1. Project Appraisal

1.1 Introduction:

Project appraisal gives generic idea and plan about the business proposal. Later on, it tells about

how the business proposal evaluate for project financing for credit facility in the bank. This

process is assessing project planning, project budget, capability and experience about the

business. Project appraisal is evaluating the effort of the project and calculating the project’s

viability.

1.2 Objectives of the project:

The project embodies a study of the lending system of Andhra bank and state bank of India to

different small and medium business units and its effectiveness. The main aim of this project is

to know the process of financing and its appraisal for a proposed enterprise.

1.3 Importance/ Relevance of Project:

From this study at the Andhra bank, with the help of the business cases, we can know about the

financing system of the Andhra bank. This study helped to dig out the information about how the

SME sectors are being financed in Andhra bank as presently all the SME sectors are growing.

This study also helps to understand the whole business plan, project appraisal, credit rating

system and its major criteria for credit facility from the banks.

1.4 Methodology

For project Appraisal of cases, Data were collected from Internal and External sources. The

study is conducted with the help of personal interviews with the loan officer, finance manager

from primary sources using the suggestive question. The secondary data were collected from the

business cases of the Paralakhemundi with the help the Andhra bank.

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2. Analysis of the study:

2.1 case-1:

2. 1.1 Background:

M/S SIVA SHANKER CASHEW INDUSTRY

AT; SIDHAMADANGO

PO: RANIPANTHA

TAHASIL: PARLAKHEMUNDI

DISTRICT: GAJPATI, ODISHA.

The industry is located in Sidhamadango a village near to Paralakhemundi. The unit is located

near to Paralakhemundi, so they have all the advantages of procurement of Raw material and

market for the product. They can procure raw material from inside and outside of the district

mainly from Khandava, Kashinagar, Haddubangi, and Gunupur.

The unit can sale the finish goods not only the nearby market of Palasa and

Paralakhemundi but they can sale in various places like Hyderabad, Nagpur, Raipur,

Ahmadabad, Kanpur etc through the commission agents. The cashew dry fruits have its demand

and market throughout the year.

The cashew unit is a labor-oriented unit, so the unit needs a large no. of labor. The total man

power require for cashew unit is 45 which include machine operator, roster man cum helper ,

grading man, packaging, unskilled labor, accountant and watchman

The total Working day is 300 days per annum; working hr. 8hrs per day with single shift.

Electric power is to be utilized for driving of machinery and general lighting purpose. The unit

needs three H.P power from SOUTHCO.

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2.1.2 Appraisal Analysis:

2.1.2.1 Managerial Competence

The management will be done by P. Krishna kumari who is having a vast experience in working

and managing cashew business, but she was only doing trade earlier. As it’s a project of cashew

business only there is no need for much technical knowledge. As the borrower has taken a loan

earlier and had paid it in time its shows his honesty and integrity. As she has already owned a

cashew trading business, which she was managing it properly its shows her entrepreneurial

talent.

2.1.2.2 Technical Feasibility

Shiv Shankar Cashew Industry is located at Paralakhemundi; due to availability of raw material

in this area. The amount of the land is Rs 1.00 Lakh contributed by the promoter. There are

machine like bowler and roster and other plant requirements are available in nearby city

Vishakhapatnam and can be procured easily. The whole project cost Rs.15 lakhs. For the

Electricity and power, the charges estimated Rs. 50,000 and they are planning for getting power

from South co, Odisha. They are taking skilled worker and unskilled labor from nearby areas.

The wastage showed in the project is very minimum like 1kg in every ton which is not much and

bearable. When the input is 65tons per day output is 720kgs.

2.1.2.3 Commercial Viability

The cashew industry is one of the most profitable industries in the area of Paralakhemundi and

Palasa. People prefer to start their business here because they get enough raw material and

market to sale as Palasa is known as the cluster for cashew industry. The cashew from Palasa is

exported to many countries and states. The various states which deal with cashew are Odisha,

Andhra Pradesh, Madhya Pradesh and Maharashtra. The price of the cashew per kg of good

quality is Rs300 which is affordable to the customer.

