project financial services
TRANSCRIPT
Guru Jambheshwar University of Science & Technology Hisar 2008-10
A Project on
“Financial Services”Submitted in partial fulfillment of the requirement
of Masters of Business Administration, Distance Education
Guru Jambheshwar University of Science & Technnology, Hisar
Research Supervisor Submitted By:
Suresh Mittal Pardeep Kumar
Chartered Accountant Enrolment No.08061402157
Session 2008-10
Directorate of Distance of Education
Guru Jambheshwar Univesity of Science & Technololgy Hisar (Hisar)
DIRECTORATE OF DISTANCE EDUCATION
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Guru Jambheshwar University of Science & Technology Hisar 2008-10
GURU JAMBHESHWAR UNIVERSITY OF SC & TECH. HISAR
FORMATE FOR RESUME OF SUPERVISOR / GUIDE
1. NAME SURESH MITTAL
2. DESIGNATION CHARTERED ACCOUNTANT
3. QUALIFICATION B.COM, CHARTERED ACCOUNTANT
4. AREA OF SPECIALIZATION TAXATION
5. EXPERIENCE 15 YEARS EXPERIENCE INCOME TAX
AUDIT,TDS & SERVICE TAX
6. OFFICIAL ADDRESS 309, MAMTA ENCLAVE
VILL-DHOKALI, ZIRAKPUR (PB)
7. TELEPHONE NO. 9876008470
8. MOBILE
9. E-MAIL [email protected]
I am willing to supervise Mr. Pardeep Kumar
Enrollment No.- 08061402157
On the topic “ Financial Services”
Countersigned by Director of Study Centre with Seal
CERTIFICATE
This is to certify that Mr.Pardeep kumar , Enrollment No.08061402157 has completed under my supervision his
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project on “Financial Services” in the specialization area “Finance”
The work embodied in this report is original and is of the standard expected of an MBA student and has not been submitted in part or full to this or any other university for the award of any degree or diploma. He has completed all requirements of guidelines for the Research Project Report and the work is for evaluation.
“ Certified that the work done by the candidate is original and is of the standard expected of an MBA student.”
NAME : SURESH MITTAL
DESIGNATION : CHARTERED ACCOUNTANT
ORGANIZATION: CHARTERED ACCOUNTANT
Forwarded by Head/ Director of Study Centre
(with signature, name & SEAL)
DECLARATION
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This is to certify that the project report entitled “ Financial Services” is my original work and this has not been submitted in part or full to this or any other university/institution for the award of any degree or diploma.
Signature of Candidate
NAME: Pardeep Kumar
ENROLLMENT NO:08061402157
SPECIALIZATION: Finance
SESSION : 2008-10
INDEX
SR.NO. CHAPTER NAME PAGE NO.
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1. Executive Summary 6-7
2. Introduction 8-9
3. Objective of the Project 10
4. Conceptual Framework 11-12
5. Types & detailed summary of Finance 13-68
6. Research Methodology 69-70
7. Conclusion 71-72
8. Bibliography 73
EXECUTIVE SUMMARY
A project report is written statement of ideas, collection of information, method of implementing an ideas & a map for the management.
Different type of financial products and services penetrate our daily activities. As a major group of
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financial instruments, banks have been expanding their services scope, and hence, universal banks, which provide a variety of financial products and services in one house, have experienced growing popularity in some industrialized countries. In India, banking instutions have assumed a key role in the simplistic financial sector. Commercial banks have made effort to diversify their products and services, but a lengthy process is expected for their transition into truly universal banks. It is argued that the current structure and practices of the local market also contribute to this lengthy transformation.
The project has been divided into two parts. In initial chapters of the project was given to general concept and fundamental principles for project financing, method of types of industries. The later chapter covers various methods of project financing and its sub methods i.e. term loan and working capital limit in project financing. Funding the requirement of the term loan and working capital by the following procedures of credit monitoring assessment (CMA) for funding of short- term loan and long term loan.
