ABSTRACT

Banks have played a critical role in the economic development of some developed countries such as Japan and Germany and most of the emerging economies including India. Banks today are important not just from the point of view of economic growth, but also financial stability. In emerging economies, banks are special for three important reasons. First, they play a leading role in developing other financial intermediaries and markets. Second, due to the absence of well developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs. Finally, in emerging markets such as India, banks cater to the needs of a vast number of savers from the household sector, which prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks.

The Indian banking sector has been remarkably successful in some respects. Its immense size and enormous penetration in rural areas are exemplary among developing countries, as is its solid reputation for stability among depositors. The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation.

Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.

This project explains various credit facilities and processes followed by one of the most reputed bank in the country, Punjab National Bank. Each bank has its own set of policies that must be followed while sanctioning a loan and care must be taken that the money provided by the bank is being used up for the intended purpose only. The task ranging from acceptance of loan proposal to sanctioning of loan is carried out at Credit Division of the bank. Moreover, each loan proposals fall under powers of different levels depending on the size of the proposal.

The study is undertaken to understand the process of project appraisal for term loans being followed at PNB. With a developing economy and many multinational companies coming up, new projects are being undertaken. These projects require huge amount of capital and thus banks come forward to finance these projects depending on the feasibility of the project. PNB carries out an extensive study of the project and checks for it feasibility and if the project seems to be feasible, a decision is taken. This process of carrying out the feasibility test of the project based on the financial position of the company is called Project Appraisal.

ContentsPage No.

Acknowledgement 2

Certificate of Approval 3

Executive Summary 4-5

Abstract 6

1. Introduction1.1. Banking an introduction (Indian Perspective).

(a)Nationalisation of Banks.(b)Liberalisation.

1.2. About Punjab National Bank.1.3. Profile of the Bank.1.4. Vision.1.5. Corporate Mission.1.6. Organizational Structure. 1.7. Diversification of PNB.1.8. Financial Performance.1.9. Credit Department.1.10. Risk Management Department (RMD).

(a)Credit Risk Rating Tools..1.11. About the Project

(a) Objectives of the Project.(b) Scope of the study.(c) Methodology.

1.12. Credit Facilities(a) Fund Based Facilities.(b) Non Fund Based Facilities.

9-22999

1011121313141415161720202020212121

2. Term Loans and Working capital2.1. Term Loan Appraisal.2.2. Financial Evaluation.2.3. Sensitivity Analysis.2.4. Techno-Economic Viability (TEV.2.5. Technical Appraisal.2.6. Economic Viability.2.7. Financial Viability.2.8. Risk Analysis.2.9. Management Evaluation.2.10. Compliance to exposure Norms.2.11. Maximum Industry Exposure Limit.2.12. Security.2.13. Pricing.2.14. Post Sanction Process (a) Ensuring end-use of funds. (b) Preventive Monitoring System (PMS). (c) Stock Audit.

(d) Monitoring of Weak Irregular Accounts.

23-32242427272828282830303031313132323232

3. Assessment of Term Loan to XYZ Cement Corporation Ltd. (XCCL). 33-77

2

3.1 Introduction (a)The Promoter Company: XYZ Associates Ltd(XAL)

3.2 Loan Proposal (a) Management Evaluation.

(b) Business Group Evaluation. (c) Business Strategy. (d) Banking arrangement of the parent company. (e) Compliance to exposure Norms. (f) Financial analysis. 1. Past Financials. 2. Usage and Sources of Fund.

(g) Status of Tie-Up of Loans. (h) Financial Viability Analysis of the Project. 1. Sales and Profitability Projections. (i) Projected Financial. 1. Financial ratios. 2. Balance Sheet Projections. 3. Cash Flow Projections. (j) Calculation of DSCR. (k) Sensitivity Analysis. (L) Security. 1. Primary. 2. Collateral.

(m) Security Margin. (n) Technical Evaluation. (o) Statutory Approvals. (p) Present Physical & financial status. (q) Implementation schedule, Procurement & location analysis. (r) Economic analysis. (s) Industry analysis. (t) Risk analysis. (u) Draw down Schedule. (v) Proposed Repayment Schedule. (w) Pricing. (x) Strength weakness and Mitigants

3333343637394044454547484949535354555657575758585960626367707374757576

4. Conclusions and Recommendations4.1 Conclusions.4.2 Recommendations.

78-827879

5. Limitations of the Study 83

6. List of Abbreviations Used 84-85

7. References 86

3

1. Introduction

1.1 Banking an introduction (Indian Perspective)Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.

1.1 (a) Nationalisation of Banks:

Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting to nationalise the banks.

The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country. The Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

1.1 (b) Liberalisation:

In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a

4

modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

1.2 About Punjab National BankPunjab National Bank was registered on 19 May 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. The founding board was drawn from different parts of India professing different faiths and a varied back-ground with, however, the common objective of providing country with a truly national bank which would further the economic interest of the country. PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala Harkishan Lal, Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management of the Bank in its early years. The board first met on 23 May 1894.

PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that has survived to the present. (The first entirely Indian bank, the Oudh Commercial Bank, was established in 1881 in Faizabad, but failed in 1958.)

5

PNB has had the privilege of maintaining accounts of national leaders such as Mahatama Gandhi, Shri Jawahar Lal Nehru, Shri Lal Bahadur Shastri, Shrimati Indira Gandhi, as well as the account of the famous Jalianwala Bagh Committee.

The Bank made steady progress right from its inception. It has shown resilience to tide over many a crisis. It withstood the crisis in banking industry of 1913 and the severe depression of the thirties.With the passage of time the Bank grew in strength spreading its wings from one corner of the country to another. Some smaller banks like, The Bhagwan Dass Bank Limited, Universal Bank of India, The Bharat Bank Limited, The Indo-Commercial Bank Limited, The Hindustan Commercial Bank Limited and The Nedungadi Bank were brought within its fold.

1.3 Profile of the bankWith over 63 million satisfied customers and more than 5100 offices in 764 cities including presence in 10 countries, with 2 branches at Hongkong, 1 each at Kabul and Dubai; representative offices at Almaty, Dubai, Shanghai and Oslo; a wholly owned subsidiary in UK; a joint venture with Everest Bank Ltd. Nepal and a JV banking subsidiary “DRUK PNB Bank Ltd.” in Bhutan. PNB has continued to retain its strong position in the banking industry. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card, debit card; bullion business; life and non-life insurance; Gold coins & asset management business, etc.

PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its ‘IT strategy’ follows the ‘Business strategy’ so as to arrive at “Best Fit” i.e. the IT strategy should be in accordance with the wants of the bank in order to achieve synergy and hence the maximise output along with offering the best possible service to its customers. The Bank has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution (CBS) since Dec’08, thus covering 100% of its business and providing ‘Anytime Anywhere’ banking facility to all customers including customers of more than 3000 rural & semi urban branches. The Bank has also been offering Internet banking services to its customers which also enables on line booking of rail tickets, payment of utilities bills, purchase of airline tickets, shopping etc. Towards developing a cost effective alternative channels of delivery the Bank has opened up more than 6000 ATM’s. With the help of advanced technology, the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. With its policy of inclusive growth, the Bank’s mission is “Banking for Unbanked”. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. Under Branchless Banking model, the Bank is implementing 40 projects in 16 States.

Backed by strong domestic performance, the Bank is planning to realize its global aspirations. Bank continues its selective foray in international markets with presence in 10 countries. The bank has 4 overseas branches and an offshore banking unit in Mumbai, wholly owned subsidiary in UK with 7 branches & a subsidiary each in Kazakhstan & Bhutan; 5 Representative offices in Australia, Norway, Dubai, China and Kazakhstan; and one joint venture with Everest Bank Ltd., Nepal.

Bank is pursuing up gradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney, Australia and taking controlling stake in JSC Dana Bank in Kazakhstan.

6

Punjab National Bank also maintains strong correspondent banking relationship with 200 leading international banks all over the world. This enhances its capacities to handle transaction world-wide. Besides, bank has Rupee Drawing arrangement, with exchange companies in the Gulf. The Bank is also a member of SWIFT and 85 branches of the bank are connected through SWIFT’s computer-based terminal at Bombay. With its state-of-art dealing rooms and well-trained dealers, the bank offers efficient FOREX dealing operations in India. The bank has been focusing on expanding its operations outside India and has identified some of the emerging economies which offer large economies which offer large business potential. Bank has set up a representative office at Almaty, Kazakhstan with effect from 23rd October 1998.

1.4 VISION"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

PNB VISION 2013QUANTITATIVE DIMENSIONS-

Deposits to increase from Rs.166457 Crore in March 2008 to Rs.582000 Crore in March 2013,at an average growth of 32%.

Advances to increase from Rs.119502 Crore in March 2008 to Rs.418000 Crore in March 2013,at an average growth of 28%.c.

Total business to increase from Rs.285959 Crore in March 2008 to Rs.1000000 Crore in March2013,at an average growth of 28%.

Operating profit to increase from Rs.4006 Crore in March 2008 to Rs.15000 Crore in March 2013 with a CAGR of 30.2%.

Net profit to increase from Rs.2049 Crore in March2008 to Rs.7500 Crore in March 2013,at anaverage growth of 30%.

The Return On Assets {ROA} to increase from 1.15% in March 2008 to 1.30% in March 2013 (This ratio is comparable to the ROA of the peer banks and is also better than all banks ratio of 1% as on March 08).

The Return on Equity {ROA} to increase from 19% in March 2008 to 21% in March 2013.

15 Crore in March 2013. To have a rural coverage of 100000 villages in the Indo-Gangetic plains by March 2013.

QUALITATIVE DIMENSIONS1. A leader and front runner amongst nationalized banks

I n F i n a n c i a l i n c l u s i o n . I n a l l d o m e s t i c o p e r a t i o n s . In adopting best risk management practices. In adopting global best practices in Corporate Governance & Corporate Social

Responsibility. In HR policies to raise skil ls, morale and productivity.

2. To be Global Bank

Among the top 3 Indian banks with global presence in Middle East, South East Asia, China, UK, Australia, Canada, etc.

Bring best global practices to effectively compete with global players in India.3. Become a universal bank

7

Provider of complete range of financial services. 4. To be the most profitable Bank amongst nationalized banks by focusing on:

Fee based income/off-balance sheet exposures Mid Cap segment, Retail lending, SME Advances &Agriculture. R e d u c t i o n i n G r o s s N P A s E x p e n d i t u r e C o n t r o l . L o w c o s t d e p o s i t s . Ensuring higher spreads (return on advances minus cost of deposits/funds)

5. Capitalize on IT initiatives Provide more value added services. E x p a n d r e a c h o f A T M s . Bank Office Centralization of all CBS branches. Provide IT advisory services to other banks

6. Explore options of in-organic growth Merger of Private/Public Sector Banks

7. Enlargement of customer base and retention of existing customers. 8. Ensure smooth transition to adopting Basel II norms ahead of schedule.9. Develop robust Management Information System for better decision making and policy prescription.10. Further entrench brand image of the bank.

1.5 CORPORATE MISSION"Banking for the unbanked"

1.6 Organizational StructureThe bank has a three tier structure comprising of head office, circle office and branch office. There are 65 circle offices and 4267 branch offices. There is decentralized power up to the branch level which has improved speed of decision making.

Figure: Organizational Structure of Bank

8

Field General Manager (FGM)

Ci rcle Offi ce

Branches

1.7 Diversification of PNB

Diversification initiatives of the bank have shown promising results. PNB has undertaken bullion business, merchant banking, mutual fund business, PNB Debit card and has also undertaken foreign exchange business. Consistent profit performance, improved fundamentals and strong technology base have provided PNB with distinct advantages to meet the forces of composition effectively.

Punjab National Bank has taken a number of initiatives for the benefit of its invaluable customers and has virtually become one stop shop for various financial products & services. The bank has made Bancassurance Tie-up with oriental Insurance Co. Ltd. (OICL), a public sector undertaking, which offers variety of products e.g. Fire Insurance, Motor Vehicle Insurance, Marine Insurance & Misc. Insurance Policies like Shop-keepers’ policy; theft/burglary Policy; Fidelity Guarantee Policy; Personal Accident Policy, Health Insurance Policy; Overseas Travel Insurance Policy, House Hold Goods etc. at a competitive price with assured post sale services.

1.8 Financial Performance

The bank maintains a strong position in the Indian banking industry. The impressive operational and financial performance has been brought about by bank’s focus on customer based business with thrust on SME, Agriculture and a more inclusive approach to banking, better asset management, improved margin management, thrust on recovery and increased efficiency in core operations of the bank.

Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, PNB has achieved significant growth in business which as of today

9

Board of directors

CMD

ED

GM (Cred

it)

GM ( NPA

& Wea

k Account)

GM (Retail &

lending)

GM (Treasury)

DGM

DGM

AGM

AGM

Functional head

AGM

.

.

.

.

.

.

DGM

.

.

.

.

.

.

GM (IRM

D)

GM (Deposits)

GM (Audi

t)

FGM'S

amounts to over Rs 6.73 lakh crore. PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network, business and many other parameters. During the FY 2011-12, Net Interest Income (NII) increased by 13.6% while Net Interest Margin (NIM) was 3.84%. Net Profit increased by 10.2% to reach Rs.4884 crore. Operating Profit was Rs.10614 crore, 17.2% up from last year. PNB continues to be among leading banks amongst nationalized banks in net profit, operating margins, total business, deposits, advances, CASA deposits and customer base. Summary of the financials for this year is as below:

PARAMETERS Mar’12 (quarter) (in Crore Rs.) Mar’11(in Crore Rs.)Operating Profit 10614 9056Net Profit 4884 4433Deposit 379588 312899CASA Deposits 134129 120325Advance 293775 242107Total Business 673363 555005

Source: press release (performance highlights)

1.9 Credit Department (CD)Commercial lending organization structure in PNB consists of Branches, Mid Corporate Branches (MCBs), Large Corporate Branches (LCBs) and Head Office (CD). Credit Division (CD) looks after the loan proposals which fall into the purview of GMs-HO/ED/CMD/MC/Board. Medium corporate branches are headed by AGMs and LCB as DGM. Based on the guidelines received from Department of Financial Services, Ministry of Finance, Govt. of India, it has been decided to form Credit Approval

Committees at HO/CO level as under:

CAC at HO level Headed by Credit proposals

HOCAC Level-I Senior most GM(Credit) Above Rs.35 crore but upto Rs.50 crore

HOCAC Level-II Senior most ED Above Rs.50 crore & upto Rs.100 crore

HOCAC Level-III CMD Above Rs.100 crore & upto Rs.400 crore

Similarly, at Circle Office level, two Credit Approval Committees shall be set up as under:

CAC at CO level Headed by Credit proposals

COCAC Level-I Circle Head Beyond loaning powers of Incumbent of the branch but within vested loaning powers of Circle Head (AGM/DGM as the case may be)

COCAC Level-II FGM Beyond loaning powers of Circle Head but not exceeding Rs.35 crore

10

CD looks after proposals for all types of loans which fall within the purview of GMs-HO/ED/CMD/MC/Board. A credit appraisal goes through different level of sanctioning to enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of management for action.

The bank has introduced “grid/committee” system in credit sanction process wherein every loan proposal falling within the vested power of DGM and above is discussed in a credit committee, which, on the merit of the case, recommends the proposal to the sanctioning authority. Such committees have been formed both at HO and ZO levels. The credit committee at HO includes GMs-credit and CGM/GM-RMD. For credit proposals falling within the vested power of CGM/GM, the credit committee at HO includes DGM/AGM/Chief Manager-RMD and DGM/AGM/Chief Manager-CD. CD looks after all proposals for all types of loans which fall within the purview of GMs-HO/ED/CMD/MC/Board. A credit appraisal goes through different level of sanctioning to enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of management for action.

1.10 Risk Management Department (RMD)“Credit risk” is the possibility of loss associated with changes in the credit quality of the borrower or counter parties. In a bank’s portfolio, losses may stem up due to a variety of reasons varying from outright default due to inability or unwillingness of a borrower or counter party to honor commitments in relation to lending, settlement and other financial transactions the bank also faces risk if the market value of the collateral falls down.PNB has an elaborate risk management structure in place. Credit Risk management structure at PNB involves

- Integrated Risk Management Division (IRMD)RMD frames policies related to credit risk and develops systems and models for identifying, measuring and managing credit risks. It also monitors and manages industry risks.

- Circle Risk Management Departments (CRMDs)Risk Management Departments at circle level are known as CRMD.Their responsibilities include monitoring and initiating steps to improve the quality of the credit portfolio of the Circle, tracking down the health of the borrowal accounts through regular risk rating, besides assisting the respective Credit Committee in addressing the issues on risk.

- Risk Management Committee (RMC)It is a sub-committee of Board which is responsible for formulating policies/procedures and managing all the risks.

