project of corporates

8/20/2019 Project of Corporates

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INTRODUCTION

Banks play a very important role in the economic life of the nation. The soundness of

the banking system is very essential for any nation to grow and prosper. Thus it can be

said as a matter of fact that “A bank is just like a heart in the economic structure

and the Capital provided by it is like blood in it. As long as blood is in circulation

the organs will remain sound and healthy”. Thus a sound banking system is an

indicator of whether the economy is strong or weak.

Banking activities like lending, borrowing etc facilitate the process of production,

distribution, exchange and consumption of wealth. In this way they become very

effective partners in the process of economic development. Today modern banks are

very useful for the utilization of the resources of the country. Agriculture, industries,

infrastructure etc all these sectors are growing with the finance provided by the banking

sector.

Accepting deposits for the purpose of lending is the essence of banking!. Banks

provide various types of loans such as personal loans, agricultural loans, corporate

loans etc to individuals, farmers, firms, other financial institutions etc for meeting their

re"uirements.

Individuals are provided by personal loans to meet his re"uirements such as car loans,

educational loans, home loans etc. Banks provide funds to corporates to enable them to

contribute to the economy by providing funds to him for setting up his business,

expanding his business, modernizing it etc.

#ome of the sources of financing to corporate$firms$entrepreneurs are%

1) Term loans project !inance.") #orking capital loans.$) %&port !inance') (emand loans) (evelopmental loans etc.

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Sources of financing to the corporate/firms/ entrepreneurs*

1) Term loans% As the name suggests, these loans are given for fixed period of time

with the provision that its repayment shall also come in regular pre&fixed

periodical installments which may be e"uated or graduated. These are long term

loans sanctioned for the purchase fixed assets such as e"uipment used in its

production process, land ac"uisition or factory premises by the persons engaged

in business and trade or in manufacturing or servicing etc..These loans are used

for the creation of fixed assets. This is a source of debt finance for long term

purpose as pro'ect implementation takes from ( year to )years depending on the

type of pro'ect and the loan is repayable in * to (+years.Term loans can be

upee currency term loan and -oreign currency term loan. upee term loan are

for expenditure incurred for purchase of land ,plant and machinery, technical

knowhow ,margin for working capital, preliminary expenses etc. -oreign currency

term loans are for import of plant and machinery, technical knowhow etc.

") #orking capital loans% In order to meet the day to day working re"uirements of

the business working capital loans are sanctioned so as to facilitate smooth

functioning of the business. These loans are used to meet the need such as

purchase of raw materials , payment to the workers ,rent, electricity, utility etc .

There are different methods used for assessing the working capital loan re"uired

by the unit such as Turnover method, olding period method and the cash

budget system. After the assessment and the sanction of the working capital loan

it is disbursed as and when re"uired for the smooth functioning of operations.

The working capital loans are for a shorter duration as compared to the term

loan.



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$) %&port !inance* These loans are provided to the exporters in order to encourage

the exports of the country. In these loans pre& shipment and post&shipment

finance is provided to the exporter. The exporters have to however provide thebank with the necessary documents in relation to exports for availing such loans.

') (emand loans* This is the fund demanded instantaneously by borrower due to

uncertain changes /e.g. economic downturn, inflation, price rise etc.0. This is the

loan /such as an overdraft0 with or without a fixed maturity date, but which can be

recalled anytime by the lender and must be paid in full on the date of demand.

This is generally not used for pro'ect finance but its relevance with pro'ect finance

becomes more important in adverse situations if term loan is already financed for the pro'ect.

) (evelopmental loans* -inancing pro'ects which are different from conventional

financing involves lots of capital and risk. 1evelopmental loans are used for

financing infrastructure pro'ects which re"uire large amount of funds and have

long gestation period. In these loans generally there is public private partnership.

The developmental loans are re"uiring usually huge amounts and so are mostly

forwarded to the head offices for their approval.

PROJECT FINANCE



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2ro'ect finance involves raising funds for a capital investment pro'ect that can be

economically separated from its sponsor. This type of finance is mainly used for the

purchase of plant and machinery3 land ac"uisition, factory premises etc. The suppliers

of funds depend primarily on the cash flows of the pro'ect to service their loans and

provide return on their investment in the pro'ect.

In the case of pro'ect finance the banks or the financial institutions have to check the

viability of the pro'ect before providing financial assistance to the corporate. They have

to find out the expected returns from the pro'ect and the risks associated with it. The

banks should also know clearly the main purpose for the pro'ect, its viability,

government restrictions, industry trend etc.

In order to provide the finance for the pro'ect the banks goes through different phases

for the purpose of lending these phases are%

2ro'ect Identification% Identifying the needs and re"uirements of the pro'ect. The amount

of finance re"uired.

2ro'ect #election% The banks do not provide loans for all the pro'ects some banks prefer

to lend to a particular type of pro'ect due to its lower risk. Banks ask for a pro'ect report

giving the details about the estimations and future pro'ections made by the proponent.

2ro'ect Appraisal% In this phase the banks conduct the appraisal of the pro'ect so as to

know whether it is financially, commercially and technically feasible or not.

Implementation% It involves the sanctioning of the pro'ect in this phase and the re"uired

formalities to be done.

-ollow&up% 4onitoring the funds which are provided by the bank for the pro'ect purpose.

REASONS FOR PROJECT FINANCIN



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The pro'ects that re"uire finance from the banks or the financial institutions are namely

for the following purposes%

1) +etting up o! ,ew projects* It is one of the basic purpose where corporate

firms, entrepreneurs etc turn towards the banks for financing .The entrepreneurs

who would like to set up a new unit and are not having sufficient funds for it

approach the bank along with the proposal for meeting their need of financing .

The banks than looks into the purpose and the reason behind the desire of

entrepreneurship of the proponent in such cases before taking any decision.") %&pansion projects* These pro'ects are undertaken to increase the existing

capacity of the units so as to enable more production to meet the increasing

demand. 5xpansion pro'ects increase the existing capacity by adopting new and

better technology e"uipments and for this purpose the need for finance arises.$) (iversi!ication projects* The changing business scenario forces to bring out

new products as per the demand and re"uirements of the end user. Thus for the

manufacturing of the new products by existing units there is need for funds.

These pro'ects diversify the product line by the existing units. 1iversification

pro'ects are more seen in firms that have large product mix.') -ackward ntegration projects* Backward integration means moving towards

the source of raw materials i.e moving towards the suppliers .-or manufacturing

certain products which are being used as raw material by the existing unit finance

is re"uired and for this purpose the need for funds arises.) /orward ntegration projects* These pro'ects are the ones that are aiming for

manufacturing of certain products which re"uire the products of the existing unit

as raw material. They are moving ahead towards the consumers.