Competitors Analysis:

As per the proposal the unit is projected to locate at Paralakhemundi. The cashew processing unit

can supply dry cashew fruit all around the Odisha and Andhra Pradesh. There are around 65

cashew processing units within the 40 k.m Circle of Paralakhemundi. As per the District

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Industries Center there are another 100 units required for this market. This unit can be able to

reach the demand for the local as well as outsiders.

2.1.2.4 Financial Viability

The total project cost is 15 lakhs in which the cost of land is also included. The proprietor’s own

contribution is Rs.195000 which includes Rs.1 lakh cost of land and Rs 95000 as working

capital. The borrower’s contribution is 7% of the total cost. So far the profitability of this unit is

consent it is growing every year, it started with Rs 5.8 lakhs and reach to Rs 6.7 lakh in the 7 th

year. She has to generate Rs.3.35lakhs in first year with an interest rate 14%, in this way the

borrower has to repay the loan within 7 years time.

The sale is 100% as the market demand is much more then the production capacity. The sale

for the 1st year will be Rs36 lakhs and the closing stock will be assumed to be Rs 3.5 lakhs.

Capacity utilization of Siva Shankera Cashew Industry will be 55% in the 1 st year and every year

it will increase by 10% of the production capacity.

Here the borrower showed the raw material price as per the market rate and the price of

repair and maintenance cost as rate 1.2% of the total machine cost which is much less than the

requirement. It shows that the unit doesn’t want to make any hidden cost and profit.

As per the project the depreciation is calculated 20% for the fixed assets and 25% for moving

assets. Here the unit is showing a depreciation rate below the IT norms as 10% and 15%, as per

the financial year 2009-10 and it is also up to the mark. Here the borrower has not taken any

thing on lease. So the consent person no needs to show any lease agreement.

The DSCR will be 1.2, in the first year and by the end of the 7th year it is estimated to reach

12.85. The Average D.S.C.R is 6.2 which will be above the bank rate of 6. The DSCR or debt

service coverage ratio is ratio which shows the repayment capacity of the project. Another ratio

is I.S.C.R. The ISCR shows the interest covering ability of the borrower. Projected average of

the ratio is 5.72 and in the 1st year the ratio will be 1.88 and it will expect to reach to 8.77 in the

end of the 7th year.

The ROI is estimated at 58% which shows that the units return will be more then ½ of the total

contribution made by the borrower. Debt Equity Ratio is 6.78:1 it shows that she has applied

the loan amount which is around 7 times of the amount contributed by her.

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The required working capital for this project will be Rs1.29 lakhs and the projected Current

Ratio is 1.35 in the 1st year and it reaches to 3.44 and the estimated average current ratio is 2.39.

As per the credit rating it will get 10. Estimated Net profit ratio is 19.62%.

The unit is able to reach its break even in the 15 th month from their production when it will be

started. Margin of safety is Rs 145000.

Parameters for Credit Rating System

Parameter Score Siva Shankar Cashew Industries

Mark secured

Remark

Current ratio 1.15 & above1.13 below 1.151.10 below 1.13Below 1.10

10860

2.39 (Average)

10 They have scored good marks in current so they have enough working capital to run the business.

Total Debt equity ratio

2.5 & below2.6 to 3.503.6 to 5.005.01 to 6.01Above 6.01

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6.92 1 They have scored less in DER but as per the rules they can raised loans at 0% contribution up to 20 lacs loan, they are contributing 6.7% that is good for the project.

Interest commitments

Timely repayment on due date Delayed payment up to 30 days 31 to 90 daysOver 90 days

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20

Timely repayment

5 They have scored well in repayment of loan and interest amount, it shows that they are capable enough to repay the loan.

Compliance with terms & conditions of sanction, including documentation and creation of charge

Complied promptly

with delay

Not complied

5

3

0

Complied promptly

5 They have submitted all the documents as per the terms and conditions.

Total sales/inventory sundry debtors

Above 4 timesAbove 3 to 4 timesAbove 2 to 3 times2 and below

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2

8.5 times 5 The sale is 8.5 times more than they inventory and sundry debtors, this shows the amount of cash sales is more than the credit sales.

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0Submission of MSOD/stock statement/renewal data

Timely submissionSubmission within reasonable timeDelayed/irregular submission

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1

Submission within reasonable time

3 They are submitting all the document as per the terms and condition of the bank

Achievement of projected sales

Achievement:Above 85%Above 75% to 85%Above 50% to 75%50% and below

5430

Above 85% 5 As per the performance of the unit, they are achieving 85% in 1st year and the sales volume is increase in the succeeding year. So they performance of the unit is good.