- Credit Risk Management Committee (CRMC)It is a top level functional committee headed by CMD and comprises of EDs, CGMs/GMs of Risk Management, Credit, Treasury etc. as per the directives of RBI.

- Credit Audit Review Division (CARD)It independently conducts Loan Reviews/Audits.

The risk management philosophy & policy of the bank focuses reducing exposure to high risk areas, emphasizing more on the promising industries, optimizing the return by striking a balance between the risk and the return on assets and striving towards improving market share to maximize shareholders’ value.

The credit risk rating tool has been developed with a view to provide a standard system for assigning a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is

11

applicable to all large corporate borrower accounts availing total limits (fund based and non-fund based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore. The Bank has robust credit risk framework and has already placed credit risk rating models on central server based system ‘PNB TRAC’, which provides a scientific method for assessing credit risk rating of a client. Taking a step further, the Bank has developed and placed on central server the score based rating models for retail banking. These processes have helped the Bank to achieve fast & accurate delivery of credit; bring uniformity in the system and facilitate storage of data & analysis thereof. The analysis also involves analyzing the projections for the future years.

1.10 (a) Credit Risk Rating tools:

P.N.B TRAC:

It is a web based tool which is presently deployed in Sun Server with Solaris 9.0 OS. Various models are formulated to match up with the different segments of corporate borrowers. Depending upon the company type, it includes models as:-

1) Large corporate credit risk rating model.2) Mid corporate credit risk rating model.3) Non banking financial companies credit risk rating model.4) Small loan borrowing accounts risk rating model.5) New project risk rating model.

The financial data can be recorded in the system either manually or by retrieving the data directly to the tool through Prowess.

The model is segregated into four main parameters on the basis of which a company is rated.

1) Financials: Financials of a corporate borrower forms the basis of its credibility to the banks. It determines the viability of the cost of the project and means of finance as envisaged in the project report. Profitability and the capability of the project to create cash inflows for servicing the debt and interest can be ascertained by the past and projected financials of the company.

2) Quality of Management: Under this, the bank ascertains the performance of the company under competition in terms of return on investment. It ascertains whether the promoters have the desired background, experience, and knowledge to successfully implement the project.

3) Conduct of AccountThe past experiences of the bank with the borrower are assessed in this section. The bank takes into account whether the borrower had shown signs of being credible by regularly repaying the interest amount. Records of defaulting in the past can bring a possibility of creation of an NPA.

4) Industry Outlook and Business PerformanceIn order to check on the profitability of a new project, an independent reasonable assessment based on the study of various relevant variables should be made.

Each of the main parameter includes different subjective as well as objective parameters on which the company is rated on a scale of range 0 to 4 with 0 being a very poor and 4 as an excellent score.

In subjective parameters, scores can be assigned in decimals in multiples of 0.5 with a proper justification whereas in objective parameters, scores are assigned up to two decimal places.

12

Once the overall scoring is done, it is then the rating is assigned to the borrower ranging from PNB- AAA to PNB- D as given in the table.

Rating Category Description Score Obtained (%) Grade Within the rating Category

PNB-AAA Minimum Risk Above 80.00 PNB-AAAPNB-AA Marginal Risk Above 77.50 up to

80.00PNB-AA+

Above 72.50 up to 77.50

PNB-AA

Above 70.00 up to 72.50

PNB-AA-

PNB-A Modest Risk Above 67.50 up to 70.00

PNB-A+

Above 62.50 up to 67.50

PNB-A

Above 60.00 up to 62.50

PNB-A-

PNB-BB Average Risk Above 57.50 up to 60.00

PNB-BB+

Above 52.50 up to 57.50

PNB-BB

Above 50.00 up to 52.50

PNB-BB-

PNB-B Marginally Acceptable Risk Above 47.50 up to 50.00

PNB-B+

Above 42.50 up to 47.50

PNB-B

PNB-C High Risk Above 40.00 up to 42.50

PNB- B-

PNB-D Caution Above 30.00 up to 40.00

PNB- C

30.00 and below PNB- D

The company gets rated regularly and the latest rating is considered when it applies for a renewal of WCL or a new term loan. The rating assigned to the company is valid up to 18 months from the last date of drafting of the current balance sheet or 15 months from the last date of the month at which rating was confirmed, whichever is earlier. Right after the deadline, the previous rating is mentioned as ‘due’ and further if the company fails to submit the required financial data to the bank for three months after this date; it is then coined as ‘overdue’.

WEIGHTED SCORE TABLE

FINANCIAL 40%

CONDUCT OF ACCOUNT 10%

INDUSTRY & BUSINESS 25%

MANAGEMENT 25%

13

Hurdle points

Hurdle points are the minimum acceptable benchmark rate for some specific parameters. If the company fails to attain the benchmark rating in that particular parameter, then the final rating of the company gets PNB-BB (Average risk) as its final rating in spite of considering the previous final rating( in case the rating is higher than BB) or 1 rating lower than the previous rating (in case the rating is lower than BB).

PMS TRACKING

It is a system to provide post sanction monitoring of the health/conduct of borrower accounts on regular intervals on a continuous basis.

Earlier the bank had QRS (Quarterly Review Sheets) as its monitoring system which was subjective in nature, had limited parameters to be captured and did not propose any action.

On the contrary, PMS is an action oriented post sanction monitoring tool. PMS report consists eight parts:-

Part I is a brief profile of the account. Part II has PMS index score and mentions the reasons for the irregularities. Part III details about the financial/operational performance of the borrower. Part IV consists of details of un-compiled important terms and conditions of sanctions. Part V mentions the status of outstanding serious inspection irregularities. Part VI includes position of the account(s) as at the end of the quarter. Part VII has details of security verification, insurance, stock audit, consortium meeting. Part VIII has comments and action plan.

There are 6 sections subdivided into 29 parameters on which the borrower is evaluated.PMS scores are penalty points allotted for unsatisfactory features observed in the conduct of an account. The scores awarded are negative in nature i.e. higher the score poorer is the health. It is based on this score that PMS rank is determined. The ranking scale is a ten point scale based on PMS index score, in which 1 is said to be the most satisfactory position and 10 to be the most unsatisfactory position.Given below is the ranking and the category to which an account belong with respect to its rank:-

PMS SCORE PMS RANK CATEGORY

0-1000 1 HEALTHY

1001-2000 2 HEALTHY

2001-3000 3 EARLY WARNING

3001-4000 4 EARLY WARNING

4001-5000 5 EARLY WARNING

5001-6000 6 WARNING

6001-7000 7 WARNING

7001-8000 8 WARNING

14

8001-10000 9 LIKELY NPA / NPA

ABOVE 10000 10 LIKELY NPA / NPA

PMS also provide an action manual for the bank which mentions options as an early warning. Some of these options are:-

Careful vetting of loan documents. Review of compliance with terms and conditions. Meeting with party on reasons for business decline. Influence borrower business plans. Demand financial restructuring of borrower’s balance sheet. Increase interest rates. Increase frequency of PMS and appraisal. Re-inspection of primary security, stock audit by external auditors. Valuation of collateral security. Change loans terms and conditions. Legal counsel on documentation and charge creation. Insistence on higher collateral, guarantees. Insistence on higher margins. Change in the form of exposure - cash credit to short term loans. Tagging Reduction of exposure - insist on inclusion of other banks in consortium. Phased exit from the consortium.

1.11 About Project

(a) Objectives of the Project1. To gain an insight into the Credit Administration process of the bank.2. To understand the different type of credit facilities and credit delivery mechanisms provided

to industrial customers viz. Overdraft, Cash Credit, Drawing Rights, Fund Based Credit, Non Fund Based Credit etc.

3. To understand the different methods available for risk vetting of lending proposals, different risk assessment models and the different credit rating procedures used in Punjab National Bank.

4. To understand the appraisal process of Term Loan and Working Capital Financing proposals5. To understand the factors affecting rate of interest levied viz. risk assessment, bank

guidelines, sectoral policies, business considerations etc.6. To understand various norms like credit exposure limits etc., that influence credit disbursal

for various sectors, companies and business groups.

(b) Scope of the StudyThis report covers:

1) Credit Administration at PNB.2) Various types of Bank Finance.3) Term Loans Financing.4) Appraisal Process of Term Loans.5) Post Sanction Processes6) Case Study describing actual appraisal of a Term Loan proposal.

15

(c) MethodologyTo fulfill the objectives of the study following methods were used:1) Study of various bank guidelines, circulars and instruction books.2) Study of pre-approved proposals3) Personal interaction with the employees of Credit Division4) Personal interaction with the employees of RMD and Technical Cell5) Developing cases based on actual work done at Credit Division

1.12 Credit FacilitiesPunjab National Bank provides different types of credit facilities according to the banking norms and convenience of the clients. Different type of facilities provided can be classified as below:

(a)Fund Based FacilitiesFund based facilities are those which require an immediate outlay of funds towards the borrowing party. Punjab National Bank provides following fund based facilities:

1. OverdraftsOverdraft accounts are treated as current accounts. Normally overdrafts are allowed against the Bank’s own deposits, government securities approved shares and/or debentures of companies, life insurance policies, government supply bills, cash incentive and duty drawbacks, personal security etc. Overdraft accounts should be kept in the ordinary current account head at branches.

2. Demand LoansA demand loan account is an advance for a fixed amount and no debits to the account are made subsequent to the initial advance except for interest, insurance premium and other sundry charges. As an amount credited to a demand loan account has the effect of permanently reducing the original advance, any further drawings permitted in the account will not be secured by the demand promissory note taken to cover the original loan. A fresh loan account must, therefore be opened for every new advance granted and a new demand promissory note taken as security.Demand loan is a loan, which is payable on demand in one shot i.e. bullet repayment. Normally, demand loans are allowed against the Bank’s own deposits, government securities, approved shares and/or debentures of companies, life insurance policies, pledge of gold/silver ornaments, mortgage of immovable property.

3. Cash credit AdvancesCash credit account is a drawing account against the credit granted by the bank and is operated in exactly the same way as a current account on which an overdraft has been sanctioned. The various types of securities against which cash credits are allowed are pledge/hypothecation of goods or produce, pledge of documents of title to goods, mortgage of immovable property, book debts. Trust securities etc. In cash credit accounts the borrower is allowed to draw on account within the prescribed limit as and when required.

4. Bill FinanceBill finance are the advances against the inland bills they are sanctioned in the form of limits for purchase of bills (ODD) or bills of discount (BD) or bills sent for collection. Bills are either payable on demand or after usage period.

16

(b)Non-fund Based CreditWhile fund based credit facilities require immediate outlay of funds from the bank, non-fund based facilities basically include the promises made by banks in favor of third party to provide monetary compensation on behalf of their clients if certain situations emerge or certain conditions are fulfilled. The non-fund based business is one of the main sources of bank income. Income is in the form of fees and commissions as compared to interest income in case of fund based lending.Non-fund based credit plays an important role in trade and commerce. The borrowing clients of banks prefer to avail of the non –fund based facilities mainly because:

a) The facility does not require immediate outlay of funds and therefore the cost of such funds tend to be lower than the cost of fund based credit facilities.

b) A bank guarantee (BG) or letter of credit (LOC) issued by a bank on behalf of its client is an off-balance sheet item in the books of clients, hence do not show up as debt or liability.

For the lending banks, cost of providing non-fund based facilities is significantly lower than the cost of providing fund-based facilities.

Nevertheless, the inherent risk which are associated with N.F.B credit facility are same as those attached with FB credit proposals. In case of default, provision of funds becomes necessary. Also, NFB exposure is facilities that are not treated as off-balance sheet exposure and minimum capital adequacy need to be maintained against the NFB exposures as well.

Assessment of Non Fund based facilities shall be subjected to the same degree of appraisal, scrutiny as in the case of fund based limits because outstanding in these facilities are to be reckoned at 100% for exposure purposes. Therefore, need based requirement of a borrower should be assessed after reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of LCs and industry practices and business requirements in case of LGs. The working of NFB assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities, cash flow aspects should also be taken into account.

1. Bank GuaranteesBGs maybe financial or performance based in nature. In a financial guarantee, the issuing banks assume an usual credit risk which is the domain of the banks. However, issue of a performance guarantee involved technical competency and managerial ability of a customer to ensure the performance of the contract for which guarantee has been drawn.Issuing bank’s responsibility against the BG is absolute. Thus, proper appraisal needs to be done before issuing BG, as it is the responsibility of the issuing bank to honor its guarantee when invoked.

2. Letter of CreditA document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's credit for the customer's credit. It is an undertaking issued by bank on behalf of the buyer to the seller, to pay for the goods and services, provided that the seller presents the documents which comply with the terms and conditions stipulated in the LOC. All letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. It is different from BG in the sense that in case of LOC, the issuing bank does not wait for the buyer to default, and for the seller to invoke the undertaking. While in BG, comes into play only when the principal party (the buyer) has failed to pay its supplier.

17

2.Term Loans and Working CapitalTerm loans are those loans that are lent for extended period of time majorly for the capital expenditure by the firm. This is different from the short term loans which are mainly provided for meeting working capital requirements and maintaining short term liquidity. Term loans are provided for acquisition of fixed assets are to be repaid from the cash generated from the operations. Credit delivery for term loans are broadly through two means: Fund based and Non –fund based. Fund based term loans like cash credit provided outright cash while non-fund based loans like Deferred Payment Guarantee(DPG) where the liability to make payment crystallizes after the bill again such guarantees are presented for payments.Term loans are sanctioned for acquisition of fixed assets like land, building , plant/machinery, office equipment, furniture-fixture and other capital expenditure like purchase of transport vehicles and other vehicles, agricultural equipment etc. The term loan is not a demand loan and is repayable in terms of Installments irrespective of the period or the security cover.Term loans are normally granted for the periods varying from three to seven years and under exceptional circumstances beyond seven years. The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend, as is being done for ALM.

Since term loans are provided for a long tenure ensuring the viability of the project and sufficient generation of cash over a the long tenor of the loan becomes critical.

Working CapitalThe number one reason most people look at a balance sheet is to find out a company's working capital (or "current") position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt.

Current Assets - Current Liabilities = Working Capital

One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor - all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.

18

Any manufacturing firm for that matter any company operating in any industry needs to maintain a bare minimum level of inventory at any point of time below which its production would get suffer, this minimum level is called as Core Current Asset level. This varies constantly with changes in sales and activity level. Fluctuating component in the working capital is the portion above this level that is continuously changing due to changes in demand, seasonality of product etc. Businesses finance permanent core component through long-term sources of fund like equity or long term loans. Fluctuating Component is financed mainly by availing the short term loans and other credit facilities from the bank. Main focus here is to avoid overfunding or underfunding of the operations. While over funding will amount to locking up of assets unproductively in the form of idling cash or inventories, at the same time under funding would seriously hamper the day-to-day operations and pose a threat to the survival of the enterprise. Hence, it is critical to determine correctly the maximum amount of bank finance that should be provided.

2.1 Term Loan AppraisalBefore a term loan gets sanctioned it has to go through a well defined appraisal process where it is evaluated on the basis of various parameters. In order to mitigate the risk of default and fraud inherent in the lending process, due diligence is followed. The process of appraisal followed is reviewed regularly to account for new guidelines from the RBI and changes in bank’s credit policies. Various components of the appraisal process are as detailed below:

2.2 Financial EvaluationIt is the process of evaluating the financials of the borrower in order to ascertain the financial health of the company. Rearranged financial statements are used to ascertain the capital requirements, liquidity, long-term solvency, debt-repayment capacity etc. of the business involved. Various components of financial evaluation are as follows:

Reclassification and Rearrangement of Balance Sheet itemsFinancial statements contain the information about the financial health of enterprise. Since different applicants use different formats and classification of some of the items present in the balance sheet is subjective, it becomes necessary to re-arrange the balance sheet items to achieve standardization. This is done in order to make the analysis and comparison of the balance sheet that much easier for the people analysing the proposal.

Components of the balance sheet are used in calculating ratios like Debt Equity Ratio (DER), Debt-Service Coverage Ratio (DSCR), Current Ratio, Fixed Asset Coverage Ratio (FACR), Maximum Permissible Bank Finance (MPBF) etc. There are various guidelines from the RBI and Bank on the permissible values of these ratios and the relaxation permissible (if any). So, proper rearrangement of financial statements is a critical process in the credit lending process.

Classification of items into various heads depends on the policies of the bank for ex. classification of a particular liability as a current liability or long term liability etc. while rearranging the balance sheet depends on the internal guidelines of the Bank.