The project is the case study of “winner Nippon Electronics Ltd, Raglan Infrastructure Ltd. & Synergy Telecommunication” and also its short term loan & long term financial requirements are highlighted.
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INTRODUCION OF THE PROJECT FINANCING
Finance is the lubricant of the process of economic growth. When finance mode is available, industrial activities can be initiated which give rise to new investment apportunities towards industrialization.
Banking institutions are dominant operators in modern financial systems and important business entities in an economy. They are divided into two separate types of institutions, namely commercial banks and investment banks in some countries, while in other countries such division is vague or even non-existent. The so-called universal banks engage in all forms of commercial and investment banking, not only including lending and deposit taking, but also underwriting securities and
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securities trading. In particular, some universal banks may own significant equity interests in companies with voting rights. Germany is the typical example running the universal banking system. Canada and Switzerland, among others, are noteworthy examples moving towards universal banking.
Project finance refers to the financing of long term infrastructure, industrial project and public services based upon resourse or limited resourse financial structure where project debt and equity used to finance the project and cash flow generated by the project.
Arranging short- term financing, controlling cash, managing accounts of finance management. A thorough understanding and application of all these aspects is necessary to be able to maintain the optimum level of finance with in the firm.
The requirement of the project financing is depending upon the nature of the business. The business may be small are large, but the requirement depend on the operation of the business it means the cycle of the business. If the operating cycle is longer the requirement of finance would be longer of the business.
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OBJECTIVES
To understand the concept of project financing, it’s various components, methods and nature of project financing.
To define financial services and explain its scope.
To discus about the various innovative financial instruments.
To study of requirement of finance according to the structure and size of the industries.
To explain the present scenario of financial services sector in india.
To understand the functions of universal banking.
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CONCEPTUAL FRAMEWORK
History of project financing:-
Limited recourse lending was used to finance maritime voyages in ancient Greece and Rome. Tts use in infrastructure projects dated to the development of the panama canal and was widespread in the US oil and gas industry during the early 20th century. However, project finance for high-risk infrastructure schemes originated with the development of the north sea oil fields in the 1970s and 1980s. For such investments newly created special purpose corporation (SPCs) were created for each project, with project operations. Such projects were previously accomplished through utility or government bond issuances, or other traditional corporate finance structures.
The Indian financial services has undergone a metamorphosis since 1990. During the late seventeen and eighties the Indian financial services was dominated by commercial bank and other financial institutions which makes the requirement of Indian industries.
As a result of innovation, new instruments and new market are emerged in the capital market. The capital market and the money market are getting windened and
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depended market. There has been a structural changes in the international capital market with the emergence of new products and innovative techniques. Many financial intermediaries including bank have already started expand of their activities in the financial services sector by offering variety of new products.
What is the project financing?
Types of Financial Services11
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Financial Services↓
Commercial Bank Investment Services
Insurance Advisory Services
↓ ↓ ↓ ↓ •Private •Asset • Insurance •Stock brokers Banking Management Brokerage (Private Clients•Investment •Hedge Fund • Insurance Services and Banks Managers Undertaking discount•Bank Cards • Custody • Reinsurance brokers•Credit Card Services Machine Services and networks
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.
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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 financing involves non-recourse financing of the
development and construction of a particular project in
which the lender looks principally to the revenues
expected to be generated by the project for the
repayment of its loan and to the assets of the project as
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collateral for its loan rather than to the general credit of
the project sponsor.
“Project Finance” is a method for obtaining commercial
debt financing for the construction of a facility. Lenders
look at the credit-worthiness of the facility to ensure debt
repayment rather than at the assets of the
developer/sponsor. Farm biogas projects have historically
experienced difficulty securing project financing because
of their relatively small size and the perceived risks
associated with the technology. However, project
financing may be available to large projects in the future.
In most project finance cases, lenders will provide project
debt for up to about 80% of the facility’s installed cost
and accept a debt repayment schedule over 10 to 12
years. Project finance transactions are costly and often an
onerous process of satisfying lender’s criteria.
“project finance involves the creation of a legally
independent project company financed with non-recourse
debt for the purpose of financing a single purpose capital
asset, usually with a limited life”.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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
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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.