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0) ehabilitation projects* -inance is re"uired for the purpose to revive the sick

units which have a potential to be healthy again with some infusion of fund and

proper management in these cases the units are studied in detail and funds are

infused in them only on the being almost certain about the recovery and revival of

these sick units. The sick units are made viable to compete with normal$healthy

units.

2) 3oderni4ation projects* These pro'ects are for the improvement of the existing

units in one or a number of ways by modernizing the present activities by % Adopting the new method of production by setting up new machinery with

new and better technology and replacing the old machinery with obsolete

technology.

Increasing the product mix to meet the changing re"uirements of themarket. To increase the demand and grow in the competitive market by

increasing the product range. 4odernizing the existing units by reducing the manufacturing cost with a

view to en'oy the economies of large scale production at lower cost and

also for improving the "uality of the existing product so as to generate

more demand for the product. 6hanging the re"uirement of the raw materials by adopting some thing

new or different.

ORIENTA! "AN# OF CO$$ERCE

7riental bank of commerce was established on (8 th -ebruary (89) in :ahore . its

modest beginning is creditable to its founder :ate ai Bahadur :ala #ohan :al, the first

6hairman of the 7B6. ;ithin four years of coming into existence, the country

partitioned and the Bank shifted its egistered 7ffice from :ahore to Amritsar. The



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7riental Bank of 6ommerce was nationalized on (*th April (8 wealth by ensuring sound growth of business and

make valuable contributions to national economic growth.

The banks undertakes many development programmes and pro'ect such as the 7B6

India grameen pro'ect, 6omprehensive village development programme etc. It offers

various services and products, like current$ savings account, general loans, educational

loans, agricultural loans, corporate loans etc, for the benefit of various section of the

society.

PROCEDURE OF PROJECT FINANCE %AT ORIENTA! "AN# OF CO$$ERCE&'


INTERVIEW WITH THE MANAGER OF

THE LOAN DEPARTMENT.

SUMISSION OF THE PRO!ECT

REPORT WITH ALL THE DETAILS


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INTER(IE) OF T*E APP!ICANT

At 7riental bank of commerce the proponent has to approach the manager of

the loan department and state his re"uirements for the loan .This step is 'ust a

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ASSESSMENT OF THE

REPORT#PRO!ECT APPRAISAL

SUMISSION OF THE FILLED IN

APPLICATION

PROCESSING OF THE APPLICATION

PROPOSAL FORWARDED TO

SANCTIONING AUTHORIT$

SANCTION LETTER ISSUED

DOCUMENTATION % DISURSEMENT

CREDIT MONITORING AND FOLLOW

SANCTI

ON

RE!ECTE

D


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discussion but it is undertaken to help build confidence in the loan manager to

be satisfied that the applicant has the need for the appropriate purpose. It is more like a discussion where in both can clear the doubts going in their mind

and would help in better understanding.

Interviewing the proponent will help the manager to know about the purpose for the loan prior moving to steps ahead and the manager can than decide whether

they are financing loans for such purposes as stated by the proponent.

It will help the manager to know whether the proponent has strong desire for

starting a new venture, expansion of the existing unit etc or he has come to the

bank for financial assistance because scheme is available and he 'ust want to try

out something new . If the banker is successful in studying the above aspect half

of his 'ob is almost done.

The manager can also raise the doubts that he have from the pro'ect idea for

which the proponent has approached him .If the proponent is certain what he

wants to do in the pro'ect, he knows what he aspires to achieve from the pro'ect

and has the re"uired knowledge for the same, the proponent would answer the

"ueries put up by the manager this would help the manager to 'udge the

capability and knowledge of the proponent. The manager if he is satisfied and has confidence in the proponent after all the

discussion than he would ask the proponent to submit the pro'ect report in

details, thus moving to the next step of the pro'ect financing.

PROJECT REPORT

The second step is the submission of the pro'ect report by proponent $ borrower

to the manager .This report is very helpful for the bank to make the investment

decision.

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The borrower has to submit a detailed pro'ect report containing the details about

the pro'ect, proponent, industry, security, feasibility etc. These details are re"uired by the manager to make a further decision thus the

borrower has to try an incorporate most of the details that he could to explain the

feasibility of the pro'ect. The pro'ect report generally contains the following information%

A) (etails about the 5wnershipType o! business% ;hether the business is

sole proprietorship, partnership or public$ private limited co. In case of%

+ole6proprietor

(0 1etailed bio&data of the proprietor, age, educational "ualifications, work

experience, photo identity, residential address etc.

?0 :ist of total assets owned by proprietor .

)0 :ist of total liabilities of the proprietor.90 Income tax details for the last three years.

7artnership

(0 The number of partners and their contribution in the company.?0 1etails of the partners work experience, "ualifications etc. )0 Assets and liabilities of the partnership firm.90 Any other debt liability.*0 -inancial data of the partnership firm.

8imited company

(0 Brief history of the company.?0 2romoters of the company and the board of directors.)0 #hareholding pattern and the capital structure.90 1ate of commencement of business.*0 -inancial performance of the company in the last three years and prior.@0 2ast borrowings details from banks and other financial institutions.

-) (etails relating to the -usiness*(0 1ate of commencement of the business.?0 :icenses re"uired for carrying the business.)0 -inancial statements of the business for the past years.90 4anufacturing process in the business.*0 2rofitability of the business.@0 2ro'ects already undertaken and future pro'ects.

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C) 7roject details*(0 Brief description of the pro'ect.?0 1etailed cost of the pro'ect.)0 5stimated revenue from the pro'ect.90 aw material and utilities re"uirements.

*0 2rofitability.@0 Technology to be used.0 #tatutory approvals.


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PROJECT APPRAISA!

7nce the pro'ect report is submitted than is the very crucial step of the appraisal of the

pro'ect report. 2ro'ect appraisal is “A detailed and critical appraisal o! the project !or

taking a !inal decision about !inancing any project: whether individually or

jointly”. It is used to "uestion the pro'ects so as to be sure about the pro'ect before

deployment of resources in it. Appraisal of the pro'ect report is very crucial so as to

avoid sick units and the wastage of scarce resources. arious risks associated in the

pro'ect like financial, technical, industry etc are studied in detail for this purpose. At the

7riental bak of commerce the pro'ect report submitted by the proponent is studied and

analyzed thoroughly. The pro'ections given by proponent in the pro'ect report arechecked completely to see whether they are achievable, realistic and unbiased. The

proponent$borrower should also pass the @6>s test. This test comprises of the following

character, capacity, capital, condition, cash flow and collateral. 5ven the managers

should be competent enough to handle the pro'ect3 they should have the re"uired

knowledge, expertise and skills which the bank manager takes "uite a note of while

studying the report and during the initial interview. The contribution of funds from the

business for the pro'ect should be sufficient. The bank will provide the funds if there is

contribution from the business also.

The bank takes into account the following for the appraisal respectively%

(0 -inancial appraisal.?0 Technical appraisal.)0 4anagerial appraisal.