The reclassifications to be done as per the Bank’s/RBI’s guidelines are detailed below:

Current LiabilitiesCurrent liabilities include the known obligations to be within a year. These are classified as:

1. Short term borrowings including bills purchased and discounted excluding bank finance

19

2. Unsecured Loans3. Public deposits maturing within the year4. Sundry Creditors5. Interest and Other Charges accrued but not due for payment6. Advance/Progress Payments from customers7. Deposits from dealers, selling agents etc.8. Instalments of deferred payments, debentures, redeemable preference shares, long term

deposits payable within one year9. Statutory Liabilities like provision for PF dues, Taxes etc. 10. Miscellaneous Current Liabilities like proposed dividends, liabilities for expenses, gratuity

payable within one year etc.

Current Assets1. Cash and Bank balances2. Investments in Govt./Trust Securities, for short term and fixed deposits with banks.

Investments in shares and debentures etc. should be excluded from current assets.3. Recoverable arising out of sales.4. Instalment of deferred receivable due within one year.5. Raw material and consumable spares including that under transit. But slow moving and

obsolete items should be excluded from current assets and should be grouped as non-current assets.

6. Stock in process, and finished goods( including goods-in-transit)7. Advance payment for tax, prepaid expenses, advance for purchase of raw material and

consumables. But security deposit/tender deposit are classified as non-current assets irrespective of their maturity.

8. Money receivable from contracted sales of fixed asset during the next 12 months.

Treatment of Export Receivablesa. For calculating MPBF, the amount of export receivables may be excluded from the current

assets as need based limits for export receivables could be sanctioned and in respect of such receivables borrowers are not required to bring in 25% by way of Net Working Capital.

b. Where an exporter desires, export receivable may be included in the total current assets for arriving at MPBF, but the minimum stipulated NWC(i.e. 25% of total current assets) may be reckoned after excluding the quantum of export receivables from the total current assets for fixing up the post shipment credit limit.

Treatment of Investment Made in Associate/Allied Companies/Subsidiaries etc.Investments made in shares, debentures, etc. of a current nature, units of UTI and other mutual funds and in associate companies/subsidiaries and inter corporate deposits and loans are to be excluded from the current assets build up for calculating MPBF (Maximum Permissible Bank Finance).

Treatment of Redeemable Preference SharesPreference shares redeemable within one year should be considered as current liabilities. However, preference shares redeemable after one year should be considered as term liabilities.

Treatment of Unsecured LoansIn case of Partnership, Proprietorship, and Private Ltd. Companies, the unsecured loans raised by friends, relatives, and directors etc. that remain in the business for continuous

20

basis may be treated as quasi capital to the extent not exceeding 100% of tangible net worth of the party subject to the condition that these loans shall not be withdrawn during the currency of the loan and shall be subordinate to bank borrowings. Amount of unsecured loans over and above the net worth of the party should be treated as term liability for calculating various financial ratios. For Public Ltd. companies, the unsecured loans should be treated as long term debts.

Treatment of DTL and DTA(Deferred Tax Asset and Liability)The tax effect of the timing difference originating during a period (Difference between Accounting Income and Taxable Income) is referred to as Deferred Tax Asset/Liability depending on whether the Tax rebate relating to the current accounting period would be available in the subsequent accounting periods has been claimed in advance during the current accounting period.

DTA is arrived at through increasing the profits/ reducing the loss. The eligible tax rebate reflected as DTA can be recognized only if it is reasonably certain that the company will earn adequate profits in the subsequent accounting period(s). Till such time, it is in the nature of an intangible asset. Therefore, it should be reduced from the Net Worth to arrive at the TNW.Using similar logic, DTL is to be treated as part of the Net Worth. Since DTL/DTA are accounting treatments only, DTL is to be added to, and DTA is to be subtracted from, the net profit for arriving at PAT.

Cost of Project & Means of FinancingCost of project and sources of finance are ascertained to ensure the Financial viability of the project for which funding is sought. The major cost components of the project is given including land and building including transfer, registration and development charges as also plant and machinery, equipment for auxiliary services, including transportation, insurance, duty, clearing, loading and unloading charges etc. The means of financing the project cost may be one or more of the following:• Equity capital from shareholders• Preference capital from preference shareholders• Capital subsidies from government • Debentures/ bonds issued by the company – public issue or private placement• Public deposits• Unsecured loans from friends and relatives• Term loans (including deferred payment guarantees)• Lease finance

Projections of Sales, Profits, Cash Flows and Balance SheetRevenues during the tenor of the loan are estimated for the project, based on the Techno-Economic evaluation and past performance. Revenue projection, in addition to the estimates of sales and other expenses are used to generate projection of profits and cash accruals during the loan tenor. Similarly, financing, repayment schedule etc. are used to arrive at balance sheet projections. A unit is considered to be financially viable, progressive and efficient if it is able to earn enough profits not only to service its debts timely but also to finance its future development/growth.

Calculating key Financial RatiosCurrent financials of existing operations, project funding information like sources of funds etc. and future projections are used for calculating key financial ratios for a period of time. These ratios tell us

21

a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under:

Debt-Equity Ratio (DER)

DER =

Debt (Term Liabilities)Equity share capital , freereserves , premium onshares etc .

after adjusting profit∧¿ loss balance¿

¿

DER signifies how much the project is leveraged. For a project of private firm, equity capital is the capital put up by the promoter, hence lower the DER higher are the promoter’s stake in the project. DER also varies from industry to industry. In capital intensive industries involving large capital investment, DER is normally higher as compared to the other industries.

Debt Service Coverage Ratio (DSCR)

DSCR= Net Profit (After Taxes )+Annual interest on longterm debt+Depreciation

Annual Interest on longtermdebt+Amount of instalments of principal payable during the year

This ratio provides us with a measure of the ability of an enterprise to service its debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The ratio may vary from industry to industry but has to be viewed with care when it is less than 1.5. This ratio shows the relationship between cash generating capacity of the unit and its repayment obligation and indicates whether the cash flow would be adequate to meet the debt obligations and whether there is sufficient margin for the lending banker.

Tangible Net Worth to Total Outside Liabilities (TNW/TOL)

TNW/TOL= Tangible NetWorth(PaidupCapital+Reserves∧Surplus−Intangible Assets)

Total outside Liabilities

This ratio gives a view of borrower's capital structure. If the ratio shows a rising trend, it indicates that the borrower is relying more on his own funds and less on outside funds and vice versa.

Profit-Sales RatioOperatingProfit beforeTax excluding other Income

SalesThis ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure.

2.3 Sensitivity AnalysisThe sensitivity analysis is carried out by the bank in order to evaluate capacity of the project to absorb shocks due to adverse movement in prices/ some other adverse developments and sustain financial viability. The viability of a project is dependent on various factors which include selling price, cost of raw materials, cost of finance, availability of critical inputs and dependence on market like buyer/seller market, other key technical parameters etc.In the absence of any defined factors and its values for carrying out the sensitivity analysis, it has been decided that a common 5% sensitivity factor on sale price/cost price of major raw materials

22

should be applied in appraisals of all the projects irrespective of the industry. However, 10% sensitivity factor may be applied in highly volatile industries by assessing the expected volatility in sale price/ cost price of major raw materials in future on case to case basis.

2.4 Techno-Economic Viability (TEV)Techno Economic Valuation is mandatory for all term loan proposals. Term loan proposals are for the funding requirements for new business development/expansion. Since, loans are to be repaid from the cash flow generated from the new business, it becomes necessary to ascertain the feasibility of the project and economic viability. Assets created from the capital expenditure done from the Term loan funds should have enough revenue generation potential so as to ensure the servicing of the loan. It is also necessary to make sure that finances sought are indeed meant for expenditure on the project and will not be deviated to capital markets or other activities. TEV involves market potential studies, stages of business cycle, technology related inputs and cost components including the reports on equipment/raw material suppliers, comparative study of similar projects and preparation of financial models for the individual project.

2.5 Technical AppraisalTechnical appraisal focuses on the feasibility of the project. Various components of the projects are evaluated for their technical soundness, cost expenditure on them and quality etc. some of the aspects of the projects that are looked upon are as below:a) Location and Siteb) Raw materialc) Plant & machinery, plant capacity and manufacturing processd) Lande) Buildingf) Technology & processg) Size of the planth) Power Supplyi) Water Supplyj) Labour supplyk) Implementation Schedule

2.6 Economic ViabilityThis has bearing on the earning capacity of the project and earnings are dependent on sales. Therefore, the borrower’s projection of sales should be assessed keeping in view the following factors:a) Demand and Supply position of the product and its substitutes;b) Proposed selling price vis-a-vis prices of the competing products;c) Quality of the product as against the quality of competing products

2.7 Financial ViabilityFinancial viability seeks to determine:a) Whether cost of project and means of finance are realistic.b) Whether project is capable of profitable operations.c) Whether project is capable of generating adequate surpluses for servicing the debt and interest and can take care of future organizational development.d) Whether estimates of cost of production fully cover all items of expenditure.e) Whether sources of finance are adequate.f) Whether there is a reasonable basis for competitive profitable operations.

23

2.8 Risk AnalysisPNB has elaborate risk management structure, process and procedures in place. For the appraisal of the loan proposals, RMD provides the risk ratings for the client and project based in the patented internal models of the PNB that have been developed based on statistical analysis of data. These models are placed on central server based system ‘PNB TRAC’, which provides facility to assess credit risk rating of a client. This credit risk rating captures risk factors under four areas:1. Financial evaluation (40%)2. Business or industry evaluation (30%)3. Management evaluation (20%)4. Conduct of account (10%)

Cumulative weighted score is calculated and rating of the project/company is ascertained as per the chart below:

Rating category

Description score obtained grade

AAA Minimum risk Above 80.00 AAA

AA Marginal risk Between 77.50 - 80.00 AA+

Between 72.50 – 77.50 AA

Between 70.00 – 72.50 AA-A Modest risk Between 67.50 – 70.00 A+

Between 62.50 – 67.50 A

Between 60.00 – 62.50 A-

BB Average risk Between 57.50 – 60.00 BB+

Between 52.50 – 57.50 BB

Between 50.00 – 52.50 BB-

B Marginally acceptable risk

Between 47.50 – 50.00 B+

Between 42.50 – 47.50 B

Between 40.00 – 42.50 B-

C High risk Between 30.00 – 40.00 C

D Caution risk Below 30.00 D

Some of the important risk rating models used in loan appraisals are summarized as below: S.No. Credit Risk Rating Applicability

Total Limit Sales1 Large Corporate Above Rs. 15 Cr. Above Rs 100Cr.2 Mid Corporate Between 5 Cr.and 15 Cr. Between Rs 25 Cr

and 100 Cr3 New Project Rating

ModelsAbove Rs. 5 Cr. Cost of Project

above 15 Cr4 Entrepreneur New

Business ModelNew Business et requiring finance b/w 20 Lakh and 5 cr

Cost of Project upto Rs.15 Cr

5 Credit Risk Rating model All Banks and Financial Institutions

24

for banks and FI

Table: Rating Models and Their Applicability

PNB also takes into account the ratings of the company/project from the independent credit rating agencies like ICRA, CRISIL, Fitch, CARE etc. Rating history of the borrower is studied and any degradation in the rating demands causal analysis. In some cases, final sanction is conditional upon the completion of credit rating by external agencies.

2.9 Management EvaluationManagement is examined carefully and methodically during the credit appraisal. Management evaluation entails:

a. Credit History of the Directors, Promoters etcb. Professional, experience and qualification of the promoters, directors and top managementc. Reputation of the promoters in project executiond. Performance of the management

Credit history of the management and the company is sought from the centralized credit databases like CIBIL, Equifax etc. Directors etc. should have positive credit reports and should not be there in the list of wilful defaulters circulated by RBI etc. Credit history is also sought from other banks where the company has accounts to find out any abnormal behaviour. Moreover, credit history and account behaviour of the companies belonging to the same business group (i.e. business houses) as the borrower is also taken into account. In case the accounts of any unit belonging to a Group become irregular and the concerned promoters do not co-operate with the Bank and Financial Institution to settle their dues, the Group will not be provided accommodation from the Bank. According to the banks guidelines, financial support for setting up of new ventures or expansion should not be extended to unit belonging to a group which is a wilful defaulter or non cooperative so as to ensure that no amount lent to a healthier unit of a group for its Working Capital requirements is transferred to another unit within the group by reducing the Current Ratio or any other means. For identification of cases of Promoter Groups/Companies for deterrent action, a coordinated approach should be taken by the Banks and Financial Institutions. However, Industrial Units in Public Sector are to be kept out of the purview of Group Approach.

2.10. Compliance to Exposure NormsExposure includes credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstanding, whichever are higher, shall be reckoned for arriving at exposure limit. Further, non fund based exposure is calculated at 100 percent of the limits or outstanding, whichever is higher. In case of fully drawn term loans, where there is no scope for redraw of any portion of the sanctioned limits, the outstanding shall be reckoned as exposure. However, in the case of other term loans, the exposure shall be computed as usual i.e. “sanctioned limits or outstanding, whichever are higher”.

2.11 Maximum Industry Exposure Limit

The bank has developed a model for fixation of industry wise credit exposure ceilings. The model captures external factors like rating of industry by external agency, nature of industry and its importance in economy as well as internal factors like level and trend of asset impairment, exposure level and quality of exposure in the industry. This model provides scientific assessment and corresponding exposure ceiling level to an industry. These limits shall be reviewed on the basis of data analysis regularly. As the ceilings proposed are internal ceilings to achieve diversified growth of

25

portfolio and reduce portfolio concentration, it is provided that the monitoring against such limits would be based on actual outstanding. However, undisbursed term loan amounts in any industry shall also be monitored closely. Further, the industry-wise exposures shall also be monitored closely by Credit Division (HO), especially those industries which have reached trigger level of 85% of exposure limit so that instances of breach of ceiling could be averted.

Industry/Sector Ceiling in percentageS. No. Sector Exposure

All Engineering 6%Chemicals, Dyes, Paints 3%Construction 5%Food Processing 5%Iron and Steel 10%Other Textiles 5%Paper and Paper Products 3%Petroleum 3%Sugar 5%

2.12. SecurityAll the loans are secured against the collaterals. During the loan appraisal process collateral are valued for margin of safety requirements and valuation is verified. Type of bank’s claim on the collateral i.e. mortgage, hypothecation, first pari-passu charge, lein etc is decided. In addition, the terms and condition for maintenance of the collateral are laid down.Further Guarantee is sought for the loan from the group holding company. This is known as Corporate Guarantee. Sometimes personal guarantee is also sought from the Promoters in case of privately held companies or partnerships. FACR is one critical financial ratio which is ascertained to ensure that loans are adequately covered by fixed assets.

2.13 PricingLoan pricing which was earlier based on the BPLR (Benchmark Prime Lending Rate) regime has now been administered under BR (Base Rate) regime as per the RBI directives. Under BR system banks specify a base rate above which all the loans are priced. Base rate is revised from time to time as per the leads of RBI review of interest rates that depends on the macroeconomic situations. At PNB pricing of loans depends on following factors:

a) Credit Rating of the ClientBetter the risk rating of a business lower is the spread (interest charged) over the base rate.

b) Nature of the business sectorApart from the credit rating business sector to which a borrower belongs also effects the pricing of the loan. For example pricing for a business in Food processing sector with credit rating “AA” will be different from a business in Real estate sector having the same credit rating “AA”.

c) Special Business Considerations and Competitive PressuresIn consortium financing, PNB has to keep the pricing in line with other business partners. Also due to competitive consideration and a view of garnering further business from reputed clients discounts can be offered. Sometimes, there are special lending schemes for various sectors having specific pricing guidelines.

26

2.14. Post-Sanction ProcessesAfter the appraisal and sanctioning process, procedures for loan disbursal, legal documentation and continuous monitoring of the loan implementation i.e. end-use, collateral maintenance, financial health of the loanee etc. come into picture. Some of the important processes are as described below:

(a)Ensuring end-use of fundsOne aspect of credit risk management and control is to ascertain the end use of the funds. This is because the risk profile of a loan is directly related to its prospected use. For example, if a loan issued for purchase of machinery is diverted to real estate investment or say to capital markets, then probability of default increases considerably. Hence, it becomes necessary for banks to monitor the usage of the loaned funds. Financial statements issued by Chartered Accountants are analyzed to observe the spending of the funds. Moreover, PNB has put in place guidelines and procedure to ascertain the use of funds through actual inspection. Some of the illustrative measures that could be taken by the branches to ensure end-use of funds are:

i) Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of the borrowers.

ii) Regular inspection of borrowers’ assets charged to the Bank as security.

iii) Periodical scrutiny of borrowers’ books of accounts.

iv) Periodical visits to the assisted units.

v) System of periodical stock audit, in case of working capital finance.

(b)Preventive Monitoring System (PMS)Bank has introduced Preventive monitoring system for large borrower accounts. The system is applicable to all borrower accounts having sanctioned limits (FB plus NFB) above Rs. 1 crore. The model for PMS has also been placed in central server environment. This system is a dynamic system for tracking the health and conduct of borrowers accounts to capture the signals for an early warning. Timely decision should be taken on the future course of action in the borrower accounts depending upon PMS rank.