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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 data25
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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
Funds Mobilization and Credit Rationing
The traditional activities of banks are deposit
taking and lending. Deposits are liabilities of
banks, while funds extended by banks to
borrowers are their assets. The fundamental
function of banks is to mobilize available funds
from the surplus units to the deficit units. A “must”
technique when banks reallocate funds is credit
rationing.
Bank credit is extended to the “good” ones, who
are more likely to settle their debt principals and
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interests. Default risk is a primary concern of
banks when financing the deficit units. Asymmetric
or imperfect information is the factor behind
default risk. In reality, financial markets are not
necessarily efficient under prefect information.
Information is costly as well as not available to
everyone. Under this circumstance, banks with
their advantages in collecting information could
minimize default risk to certain level. To a further
extent, some banks would insist to monitor their
borrowers and take certain control over their
borrowers’ businesses.
There are three basic mechanisms that banks
apply in order to monitor their borrowers.
First, a bank can directly obtain information of the
borrower’s cash flow when the bank itself handles
the borrower’s deposit account. The second
arrangement is more formal as restrictive
covenants are stipulated in a loan contract. The
borrower is required to maintain a pre-set range of
liquidity determined by the bank. Lastly, the bank
is granted the right to monitor the operation of the
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enterprises that borrow from them. Universal
banks often apply the last mechanism and
maintain a close and extensive connection with
borrowers. Such connection will promise certain
extent of lender control over those enterprises,
and hence, universal banks are argued to be in
advantageous position to overcome the problems
led by the absence of reliable information and
facilitate effective funds mobilization
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 rating
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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
Project Rejected Solve the queries
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Sanction of proposal on various
Terms & Condition
Communication of Sanction
Acknowledgement of Sanction
Application to comply with Sanction Terms & Condition & execution of Loan Documents
Disbursement
Guru Jambheshwar University of Science & Technology Hisar 2008-10
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).
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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).
Describes the nature of the industry, market and/or
market segment(s) (stable or going through rapid
change and restructuring).
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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.
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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).
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.
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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:
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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
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
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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.
Access to a qualified labor pool.
Access to production inputs (electricity, natural gas,
water, etc.).
Investigate emissions potential.
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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.
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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.
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.
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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.
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Guru Jambheshwar University of Science & Technology Hisar 2008-10
Determines project expected cash flow during the
start-up period.
Identifies project an expected income statement,
balance sheet, etc. when reaching full operation.
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
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Guru Jambheshwar University of Science & Technology Hisar 2008-10
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.
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Guru Jambheshwar University of Science & Technology Hisar 2008-10
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
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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
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projects and assigns scores against them thereby
determining the risk level involved with the project.
It is divided in Four Sections:
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
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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
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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 Service 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.
Financial risk evaluation is only one of the parameter and
not the only parameter for determining the risk level. It
is important to evaluate the Management Risk also while
evaluating the risk relating 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 firm crisis
situation. In order 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 46
Guru Jambheshwar University of Science & Technology Hisar 2008-10
have a team of well qualified and experienced
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,
infrastructure: Favourable, neutral, unfavourable.47
Guru Jambheshwar University of Science & Technology Hisar 2008-10
v)Technology ie, proven Technology- not to be changed
in immeditate future, technology undergo change,
outdated technology.
vi)Capacity utilisation
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.
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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.49
Guru Jambheshwar University of Science & Technology Hisar 2008-10
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:
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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
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Means of finace
1. Nature of Facility
2. Purpose
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 PROPOSAL
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
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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
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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 provides details of important financial elements over a
period of years. It includes
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Details on Paid capital, Tangible Net worth, Net working
Capital, Current Assets, Current Liabilities, Net Profit, Net
Sales, Reserves and Surplus, Intangible Assets, Long
Term Liabilities, 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 performance trend of the
company also of the Projections made. Such financial
highlight play an important role in assessing the financial
strength and weakness of the business.