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90 6ommercial appraisal.

FINANCIA! APPRAISA!

At oriental bank of commerce, more emphasis is given on !inancial appraisal of the

report. The financial appraisal of the report is to deal with the financial side of the

pro'ect. #ince the bank is providing the loan it wants to know about how it would be able

to recover the loan and in how many years. Thus the financial appraisal would enable

the bank to know all the necessary details as per the loan recovery. -or conducting the

financial appraisal the bank would study the following%

(0 The cost of the 2ro'ect.?0 5stimates of the revenue)0 6ost of production.90 #ources of finance.

*0 atio analysis.@0 Breakeven point.0 2ro'ected 6ash flow statements.


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a) 8and and development costs* The location of the land and the

infrastructure around it is a ma'or factor in determining the cost of the land.

The legal charges that are incurred for the land ac"uisition and the

development also are to be taken into account while calculating the cost.

;hether the land is agricultural or non agricultural land, freehold or leasehold

is to be determined.The costs of laying the roads and leveling it , fencing gates are also to be

calculated .b) -uildings* ate per s"uare meter for construction, design and layout of the

building that is to be constructed. Breakup of the civil construction costs.

;are houses constructed near the building .Any other construction as per the

re"uirement its costs, area and type of construction.c) 7lant and machinery* 4ain items of plant and machinery. ;hether the

machinery is indigenous or imported and its availability. 1elivery schedule of

the machine. ;hether it is to be purchased against :6. ;hether it meets the

re"uirements of latest technology. The Came of suppliers and their status

report. ;hether it is a new or ?nd hand machine . In case it is ?nd hand,

certification with regard to its condition, residual life etc.d) 5ther !i&ed assets* The other fixed assets are furniture and fixture , vehicles

for transportation , other e"uipments that are to be used in the factory building

are some of the other fixed assets that would be re"uired. The costs of these

assets, their installation and purpose must be well determined.e) 7reliminary and pre operating e&penses* The preliminary expenses are

those incurred at the very beginning before the starting of the business

.arious items and the nature of the preliminary expenses are to be

determined.!) %ngineering and consultation !ees% The engineering and consultation fees

are to be paid.

g) #orking capital re;uirements* The margin money for the working capital is

to be kept for meeting the working capital re"uirements of the stock of raw

materials, finished goods etc.



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h) 7rovision !or Contingencies* 2rovision for contingencies is to be made for

the rise in prices of the raw materials, transport, any new additions etc.

Inflation is the ma'or reason to provide for contingencies ,provision can be

made between *&(+ D depending on the nature of the pro'ect and the time

frame.

") +ources o! !inance* The sources of finance would determine the type of

financing for the pro'ect. The 6ompany has an option to obtain finance from

various other sources like issue of ordinary$preference shares, convertible bonds

and debentures, term loans from financial institutions and banks, 56Bs, foreign

direct investments, lease financing etc. owever the company should neither be

overleveraged nor underleveraged. Banks will not lend in a pro'ect in which the

promoters would not risk anything from their side.%;uity* A certain percentage of the capital costs are met by the promoters to

have their stake in the pro'ect. 5"uity provided acts as a buffer during operational

difficulties. 5"uity provided doesn>t re"uire any interest payments as in debt. As

regard promoters> contribution details are to be given about whether it is by way

of e"uity, internal accruals, private e"uity etc and how much would be infused

upfront. Identifiable sources of promoters> contribution should be clearly brought

out.(ebt* Banks and financial institutions provide the funds that are re"uires as long

term loans or working capital loans for the pro'ect. These loans attract an interest

on the loan amount. The banks would however see how much e"uity financing is

done in the pro'ect before granting any loan as the e"uity financing would

indicate whether there is any cushion or not , e"uity provided will build

confidence as the promoters have even put in their funds.

$) Cost o! production* The cost of production is pro'ected by determining the

capacity of the production, the raw materials re"uired and the various other

resources re"uired for the purpose of production. Appropriate estimates would

give a basic idea about how much would be the cost of production. It will help to

see how would be the profit that can be earned .The raw material sources



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whether they are imported or not , the labor used such as skilled or unskilled

labor for the purpose of production and various other resources utilized would all

comprise of the cost that would be paid for production.

') 7ro!itability %stimates% The profitability estimates are the estimates of theexpected sales revenue and the cost that is incurred for production by the units.

The estimates that are made for the sales and the costs should be checked

correctly so as to not give a rosier picture than what is expected in actual from

the pro'ect thus the verification becomes very essential in the case of making

profitability estimates. The bases for the various costs are to be identified and

checked. The estimation can be done as follows%

A0 #ales estimates erify the installed capacity3 do not assume full

production capacity in the initial year. Assume

approximately @+ D production in the first year.

Eradually assume a little higher in the second

year approximately +&


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monthly basis.

10 7ther resources 5lectricity re"uired, water supply re"uired, any

other materials re"uired are to be identified.

Any construction to be made for any purpose.

501epreciation 1epreciation is calculated on straight line basis

for the estimating whereas on written down basis

for tax purpose.

Eenerally land is not to be depreciated , building

and furniture are provided for at (+D

The machinery and e"uipments depreciation is

basically identified from the life of such assets. Additional use of machinery would increase their

depreciation rate.

-0 ent, insurance,

interest etc.

Identify the area that has to be taken on rent.

The rent per s"ft would depend on different

criteria such as location, infrastructure at the

place of the unit etc.

Insurance is taken to avoid the risks in the

future.

Banks insist on insurance as it helps to protect

the security.

The insurance will depend on the cover taken

Interest paid on the loan is determined by the

bank at the time of granting the loan.

0 #AE expenses #elling and distribution expenses like packaging

expenses, advertisements etc are to be

estimated.

Administrative expenses such as fees paid any

other general or administrative expenses



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incurred are to be taken into account.

I02rofit After determining the various expenses and the

sales revenue the difference is determined.

2rofit is when revenues exceed the costs

incurred this is profit before tax.

) Cash !low estimates and 7rojected balance sheet* The cash flow estimates

are prepared to see that the unit does not face any li"uidity problem.2ro'ected balance sheet is prepared to give a idea about the future position

based on the various estimations that are done. The profitability estimates and

the cash flow estimates along with the pro'ected balance sheet will portray a

future financial picture of the pro'ect. At oriental bank of commerce they want the future pro'ections of the balance

sheets to identify whether the pro'ect is viable or not. 2ro'ected balance sheet

shows the position of the share capital, loans, fixed assets, current assets,

debtors and creditors which help to identify the future picture of the pro'ect. At

7B6 they study the financial pro'ections thoroughly before granting the loan as

they place emphasis more on the financial pro'ections.

0) +ensitivity analysis* #ensitivity analysis to be done since the future is uncertain

and it is important to know what will happen in case of these uncertainties.