(c)Stock AuditBank has a policy to conduct annual stock audit (including book debts) for all accounts with fund based working capital limits of Rs.5 crore and above whether standard or NPAs. Annual Stock Audit is compulsorily conducted in all accounts with risk rating ‘B’ & below and having fund based working capital limits of Rs. 1 crore and above.

(d)Monitoring of Weak and Irregular AccountsThe bank has established systems for Inspection and control of its lending activity to ensure that loan accounts are conducted in terms of sanction so as to have a sound credit portfolio. Credit Division, HO monitors all weak and irregular loan accounts below standard category having outstanding of above Rs.10 lac on monthly basis.

27

3. Assessment Of Term Loan to XYZ Cement Corporation Ltd.(XCCL)

3.1 Introduction:XCCL is 100% subsidiary of XYZ Associates Ltd (XAL), the Flagship Company of the group. The group through its investment company XYZ Development Corporation Limited (XDCL) acquired XCCL from PQR group (a Pune based group having interests in cement, power, mineral water and real estate) for a consideration of Rs. 222.64 crore paid in two tranches in April 2010 and October 2010. In consideration for the cost of acquisition, the group obtained the company which had assets in the form of 191 Ha plant site (along with ancillary facilities like staff colonies, railway sidings, etc.), mining rights to 3 limestone mines along with 328 Ha of land for one of the mine (all located within a distance of 5-6 km from the plant site). The group has transferred the ownership of XCCL from XDCL to XAL in February 2011.

XCCL under its previous owner (PQR group of Pune) was known as PQR Cement Private Ltd (PCPL). PQR group had acquired this cement manufacturing unit of erstwhile M/s ABC Ltd (formerly WXY Cements Ltd) in 2007 pursuant to the order of Debt Recovery Tribunal. PCPL’s existing unit of 0.54 MTPA cement capacity was based on old technology/wet process. PCPL operated the plant for approx two years producing 80,000 and 60,000 tones of cement in 2008 and 2009. PQR group did not have sufficient resources and expertise to modernize the existing unit or implement such a large project and sold the unit to XYZ group. XCCL proposes to scrap the earlier plant and develop the cement plant and the captive power plant employing latest technology and modern techniques.

XYZ Cement Corporation Limited (XCCL/the Company/Borrower), proposes to setup a 3 million tonne Integrated Cement Plant including 35 MW captive power plant at Village Shahabad, Gulbarga District in the State of Karnataka. The company has already received existing 191 Ha plant site and mining rights for three blocks – Bankur, Masarwada and Shahabad – Taranhalli along with 328 Ha of entire mining land for Bankur mining concession. The existing plant area land is sufficient for implementation of the proposed 3 million tonne cement plant along with captive power plant. The company has already entered into mining lease for Bankur Concession and has initiated process for getting the mining lease executed for the other two blocks. Total Limestone reserves (measured and Indicated) for all three blocks stand at 488 million tones (as per geological survey) sufficient for 100 years of operation of the plant. The company has also identified the sources of other raw material like fly ash, gypsum; coal etc. The company has most of the approvals like water, railway siding etc in place. It has identified major suppliers of plant & machinery and has placed orders for Rs. 300 crore with reputed domestic and international supplier.

(a)The Promoter Company: XYZ Associates Ltd (XAL)

XYZ Group (the Group) is a diversified business entity with interest in various business segments such as Engineering & Construction, Cement Manufacturing, Power Generation (Thermal, Hydro and

28

Wind), Real Estate & Hospitality, Roads & Expressways, Oil & Gas Exploration, Mining, Hotels, Education and Sports.

XYZ Associates Limited (XAL), promoted by Shri A and his associates, is the flagship company of XYZ Group. The group is third largest cement manufacturing group of India with existing capacities of over 21.30 million tonnes. With the proposed capacity additions, the Group will have a total capacity of 39.05 MMTPA by FY 2014 and make the group pan India player. In its Construction division, XAL has an extremely robust order book. As on 30th September 2010 the total value of contracts pending execution stood at over Rs. 46,000 crore. XAL through its various subsidiaries has business interests in Real estate, Power generation and Hospitality industry also. The company is implementing/developed number of thermal and hydro power projects across India like Baspa, Vishnuprayag, Nigrie, Bara, Bina etc and is developing large tracts of real estate projects. The company along with its subsidiaries has 700 MW of operational capacity and 12770 MW of power generation capacity under implementation. The company currently has five star hotels operating across north India. The company is listed on both NSE and BSE. The market capitalization of the company stood at Rs. 18,638 crore as on March 28, 2011.

(Rs in crore) Company Turnover Net Profit Cash AccrualsMarch 31st , 2010 10,497 1,708 2,614March 31st , 2009 6,100 897 1,201

3.2 Loan Proposal:

GIST OF THE PROPOSAL

Proposal for approval of Term Loan (TL) of Rs.250 crore for implementing 3.0 MMTPA Integrated Cement Plant and 35 MW CPP at Village Shahabad, Gulbarga, District,Karnataka. [ROI: BR(10.75%)+TP(0.50%)+Spread(1.75%)=13%, Up-front Fee:0.25%, Door-to-Door Period :10 years]

Purpose To part finance the project for implementing 3.0 MMTPA Integrated Cement Plant and 35 MW CPP at Village Shahabad, Gulbarga District in the State of Karnataka

Cost of Project Rs.1404.00 crore

Total Debt Rs.913.00 crore

Promoter’s contribution Rs.491.00 crore

Proposed TL

Our share

Rs.250.00 crore

27.38%

DER 1.86:1

Construction Period 3 years

Post construction moratorium 1 year

Repayment Period 6 years

29

Door to door tenor 10 years

Whether fresh/renewal/ enhancement

Fresh

Asset Classification as on date and last PMS score

N.A. being a new company

Credit Risk Rating by Bank is BB indicating average risk

Rating Date of Rating

Score ABS Reasons for degradation

Present BB 08.08.2011 53.12%

NPM* N.A.

Previous N.A. being a new account

*NPM: New Project Model up to implementation.

Rating from External Agency (The external rating should be mapped to the internal rating)

To be arranged within a period of 6 months from the date of first disbursement failing which penal interest as per bank guidelines to be charged.

Whether Agriculture/Retail/ SME/Others (Please specify)

Large

a) Whether Sensitive Sector –

Real Estate/Capital Market

b) Applicable Risk weight

No

100%

Consortium/Multiple Banking Consortium

Lead Bank Yet to be decided

PNB’s Share 27.38%

Date of application

Date of receipt of proposal

Date of clarifications, if any, received at BO/CO/HO

Date of placing the proposal

Remarks

22.04.11 (BO)

22.04.11 (BO)/13.07.2011(HO)

08.07.11(BO)/08.08.2011(HO)

08.08.2011

30

Nil

Date of last sanction & authority/’In Principle’ Consent

10.05.11/NBG

Customer ID No. N.A

Activity code (as per ladder) 7210 manufacturing of Cement: Large Plants)

(a)Management Evaluation

i)Promoters and Director’s Profile

Directors (S/Shri)

Name and Designation

Address/Mobile No./e-mail address of Main Directors/

Guarantor Directors/

Key persons

Whether Promoter/ Professional/ Nominee

A A-9/27, Vasant Vihar, New Delhi-57

PAN:AAOPG1931A

Promoter

B A-9/27, Vasant Vihar, New Delhi-57

PAN:AANPG5143P

Promoter

C D-10, Hospital sector, Bhilai (Chhatisgarh)-490006

PIN:ACPPR7716M

Director

D E-2/11, Vasant Vihar, New Delhi-57

PAN:ABKPS1555M

Director

E C-37, NSDE, Part -1, New Delhi-49

PAN:AAXPK7004R

Director

a) If any of them, in the list of Caution Advices circulated by the Bank from time to time/RBI's/Wilful defaulters' list/Caution List of ECGC

No

b) If any one of them connected in the past with any NPA/OTS/Compromise/unscrupulous defaulters

No

c) If any of them, related to Directors/Senior Officers of PNB No

d) i) Management Change since last sanction, if any N.A.

31

e) i) Report on due diligence carried out in terms of L&A Circular No. 170 dated 25.10.2008 and comments on adverse features, if any(ii) Due diligence report from CA/CS in terms of LAC 139/2009

(iii) Confirmation that CRs have been compiled/reviewed as per extant guidelines

iv) Confirmation that CRs have been drawn from CIBIL Database and comments on adverse features, if any

Yes ( No adverse features)

Will be obtained before release of the facility.*

Yes

Yes ( No adverse features)

Conclusionsa) Company management is well qualified and possesses requisite experience for executing the

projects of complexity for which funding has been sought. Directors have experience in the field of supply chain and infrastructure development and also in the diverse business functions such as finance, administration and personnel management.

b) CIBIL reports of the above mentioned has been obtained and all of them have clean credit history. None of them have been notified as willful defaulter or has been connected in the past with any NPA.

c) There is no conflict of interest, as none of the Director’s is related to Director’s or senior officers of PNB.

(b)Business Group Evaluationa. Group Name XYZ Group.

b. Address of Regd. Office Pune

Corporate Office Noida

Works/Factory Village Shahabad, Gulbarga District

c. Constitution

Constitution code as per ladder

Public Limited Company (Not Listed)

8208

d. Date of incorporation

Date of change of name

31.07.1996

23.12.2010

e. Dealing with PNB since New Relationship with the company. However, the group is already dealing with our bank satisfactorily.

f. Industry/Sector Cement Industry

32

g. Business Activity Manufacturing of cement

The XYZ Group is an Indian conglomerate based in Noida, India. It was founded by Shri A the company is involved in well diversified infrastructure conglomerate with business interests in Engineering & Construction, Power, Cement, Real Estate, Hospitality, Expressways, Sports & Education (not-for-profit). MR. A, Founder Chairman of XYZ Associates Limited after acquiring a Diploma in Civil Engineering in 1950 from the University of Roorkee (now Indian Institute of Technology Roorkee), had a stint with Govt. of U.P. and branched off on his own, to start as a civil contractor in 1958, group is the 3rd largest cement producer in the country. The groups cement facilities are located today all across the country.

XYZ Group (the Group) is a diversified business entity with interest in various business segments such as Engineering & Construction, Cement Manufacturing, Power Generation (Thermal, Hydro and Wind), Real Estate & Hospitality, Roads & Expressways, Oil & Gas Exploration, Mining, Hotels, Education and Sports. The flagship company of Xyz Group is Xyz Associates Limited (JAL).

The XYZ Group structure is as below (along with % completion of various projects):

33

(c) Business Strategy

In order to take advantage of the opportunities arising in the infrastructure and power sectors in India, the Group has embarked upon a growth strategy, which includes, inter alia, expanding its engineering and construction business, as well as increasing cement production capacity. In relation to its engineering and construction business, XAL’s strategy is to place particular focus on hydro-power projects (both as a construction company and as an Independent Power Producer (IPP), whilst also looking to capitalize on opportunities in emerging infrastructure development projects, including projects being undertaken on a Build-Own-Operate (BOO) basis, and to seek opportunities in relation to highways and expressway projects, and real estate development. XAL has diversified into the rapidly growing real estate sector and is presently developing a unique golf centric real estate development through XYZ Greens, at Greater Noida, and proposes to develop a total of 8 million sq. ft of real estate. The Taj Expressway Project coupled with the Real Estate Development, involving development of a 160km six lane access controlled expressway linking Agra to Noida and development of 6,250 acres of land at five or more locations for commercial, industrial, institutional, residential and amusement purposes further provides the Group with extensive real estate development opportunities. XAL has also been awarded a contract for construction of a 1047 km expressway in Uttar Pradesh linking Grater Noida to Ballia, “Ganga Expressway”, coupled with development of 30,000 acres of land along the expressway for real estate and commercial purpose at various locations.

Having established a satisfactory presence in the development of hydro-power projects as an Engineering Procurement and Construction (EPC) contractor and on a Build-Operate-Own (BOO) basis, the company is now entering into other areas related to the energy sector including, amongst others, the development of thermal power projects, oil & gas exploration, coal mining and reconnaissance surveys with a focus on developing into an integrated power player. As part of this strategy, the company, in consortium with Prize Petroleum Company Ltd. (PPCL) [a joint venture company of Hind Petroleum Corporation Limited (HPCL) and certain India Financial Institutions], participated in the New Exploration Licensing Policy (NELP)-VI round of bidding for various potential oil blocks in India. The bid by the consortium for the South Rewa Block has been accepted (with the company holding 90% PPCL holding 10% of the participating interest in the block).

In view of the Government’s encouragement of hydro-power projects to meet the current energy supply demand imbalance and to meet projected increases in power demands and to rebalance the thermal power/hydro-power mix, the company expects that there will be increased business opportunities in the hydro-power sector, both on an EPC contract basis and on a BOO basis. The company’s success in the hydro-power sector in integrating its strengths in engineering, technology, project management and construction expertise together with its large well-trained workforce and its highly specialized machinery, plant and equipment, provides it with a significant competitive advantage.

The Group’s principal areas of activities are categorized into the following segments:

Engineering and Construction Cement production Power Generation (including Thermal, Wind and Hydro-power); Real Estate & Hospitality

34

Roads and Expressways Oil and Gas Exploration Mining Hotels Education Sports

(d)Banking arrangement of the parent company as on 31-3-20011

Sl FIs/Banks Limit O/s Sl FIs/Banks Limit O/s

(a) TERM LOANS (b) CORPORATE TERM LOAN

IDBI Bank 50.00 2.50 State Bk of Patiala 200.00 100.01

Karnataka Bk 5.00 - Bank of India 500.00 -

Indian Bank 50.00 2.50 L&T Finance 100.00 84.00

Total (a) 105.00 5.00 IDBI Bank 2500.00 1899.58

Karnataka Bk 150.00 150.00

SBI 1000.00 905.15

Total (b) 4450.00 3138.74

(c) XYZ HIMACHAL CEMENT PROJECT (d) XYZ ROORKEE CEMENT GRINDING UNIT (JRCGU)

SBOP 100.00 - Uco Bank 160.00 -

BOM 75.00 56.25 Total (d) 160.00 0.00

OBC 50.00 40.00 (e) U. P. CEMENT PLANTS

KarnatakaBk 50.00 - PNB 100.00 -

Syndicate Bk 80.00 - Central Bk of India 100.00 100.00

Corporation Bk 50.00 - BOM 75.00 69.95

Central BOI 100.00 - SBT 50.00 0.12

J&K Bank 25.00 20.00 Karnataka Bank 60.00 -

IDBI Bank Ltd 100.00 70.00 State Bank of Patiala 80.00 79.68

Axis Bank:NCD 50.00 17.50 Corporation Bank 50.00 -

Aka Export Finance Bank

EURO 15.85 M

53.26 OBC 75.00 75.00

35

Total(c)

680.00

+ EURO 15.85 M

257.01 Total (e) 590.00 324.75

(f) XYZ SIDHI CEMENT PLANT

Yes Bank. 50.00 -

KVB 50.00 29.98

PNB 50.00 0.00

OBC 100.00 54.14

Total (f) 250.00 84.12

Total (a+b+c+d+e+f)

6235.00

+ EURO 15.85 M

3809.62

XYZ GUJARAT CEMENT PLANT

Sl FIs/Banks Limit O/s Sl FIs/Banks Limit O/s

A SP-I B SP-II

PSB 50.00 - Union Bank of India 100.00 95.00

OBC 50.00 - BOM 50.00 47.00

PNB - - Central BOI 100.00 95.00

SBM 75.00 - Bank of India 100.00 95.00

SBI 50.00 - J&K Bank 100.00 95.00

Syndicate Bank 100.00 0.02 Corporation Bank 50.00 46.96

Corporation Bk 80.00 - Punjab & Sind Bank 75.00 0.00

SBOP 80.00 - Bank of India (ECB) 45.58 44.68

L&T Infra Fin. 80.00 0.00 Total (b) 620.58 518.64

Axis Bank 100.00 -

Total (a) 665.00 0.02

C CPP Wanabori

Union BOI 63.00 (0.00)

36

Total (c) 63.00 (0.00)

Total (a+b+c) 1348.58 518.66

XYZ BALAJI CEMENT PROJECT SIKANDRABAD XYZ CEMENT GRINDING UNIT

Sl FIs/Banks Limit O/s Sl FIs/Banks Limit O/s

Corp. Bank 150.00 150.00 Axis Bank Ltd 125.00 103.71

SBT 80.00 55.91 Total 125.00 103.71

Andhra Bank 80.00 80.00

WCDL & Lumpsum against Bill discounting facility

PNB 80.00

66.54

Axis Bank Ltd 600.00 285.00

IOB 80.00

80.00 SIDBI –FCL 201.00 201.00

Allahabad Bank 100.00 100.00 Total 801.00 486.00

Central BOI 80.00 80.00 Captive Power Plant- Churk & Sidhi

SBBJ 80.00 70.00 ICICI Bank (Churk) 800.00 639.00

Dena Bank 100.00 100.00 ICICI Bank (Sidhi) 400.00 332.00

Axis Bank 200.00 196.54 Total 1200.00 971.00

Total 1030.00 978.98 Other Cement Project

Axis Bank: NCDs 500.00 500.00

YES Bank 450.00 25.00

Total 950.00 525.00

GRAND TOTAL – CEMENT DIVISION

11689.58

+ EURO 15.85 M

7392.97

37

Engineering Division

Name of Bank/FI Amount O/S Name of Bank/FI Amount O/S

Term Loan: NCDs

Canara Bank 200 200 Axis Bank. (Arranger) 1400 1400

Exim Bank of India 160 32 ICICI Bank. 1000 645

ICICI Bank 375 300 LIC 1500 1438

ICICI Bank (ECB) USD 38 Mio 116 SCB 900 675

IDBI Bank 300 147 Yes Bank 500 500

IDFC 100 27 Sub-total (ii) 5300 4658

Karur Vysya Bank 30 13 Unsecured Loan

LIC 50 25 Yes Bank Ltd. 200 100

SBBJ 50 17 LIC Mutual Fund 1000 1000

SBH 300 229 ECB $350 M 1848

SBI 1250 1026 Sub-total (iii) 1200+$ 350 M

2948

SBOP 50 17

UCO Bank 100 25

Union BOI 65 19

Sub-total (i) 3030 + $ 38 M

2193 Grand Total – Engg Division

9530 + $ 388 M.