Supported by collateral security including II nd charge on fixed assets

Security coverage 50% and above25% to 49%Below 25%

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68.33% 5 The unit has covered 68.33% of collateral security, so the bank has enough faith for that unit.

Operational experience in cash credit

Liability not exceeding DP/limit. Adhoc adjusted in time

Liability exceeding limit occasionally but within DP.Adhoc/excess drawls are adjusted in time

Liability exceeding frequently and adjusted with some delay

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1

Liability exceeding limit occasionally but within DP.Adhoc/excess drawls are adjusted in time

3 In initial stage they had less deposit as compare to cash credit amount but later they had adjusted to the bank balance.

Table No. 2.1

2.1.2.5 Environmental issues: To reduce the pollution the unit will use new technology

like boiling machine. The unit got “No Objection Certificate” from pollution control board.

After breaking the cashew kernel cover, the cover is used in hotel as fuel. As it is biodegradable,

the remaining part of wastage can be easily dissolved in soil.

2.1.2.6 Strength: As the market has vast demand for cashew kernel, the firm can gain more

profit and this proposal will generate more revenue. It can able to expand its production capacity

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every year. It has situated in good location where there is available of enough raw material and

labors easily.

2.1.2.7 Problems/ Remarks in the case: There is wide market for cashew industry, as

compare to that the unit is very small. So it has to extent the unit in the next financial year.

The expansion of the unit can be depending upon the increase of raw material consumption and

its sales turnover.

2.1.3 Finding of the Case:

In Paralakhemundi, the market demand of cashew is very high as compare to the supply so it is

viable to start a cashew unit in Paralakhemundi. To meet the demand of the customers there is

enough availability of raw material in this area, so the market demand for cashew unit is very

much profitable.

As per the credit rating, system of the bank it is shown that the unit has scored above 95% in

every criteria of rating like current ratio, total debt and equity ratio, documentation, sales

realization period, DSCR, operational experience in cash credit and collateral security. So it is

viable to run the business in Paralakhemundi.

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2.2 Case-2

2.2.1 Background of the case:

The Hotel and resort industry is one of the growing industries in India. After 1991, due to

liberalization, globalization and privatization the hotel industry has been growing at an average

rate of 12-14%. As per the increase in number of tourist, the hotel and resort is also needed to be

increase in an affordable manner.

Durga Classic Multiresort Pvt. Ltd

Location: - Danka street, Dola Tank road, Paralakhemundi.

Dist: - Gajapati, Orissa- 751200.

The Hotel will be located near Dola Tank in Paralakhemundi, which is district head quarter of

Gajapati. It is also connects to govt. hospital. Peak time of business is Rath Yatra. Therefore, the

resort will have another advantage of better business.

B.N. Palace and Paralakhemundi Palace attracts many tourists, so the resort will have advantage

of attracting those tourists by providing good quality of service and facility in an affordable

price. The resort plan to provide services like secretarial staff, Tele conferencing facilities , 24

hours butler services, internet, email, A.C guest room, bar facility, CC T.V, safe deposit locker

etc.

2.2.2 Project Appraisal Analysis:

2.2.2.1 Managerial Competence:

Ms. A. Gouri, age is about 31 years old and Shankar Prasad Acharya, age is about 41 years old

are the promoter of the Durga Classic Multiresort Pvt.Ltd. Ms. A. Gouri is 5 years well

experienced person in hotel industry and Shankar Prasad Acharya is a business person and also

having 9 years experience in hotel industry. Both promoters are sincere and hard working.

2.2.2.2 Technical Feasibility

Durga classic multi Resort is located at Paralakhemundi that is a semi urban place in Odisha and

near to the border of Andhra Pradesh. The land cost is Rs.13.75 lakhs, which is contributed by

the promoter. The total size of the project is Rs.222.99 out of which Rs.125 lakhs as a term loan

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from the bank and the promoter contributed Rs.97.99 lakhs. For the Electricity and power the

charges estimated is Rs. 12.05 Lakhs and they are planning to get this power from Southco,

Odisha.