#ensitivity analysis is done for increase in input cost, decrease in selling price,

and decrease in production capacity, increase in interest rate or any other ma'or

factor affecting the profitability. It is done as the pro'ections may not be the same

as actual due to certain deviations. It helps to know the impact of these changes

on the debt service coverage ratio, internal rate of return etc.

2) -reak even analysis* The break even analysis is conducted so as to know how

much should be produced and sold at a minimum to ensure that the pro'ect does

not lose money. This point of no loss at minimum "uantity is called the breakeven

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1ebt G e"uity ratioH :ong term debt $ Total e"uity

point. ;hile appraising a pro'ect, the break&even point should be expressed in

terms of the percentage of installed capacity to know the margin of safety in the

capacity.


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6urrent ratioH 6urrent Assets $ 6urrent :iabilities

current liabilities. Bankers in India have used a norm of (.)) as

satisfactory ratio however internationally it is ?. 6urrent assets comprise of

cash, current investments, debtors, inventories, loans and advance and

prepaid expenses. 6urrent liabilities include #hort term bank borrowings

,trade creditors and other current liabilities

(ebt6service coverage ratio* this ratio indicates the capacity to repay the

term loan and the interest on it. It is calculated by the following formula%

1#6H 2AT 1epreciation Interest on term loans lease rentals if any epayment of debt Interest on term debt lease rentals if any

This ratio is the indicator of the long term solvency of the borrower and its

ability to service its obligation. The debt service coverage ratio of (.* or

more is satisfactory. This ratio should be calculated for the entire

repayment period.

nterest coverage ratio* This ratio is calculated to identify how easily the

company would be able to pay the interest on the outstanding loan. The

lower the ratio is, it is a sign of poor performance as the interest would not

be paid easily signaling that the company is facing the debt burden. It is

calculated as follows %

9ross 7ro!it margin* It is defined as the difference between the net salesand the cost of goods sold. It shows the margin left after meeting the

manufacturing costs. It measures the efficiency of production and pricing.


Interest coverage ratio H 5BIT $ Interest expense

Eross profit margin H Eross profit $ Cet sales


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,et pro!it margin* It shows how much would be the margin after

deducting the cost of production. It is the indicator of the overall efficiency

of the production, administration, selling, financing, pricing and tax

management. The higher the profits the better are the prospects.

/i&ed assets coverage ratio* Banks sanction Term loans against the

security of fixed assets. The excess of fixed assets over term loans

secured by them provides for the margin of security. In order to find out

the available security cover, fixed assets coverage ratio may be calculated

by the lending institutions by the following formula%-ixed asset coverage ratio H JCet fixed assets 6apital work in progressK

JTerm loans deferred credits debenturesL other loans secured by fixed assetsK

>) (iscounted cash !low techni;ues* Investment criteria is broadly divided into

two categories i) (iscounting criteria and ii) ,on discounting criteria1iscounting criteria comprises of the C2, I and the benefit cost ratio.Con discounting criteria comprises of 2ayback period and accounting rate of

return. ;e look mainly at the discounting criteria for pro'ect appraisal.a) ,et present value* The net present value is the sum of the present values of

the cash flows positive as well as negative that are expected to occur over the

life of the pro'ect.C2 is used to appraise the long term pro'ects. It is used for

the purpose of capital budgeting and also widely used in economics. It

indicates how much value a pro'ect adds. It measures the excess or shortfall

of cash flows in terms of present value and is calculated as follows%

;hen C2M+ it is a positive indicator such pro'ects should be

accepted as they will add value to the firm. ;hen C2N+ it is not a good indicator as it will reduce the value of the

firm. These pro'ects should be re'ected as they will harm the existing

value. ;hen C2H+ it shows that this particular investment would neither

gain nor lose value. #uch pro'ects can be accepted provided they have


Cet profit margin H Cet profit $ Cet sales


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bright future prospects depending on their positioning and other

benefits. Eenerally these pro'ects adds no monetary value and so are

looked indifferently.

b) nternal rate o! return* It is the rate used in capital budgeting to comparethe profitability of the pro'ects.I is the rate at which the C2 e"uals to zero.In the context of saving it is called as the rate of return. It is the discount rate

which e"uates the present value of the cash flows with the initial investment.

A pro'ect is worthwhile if its I exceeds the cost of capital, otherwise it is not

worthwhile. Accept i! ? Cost o! Capital.

c) -ene!it =cost ratio* The B6 of a pro'ect is the present value of its benefits

i.e. the cash inflows divided by the present value of its costs i.e. the cash

outflows. It is calculated as follows %B6 H 2resent value of benefits $ Initial Investment.

Accept the pro'ect when B6 M(.Indifferent to it when the B6 H +.e'ect the pro'ect when B6N(.

7ut of the various techni"ues mentioned above is prominently used for

pro'ect financing. It is useful to show whether the pro'ect is worthwhile and the

company would be able to meet its obligation.

After the financial appraisal is done with the next step is technical appraisal.



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TEC*NICA! APPRAISA!

Technical analysis is the systematic gathering and analysis of the data pertaining to the

technical inputs re"uired. The technical appraisal is conducted to ensure that the

physical facilities re"uired for production will be available without any difficulty. It is

choosing the best alternative from the various alternatives available for them. The

technical appraisal involves the following%

:ocation of the pro'ect.

4anufacturing process to be used.

#ize of the plant.

2lant layout.

2lant and machinery to be procured. 2roduct mix.

#chedule of pro'ect implementation.

8ocation o! the plant

The location of the plant is very important factor as it helps to determine the future

performance of the pro'ect. The study of the location is crucial as it helps to estimate the

cost associated with the pro'ect. The following are studied about the location of a plant%

a0 Type of the land% The type of the land indicates whether the land is

underdeveloped or developed. The soil type of the land. ;hether there are any

claims on land by any other parties. The sufficiency of the land area in

re"uirements to the pro'ect.



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b0 2roximity to the source of raw material% The proximity to the source of raw

material would reduce the transportation expenditure. The raw materials which

are bulky or fragile would be very difficult to be transported at long distance in

such cases it is beneficial to have source of raw material closer to the

manufacturing unit. The closer is source of raw material the lesser is the delay in

the manufacturing procedure as raw materials would reach on time.c0 2roximity to the market% The proximity to the market would lead to faster delivery

of the finished products. #ome 2roducts which become bulky after

assembling $manufacturing should have proximity to the market ex% Automobiles.