9799

Conclusions

a) Group has adequate experience in planning and executing the project.b) The company seems to be operating the accounts in a satisfactory fashion. Credit Opinion of

the Major Banks shall be obtained before disbursement.c) All the businesses of the group are in the manufacturing sector. Group has considerable

experience in this field.d) New project for which funding has been sought is part of the horizontal integration and fits

in with the overall business of the group.

38

(e)Compliance to Exposure NormsIndustry POWER

Outstanding 976.50

% of Gross Credit in the Industry 0.40

Ceiling in terms of outstanding as per current loan policy 3%

Amount of NPA in industry 15.30

% to total advances in industry 1.57%

Existing Proposed %age of Bank’s Capital Funds as on 31.03.11

As per Exposure Norms

Amount (%age)

Company - 250.00 0.81% 3706.52 12.00%

XAL 147.48

To continue

0.48%

XPVL 260.64 0.84%

XKHCL 894.00 2.89%

XIITS 1.76 -

XSS 6.03 0.02%

BPSCL 360.00 1.17%

XIL 1000.00 3.24%

XPGL 200.00 0.65%

XPGCL 606.04 1.96%

Total 3475.95 3725.95 12.06% 9266.40 30.00%

ZAL-XYZ Associates Ltd.: LCB, Delhi XPVL- XYZ Power Ventures Ltd: BO: The Mall, Shimla

XKHCL- XYZ Karchan Hydro Corporation Ltd.: BO: Foreshaore Road, Mumbai

XIITS- XYZ Institute of Information & Technology Society: BO:The Mall , Shimla

XSS- XYZ Seva Samsthan: The Mall , Shimla

BPSCL- Bina Power Supply Company Ltd: LCB, Delhi. XIL- XYZ Infratech Ltd.: LCB, Delhi

XPGL-XYZ Power Grid Ltd.:BO: Foreshore Road, Mumbai

39

PPGCL- Prayagraj Power Generation Company Ltd.: LCB, Delhi.

Coclusion:

1) Exposure to the group and company is within the prescribed norms.

2) Exposure to the Industry is as per the extant guideline

(f)Financial analysis

1.Financial Ratios

Key past financials of JAL is presented hereunder: (Rs Crore)

Particulars Mar-07 Mar-08 Mar-09* Mar-10* 9M FY11

(Audited) (Audited) (Audited) (Audited) (UnAud)

Net Sales 3,478 3,985 5,764 10,089 9,061.16

Operating Profit 943 1,097 1,676 2,525 2,463.39

Other Income 98 289 388 1,371 523.18

PBDIT 1,040 1,386 2,064 3,896 2,813.39

Depreciation 163 203 309 458 457.29

Interest 257 339 504 1,056 989.47

PAT 415 610 897 1,708 864.16

Cash Accrual 585 883 1,295 2,400 1,553.42

Paid up Capital 219 234 237 425 425.29

TNW 3,054 4,849 7,076 9,120 -

TTL 4,725 7,280 11,795 15,024 -

TOL 7,823 11,961 18,143 23,762 -

Net Sales Growth (in %) - 14.58% 44.64% 75.03% -

PBDIT Margin (in %) 29.91% 34.77% 35.81% 38.61% 31.05%

PAT Margin (in %) 11.93% 15.30% 15.56% 16.93% 9.54%

TOL/TNW 2.56 2.47 2.56 2.61 -

TTL/TNW 1.55 1.5 1.67 1.65 -

40

Particulars Mar-07 Mar-08 Mar-09* Mar-10* 9M FY11

(Audited) (Audited) (Audited) (Audited) (UnAud)

Current Ratio 1.31 1.22 1.39 1.46 -

Interest Coverage 4.04 4.09 4.09 3.69 -

* Financials post merger of group companies namely Gujarat Anjan Cement Ltd, Xyz Cement ltd., Xyz Enterprises Ltd. and Xyz Hotels Ltd. with JAL.

Conclusion:

a) Consolidated DER for the Group is 2.61. This figure shows that the company is quite dependent on outside sources for funds and its own funds are not sufficient for operations. But, an important issue to be looked at here is that this is an infrastructure firm and a large chunk of its projects are nearing completion (formula 1 race track, expressways, power plants etc) this will increase the profitability of the company and bring down the DER (as payment is done after completion of the project).

b) JAL reported 75% growth in Net Sales in FY10 on account of robust performance across business segments; cement sales increased from 6.95 MMTPA in FY09 to 9.15 MMTPA in FY10; Construction division reported 90% increase in topline on account of execution of large orders in construction division (Yamuna Expressway and other projects for group companies).

c) The operating profit margin of JAL decreased in FY10 on account of lower margins in construction segment due to increased competition and higher raw material prices. Cement prices also corrected in second half of FY10 thereby decreasing the margins for the cement segment.

d) Net profit for FY10 includes onetime extraordinary income of Rs.1316.35 crores on account of sale of shares held in treasury (created on account of merger of group companies).

e) The company is in an expansion mode and hence the gearing (TTL/TNW) was high at 1.99 (as on 31.03.10). Gearing is expected to reduce over the next 3 years as the ongoing expansion plans are expected to stabilize and the additional cash flows will be used for repayment of debt. The position may be considered satisfactory.

f) 9MFY11 Sales: XAL has reported a 33% increase in Net Sales for 9MFY11 vis-à-vis corresponding period of the last FY, with higher revenues from construction, real estate and cement divisions (commissioning of new capacities).

g) 9MFY11 Profitability: Operating profit, for 9MFY11 vis-à-vis corresponding period of the last FY, increased marginally by 4% with lower contribution from the Cement and Power divisions owing to increased input costs. Real Estate and Hotel divisions registered higher profits. Employee costs increased by 40% with commissioning of new capacities in cement and power. Interest costs also increased by 31% owing to drawdown of sanctioned loans for expansion projects and hardening of interest rates.

41

2.Usage and Sources of Fund:

A brief summary of the Project Cost is presented hereunder:

a) Cost of Project (Rs. Crore)

S. No Particulars Amount S. No Particulars Amount

1 Land and Site Dev. 97.00 7 Pre operative expenses 25.16

2 Building, Civil Works and equip.foundation

182.00 8 Contingency @ 5% of hard cost excl land

54.68

3 Mechanical & Electric Equipment

533.81 9 Margin Money for Working Capital

22.49

4 Engi. & Know how 6.05 10 IDC @ 12.25% 136.31

5 Mining Machinery 41.46 Total Project Cost 1404.12

6 Misc. Fixed Assets incl. Power Plant

305.16 Say 1404

b) Sources of Funds

The project is proposed to be funded by way of a mix of debt: equity ratio of 65:35 as under:

ParticularsAmount (Rs Crore)

Debt 913

Equity 491

Total 1404

The Company has approached Axis Bank Limited to arrange the term debt aggregating Rs 913 crore. Axis Bank has already sanctioned Rs. 100 crore as short term loan to the company for meeting the project expenses. Considering the resourcefulness of promoters, it is expected that they would be able to mobilize Rs 491 crore towards equity infusion for the Project. XAL’s projection for the next three years is provided below:

(Rs. Crore)

42

Particulars 2011 2012 2013 2014

SOURCES OF FUNDS

PAT 1,346 2,771 2,732 3,512

Depreciation and other non cash expenses 837 1,121 1,214 1,166

TOTAL SOURCES OF FUNDS 2,183 3,892 3,946 4,678

USES OF FUNDS

Repayment of Loans 1,487 1,466 1,958 2,503

Balance 1,487 2,426 1,988 2,175

Investment in XCCL - 148 145 198

Balance 1,487 2,278 1,843 1,977

(g)Status of tie-up of loans

Axis Bank has underwritten the entire debt of Rs.913 crore required for the project with hold-on position of around Rs.200 crore.

It is informed that the company has obtained final sanctions aggregating to Rs.1150 crore(against proposed debt of Rs.913 cr) from various banks as under:

(Rs. in crore)

Name of Bank Limit

Andhra Bank 200.00

J&K Bank 150.00

BOB 150.00

SBP 150.00

Vijaya Bank 100.00

SBH 100.00

SBT 100.00

Axis Bank *200.00

Total 1150.00

43

Crushing (Primary & Secondary Crusher)

Limestone

Stacker/Reclaimer(Stockpiling/Blending)

Raw Meal

Raw Mill Grinding(Vertical Roller Mill /Ball Mill)

Storage Silos(Storage)

Kiln Feed

Suspension Pre-Heater/Precalciner (Pre-calcining)

Rotary Kiln (Calcining)

Clinker

Clinker Cooling

Storage Silos (Storage)

Grinding Mill (Grinding)

Cement

Additives

Fuel

Fuel

*Intended hold position

(h)Financial Viability Analysis of the project:Financial Viability of the project is ascertained through sales, profitability and balance sheet future projections. Critical ratios like DSCR for the project have been calculated on the basis of these projections. Moreover sensitivity analysis has been done to gauge the impact of deviations from projections.

1.Sales and Profitability Projectionsa) Cement Manufacturing Process

44

b) Sources and Drivers of Revenue

Cement demand is expected to register a CAGR of 10 per cent in the next 3-4 years (2010-11 to 2013-14), translating into a GDP multiplier of 1.1 during the period. Growth in the northern and southern regions, although lower than the last 3 years, is expected to outpace the all-India average.

The demand for cement in 2010 was estimated at 200 million tonne. With the expected growth rate of 10-11%, the demand is expected to be around 320 million tonne by 2015.

The housing market has witnessed a boom in the last 5 years on the back of increasing affordability, change in the demographic pattern, and nuclearisation of families due to urbanisation and growing penetration of finance. Housing, which accounts for 60-65 per cent of total cement consumption, is likely to grow at a healthy rate due to rising income levels, migration trends and strong growth potential. It is expected the total housing stock, estimated at around 146 million units, to increase by 4-6 per cent (CAGR) from 2008 to 2012, i.e. the addition of around 4.6 million units, annually.Housing Stock in IndiaParticulars 2008 2012

Estimated housing stock (million units) 146.3 164.7

Estimated floor space area (bn sq ft) 112.9 135.8

Roads have been the largest beneficiary of the infrastructure boom as its intensity of construction is the highest amongst all sectors taken into consideration. The majority of investments are expected for the National Highway Development Project. Overall in the roads sector an investment to the tune of Rs 2,446 billion over the 5 years from 2007-08 to 2012-13 is being expected. Other sectors such as power, ports, airports, railways and irrigation are expected to witness considerable investments as well, thereby pushing up cement consumption.

45

301.4

253.7

276.5

328.5

230.6

150

200

250

300

350

FY11

FY12

FY13

FY14

FY15Year

s

The commercial construction segment can be divided into four parts - retail, office space, hotels, and other civil structures such as hospitals, multiplexes and schools, all of which are registering strong growth that is translating into healthy cement consumption. IT and ITeS industries are expected to register a CAGR of 17.8 per cent and 22 per cent over the next 5 years, respectively, due to global cues. During the previous corresponding period, the IT and ITeS industries rose at a CAGR of 33 per cent and 34 per cent, respectively. The organised retail industry in India expanded at a healthy pace of over 28 per cent in 2007-08 on the back of the influx of large domestic and international conglomerates looking to tap the local opportunity and capture market share. Hence, the total organised retail market size, which was estimated at around Rs 679 billion in 2007-08, is expected to increase to Rs 2,366 billion by 2012. Thus, we see a huge demand for cement from this segment in the coming years.

With the Indian economy growing at an average of 8 per cent in last 3 years, demand from all end-user segments has risen substantially. This has resulted in the majority of industries such as steel, cement, paper and petrochemicals operating at high utilisation rates to meet demand. Consequently, all major players have announced capacity expansion plans that are in various stages of implementation. Thus, industrial investments are expected to surge nearly three-fold, from Rs 2,867 billion in 2002-03 to 2006-07 to Rs 7,841 billion between 2007-08 and 2011-12.

India has gradually built competency in the global cement industry. Export demand, especially from the Middle East market has emerged as the new stabilizing factor for the Indian cement industry and we see this growing further in the near future.

As per Crisil estimates based on real GDP growth method, the cement demand for the next five years is illustrated in the following chart:

46

c) Profitability Projections:Year ending 31st March, 2015 2016 2017 2018 2019 2020 2021

Gross Sales 1122 1265 1336 1336 1336 1336 1336

Less: VAT 125 141 148 148 148 148 148

Less: Excise 129 146 154 154 154 154 154

Less: Freight 180 203 214 214 214 214 214

Net Sales 688 776 819 819 819 819 819

Raw Material Cost 87 98 104 104 104 104 104

Power & Fuel 174 196 207 207 207 207 207

Distribution /packing 29 33 35 35 35 35 35

Salaries & Wages 38 40 42 44 46 48 51

Overheads 28 33 36 38 40 42 44

Total Costs 356 400 424 428 432 436 440

EBITDA 332 376 396 392 388 383 379

Other Income 6 12 18 25 31 37 44

Interest on TL 111 99 81 62 44 25 7

Interest on WC 7 8 9 9 9 9 9

Total Interest 118 108 89 71 53 34 16

Depreciation 118 118 118 118 118 118 118

Profit Before Tax 102 163 206 228 249 269 290

Tax Paid 20 33 41 53 93 104 113

PAT 82 131 165 175 155 165 176

47

(i) Projected Financials

1.Financial RatiosYear ending 31st March,

2015 2016 2017 2018 2019 2020 2021

Clinker Production (‘000 tones)

1,843 2,079 2,195 2,195 2,195 2,195 2,195

Cement Production (‘000 tones)

2,420 2,730 2,882 2,882 2,882 2,882 2,882

Capacity Utilization 80% 90% 95% 95% 95% 95% 95%

Gross Sales 1,122 1,265 1,336 1,336 1,336 1,336 1,336

Net Sales 688 776 819 819 819 819 819

Total Costs 356 400 424 428 432 436 440

EBIDTA 332 376 396 392 388 383 379

Total Interest 118 108 89 71 53 34 16

Depreciation 118 118 118 118 118 118 118

Profit Before Tax 102 163 206 228 249 269 290

Tax Paid 20 33 41 53 93 104 113

PAT 82 131 165 175 155 165 176

Adjusted NW 573 704 869 1,044 1,199 1,364 1,541

Term Debt 913 761 608 456 304 152 -

Current Liabilities 97 109 116 116 116 116 117

TOL 1,010 870 724 572 420 268 117

TOL/TNW (adjusted) 1.76 1.24 0.83 0.55 0.35 0.20 0.08

Current Assets 319 427 564 705 825 956 1,098

Current Ratio 3.29 3.91 4.88 6.08 7.11 8.22 9.42

EBIDTA Margin 29.63% 29.73% 29.62% 29.32% 29.02% 28.69% 28.35%

DCSR 2.80 1.38 1.56 1.65 1.62 1.74 1.89

IRR 16.68%

48

2.Balance Sheet Projections:Year ending 31st March,

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Share Capital 147 293 491 491 491 491 491 491 491 491

