractive tariff.
7. Both Gridco and PTC would open LC in favor of JKL Pvt. Ltd for timely
payment of invoices.
8. Even with an increase of 1% in the interest rate, average & minimum DSCR are
JKL Pvt. Ltd. is being promoted by BCJ Group, implementing a 600 MW pit-head
coal-based power project in Angul district of Orissa. The project capacity is proposed
to be enhanced to 1200 MW through implementation of a second unit of 600 MW at a
later stage. Salient features of the proposed project, are as under:
1. Proven track record of promoters [JPL along with other group / investment
companies of BCJ group] - in running profitable business operations and adequate
financial strength to meet the equity requirements for the project;
2. Assured fuel at reasonable cost – fuel from allocated captive coal block adjacent
to project site along with additional long-term coal linkage from MCL.
Captive coal source will protect JKL Pvt.Ltd from fuel price fluctuations and
make the power cost competitive;
3. Significant progress in project development activities as under.
State support for land acquisition, water allocation and other developmental
aspects of the project secured through MoU; Section (4) notification for
acquisition of land issued;
In-principle allocation of water sufficient to meet project requirements;
Grant of various project clearances / approvals, including TOR for EIA study
from MoEF, GoI;
4. Power off-take arrangement- Execution of PPA with Gridco for sale of 25%
project capacity and execution of HOA for sale of balance power through PTC.
Analysis of the project development structure and projected financial performance
of the Project, based on the information pertaining to the project cost, financing
plan, and prevalent market conditions while a sensitivity analysis has also been
carried out to test the robustness of project financial in respect of key business and
performance parameters. The projected financials of the project are reasonably
comfortable under different sensitivity scenarios as required to service the project
debt over proposed tenor.
5. Based on the projected financials, sensitivity analysis and risks factors, SBI
Capital Markets has viewed the proposed project of JITPL, as financially viable.
SBICAP has further stated that keeping in view the proven credentials of the
project promoters, progress achieved in project development and projected
financial performance of the project, the project appears to be bankable and
accordingly, the proposal may be considered favorably for final sanction of RTL
and Subordinated debt.
In view of the above mentioned observations, recommended the following.
(Rs. in Crores)
Nature of Limit Amount
Existing Proposed Margin
Term loan Nil 300.00 25%
Interest shall be 11.50% p.a. floating for senior debt and 13.50% p.a for subordinate debt
Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The
funds of depositor‟s i.e general public are mobilized by means of such advance /
investment. Thus it extremely important for the lender bank to assess the risk associated
with credit, thereby ensure the security for the funds deposited by the depositors.
In UBI the credit appraisal is done by thorough study of the project which involves
1) Evaluation of Management: A detailed study about the promoters
is carried out in order to ensure promoters are experienced in the
line of business and are capable to implement and run the project
2) Technical Feasibility: A detailed study about the technical
aspects is done to determine the technical soundness of the
3) Financial Viability: A detailed study relating to financial
viability of the project is done; thereby ensuring that project will
generate sufficient surplus to repay the lan installment and
4) Risk analysis: it determines the risk associated with the project
this is done by performing a Sensitivity analysis and Credit
Rating. With Sensitivity Analysis the projects capacity to service
debts under worsened conditions is determined. Credit rating,
provides rating for various parameters like management,
financial, market and so, thereby determine the credit worthiness
of the borrower
5) It is on the basis of the credit risk level, collateral securities to be
given by the borrower are determined.
This shows Union Bank of India has sound system for credit appraisal.
Annexure 1: Format of Term Sheet
Union Bank OF India
Industrial Finance Branch, Mumbai
APPROVAL OF BROAD TERMS OF THE PROPOSAL
Name of the
connection or new
(Rs. In Crores)
Year (Aud.) Year (Aud.) Year (Prov.)
(Rs. In Crores)
Nature of Project
Cost of Project
tal % of
MEANS OF FINANCE
Nature of Facility
Amount Rs. Crores
Period of the facility
Door To Door Tenor
Security – Prime
Whether conforms to Loan
Customer profitability, (in case
of existing accounts)
1. Commission earned on bills
2. Processing charges
3. Commission on LC/LG
4. Credit balances in
5. Term deposits
a. Through own sources
b. Through third party