5ven in case of products that are perishable in nature it is crucial to have

proximity to the market.d0 5asy availability of labor% 1epending on the type of labor re"uired the location of

the unit becomes an important factor. In some places there is need for skilled

labor however there may not be easy availability of the skilled labor everywhere

thus location becomes important. Also the cost of labor varies at different places

so location plays an important role in identifying the cost.e0 Infrastructure facilities% The infrastructure facilities such as connectivity of roads,

availability of power, fuel, availability of water etc are important factors in case of

manufacturing. The success of pro'ects also depends on these factors as they

contribute mainly to the pro'ect and these facilities are not so easy to build or develop them so the location should be selected after analyzing these factors.

f0 #5Os% There are concessions provided by the government for setting up units at

the underdeveloped regions. These concessions include tax holidays, subsidies

etc for a certain period of time .The concessions provided by the government is

to encourage the development in those areas. #etting up units in those areas

would lead to lower costs as the labor and the other charges are comparatively

cheaper in those areas.

3anu!acturing process

The manufacturing process should be studied in depth to know about the different

activities involved in the process. The time generally re"uired for the process, the

expected resultant output, wastage from the process, time taken for each activity all

these should be studied in detail as this would help in determining the process of



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manufacturing. The "uality control process, re'ection rates, recovery from wastages all

these should also be studied.

+i4e o! the plant

The size of the plant is a determinant of the production cost, the size should be

economical it should not be very large as the unutilized capacity would increase the

cost. The plant should be of the optimum size as the banker would see whether there is

market for absorbing the production so as to discourage inappropriate use of funds by

establishing large plants even when there is not a large market. The size of the plant

can be determined on three basis%

a0 #ize of the plant with respect to the number of machines.b0 #ize of the plant with respect to the output.c0 #ize of the plant with respect to the input.

7lant layout

The layout of the plant is very important as it helps in reducing the cost of manufacturing

by saving time and avoiding wastages. The layout of the plant should be designed such

that if any expansion has to be done in future it should support that without causing any

hindrance in future expansion of the plant.

7lant @ 3achinery

1ecision has to be taken regarding the technology re"uired in the plant and machinery.

The machinery purchase decision is mostly influenced by the size of the plant, the

capacity re"uired, technology re"uired and the cost of the machine. 1ecision has to be

taken whether the machine is to be imported for getting the latest technology needed. If

the plant and machinery has to be imported for the purpose of production it should be

done by choosing the best estimates from the various estimates of different suppliers.

The installed capacity of the machine, technology used, method of operation,



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maintenance of the machinery, warranty and after sales service provided all these

factors also have to be taken into account while making the purchase decision.

7roduct mi&

It is the range of products that are to be offered to the customers to meet their demand.

The demand of the customers varies and accordingly the manufacturers have to offer

them the range of products that are as per their re"uirements. Thus the need for

manufacturing the different types of products arise in different shapes or sizes ex% The

garment manufacturers would manufacture the garments of different sizes and different

color keeping in mind the re"uirements of the end users. There should be flexibility to

change the product mix keeping in mind the changing market and the competition from

the different market players. The more flexible the production can be the higher are the

chances to meet the re"uirements of the end users. The manufacturing process should

be such that if any modernization or extension is to be done it can support it.

+chedule o! the 7roject implementation

Techni"ues such as 624 and 25T are used for the scheduling of the pro'ect. These

techni"ues help to determine the pro'ect duration and the schedule for each activities

involved in the pro'ect. The appraising officer of the bank verifies that all the activities

are covered and the correct estimation is provided about the pro'ect in respect of the

time schedule.

At 7riental bank of commerce the Technical appraisal is done by the officers having

technical expertise .owever in case of big pro'ects with huge amount the technical

appraisal is done by the outside agency as approved by the appropriate authority. The

technical appraisal is done ma'orly for the investments in new and unrelated areas

wherein the technology plays a prominent role ex% IT



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$anageria+ Appraisa+

4anagement appraisal is related to the managerial competence, integrity, knowledge of

the pro'ect, "ualifications and experience of the promoters etc. The promoters should

have the knowledge and ability to plan, implement and operate the entire pro'ect

effectively. The past record of the promoters is to be appraised to clarify their ability in

handling the pro'ects. Banks not only look at the pro'ect report but they look who is the

one responsible for the pro'ect , his capability , knowledge and expertise. In managerial

appraisal the following are studied %

Pualities of the promoters$management.

Pualification, 5xperience and 6apability of the management.

7rganizational set up.

-uture prospects and plans.

ualities o! the promotersmanagement

;hile conducting the pro'ect appraisal the bank looks at the "ualities of the promotersof the company sponsoring the pro'ect. arious "ualities such as their confidence, risk

taking ability, frankness, honestly, initiative, intelligence, energy, motivation etc all are

taken into account. These "ualities shows that the ma'or driving force i.e. the

management behind the pro'ect is competent or not to lead the pro'ect.

uali!ication: %&perience and capability o! the management.

The details regarding the "ualification of the promoters, the experience of the promoters

and their previously successfully completed pro'ects are seen by the bank. 5x% -or

establishing an IT software firm the bank will see that the promoter has the re"uired

knowledge and the "ualification for starting that firm. In case the promoter is not having

the knowledge and relying on others for information and directions to go about the



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pro'ect the bank will not lend for the pro'ect wherein the re"uired expertise and

knowledge is lacking.

5rgani4ational set up

1etails regarding the organizational set up are collected by the bank. In case of sole

proprietary firm complete details of the proprietor is taken into account as he is the

whole and sole of the business. In case of 2artnership firm>s details about each partner

such as work experience, "ualification etc is taken into consideration. In case of

companies the information about the promoters and the board of directors are to be

considered.

/uture 7rospects and 7lans

The bank not only sees the past performance but also determines the future prospects

and plans that the management has for growth. The banks will lend for those pro'ects

that have a growth potential so that the bank can easily recover its loan that it has

provided. The future prospects that the management has for the firm would help the

bank to know about the future of the pro'ect.

At 7riental bank of commerce the manager of the loan department in the preliminary

interview itself tries to understand the aim of the proponent whether the proponent

wants to be an entrepreneur or 'ust availing for finance as the scheme is available when

the manager feels that the proponent has a desire for entrepreneurship he is asked to

submit the pro'ect report with all the relevant details. This shows that the managerial

appraisal is of utmost importance.

The careful check is made to see whether the promoters or the proponent is in the

defaulters list or not. ere comes the role of 6IBI:! wherein banks can avail the data of

the defaulters and the status of the proponent as a defaulter or not by paying some



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nominal fees, owever for this the bank has to register and will get an Id and a

password.

CO$$ERCIA! APPRAISA!

6ommercial appraisal involves the assessment of the current market scenario, which

enables the pro'ect to get ade"uate demand. The factors involved in commercial

appraisal are the scope of the pro'ect in market, customer friendly process and

preferences, future demand of the supply, effectiveness of the selling arrangement,

latest information availability in all areas, government control measures etc. owever

the crucial factors for commercial appraisal are demand, supply, distribution, pricing

and other external factors.

(emand

To determine the product demanded by the end users.

To estimate the existing and future demand for the product.

To find the demand in case of exports purpose.

The consumer group demanding the product.

+upply

The installed capacity and the production capacity.