Res & Sur - - - 82 213 378 552 708 873 1049

Net Worth 147 293 491 573 704 869 1044 1199 1364 1541

Term Debt 184 543 913 913 761 608 456 304 152 -

WC Loan - - - 67 76 80 80 80 80 80

Total Debt 184 543 913 980 837 689 537 384 232 80

Current Liabilities

- - - 30 33 35 36 36 36 37

Total Sources 331 836 1404 1583 1574 1593 1616 1619 1633 1657

Gross Block - - - 1382 1382 1382 1382 1382 1382 1382

Dep. - - - 118 235 353 470 588 706 823

Net Block - - - 1264 1147 1029 912 794 677 559

WIP 332 836 1382 - - - - - - -

Current Assets - - - 120 135 142 143 143 143 143

Cash & Bank Balance

- - 22 199 293 422 562 683 813 955

Total Uses 331 836 1404 1583 1574 1593 1616 1619 1633 1657

49

3.Cash Flow Projections: Cash Flow Statement

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

A. Cash Flow From Operating activities

PBT - - - 102 163 206 228 249 269 290

Adjusted for:

Interest - - - 118 108 89 71 53 34 16

Depreciation - - - 118 118 118 118 118 118 118

Operating Cash Flow before WC Changes

- - - 338 389 413 416 419 421 423

(Inc)/Dec in Current Assets

- - - (120) (15) (8) (0) (0) (0) (0)

Inc/(Dec) in Current Liabilities

- - - 30 4 2 0 0 0 0

Cash from Operations

- - - 248 377 408 416 419 421 423

Less: Interest - - - 118 108 89 71 53 34 16

Less: Taxation - - - 20 33 41 53 93 104 113

Net Cash Flow From Operating Activities

- - - 109 237 277 292 273 283 294

B. Cash Flow From Investing Activities

Purchase of Fixed Assets

331 505 546 - - - - - - -

Net Cash Flow From Investing Activities

(331) (505) (546) - - - - - - -

C. Cash Flow From Financing Activities

Inc/ (Dec) Proceeds from equity infusion

147 145 199 - - - - - - -

Inc/(Dec) in WC Borrowings

- - - 67 9 4 (0) (0) (0) (0)

Inc/(Dec) Term 184 359 369 - (152) (152) (152) (152) (152) (152)

50

Cash Flow Statement

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

loans

Net Cash Flow From Financing Activities

331 505 568 67 (143) (148) (152) (152) (152) (152)

Opening Cash - - - 22 199 293 422 562 683 813

Net Flow - - 22 177 93 129 140 121 131 142

Closing cash - - 22 199 293 422 562 683 813 955

(j)Calculation of DSCR:Year ending 31st March, 2015 2016 2017 2018 2019 2020 2021

PAT 82 131 165 175 155 165 176

Add: Depreciation 117 117 117 117 117 117 117

Add: Interest on TL 111 99 81 63 44 26 7

Cash Flow available to serve the debt

310 347 363 355 316 308 300

Principal Repayment 0 152 152 152 152 152 153

Interest 111 99 81 63 44 26 7

Total Debt Service 111 251 233 215 196 178 160

DSCR 2.82:1 1.38:1 1.56:1 1.65:1 1.61:1 1.73:1 1.88:1

Conclusion1) DSCR is well above the minimum stipulated DSCR values. This signifies that project will be

able to generate enough funds for repayment of interest and principal as per the repayment schedule

The summary of Financial Projections is as under :

Financial Indicator Estimated Value

Minimum DSCR 1.38

Average DSCR 1.71

51

Financial Indicator Estimated Value

Project IRR (Post tax) 16.68%

Observations:

a) Company will commence operations in the FY 2014-15 with an effective capacity utilization of 80%.

b) The projection indicates net profit of Rs.82 Crores in the first year of operations.c) The estimated revenue generation is considered quite good & achievable in view of the

potential available as well as the fact that rate for various facilities are considered very competitive. Further, the group has previously been operating in the same industry so their assumption of high plant utilization in the initial years is not unfounded.

(K)Sensitivity AnalysisThe project profitability is most sensitive (i) Capacity Utilization, (ii) Direct Operating Expenditure and (iii) Selling Price. Accordingly, the sensitivity analysis has been carried out for the above stated parameters. Since the project is planned to be completed in time bound schedule and cost of most of the project elements are almost firmed up, necessary provision of escalation contingencies are also made, there are negligible chances of increase in capital cost of the project. The various results after different changes in parameters are as shown below:

Sensitivity Analysis Project IRR Min DSCR Avg DSCR

Base Case 16.68% 1.38 1.71

Sales Realization decrease by 5% 13.85% 1.21 1.51

Increase in Variable Cost by 5% 15.57% 1.31 1.63

Decrease in Capacity Utilization by 5% 15.59% 1.31 1.63

Increase in Rate of Interest by 1% p.a. 16.65% 1.33 1.66

As can be seen, the Company’s ability to service debt continues to be satisfactory even in adverse scenarios.

(L)Security

1.PrimaryPrimary security is the asset created out of the credit facility extended to the borrower and / or which are directly associated with the business / project of the borrower for which the credit facility has been extended.

In the present case the term debt facility, together with interest, liquidated damages, penal interest, additional interest, costs, charges, expenses and other monies whatsoever payable to the Lenders

52

and their Trustees will be secured by:1. A first mortgage and charge in favour of the Lenders, in a form satisfactory to the Lenders, of

all of the Projects immovable properties, present and future;2. A first ranking pari-passu fixed charge by way of hypothecation on the present and future

movable fixed assets of the Project;3. A second ranking pari-passu charge by way of hypothecation on the present and future

current assets of the Project;4. Assignment or creation of charge in favour of the Lenders of (i) all the rights, title, interest,

benefits, claims and demands whatsoever of the company in the Project Documents; (ii) all the rights, title, interest, benefits, claims and demands whatsoever of the company in the clearances; (iii) all the rights, title, interest, benefits, claims and demands whatsoever of the Company in any letter of credit, guarantee, performance bond provided by any party to the Project Documents and (iv) all Insurance Contracts/Insurance Proceeds related to the project;

The aforesaid mortgage will rank pari-passu amongst the participating consortium banks / financial institutions and will be created within 180 days of first disbursement (as detailed in para 14.C.1).

AGM(Br) has proposed that in the event of non-creation of security within the said period, additional interest at the rate of 1% p.a. on the disbursed amount will be charged, from the date of expiry of security creation period till the creation of security.

2.Collateral:

Name of Guarantor

Relationship with borrower

Net Worth Immovable Property Date of CR

Prev.

as at ….

Present

as at 31.03.10

Prev. as at ….

Present

as at 31.03.10

Prev. Present

Shri Manoj Gaur

Promoter Director

N.A. 5.63 N.A. -- N.A. 08.07.11

Personal /Corporate Guarantee

(m)Security Margin (Fixed Asset Coverage Ratio – for term loans)

Existing Proposed

Nature Book value FACR Book Value FACR on project completion

Primary - - 1381.63 * 1.51:1@

Collateral - - - -

53

Total - 1381.63 * 1.51:1

*Total project cost (Rs.1404.12 crore) – WC Margin money (Rs.22.49 crore)

@1.27 on taking only hard cost as security value.

(n)Technical Evaluation

Costing Analysis

1.Land and Site Development: The land and site development cost, estimated above include the cost of acquiring land for the two mining blocks i.e. Masarwada and Shahabad – Taranhalli. Apart from this cost of acquisition, this cost also includes expenditure for site leveling and development, cost of laying/repairing roads within the plant site and the township, boundary walls, watch tower and township etc. 2.Building, Civil Works & Equipment Foundations: The estimates for civil works & structures include facilities for plant, equipments as well as other infrastructure facilities. Total cost for the same has been estimated at Rs. 182 crore.3.Plant & Machinery: The estimated cost for plant & machinery include mechanical and electric equipment & engineering, know how, the basic cost for equipment, the cost of spares, taxes, duties and transportation cost to the sitThe freight and insurance cost up to the site has also been included in the estimate. The estimate also includes foundation and erection charges for plant and machinery.

4.Mining Machinery: The cost under this head includes expenses towards mining equipment, electrics and civil & structures for mine development. The cost for duties & taxes, freight and insurance is also included in the plant & machinery cost.

5.Miscellaneous Fixed Assets incl. Power Plant Cost: Miscellaneous Fixed Assets include costs towards power plant, compressed air station, water supply facilities, fire fighting facilities, transportation facilities, furniture, office machinery and equipment and computers, inter-plant pipeline facilities, power distribution, shop electrics and illumination, fuel storage, dam and water pipeline, heavy and mobile equipments, central maintenance and workshop etc. Infrastructure facilities like external power link, external water link and external road link have been included under this. The estimate also includes costs towards duties and taxes, erection, spares and transportation to factory site for the items covered under this head. Total MFA has estimated at Rs. 305.16 crore.

6.Pre-Operative Expenses (incl. Financing Charges): Pre-Operative Expenses include provision towards establishment charges along with travelling expenses, start-up expenses, administrative expenses, and other miscellaneous expenses likely to be incurred during the implementation of the project. The head also includes financing and capital-raising expenses.

7. Interest during Construction: The project is being financed in the debt: equity ratio of 65:35. The Interest during Construction has been estimated at Rs. 136.31 Crores. The IDC has been estimated at the interest rate of 12.25% p.a. on a Rupee Term Loan of Rs. 913 crores. Construction period of 36 months has been assumed for the project. 8.Margin Money: The working capital requirement, assessed for the first year of operation and the resultant margin money for working capital has been estimated at Rs 22.49 crores as under:

54

Margin MoneyComponents Holding period

Raw Materials 30 days

Work in Progress 15 days

Finished Goods 15 days

Receivables 30 days

Consumables 30 days

Store & Spares 30 days

Less: Creditors 30 days

Total working capital requirement 89.95 crore

Margin Money (25% of above) 22.49

9.Contingency: Considering that certain components of the project cost have not yet been firmed up and lot of components, which are imported whose cost, may vary due to the fluctuation in exchange rates, a provision for funding contingency has been made. Contingency provision has been estimated at Rs. 54.68 Crores, which is 5% of civil and plant and machinery.

(o)Statutory Approvals

The Company has secured all the necessary statutory approvals like diversion of land uses, permission for domestic warehousing, layout plan for the proposed project from the relevant authorities.The status of all necessary approvals/clearances required for the project is as under:

S. No.

Approval Status

CEMENT PLANT & CAPTIVE POWER PLANT

1 Land Possession 519 hectares already in possession and registered in the name of the company which includes approx 328 Ha of mining land and 191 Ha land for plant/infrastructure. The land is sufficient for the proposed plant.

2 Fly Ash Linkage The company is proposing to source from Raichur Thermal Power Plant. The company has initiated process for long-term contract.

3 Coal Linkage The company has initiated process for coal linkage from Singereni Collieries Company Limited (SCCL) for long-term coal linkage.

55

S. No.

Approval Status

4 Power and Electricity The company has prepared the power application along with plant layout. A 25 X 30 m plot is proposed for 33 KV/ 11 KV and 11 KV / 440 V substation opp. main receiving substation (in the plantation portion). The company is in the process for applying the same.

5 Water Arrangement The company has already received permission to draw water from Kagina river.

6 Railway Line Company has received permission from Railway authorities to reopen the existing railway siding facility. The railways had earlier suspended the approval as the company went into DRT and failed to clear the dues. The new owners cleared the railway dues and the company received permission from authorities for the same.

7 Factories Act Already in Possession.

8 Boiler for CPP To be applied

9 Chimney To be applied

10 Environment Clearance

The Company has received TOR from MOEF and the draft EIA report is under preparation. The company does not envisage a problem in the same as there was a plant running earlier on the same site and there is no further acquisition of land etc for the same. M/s Vimta labs has been appointed by the company for the same for preparation of EIA report.

11 Rehabilitation Plan Not Applicable (no habitation on the proposed Block-2 and Block-3 mines).

Other Compliances

12 Registration with Sales Tax Authorities

Already in possession

13 Registration with Central Excise Department

Already in possession

14 Approval from Electric Inspector

Already in possession

56

S. No.

Approval Status

LIME STONE MINING ACTIVITY:

1 Allotment of Mine 1. Bankur concession (Block-1): Already allotted.2. Masarwada concession (Block-2): Already allotted.3. Shahabad – Taranhalli block (Block-3): Already allotted.

2 Mining Plan 1. Bankur concession (Block-1): Already approved.2. Masarwada concession (Block-2): Yet to start.3. Shahabad – Taranhalli block (Block-3): Under preparation

by the consultant M/s Mineral Engineering Services.

3 Resettlement & Rehabilitation Plan

1. Bankur concession (Block-1): Not Applicable.2. Masarwada concession (Block-2): Not Applicable.3. Shahabad – Taranhalli block (M3 Block): Not Applicable.

4 Mining Lease 1. Bankur concession (Block-1): Already Signed.2. Masarwada concession (Block-2): Consent to sign mining

lease obtained. Will be signed after approval of mining plan.

3. Shahabad – Taranhalli block (Block-3): Consent to sign mining lease obtained. Will be signed after approval of mining plan.

5 Land acquisition 1. Bankur concession (Block-1): Acquired2. Masarwada concession (Block-2) and Shahabad – Taranhalli

block (Block-3): Commenced and company has already acquired approx. 667 Ha land for Block-2 and Block-3 mines.

6 Environment 1. Bankur concession (Block-1): Public hearing has been conducted. Final EIA report and final presentation has been made to MOEF. Clearance expected shortly.

2. Masarwada concession (Block-2): It will be applied after approval of mining plan.

3. Shahabad – Taranhalli block (Block-3): It will be applied after approval of mining plan.

(p) Present physical & financial status of project (if any)

Physical Status: Most of the key approvals and clearances such as water, railway siding, etc. are already in place and the Company is in the process of obtaining the remaining approvals and clearances. 519 hectares of land is already in possession duly registered in the name of the company which includes approx 328 Ha of mining land and 191 Ha land for plant/infrastructure. The land is sufficient for the proposed plant. The site mobilization and scrapping of the existing plant is expected to commence shortly.

57

Financial Status:

The company has incurred expenditure of Rs.60.36 crore on the project till 31.05.11 as under:

(Rs.in crore)

Particulars Amount

Advance for land 35.82

Advance payment to equipment supplier i.e. Loesche GmbH & Loesche India Pvt Ltd

19.35

Consultancy fee 1.15

Financial charges & office equipments 4.04

Total 60.36

The above expenditure has been funded out of the share application money of Rs.10.36 crore brought by the promoters and STL to the extent of Rs.50 crore availed from Axis Bank which will be converted into the Term Loan by Axis bank.

(q) Implementation Schedule

The Project is scheduled to be implemented over a period of 36 months, with zero date being 1 st

April 2011. The expected commissioning of the Project is 1st April 2014.

Activity Start date Completion Date

Acquisition of land Already acquired for plant

Already acquired for plant*

Design & drawings April 2011 Dec 2012

Civil Construction Nov 2011 March 2013

Inspection/Delivery of main machinery Nov 2011 Oct.2013

Inspection/Delivery of auxiliary machinery Feb 2012 July 2013

Mechanical erection March 2012 Jan 2014

Electrical erection August 2012 Feb 2014

Instrumentation erection October 2012 Feb 2014

Trial commissioning & commencement of January 2014 March 2014

58

commercial production

Procurement and Execution Strategy

XCCL proposes to use the semi-turnkey mode of procurement for project execution. XCCL’s directors would directly oversee the execution of the Project with the assistance of an internal Project Implementation Team or with the help of an external Project Management Agency. However, it is envisaged that the Company would en-cash on the vast experience of XYZ Group in complex project execution and set up an internal Project Management Team.

XCCL proposes to enter into an Engineering & Construction (E&C) contract with XAL for execution of the Project. XCCL is in the process of placing orders for Plant & Machinery with leading international and domestic suppliers. The Engineering and Construction Division of XAL would be responsible for erection and commissioning of the Project. The demonstrated capability of XAL in the sphere of Engineering and Construction augurs well for the Project. Further, appointment of Lenders’ Independent Engineer (LIE) has been stipulated as a pre-disbursement condition, who shall oversee the implementation of the Project.