2.2.2.3 Commercial Viability

As the Paralakhemundi is the district, head quarter of the Gajapati district, which incidentally is

in close proximity to the Andhra Border. Also people from different places coming to district

head quarter for different official work. There is no premium quality resort until today and the

site situated on the main road of Dola Tank. The market, banks, commercial establishments are

located within the distance of 1-2 K.M from the site.

Competitor analysis: There are few resorts are available with good facilities like Royal Palace,

Shree Krishana lodge which are in the main market place. However, this resort is located near

the Govt medical and offices.

2.2.2.4 Financial Viability

The total cost of the project is estimated Rs.222.99 lakhs which includes land and site

development cost Rs. 13.75 lakhs, building cost Rs. 115.25, Electrification Charges Rs. 12.05

lakhs, furniture and fixture cost Rs. 57.00Lakhs, preliminary expenses Rs. 2.00 lakhs and for

working Capital Rs. 22.94 lakhs. They plan to invest of Rs.97.99 lakhs as own contribution and

approaching for the term loan of Rs. 125.00 lakhs from Bank.

There are 35 rooms available in this resort, out of which, 8 are A.C and 27 non A.C rooms. The

average charge per room for A.C is Rs.500 and for non-A.C is Rs 300. So it is expected to earn

Rs.14.6 lakhs in A.C rooms and Rs 20.80 lakhs for non- A.C rooms. The total earning is

estimated to be Rs.35.40 lakhs. The earning per day from the food and beverage sales is

estimated Rs 8000. Restaurant sales per year will be Rs. 29.20 lakhs. From the Bar it is estimated

to earn Rs 30000 per day and per year Rs 109.50 lakhs. The total earning per year is estimated to

be Rs 174.10 lakhs. But as per conservatism it is estimated as 65% of total earning i.e. Rs.

113.17 lakhs.

The estimated profit is Rs. 14.69 Lakhs for the financial 2009-10; it shows the project generating

enough profit from the first year onwards. Promoters will be capable to repay the term loan

within the Pay Back Period of 4 years and 8 months.

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This project will be utilizing capacity of 43.72% in the 1 st year and reaches 10.59% in the 7th

year, at Break Even Point. Hence, the breakeven point and margin of safety are satisfactory.

Debt Equity Ratio is 1.28; it shows that the shareholders contribution is at satisfactory level.

The required working capital for this project will be Rs20 lakhs, the projected Current Ratio is

1.99 in the 1st year, it reaches to 1.83 by 7th year, and the estimated average current ratio is 1.51.

As per the credit rating it will get 10 score. The estimated Net profit ratio is 14.69 lakhs in the

1st year and it reaches 97.10 lakhs by 7th year. The return on investment is in 1st year 23% and

by 7th the year, it reaches to 28% and the average is estimated 30.50%. The overall financial

positions of the borrower in the coming years are acceptable because the estimated current ratios

of all the financial year are above than 0.5. Hence, the current ratios are greater than the ideal

ratio in the credit rating system; it shows the good liquidity position as per the banking norms.

2.2.2.5 Projected Profitability Statement:

Capacity utilization in initial years will starts from 70% and thereafter, it reaches the level of

90% in the 5th year onwards. It shows that the proposal will be generate profit in the first year is

Rs. 22.76 lakhs which will be increase to 97.10 lakhs by the 7 th year. This is estimated that it is

planning to run with the overall optimum capacity of 80%.

In the proposals of a hotel industry, the total direct expenses are 70.97 lakhs and it is increased in

projected succeeding years as the increase in inflation. The profit after tax will be proposed of

Rs. 14.69 lakhs and it will be increasing in the succeeding years. It shows that the resort will run

with profitability.

This proposal is not mentioning about the insurance charges of the building as they are investing

huge money for building. They are charging depreciation as per the companies’ act 1956 under

written down value method, 10% on building and furniture and 15% on electrification. As it is

proposal of the hotel industry, they are following rules of companies’ act 1956.

This proposal having the enough cash generating, as they are showing in projected in 1 st year

1.66 and it reaches 5.68 by seventh financial year. The average DSCR of the project up to 3.00, it

shows that they have enough capacity to repay the loan.

As per the proposal, the ISCR in the 1st year is 3.67, it reaches to 283.02 in the 7th year, and the

average is 52.69 it shows that they have enough capacity to pay the amount of interest.