The existing production.

Qnder utilization of capacity.

1emands from domestic as well as foreign country.

(istribution

6ost of distribution

6hannels of distribution

1elivery schedule

4ode of transport

N L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 2&


30/47

Advertisement

7ricing

1emand and supply

2rice trends

6ompetitor pricing

Taxes imposed

2rofitability

5ther %&ternal !actors

Eovernment policies. Roint ventures, tie&ups etc.

The commercial appraisal is done to know whether there is commercial viability or not of

the pro'ect. The above mentioned five factors are of great importance in commercial

appraisal however there are certain more factors that are important such as %

8i!e cycle o! the product% The different stages of life cycle help determining the

advertisement, innovation and various other costs for the product. The life cycle of the

product has to be determined in order to know when the product will reach the growth

stage and when more attention has to be given to the product so that it is not wiped off

easily from the market.

Advertisement* The advertisement expenditure is to be identified to know how much

should be spent on which media so that there is maximum coverage of the target

audience. It should be done keeping in mind the other competitive firms and sales

target.

Competition* The existing players in the market have to be identified along with their

strengths and weaknesses. The potential new entrants also have to be identified and

there should be preparation to face the competition.



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CREDIT RATIN OF T*E PROJECT

A credit rating estimates the credit worthiness of an individual or the corporation. They

are calculated from the past and present financial records of the individual or the firm.

They are done to know about the ability of a lender or investor to meet the debt

obligations and timely payments. A poor credit rating indicates high default rates, poor

financial stability and higher interest rates for the loan.

At oriental bank of commerce they use software called “3AC+” for the purpose of

credit rating. This software is provided by C+8 for the purpose of conducting the

credit ratings. The software re"uires the necessary data to be punched in and the

scores are calculated automatically and the ratings are done. This type of credit rating

software has reduced the burden of calculation and also has lead to uniformity in

assessing the credit worthiness. Based on the calculations the pro'ects are given ratings

such as AAA, AA, A or B.

The bank sets the score range for each rating but generally a score of above


32/47

The interpretation of each rating is as follows%

atings 5btained nterpretation o! the ratings obtained

AAA a0 isk is minimum .

b0 The default chances are minimized.

c0 2ro'ect is sound and the bank would be able to

recover the loan amount and the interest.

AA a0 iskier than the AAA rated.

b0 1efault chances are comparatively higher than AAA.

c0 ;ould be preferred only after the AAA pro'ects.

A a0 isk level is higher in such pro'ects.

b0 -inancial li"uidity could be under strain so default

chance may arise.

c0 4ust be constantly monitored if they are approved.

B a0 isk level is higher than the earlier ratings, so the

probability of default increases more in this case.

b0 5asily affected by certain changes in the business

environment and the impact would be on the loan

recovery so are less preferable.

c0 Cot much financially stable.

Thus AAA ratings are more favorable due to the least risk involved compared to the

others.



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PRIORIT, SECTOR !ENDIN

;hile conducting the pro'ect appraisal another aspect taken into consideration is priority

sector lending. Banks have to provide the loans to priority sector as per the targets set

for them by the BI. The priority sector comprises of the following%

(0 Agriculture.?0 #mall scale industries /including setting up of small industrial estates0.)0 #mall businesses

/7riginal cost of e"uipments used for the business not to exceed ?+ lakhs0.90 etail traders /advances to private retail traders> upto s (+ lakhs0.*0 2rofessional and self employed persons

/Borrowing limits not exceeding s.(+ lakh of which not more than s.? lakh for

working capital0.

@0 :oans to software industry/aving credit limit not exceeding s ( crore from the banking system0.

0 #pecified industries in food and agro processing sector /investment in plant and

machinery not to exceed s * crores0.s.

1omestic Banks have to lend approximately 9+ per cent to the above mentioned priority

sector from the total lending it does. owever it is a little different for the foreign banks.

The following table shows the lending re"uired for these priority sectors.

(omestic banks both public

and private in ndia.

/oreign banks operating in

ndia.

Total priority sector 9+ D of the CB6 )? D of CB6.



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advances

Total agriculture

advances

(< D of the CB6 Co target.

##I advances Co target. (+ D of CB6

5xport credit 1oes not form part of priority

sector.

(? D of CB6

Advances to weaker

sections

(+ D of CB6. Co target.

The banks thus have to lend to these priority sector as per the target specified. The

rates charged to these priority sectors also varies.

2: H ((D p.a.

#r.no #cheme Interest rate structure

( 4icro finance 2: minus (.*+D to

2: plus +.*+D

? #ervice sector pro'ect 2: plus +.?*D to 2:

plus ?.?*D

) upee term loans under all other schemes 2: minus +.?*D to

2: plus (.*D.

Su-mission an. Screening of the !oan App+ication

At oriental bank of commerce once the loan officer goes through the pro'ect report and

thoroughly appraises it, he then gives the proponent the loan application to fill with

re"uired details. The loan application would contain the following details such as%

1etails of the applicant.

1etails of the existing$proposed facilities.



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2urpose of the loan.

1etails of the facilities en'oyed by the sister$allied concerns.

:oans from other banks with details.

1eclaration by the applicant.

The complete pro forma of the loan application form is attached in the A,,%B% 1

showing the other details asked in the loan application form.

7nce the loan application is duly filled in the loan officer gives an Acknowledgement

slip to the applicant .The acknowledgement slip is attached in the A,,%B% " for

reference.

After the submission of the loan application the next step is the screening of the loan

application in this process there are two ma'or things done%

(0 Inspection by the loan officer.?0 6onformation from 6IBI:.

1) nspection by the loan o!!icer The loan officer verifies the details mentioned in the pro'ect report by onsite and

offsite inspection. ;hile conducting the onsite inspection the officer conducts a

surprise visit to the site specified and he has to verify the details mentioned in the

pro'ect report regarding the location of the plant, size of the unit, tangible net

worth, existing plant and machinery, its capacity etc. The officer would talk to the

production manager, supervisor, research and development manager to try and

generate more information if possible. erification of the books is also done and



36/47

than he submits his report. Eenerally the following are the "uestions which he

answers in the Appraisal cum #anction note%

a0 Is the applicant>s property identifiedS

b0 Is the application and other related papers properly

verifiedS

c0 ave you conducted the 2re sanction visitS

d0 Came and designation of the visiting officerS

e0 Are you satisfied with the reported reputation of the

applicantS

f0 Is the loan applied need basedS

g0 Is there sufficient margin moneyS

h0 Is the applicant related to any employee of the bankS

i0 Is the applicant defaulter of any financial institutionsS

'0 Is the applicant eligible for the loanS

After the above information is duly filled the loan officer who has visited the site would

have to give his observations and suggestions about the 2re&sanction visit.

Dindly re!er to the “Anne&ure '” !or getting the complete details regarding the

appraisal cum sanction note and recommendation and observation.