Location AnalysisThe Project is proposed to be located at village Shahabad in Gulbarga district in Karnataka. The area is well accessible by road and rail network. The nearest state highway (SH – 29) is about 17 km east of the plant site connected by Shahabad – Jevargi district road. The nearest railway station is at Shahabad on Mumbai – Chennai broad gauge line situated adjacent to the plant. The road distance from important cities is (Hyderabad: 240 Km, Mumbai – 570 km, Pune - 390 km). The location of the plant is as shown in the map below:

Proposed Product Mix

The Company has proposed an installed capacity of 7,000 MT of clinker per day and a product mix comprising 35% OPC, 65% PPC. Total cement producing capacity of the plant with the above product

59

mix works out to 9,192 TPD i.e. 3.00 MMTPA. The details of major plant and machinery proposed to be installed by XCCL are presented hereunder:

Major plant and machinery proposed to be installed by XCCLDetails Capacity

CEMENT PLANT

Limestone crusher 1750 tph

Stacker (Circular) 1750 tph

Reclaimer (Circular) 1500 tph

Limestone Conveyor 1500 tph

Stacker (Linear) 1500 tph

Reclaimer (Linear) 1 x 600 tph

Raw mill 475 tph

Coal crusher 1200 tph

Coal mill 55 tph

Rotary kiln 7000 tph

PH & PC 7000 tph

Clinker cooler 7000 tph

Gypsum crusher 25 tph

Cement mill 2 x 300 tph

Packing plant 4 x 240 tph

POWER PLANT

Boiler 170 TPH (Coal) 515˚C

Turbine 144 TPH, 510 C

Generator 35 MW, 11.0 KV 0.8 pf

Air Cooled Condenser 111.30 TPH, 0.22 at a pressure

MINING EQUIPMENTS

Primary Drilling Machine 4 Nos. 100 – 110 mm diameter hole

Hydraulic Excavator - 6 Nos. 5.5 m3 bucket capacity

Transport Vehicle - 12 Nos. 50 tonnes

60

Details Capacity

Payloader - 4 Nos. 4.5 m3 bucket capacity

Storage Capacity

Storage Capacity to be constructed at the siteParticulars Capacity

Limestone Preblending stockpile (in mines) 1 x 75,000 t

Limestone Preblending stockpile (in plant) 2 x 50,000 t

Raw meal silo 24,000 t

Clinker silo 2 x 50,000 t

Coal stock pile 2 x 12000 t

Gypsum 1 x 5000 t

Fly ash 1 x 5,000 t

Cement silo 1 x 20,000 t

Limestone Preblending stockpile (in mines) 1 x 75,000 t

The basic raw materials for production of cement are limestone, gypsum and silica. The production of cement entails mixing limestone with small quantities of silica and iron-ore, grinding the mixture, calcinations of the mixture in a kiln, and then further grinding of the calcined mixture (clinker), with appropriate quantities of gypsum for OPC and fly ash in the case of PPC. The raw materials requirements of the proposed plant will be met from different sources as under:Raw Material and their sources

Material Source Location

Distance from site

Est. Landed cost (Rs/MT)

Qty. Req. (at 95% capacity) per annum?)

Remarks

Limestone

Captive Concession–Bankur, Masarwada and Taranhalli Mines

5 – 6 km 100 3,920,000 MT

Sufficient for 100% requirement

Iron Ore Hospet / Bellary

300 km 1050 34,234 MT Easy availability in the proposed area of sourcing. To ensure steady supply of uniform quality of iron ore, a long-

61

Material Source Location

Distance from site

Est. Landed cost (Rs/MT)

Qty. Req. (at 95% capacity) per annum?)

Remarks

term contract is proposed to be entered into.

Bauxite Belgaum 300 km 1150 34,234 MT Extensive bauxite deposits are available in Belgaum district.

Chemical Gypsum

From Chemical Factories

400 – 800 km

1500 1,25,359 MT Gypsum is proposed to be procured from Coromondel Fertilizers Ltd, Visakhapattanam, Sterlite Industries Tuticorin and Rashtriya Chemicals & Fertilizers Ltd, Mumbai.

Fly Ash Raichur, Karnataka

200 km 500 561,953 MT Fly ash is proposed to be procured from Raichur thermal power plant.

Fuel Coal Singereni colliery

525 km 3900 329,175 MT Coal is proposed to be transported via railway to the plant site.

(r)Economic Analysis

Market Analysis

Target Market: The markets of interest for XCCL are:

North East Karanataka includes districts of Gulbarga, Raichur and Bidar. North West Karnataka includes districts of Belgaum, Bijapur, Bagalkot, Koppal, Gadag and

Dharwad. Central Karnataka includes districts of Bellary, Karwar, Haveri, Udupi, chikmanglur,

Chitradurga, Devangere and Shimoga. North West Andhra Pradesh includes districts of Nizamabad, Medak and Mahbubnagar. Marathawada includes districts of Bid, Hingoli, Jalna, Latur, Nanded, Prabhani, Aurangabad,

Buldana and Osmanabad. Khandesh includes districts of Dhule, Jalgaon, Nandurbar and Nashik. South Maharashtra includes districts of Kolhapur, Ratnagiri, Sangli, Satara, Sindhudurg and

Solapur. Vodharbha includes districts of Akola, Washim, Amravati, Bhandara, Chandrapur, Gadchiroli,

Gondiya, Nagpur, Wardha and Yavatmal. West Maharashtra includes districts of Mumbai, Raigarh, Thane, Ahmadnagar and Pune.

62

Goa.These markets have been identified keeping in mind the economic transportation distance and the location of other supplying clusters.

Current ScenarioThe demand for different markets is given below

Consumption in Target markets Figures for FY 10

Particulars Consumption (MMT)

Share of Target Market

North East Karnataka 1.05 3

North West Karnataka 1.80 6

Central Karnataka 1.83 6

North West Andhra Pradesh 2.09 7

Marathwada 2.85 9

Khandesh 2.01 6

South Maharashtra 2.84 9

Vidarbha 3.36 11

West Maharashtra 12.95 41

Goa 0.54 2

Total 31.32 100

West Maharashtra is the biggest cement market in this target market with an annual consumption of around 12.95 million tonnes in FY 10, which is around 41 % of the consumption of the total the target market. Cement prices in the target market vary between Rs. 135 per bag in North West Andhra Pradesh to Rs. 250 per bag in West Maharashtra. Prices especially in the North West Andhra Pradesh have been very volatile and have been fluctuating sharply since the third quarter of the FY 10. This fluctuation is primarily due to the commissioning of new capacities in Andhra Pradesh thereby increasing the supply pressure in the region.

Freight is the key component in cement distribution and pricing. Primary freight (freight from cement plant to cement depot/ warehouse in the desired market) for players has been worked out based on rail/road distances from each cement plant to each district in the target region. In the case of grinding units, clinker freight from the supplying clinkerization units to the grinding units has also been considered. Freight from railway siding to the depot or dealer warehouse has also been added to compute primary freight. Primary freight varies from Rs 15 - 40 per bag, for most players.

63

Players operating in the target market use both Road as well as Rail as the mode of transportation for cement. Transportation by road is generally preferred for short distances up to 300 Km from the plant, whereas, for distances beyond this range rail is the preferred mode of transportation. However, with the shortage in the availability of racks from railways, almost every cement company was forced to use road as the mostly utilized mode of transportation for distance over 300 Km as well to a point till which they could economize their total logistic cost.

Future OutlookQuantitative forecasting of cement demand considering the independent variables below:

- Time- National State Domestic Product (NSDP)

The future growth rates as predicted by the model for different target markets in the region are given below

Growth rates in Target MarketParticulars Consumption (million tonnes)Karnataka 10.0 % pa for next till FY 15, thereafter 8.0 % pa for next 5 years

North West A P 12 % pa for next till FY 15, thereafter 10 % pa for next 5 years

Maharashtra 8.5 % pa for next till FY 15, thereafter 6.5 % pa for next 5 years

Goa 7.0 % pa for next till FY 15, thereafter 5.0 % pa for next 5 years

From a level of around 34.11 million tonnes, in FY 11, the cement demand in the target region is likely to reach around 66.18 million tonnes, in FY 20.

Target Market in volume terms

YearNorth East Karnataka

North West Karnataka

Central Karnataka

North West Andhra Pradesh

Maharashtra Goa Total

FY 11 1.15 1.98 2.02 2.34 26.05 0.57 34.11

FY 12 1.27 2.18 2.22 2.63 28.26 0.61 37.17

FY 13 1.39 2.39 2.44 2.94 30.67 0.66 40.49

FY 14 1.53 2.63 2.69 3.29 33.27 0.70 44.11

FY 15 1.69 2.90 2.96 3.69 36.10 0.75 48.09

FY 16 1.82 3.13 3.19 4.06 38.45 0.79 51.44

FY 17 1.97 3.38 3.45 4.46 40.95 0.83 55.04

FY 18 2.13 3.65 3.73 4.91 43.61 0.87 58.9

64

FY 19 2.30 3.94 4.02 5.40 46.44 0.91 63.01

FY 20 2.43 4.18 4.27 5.83 48.53 0.94 66.18

Achievable Volumes

Competitive Advantage Index (CA Index) for JCCL and all its probable competitors has been used to determine the volume share to be achieved in the target markets where CA index may be defined as:

CA Index = Ex Factory Realization for a player in a market/ Average Ex Factory Realization for all players in a market.

Based on the above calculations Achievable volumes and market share for JCCL based on the CA Indices for FY 15 is given below:

Acheivable Volumes in FY15

Particulars Market Size Achievable Volume

Market Share

North East Karnataka 1.69 0.12 7%

North West Karnataka 2.90 0.26 9%

Central Karnataka 2.96 0.23 8%

North West Andhra Pradesh 23.69 0.17 5%

Marathwada 4.28 0.24 6%

Khandesh 3.02 0.21 7%

South Maharashtra 4.27 0.27 6%

Vidarbha 5.06 0.28 5%

West Maharashtra 19.47 0.94 5%

Goa 0.75 0.04 5%

Total 48.09 2.76 6%

(s)Industry AnalysisIndia has one of the lowest per capita consumption of cement. The per capita consumption is around 159 Kg compared to the world average of 320 kg. Presently, the industry operates out of 12 clusters across India. Industry competition is also regionalized since cement is a low-value high volume commodity making transportation over long distances uncompetitive.

65

At present, 94% of the total capacity in the industry is based on modern, environment-friendly and energy-efficient dry process technology, with only 6% of the capacity based on old wet and semidry process technologies. India is the second largest producer of cement in the world after China, having a cement capacity of 246 MMT for the year ended 31st March 2010 as compared to 206 MMT for the year ended 31st March 2009 (Source: CMA). Cement production commenced in India in 1914 and has increased significantly since 1980. During the period from 1989 to 1990, to the period 2009 to 2010, installed capacity (excluding the estimated capacity of mini cement plants) increased from approximately 55.87 MMTPA to approximately 235 MMTPA.

The cement industry in India is fragmented and consists of large manufacturing plants and mini cement plants. Mini cement plants are those with capacities of up to 300,000 MTPA. There are approximately 134 large plants with a combined installed capacity of 235 MMTPA, which are operated by some 44 cement producers. The total capacity of mini cement plans is estimated at approximately 11.10 MMTPA.

Cement prices and margins vary across regions, due to the variation in demand-supply balance, level of concentration and demand growth. Over the last five years, prices in the North have remained lower than the rest of the country because of the highly fragmented nature of the market. The prices in all the regions have been quite firm and have been stable in the year ended 31st March 2010.

Supply Outlook

In 2009-10, the aggregate cement capacity in India was 246 MMT. The industry operated at a utilization level of 82 % producing 200 MMT for FY 2009-10. Further, the cement plants can be classified as either large units or mini or white cement units. Their capacities and production for FY2009-10 is as under:Capacity and Production for Large Cement PlantsParticulars Capacity % Production %

Large cement units 235.9 94% 194.0 97%

Mini cement and white cement units 11.1 6% 6.0 3%

Total 246 100% 200 100%

Note: Mini cement units refer to those with a capacity of under 0.3 MMTPA

Source: All India Mini Cements Association of India and CMA

The Indian Cement industry is characterized by regional concentrations. Southern region have a cement surplus, while regions in eastern and northern India have a deficit. This is because cement is a bulky commodity with high transportation costs which results in most of the cement plants being setup near the limestone mines of Andhra Pradesh, Karnataka, Gujarat, Rajasthan, Madhya Pradesh and Maharashtra. The Southern region had the highest installed capacity, estimated at around 88 MMTPA with Andhra Pradesh alone accounting for 55 MMTPA.

66

The region-wise production and consumption pattern is presented in the table below:Region-wise production and consumption pattern (In MMT)For the FY ended 2004 2005 2006 2007 2008 2009 2010

Capacity 146.4 153.6 158.1 167.1 175.7 206.6 235.9

North 32.4 35.1 37 40.6 43.6 48.5 50.6

South 46.3 46.9 49.8 53.2 55.8 67.1 88.1

East 23 23.4 24 25.2 26.5 30.3 33.4

West and Central 44.8 47 47.3 48.1 49.8 60.7 63.8

Production 117.4 127.6 140.5 155.7 168.3 181.4 200.6

North 28.7 30.9 34.5 37.2 41.5 41.2 46.5

South 36.1 36.8 43.6 49.9 53.6 59.7 66.4

East 16.7 18.7 20 21.8 22.7 26.0 28.4

West and Central 36 38.9 42.3 46.7 50.5 54.5 59.3

Capacity utilization (%) 80.2 83.1 88.9 93.1 95.8 88 85

Demand 122 131 144.8 154.9 167.7 177.7 198

North 36.3 38.4 34.6 45.8 49.8 35.1 39.0

South 31.5 30.8 44.4 44 48.7 53.8 59.0

East 17.5 20.3 19.8 24 25.3 28.2 33.0

West and Central 28.6 31.6 36.8 35.2 40.2 60.7 67.0

Exports 8.1 9.9 9.2 5.9 3.7 - -

Surplus (Deficit)

North -7.6 -7.5 -0.1 -8.6 -8.3 6.1 7.5

South 4.6 6 -0.8 5.9 4.9 5.9 7.4

East -0.8 -1.6 0.2 -2.2 -2.6 -2.2 -4.6

West and Central 7.4 7.3 5.5 11.5 10.3 -6.2 -7.7

Source: CMA

67

The future effective cement capacity based upon effective plant utilization works out to be as follows:

Year Effective Capacity in mtpa

FY 11 281.9

FY 12 319.4

FY 13 346.6

FY 14 359.5

FY 15 367.8

(t)Risk AnalysisThe company has been rated as “BB” (53.12%) signifying “Average Risk” under New Project Rating Model by RMD, HO.

Risk factors and Mitigants as proposed by the company:

Risk Factors Risk Mitigants

Project Execution Risk

Land Acquisition: XCCL is already in possession of approx. 519 Ha of land, including 328 Ha of limestone mines and 191 Ha of plant and other area. The presently available area is sufficient for implementation of the proposed plant and operations from limestone from the Bankur mine. The land acquisition for Block-2 and Block-3 mines has also commenced and the company has already acquired approx. 667 Ha land for the said mines.

Construction Contract: XAL, having substantial experience in setting up of cement plants, is expected to carry out all civil works for the plant. No major risk is envisaged in the same.

Cost Escalation: Project cost estimates are based on the extensive experience of the Group in cement and DPR by HOLTEC. The XYZ Group has significant experience in implementation of large cement projects. Orders of around Rs.300 crores for plant & machinery have already been placed. Further the sponsors shall provide an undertaking to fund any cost overrun from their own resources.

Sponsor Risk The XYZ Group has existing cement capacities of approx 21 MMTPA, which is slated to increase to around 36 MMTPA by FY12. The Group has an established

68

Risk Factors Risk Mitigants

track record of over 30 years in cement, civil engineering construction and hospitality businesses and execution of similar projects across India. The sponsor company, XAL is estimated to have sufficient cash flows to fund the said project.

Funding Risk Considering the net worth of XAL and the resourceful promoters, it is expected that the company would be able to mobilize the required Promoters’ Contribution of Rs.491 crores. As shown in the financial projections for XAL, the company had enough cash balance for the next three years to infuse the required equity.

Clearances & Approvals

As the old unit was already operational in FY09, most of the approvals like water, railway siding etc. are already in place. XCCL has already received TOR from MOEF and the draft EIA report is under preparation for the plant. The company does not envisage any major problem in the same as there was 70-year old plant running on the same site and there is no further acquisition of land etc. for the same. Public hearing for first mine has been conducted and EIA report/Final presentation to MOEF has been made. Final environmental clearance is expected shortly. XCCL has also submitted the mining plan for other 2 mines to the concerned authority and has commenced acquisition of land for the same.

Industry Risk:Cyclicality in the Cement Industry

Bunching of capacity additions is expected to impact capacity utilizations and operating margins upto FY11. However, demand for cement is estimated to grow at a CAGR of 10-11% over the next 5 years, primarily driven by demand from infrastructure sectors with government’s increased focus on infrastructure and housing. In the medium to long term, demand is expected to be sufficient to absorb the impact of capacity additions.

Geographical Concentration Risk & associated Revenue Risk

The majority market for the unit shall be Maharashtra where approx. 70% of output would be sold. The demand for cement in West & South has demonstrated some firmness even in the current temporary oversupply situation and is expected to be sufficient to sustain firm prices beyond FY12. Sensitivity analysis for a 5% drop from conservatively estimated gross selling prices (Rs.230-35 per bag) gives a comfortable Avg. and Min. DSCR of 1.51 and 1.21, respectively. With Xyz Group’s established presence in the North and Central India and upcoming capacities in the South & West, the Group would have a national presence.