* Status of the project:
A brief of Project
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Guru Jambheshwar University of Science & Technology Hisar 2008-10
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-going 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 Statements56
Guru Jambheshwar University of Science & Technology Hisar 2008-10
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.
* 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.
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Non Fund based credit are in form of guarantees like
Letter of Credit (L/c), Letter of guarantee (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,
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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.
Assessment of Non Fund Based Limit
1. Non Fund Based Limits are normally to be sanctioned
for existing customer only who already enjoy fund
based limits
2. If new borrower full processing as applicable to Fund
Based Limits to be carried.
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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 economical
quantity of supply of stocks
5. Non Fund based Limits are to be supported by
necessary fund based limits.
6. Past experience of payment of bills under 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 ambiguous clauses.
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:60
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It is important both for the bank and the applicant to
safeguard its interest, this could be achieved by settling
at mutually acceptable terms and condition in order 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.
METHODOLOGY OF PROJECT
Sources of Data Collection:-
Data collection is key part of project work. There are two
types of data collection, first is primary source and second is
secondary of data collection.
Primary Sources:-
The primary data includes profile, financial statement, and
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case study has been obtained from project of “Winner Nippon
Electronics Ltd., Raglan Infrastructure Ltd. & Synergy
Telecommunication”
Secondary Sources:-
The secondary data relating to the procedures of assessment
of project financing in small-scale industry (SSI) and large-
scale industry, RBI guidelines etc. have been sourced from
reference books and websites.
Hypothesis:-
Project finance is the one of the biggest source of borrowing
the debts.
Scope of the project:-
Company has given various guidelines, advice and projection
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for obtaining the finance form the banks and other financial
services. And developing of the company keeping in the view
economic of the country. I have under taken the study of fast
developing company with reference to its financial position. It
is necessary to under taken the impact of “Financial Services”
and various services provide to their clients.
Limitation of the study:-
The time, limitation is the most important problem to collect
the various information.
Lack of technical knowledge of project financing, I could not
understand some technical terms of the project financing.
CONCLUSION
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Finance has very close ties with most people. Numerous
financial products and services have penetrated our lives.
The globe is ever-changing and financial products and
services have to keep up with the pace of people’s
demand. Banks, which assume a leading position in most
financial systems, have to be prepared for the growing
need of their customers. In some countries, universal
banks, which offer a wide range of financial services,
have proved responsive to customer demand and helpful
in facilitating economic developments.
India’s financial sector is relatively bank-oriented, and
banks are the primary supplier of financial services. With
the regulatory allowance for universal banking, Indian
banks continue to expand its coverage of financial
services in response to customer demand and profitability
concerns. In countries with universal banking system,
banks usually serve as an important source of external
finance for enterprises.
India’s banking sector follows closely the global trend of
financial developments. It is believed that the concept of
financial supermarkets could play a significant role in
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Guru Jambheshwar University of Science & Technology Hisar 2008-10
future given that an increasing number of transnational
companies have been set up in the region and also by the
opening of Indian Banking sector to foreign players.
It is totally based on our logical skill and even it has to
depend upon our analytical skill.
In the projection I have learn how to build the company’s
position and how would the company rich their turnover?.
And in that to perceive the achievable turnover of the
company and to put the comments on it, and to find out
why company has not achieved their goals.
So, the above case study shows really position of the
company and this case study is really helping me to build
my analytical skill. This is the very well experienced for
me and it absolute, it helps me to rich my goal.
BIBLIOGRAPHY
NAME OF BOOKS REFER
Book Name Auther Edition Publication
Financial
management
I.M.Panday 9th edition Vikas Publishing
housing Ltd.
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Financial
Management
C.Choudhury 3rd edition Tata Mcgraw Hill
Publishing Co.
Ltd.
Source of information:
www.Worldbank.org
www.rbi.org
http://www,ilustrados.com/publicationes/EpyAuVZyFGlwOIAq.php.
http://www.greentie.org/finance/pftypes.php
http://www.hyflux.com/hyfux_b_model.html
www.eagletraders.com/loans/loans_what_is _project_finance.htm
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