") Con!ormation !rom C-8

6IBI: & India=s first credit information bureau & has been established to cater to the credit

information re"uirement of the financial sector and serves as an effective mechanism

for curbing the growth of Con&2erforming Assets /C2As0. The eserve Bank of India

/BI0 constituted a ;orking Eroup in 1ecember ?++( to examine the possibility of

6IBI: performing the role of collecting and disseminating information on suit&filed

accounts and list of defaulters, being reported to BI by banks and notified financial

institutions. BI implemented some of the recommendations of the ;orking Eroup. BI

apprised banks, -Is and state financial corporation>s of the formation of 6IBI: and

directed them to send, to 6IBI: as well as to BI, data on%



37/47

#uit&filed accounts of s. ( 6rore and above,

#uit&filed accounts /wilful defaulters0 of s. ?* :acs and above.

6onsecutively the banks and the financial institutions submitted the re"uired data to

6IBI: as well as to BI. At present, 6IBI: is maintaining a database on suit&filed

accounts of s. ( 6rore and above and suit&filed accounts /wilful defaulters0 of s. ?*

:acs and above. This information is based on an application developed to enable the

users to access data through a parameterised search process across banks and

companies at various geographical locations. #uit&filed accounts of lower value are

being covered in a phased manner.

7riental bank of commerce for the purpose of getting the information of the defaulters

uses the information from 6IBI:. The bank being a member has its :7E IC I1 and

2A##;71 for this purpose. The bank officer :7E# IC and than enters the name and

the details of the proponent and gets the information about the status of the

applicant$proponent whether he is a defaulter or not. The banks have to pay some

minimal fees for being a member however they get the benefits of knowing about the

defaulters and so the banks avoid lending to such applicants. This has reduced the level

of C2A>s of the bank to a greater extent.

SANCTIONIN

At oriental bank there are discretionary powers for sanctioning the loans, The powers

are divided into a three tier system such as Branch level, egional level and ead

officer along with the board. Again there is discretionary power that are assigned to

each bank for sanctioning the loan amount for ex% At :okhandwala branch the manager

has the power to sanction the loan amount up to upees (.* crores only. #imilarly the



38/47

smaller branches have lesser sanctioning power and can sanction lower amounts below

( crores. The hierarchy of sanctioning power is shown in the table below%

#AC6TI7C A47QCT A::7;51 AQT7IT

:oans below * crores Branch office /discretionary

power to each branch0

:oans between * crores to ?+ crores egional office

:oans above ?+ crores ead office along with B71

7nce the final report is prepared and forwarded to the sanctioning officer for the

approval the sanctioning authority than have to decision about the rate of interest, fees,

terms and conditions and securities that are to be mortgaged or pledged. Thesedecisions are crucial and they are taken keeping into account the capacity of the

borrower. The rate of interest charged can be fixed rate of interest or floating rate of

interest. These rate of interest will determine the cash flow to the bank in terms of the

interest they are going to receive from the borrower.

1)ate o! interest

The bank may charge either fixed or floating rate of interest on the loan amount.

a) /i&ed rate o! interest% A fixed interest rate loan is a loan where the interest

doesn=t fluctuate during the fixed rate period of the loan. A fixed interest rate is

based on the lender=s assumptions about the average discount rate over the

fixed rate period. -or example, when the discount rate is historically low, fixed

rates are normally higher than variable rates because interest rates are more



39/47

likely to rise during the fixed rate period. 6onversely, when interest rates are

historically high, lenders normally offer a discount to borrowers to fix their interest

rate over time, as rates are more likely to fall during the fixed rate period . -ixed

interest rates allows the borrower to accurately predict their future payments.

The borrowers are certain about the payments they have to make so it is less

difficult for them to manage.

b) /loating rate o! interest* The rate of interest keeps on floating i.e. changing in

relation to some base rate to which a margin is added generally. -loating rate

loans are common in the banking industry and for large corporate customers. A

floating rate mortgage is a mortgage with a floating rate, as opposed to a fixed

interest rate loans. The rate of interest is decided on the basis of the B2:, past

performance of the company, risk premium, market conditions etc.

")Terms and conditions*

In order ensure that the borrower does not make any ma'or deviation from plan

of the schedule and activities without the bank>s knowledge or prior approval, it

is customary for banks to stipulate certain special covenants governing theborrower>s operations in addition to the normal terms and conditions stipulated

for all loans by the bank. The covenants could be positive i.e. allowing the

borrower to do certain actions and negative such as prohibiting the borrower from

doing certain action. -ew of the positive and negative covenants are as follows%

N L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Page 3&


40/47

75+TE% C5E%,A,T+

Qse of loan for the specified purpose only.

4aintenance of the assets that are given as security.

Timely payments of the wages, salaries, interests etc.

epayment of the installments on due date. egular payment of the insurance premium of the assets kept as security.

2ermission to banks for conducting their follow up and supervision through

inspections. 4aintenance of the books, records and all details.

,%9ATE% C5E%,A,T+

Cot to create any mortgage, lien on the assets already kept as security.

Cot to invest in any other purpose other than what the loan was seeked for.

Cot to alter the capital structure.

Cot to sell or dispose the property that is with the bank.

Cot to give guarantees without prior consent of the bank.

Cot to modernize or expand without the consent of the bank other than that

which was specified in the report.

Documentation an. Dis-ursements

There are many necessary documents that are to be provided in order to execute the

loan agreement. The following documents are that are re"uired %

(0 2roof of the identity and other constitutional documents& :etter$declaration from

the proprietor, partnership deed, 4emorandum of Association, 6ertificate of

Incorporation, 6ertificate of 6ommencement of business, 6opy of bye&laws etc.?0 :icenses to carry on the business activity

)0 Eovernment approval and the re"uired clearances.90 2ast and current year balance sheet and other financial documents.*0 1etails of the collateral security along with the proof of ownership.@0 :atest income tax assessment order and latest income tax return filed.0 egistration re"uirements such as in case of ##I etc.


41/47

80 6ertificate from the auditors stating that the company can enter into loan

agreement with the bank and the financial institutions.(+01etails about the promoters contribution.((06ertified copy of the resolution passed by the company in the general meeting for

authorizing the Board of 1irectors to mortgage the assets of the company infavor of the financial institutions$ banks.

(?06ertified copy of the resolution passed by the company>s board of directors

authorizing any director /s0 or any other person /s0 to execute the documents and

provide security for the institutional loans.()06ertified copy of the resolution passed by the company in the general meeting for

borrowing in excess of its paid&up capital and free reserves.(907ther debt obligation details if any.

7nce these documents are submitted, verified and the proposal gets sanctioned than

the loan agreement is to be made. The loan agreement is formulated along with the

necessary details about the rate of interest, loan amount, type of loan, repayment

period, security assigned for the loan, borrower>s details, terms and conditions,

declaration of the proponent etc. After the loan agreement is duly signed than the bank

would disburse the loan amount.