(u)Draw Down Schedule (annual):Period of Draw Down Total Debt Our Share

(27.38%)

FY 2012 184.00 50.40

69

FY 2013 359.00 98.30

FY 2014 370.00 101.30

Total 913.00 250.00

(v)Proposed Repayment ScheduleScheduled date of Completion of Project 31.03.14

Commercial Operations Date (COD) 01.04.14

Implementation period 3 years

Moratorium 1 year

Repayment period 6 years

No. of instalment 24 equal quarterly

Starting Date 30.06.15

End Date (Last installment) 31.03.21

Door to door tenor 10 years

(W)PricingProposed Applicable rate

ROI BR (10%)+TP (0.50%) + Spread (1.75%)= 13%*

BR(10%)+TP(0.50%)+

Spread 5.75%)=16.25%

Upfront Fee 0.25% 1.25%

Annual Review Charges

To be waived 10 paisa per Rs.100/- (subject to maximum of Rs.10 lac) p.a. & 5 paisa per Rs.100/- (subject to maximum of Rs.5 lac) p.a.

Documentation Charges

As per card rates Rs.200/- per Rs.1 lac (subject to maximum of Rs.25000/-)

Other charges As per CARD rates.

*The spread will be calculated as the difference between the Rate of Interest (i.e. 12.25%) and the Base Rate on the date of documentation. The first spread will be reset on COD and every two years thereafter.

Concluion

70

- Rate of interest has been proposed at 13 % at present linked to BR, i.e. BR + 1.75% + 0.5 % term premium.

- ROI will be fixed at 12.25% till the COD, thereafter the same will be reset and every two year onwards.

- ROI & upfront fee are in line with in-principle approval accorded by NBG in its meeting held on 10.05.11. Further, this being a consortium account, the ROI and upfront fee will be common for all the lenders.

- The matter for charging of annual review charges of Rs.5 lac as per our bank guidelines was taken up with the company/Axis Bank by AGM(Br). They have informed that the Company is agreeable to pay 0.25% plus applicable service tax as up-front fee, on the execution of Common Loan Agreement.

- Further, the Project Debt is being funded by way of consortium financing, and as such the facility will be subject to identical terms and conditions in order to maintain uniformity amongst the consortium members. Therefore, in view of the fact that the review charges have not been indicated by any other consortium member or by Axis Bank ( which has underwritten the entire debt facility) & the sizable upfront fee offered, the Company/ Axis Bank has requested for waiver of the annual review fee. AGM(Br) has accordingly recommended.

- In respect of documentation charges, AGM(Br) has recommended that instead of charging our card rates, the company shall bear the actual expenses for documentation etc. We are proposing that AGM(Br) to recover all charges as well as actual expenses as per bank guidelines.

(X) Strength Weakness and Mitigants

Strengths:

1. The project is being undertaken by XYZ Group which has strong financials and long experience in implementation and operations of the large cement projects.

2. The personal guarantee of the main promoter of XYZ Group. 3. The company has already received existing 191 Ha plant site and mining rights for three

blocks – Bankur, Masarwada and Shahabad – Taranhalli along with 328 Ha of entire mining land for Bankur mining concession, which is sufficient for implementation of the proposed project.

4. The company has already entered into mining lease for Bankur Concession and has initiated process for getting the mining lease executed for the other two blocks. Total Limestone reserves for all three blocks stand at 488 million tonnes sufficient for 100 years of operation of the plant.

5. The Company has obtained majority of the clearance required for the project like Railway Siding Approval, water, power etc.

6. The company has identified the sources of other raw material like fly ash, gypsum; coal etc. 7. The company has identified major suppliers of plant & machinery and placed orders for Rs.

300 crore with them. 8. 25% of the promoters’ contribution will be brought upfront.

Weaknesses:

1. Industry Risk: Cyclicality in the Cement Industry

71

Mitigation: Bunching of capacity additions was expected to impact capacity utilizations and operating margins upto FY11. However, demand for cement is estimated to grow at CAGR of 10-11% over the next 5 years, primarily driven by demand from infrastructure sectors with government’s increased focus on infrastructure and housing. In the medium to long term, demand is expected to be sufficient to absorb the impact of capacity additions. Moreover, the established credentials of XYZ Group in setting up several large capacity cement plants in given time and cost and running them on profitable lines will come handy in the company overcoming the cyclical nature of the cement.

2. Geographical Concentration Risk & associated Revenue Risk

Mitigation: 70% of output of the unit will be sold in Maharashtra. The demand for cement in West & South India has demonstrated firmness even in the current temporary over-supply situation and is expected to be sufficient to sustain firm prices beyond FY12. Sensitivity analysis for a 5% drop from conservatively estimated gross selling prices (Rs.230-35 per bag) gives a comfortable Average and Minimum DSCR of 1.51 and 1.21, respectively.

72

4. Conclusion and Recommendations

4.1 Conclusions Lending is more of an art than an exact science. Taking the perfect lending decision requires

understanding the business of the company and analyzing it from multiple perspectives. While attempt is made to infuse objectivity in the appraisal, sound lending decision involves taking subjective view of the proposal. This is where experience and judgment of the appraiser play a key role. As has been made apparent to us during the internship at various occasions that even though financials of the borrower were weak but due to stature/banking relationship a number of factors are ignored or steamrolled in order to accommodate the borrower.

Since banks lend funds that have been deposited by the general public with the expectation of safety and security the lending decisions taken by banks primarily focus on the safety of funds. Risk aversion and risk diversion are the main aspects that need to be looked into while lending.

To remain viable, a bank must earn adequate profit on its investment ie. A bank must generate adequate margin between deposit rates and lending rates. In this respect, appropriate fixing of interest rates on both advances and deposits is critical. Unless interest rates are competitively fixed and margins are adequate, banks may lose customers to their competitors and become unprofitable in the long run.

To mitigate risk, banks lend to a diversified customer base. Diversification should be in terms of geographic location, nature of business etc. If, for example, all the borrowers of a bank are concentrated in one region and that region gets affected by a natural disaster, the bank's profitability can be seriously affected. Also these days if a bank is focused entirely on deposits and advances it will not be able to grow beyond a certain limit that is why there is an increasing need to focus on other activities like insurance, internet banking etc. to increase profitability.

Banks achieve diversification by specifying strict exposure norms that limit the exposure to a particular industry, business group and company.

Term loan appraisal mainly focuses on the viability of the project and its ability to generate enough cash flow to service the debt over the tenure of the loan along with servicing its operational needs, plans of expansion etc.

Post sanction processes that include monitoring of accounts, ensuring end-use of funds etc. are as critical as pre-sanction appraisal process for the security of funds.

In general terms, the project is likely to receive favorable consideration and detailed appraisal is taken if:

o It has priority according to Govt. and bank guidelines.o The promoters inspire confidence.o The technology being adopted is well proven.o The product to be traded has market potential.o The promoter’s contribution is not unreasonably low.o Profitability estimates are conservative and indicate repayment of proposed

institutional loans.As we can see from the above point’s appraisal is more than just crunching a few numbers to come out with certain ratios and approving or denying a loan based on them. It is more of a perception that we form about the borrower based on the information available and our own judgment.

73

The project is rejected without detailed appraisal if it has one or more of the following features:

o Banker’s report on the promoters is not satisfactory.o Promoters are reported to have indulged in illegal and anti social activities.o Financial position of the promoter company is not satisfactory.o Cost of the project is unduly high.o Promoter’s contribution is unusually low and promoters decline to increase ito Debt equity ratio abnormally low.o Industry to which a particular unit belongs has low priority or is included in the

negative list in govt. guidelines.o Location of the proposed unit has apparent disadvantages ex. far removed from

sources of raw materials.o Second hand equipment to be acquired is too old and will not have trouble free

residual life.o Process know how has become obsolete.o There is no certainty that utilities like power, water will be available by the time the

project needs them.

For the Project: The analysis of the project reveals that it is technically feasible and economically viable. The

location of the project near sources of raw materials and excellent road/rail connection imparts advantage to the project. The locational advantage and the integrated nature of the project would help XCCL to maintain cost and quality advantage.

The cement industry, driven by strong investment in infrastructure and robust demand for housing in Indian economy, is expected to do well in short to medium term. The Company has sound marketing strategy for capturing market share and sustaining it. The proposed Project team and Marketing team of Company will draw upon the rich experience of the parent Group in the cement sector. The demonstrated capability of XAL in the engineering and construction space augurs well for the project.

The Project is expected to make positive net cash accruals from its very first year of operation. In the very first year of operation (FY 2015), the Project is expected to make a net profit of Rs. 82 crore on net sales of Rs. 702 crore. The Project shows a minimum DSCR of 1.38 and average DSCR of 1.71 over the loan tenor. The Project structure ensures comprehensive risk mitigation measures, adequate debt servicing capabilities and reasonably good returns to the stakeholders. The project is financially & commercially viable. The project has sound financials and the project IRR works out to 16.68%. Considering all this the overall debt servicing capability of the project is considered satisfactory and adequate.

4.2 Recommendations More stress should be placed on collateral valuations. Since term loans are advanced for

diverse category of businesses, sector expert should be roped in for collateral valuations. Collaterals should be estimated gross amount, expressed in terms of money, that could be

typically realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

If any of the critical ratios is marginally unfavorable then additional collaterals could be charged or pricing of the loan could be revised upward to compensate for the additional risk.

74

Due to increased activism and regulatory crises like that with spectrum allocation, mining leases, land acquisitions issues, environmental considerations etc. viability of otherwise sound projects is threatened. Social, political and economical risks should also be taken into consideration while deciding project viability. Evaluation of these risks should be made mandatory in TEV report. In addition, while assessing the risk rating for a particular project, these factors must be taken into account.

Intercompany transactions should be taken into account while analyzing financial statements. This is particularly important for the companies belonging to a closely held group because intercompany transaction may be used to make financials of the borrowing group companies look good.

More stress should be placed on the analysis of cash flows. Income is calculated based on accounting principles while debt has to be serviced through the cash flows. With short term perspective, a profitable firm may not be good for lending purpose if it does not generate enough cash to service the debt. Cash flows factor in the past trends and also take into account the company specific factors

As described above a profitable firm is not necessarily also good for lending purpose in short term. Firm may be generating good accounting profits but there could be serious liquidity problems. To identify these issues, NWC to Sales ratio could be calculated while appraising working capital financing proposals. Ideally this ratio should be around 8% - 12%. If NWC to Sales ratio is less then it means that business is growing too fast without building an adequate backup in the form of NWC also there are chances of serious liquidity problems and company is relying more on short term funds.

Financial and operational performance of the company applying for loan should be compared with its industry peers. Relative performance comparisons will not only highlight the management capability but also help in identifying any abnormalities in the information submitted by the company.

Forward looking statements with respect to sales, profitability etc. provided in the DPR and other reports submitted by the company should be treated with caution. Market analysis, demand analysis, sales projections etc. should be evaluated on with prevailing norms. Earlier performance and trend analysis could be used to ensure objectivity in forward looking statements.

Use of other ratios like DuPont analysis to evaluate how effectively assets are used by a company. It measures the combined effects of profit margins and asset turnover.

75

Using this model we arrive at the ROI for the company as below

2015 2016 2017 2018 2019 2020 2021

ROI 0.136 0.165 0.175 0.170 0.167 0.163 0.158

This ratio gives us an idea how much profit is generated by assets like in case of XYZ Ltd this company is generating an average of 0.162 profit for every 1 asset invested.

1. ERR (Economic Rate of Return) of the projected should be Calculated or Social Cost Benefit Analysis is to be done to reflect the real value of a project to society, we must consider the impact of the project on society. Thus, when we evaluate a project from the point of view of the society (or economy) as a whole, it is called Social Cost Benefit Analysis (SCBA). We then calculate the Economic Rate of Return (ERR) taking into the consideration the contribution of project to society. The main focus of Social Cost Benefit Analysis is to determine:

i. Economic benefits of the project in terms of shadow prices; ii. The impact of the project on the level of savings and investments in the society;

iii. The impact of the project on the distribution of income in the society; iv. The contribution of the project towards the fulfillment of certain merit wants

(Self- sufficiency, employment etc).v. Foreign Exchange earnings

The social cost is quantified in terms of employment generation, railways, road, Forex etc. Social cost benefit analysis is done by certain banks like World Bank, IFC (W) etc.

76

2. ROCE in consideration: ROCE should be taken into consideration along with the PBT and Other Income. Timely measurement of ROCE indicates if any diversion of funds from the project (for which financing has been done) to any other project or company.It gives a better picture of the profitability of the company and the shareholder’s share in profit making.

= OpertaingProfit

TNW

ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowings will reduce shareholder’s earnings.

3. Sanctioning of Term loan should always be accompanied with the financing of working capital because in case of term loan bank is not authorised to look into the details of the company and also financials of the company could not be tracked. But with the sanctioning of working capital monitoring of the company by looking at CMA data and other financials become easy. This prevents the diversion of loan funds by the company.

4. Number of tiers: faster decision making and faster dispersion of credit is of paramount importance. There are 3 channels:-

i. Branch Office – 3 touching points ( Officer, Manager, Chief Manager)ii. Circle Office - 3 touching points ( Officer, Chief Manager, Circle Head)

iii. Head Office - 3 touching points ( Chief Manager, Deputy General Manager, General Manager)

The bank at present has a 3 tier system with 9 touching points which need drastic reduction for faster decision making. This will curtail avoidable delays; improve efficiency besides reducing appraisal time as well as cost.

In order to expedite decision making besides qualitative improvement in credit appraisal system, it is suggested that:-

77

OfficerManagerChief Manager

Branch Office

Marketing /delivery and the credit appraisal systems to be distinct and separate. The branches to:

Concentrate on marketing of credit Focus on improvement in customer service Act as delivery point for credit dispensation and monitoring of credit

5. Limitations of the Study The data availability is proprietary, not readily shared for dissemination and is highly

confidential. Assumptions and projections are based on current market conditions and have not

taken into account the price volatility. Financial statements of the proposed project are subject to risks and uncertainties that

could cause actual results to differ materially from those mentioned in the report. The risks and uncertainties include, but are not limited to, the following:

(i) Changes in Indian laws(ii) Changes in Indian in global economic conditions(iii) Changes in government regulations(iv) Introduction of new technologies

The staff although are very helpful but are not able to give much of their time due to their own work constraints.

The study is being done keeping in mind the policies of the Head Office. Due to the ongoing process of globalization and increasing competition, no single model

or method will suffice over a long period of time and constant up gradation will be required.

78

6. Abbreviations Used:

AGM Assistant General Manager

BG Bank Guarantee

CC Cash Credit

CMD Chairman and Managing Director

CO Circle Office

CRMD Circle Risk Management Department

CCA Core Current Assets

CAD Credit Administration Department

CD Credit Division

CARD Credit Audit Review Division

CASA Current Account/Savings Account

CRMC Credit Risk Management Committee

DSCR Debt Service Coverage Ratio

DER Debt-Equity Ratio

DTL Defered Tax Liability

DPG Deferred Payment Gurantee

DTA Deferred Tax Liability

79

BD Discount of Bills

ED Executive Director

FACR Fixed Asset Coverage Ratio

FB Fund Based

GM General Manager

HO Head Office

IRMD Integrated Risk Management Division

LCB Large Corporate Branch

LC Letter of Credit

LOC Letter of Credit

MC Management Committee

MPBF Maximum permissible Bank Finance

MCB Mid Corporate Branch

NWC Net Working Capital

NFB Non Fund Based

PMS Preventive Monitoring System

PF Provident Fund

PNB Punjab National Bank

RBI Reserve Bank of India

RMC Risk Management Committee

RMD Risk Management Division

TEV Techno-Economic Valuation

TL Term Loan

WC Working Capital

ZO Zonal Office

80

7.REFERENCES: As of now, the references that have been used to understand the field of study and to gain an insight are provided below:

Websites

http://en.wikipedia.org/wiki/Punjab_National_Bank rbi.org.in RBI circular/policy/guidelines Accounting standards http://www.irc.nl/page/8903 http://www.unido.org/fileadmin/media/documents/pdf/tcb_role_standards.pdf United Nations Industrial Development Organization (1998), Guide to project proposal; Social

benefit cost analysis in developing countries.(BOOK) Monitory policy DBOD/ RBI/ECGC notification/policies http:// en.wikipedia.org/wiki/credit_appraisal http://www.crisil.com/

Books

Book of Instruction on Loan Accounts PNB, knowledge management centre, Internal Circulation.

Project Appraisal, Prasanna chandra. Project Appraisal and Technical Analysis, UNIDO. PNB Annual Report 2010-11. Internal Files of PNB. PNB Monthly Review. Performance Highlights 2011-12. PNB Credit Policy 2012-13.

81