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Credit Rating System

Parameter score Resort Mark secured

Remark

Current ratio 1.15 & above1.13 below 1.151.10 below 1.13Below 1.10

10860

1.51 10 They have scored good marks in current ratio so they have enough working capital to run the business.

Total Debt equity ratio

2.5 & below2.6 to 3.503.6 to 5.005.01 to 6.01Above 6.01

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1.28 5 They have scored well in DER; they are contributing 97.99 lakhs to the business, which is 44% of the total project cost, so the risk is less for the bank.

Interest commitments

Timely repayment on due date Delayed payment up to 30 days 31 to 90 daysOver 90 days

5

3

20

Timely repayment on due date

5 They have scored well in repayment of loan and interest amount, it shows that they are capable enough to repay the loan.

Compliance with terms & conditions of sanction, including documentation and creation of charge

Complied promptly

with delay

Not complied

5

3

0

Complied promptly

5 They have submitted all the documents as per the terms and conditions.

Total sales/ inventory+ sundry debtors

Above 4 timesAbove 3 to 4 timesAbove 2 to 3 times2 and below

54

2

0

3.79 4 The sale is 3.79 times more than they inventory and sundry debtors, this shows the amount of cash sales is more than the credit sales.

Submission of MSOD/stock statement/renewal data

Timely submissionSubmission within reasonable timeDelayed/irregular

5

3

1

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submissionAchievement of projected sales

Achievement:Above 85%Above 75% to 85%Above 50% to 75%50% and below

5430

Above 90% 5 As per the performance of the unit, they are achieving 90% in 1st year and the sales volume is increase in the succeeding year. So they performance of the resort is good.

Supported by collateral security including II nd charge on fixed assets.

Security coverage 50% and above25% to 49%Below 25%

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88.96% 5 The unit is having 88.96% of collateral security against the term loan, so the bank has enough faith for that resort.

Operational experience in cash credit

Liability not exceeding DP/limit. Adhoc adjusted in time

Liability exceeding limit occasionally but within DP.Adhoc/excess drawls are adjusted in time

Liability exceeding frequently and adjusted with some delay

5

3

1

Liability exceeding limit occasionally but within DP.Adhoc/excess drawls are adjusted in time

3 In initial stage, they had less deposit as compare to cash credit amount but later they had adjusted to the bank balance.

Table No. 2.2

2.2.3 Problems/ Remarks in the case: - Though it will propose as newly established

resort and not having any brand image, so the people may not be aware about it. The resort may

generate more revenue but whether the promoters are well known persons in local area or not.

2.2.4 Finding of the Case:-

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As per credit rating system of the Bank, it shows that the proposal of resort have scored

above 95% in every criteria of rating like current ratio, debt and equity ratio, documentation of

statements, sales realization period, Debt service coverage ratio, operational experience in credit

and collateral security. Hence, it is viable to run resort in Paralakhemundi.

It is estimated that the hotel industry has to invest more in building and infrastructure, so it

should has insurance policy to meet further uncertainty. But the proposed resort has not

mentioned about insurance policy in the report.

While appraising the project, the bank has decided to provide finance. When evaluating

managerial competence, it is found that the promoter is defaulter regarding the previous loan

with State Bank of India.

3. Findings:

The case 1 has enough reasons to get apprised like in the Credit Rating System it got 95%

marks. In financial viability, the project has enough positive aspect like the repaying capacity,

contribution of promoter to the business, enough working capital, production capacity of the unit

and there is huge market demand for the cashew nut. Therefore, the bank financed the project.

The case-2 The Durga Classic Multiresort Pvt. Ltd. got strong position in Credit Rating System

(95%), so they have enough capacity to get the loan. However, while evaluating managerial

competency the bank has found that the promoter has another loan with State Bank of India,

which has already become NPA. Therefore, the bank has strong reason to reject the project.

4. Conclusion

A project Appraisal is a tool to evaluate a project by the banker when a proposal is presented by

the concern for getting credit to the project. While doing appraisal the banker is looking at

different criteria like managerial competence, financial viability, commercial viability and

technical feasibility. By looking all the above criteria, they are giving scores as per Credit Rating

System; if the criteria are matching with minimum requirement, the bankers extend credit to the

project, if not bankers reject the proposal.

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