1isbursement of the loan amount are done as per the re"uirements of the borrower, at

7riental Bank of 6ommerce the bank gives the loan amount for specific purpose, this

implies that the loan amount could not be used for any other purpose 5x% Bank is

providing loan to buy plant and machinery at the pro'ect site thus the bank would as far

as possible make the payment to the supplier of the plant and machine thereby to

ensure that the loan proceeds are towards the very purpose of taking the loan.

1isbursement of the loan amount is also done in installments as may be re"uired. The

loan amount is disbursed in installment especially for the Infrastructure pro'ects which

re"uire huge funding for its different phases. 5ven in the case of construction pro'ects



42/47

the loans are given in installments when the loan amount is very high. This way of

disbursing the loan amount does not put pressure on banks to fund the high cost

pro'ects.

$ONITORIN AND FO!!O) UP

4onitoring is the process of observing progress and resource utilization and anticipating

deviations from planned performance. In the monitoring and controlling phase there ismonitoring of the technical performance, time and cost performance in addition to the

organizational performance. 6orrection and re&planning are some of the actions taken

after monitoring. The monitoring is done periodically or continuously by fixing milestones

in the pro'ect phases. There are many reasons that the banks nowadays follow the

continous monitoring approach. The reason for continous monitoring are%

To ensure the end use of funds.

To ensure the compliance of the terms and conditions.

To evaluate the performance of production, sales and profit.

To find out the efficiency of the management.

To assess the impact of external factors such as Eovernment policies, availability

of aw materials, availability of labor etc. To detect the early signals of non compliance and default.

To evaluate the total performance of the pro'ect.



43/47

At 7riental bank of commerce there are different techni"ues followed for the purpose of

doing the continous monitoring of the loans given. The techni"ues are as follows%

1) Assessment o! the periodical reports

The banks get the periodical performance reports covering the financial andoperational data from the borrowers. These reports contains the details about the

cost of the pro'ect incurred, time schedule of the various activities, profitability,

inventory and receivables. The cost of the pro'ect determines the various costs

incurred and whether there is any escalation of prices of steel, cement, materials

etc which is leading to cost overruns. If there is escalation of costs the reason for

the same has to be identified and corrected if possible. If the costs overruns are

due to the improper scheduling of the activities than the activities must be re&

scheduled so as to reduce the cost of the pro'ect.

The production of the unit should also be identified from the figures of licensed,

installed and utilized capacity. It has to be seen whether the plant is operational

on all days or the plant is facing problems due to power&cuts, strikes etc. After

determining the reason for the production halt remedial measures have to be

identified for the same. -ollowing the production now the sales should be

studied. It is important to know that the production is being sold at the target price

or not. If there are any variations in the figures they should be corrected by

increasing the sales. 2rofitability would be identified from the costs and the sales.

It has to be checked whether the pro'ect is making profit or loss. Any changes if

re"uired should be made to the pro'ect. The availability of the stock of raw

material, finished goods, labor all have to be checked.

") Analysis o! the borrowers Audited /inancial statementsThe financial statements i.e. the balance sheet and the profit and loss account

have to be studied. 6omparison should be made between the current and the

past performance. After identifying the changes between the previous years and

the current year if there are any problems they should be worked upon and

should not be repeated in future. Balance sheets are used not only for comparing

our past and previous performance but also inter company performances.



44/47

$) nspectionThere should be surprise inspections to check the operations of the pro'ect. The

officer should go for a surprise visit any check the books, physical assets,

availability of the facilities at the site of the pro'ect.

') (iscussion with the party and its sta!! There should be discussion with the party and its staff such as the production

manager, sales manager, supervisor, esearch and development manager to

know about the status of their departments and any improvement or correction

that is re"uired in their departments.

) +tudy o! the stock and the book debt statementsThe bank officer doing the follow up would also study the stock statements as

well as the book debt statements. The reason for studying the stock statement isit helps to know whether the pro'ect is having sufficient level of inventory or not.

The level of inventory should be optimum as shortage or excess both are

detrimental for the functioning of the pro'ect. #hortage of stock may lead to

delays in production schedule while excess stock could lead to increased

expense for warehousing, wastages etc. The book debts should not be too high

as this may increase the chances of default and affect the profitability of the

pro'ect.

0) 3arket reports and the newsThe reports in the market about the pro'ect also have an impact on the pro'ect.

The success of the pro'ect depends upon the acceptability by the market. If the

reports are favorable it would benefit the pro'ect.

2) (iscussion with the 3anagement sta!! It is important to know about the promoters, executives, internal management,

Con financial issues, expansion plans etc. -or these purposes it is important to

discuss with the management staff and extract the information needed.

The follow up process should be done continuously so as to protect the banks

from losses due to negligence and lack of supervision. At the oriental bank of

commerce continuous monitoring process is followed for the purpose of

supervision and control.



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CONC!USION

Banks play a ma'or role in any economy by meeting the funding re"uirements of

the various sectors. It becomes extremely crucial for a bank to finance those

pro'ects that would be viable ,profitable and beneficial to all the concerned

parties. The bank is the custodian of people>s money so this money has to be

channelized into the productive areas. This makes 2ro'ect Appraisal of utmost

importance. The key learning>s from the pro'ect appraisal process of pro'ect

financing for corporates at 7riental bank of commerce are%

a) The importance of appraising the pro'ect from the conception stage to

implementation stage and from periodical monitoring to evaluation

stage is inevitable.

b) The bank officers take utmost care that only the viable pro'ects are

sanctioned and so they follow a strict procedure to avoid any C2A>s later.

c) 2ro'ects Appraisal is getting more advanced with the use of better technology

software that reduces the calculations burden. -or ex% I4A6# at 7riental

bank of commerce.

d) 5stablishing new units, 4odernization of existing units and 5xpansion of

existing units are encouraged so as to facilitate growth.

e) -ollow up is to be done continuously so as to detect any cases of default at

the earliest.



46/47

Anneure

Annexure (% :oan Application -orm.

Annexure ?% Acknowledgement #lip.

1eclaration by the Applicant.

:ist of the 1ocuments re"uired.

Annexure )% Euidelines for 2ro'ect eport.

Annexure 9% Appraisal cum #anction note.

/Findly refer the hard copy of the pro'ect for the annexure as they are the documents

provided by the bank0



47/47

"i-+iograph0

-55D+

+r. ,5 ,ame o! the Author Title o! the book

( 2rasana chandra -inancial management

? 1 2 #harda andbook on 2ro'ect Appraisal and

-ollow up

) . Iyengar Introduction to Banking.

#%-+T%+

+r. ,5 ,ame o! the #ebsite

( www.obcindia.co.in

? www.sidbi.com

) www.rbi.org.in

9 www.google.com

project of corporates

Documents