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O B J E C T I V E O F T H E P R O J E C T :
The main objective of the project is to interpret and analyze the intricacies involved in the
decision making process which a bank undergo while sanctioning a loan against an applicant
and to suggest any change which might make the entire process operate more efficiently,
impartially and economically resulting in customer satisfaction and better utilization ofresources available with the bank finally increasing its profit at the end of a financial year.
The project also intends to determine the market share owned by different financial
instruments of ICICI and discover any niche market along with its demand which is still
unattained by the existing financial instruments of different categories as well as to
determine the factors which provides products of other banks an upper hand over the existing
products of ICICI Bank in a particular product category for a given sample of population in a
particular area. Finally to frame certain marketing strategies on the basis of the information
derived out of survey to make the products of ICICI popular in its target segment.
ME T H O D I L O G Y U S E D :
The credit appraisal process is based Feasibility analysis which comprises of determining
Managerial Competence, Technical Feasibility, Commercial Viability and Financial Viability of
the loan proposal as per the guidelines of RBI. The bank uses feedback of organizations like
CRISIL, ICRA and NIBM for this purpose. While determining projected sales of the end
products of a term loan proposal the past growth of the organization becomes a significant
issue.
The Marketing of Bank Products involves a survey to determine the current market share ofthe products of bank and framing suitable marketing strategies to determine effective niche
markets and fulfill their demand.
F I N D I N G , C O N C L U S I O N A N D R E C OMME N D A T I O NS:
The credit appraisal procedure followed by ICICI Bank is very effective as it holds least Non-
Performing Assets and the products of ICICI Bank are much popular among people of the region
of survey.
The company should also opt for a rigorous market research in order to determine thereasons of unpopularity of its products and try to determine certain segments still uncovered
by the leading players in respective product category.
It is recommended that in order to establish ICICI as a bank of every INDIAN it should open its
branch at every corner of the country. For this purpose the rural areas should be targeted first.
Then need analysis of demands of people of those regions followed by designing products which
would furnish their needs effectively.
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ICICI BANK -
C om p a n y b a c k g ro u n d : ICICI Bank is the largest private sector bank & the
seco nd larg es t bank in the cou ntry in terms of as set s . It i s a p a n-Ind ia p la yer
with around 950 bra nch es ( including rec e ntly a cq uire d Sang li bank). The bank
has boo ste d its overs e a s ope rat ion s in th e las t three ye ars and now ha s
presence in 18 countr ies ei ther through subsidiar ies or representat ive off ices
.Tog et he r with its su bs id ia rie s , ICICI Ba nk o ffers a com p le te sp e ctru m of
f inancial services & products ranging from commercial banking to investment
ba nking , m utu al fund to insura nce .
ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81
billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year
ended March 31, 2010. The Bank has a network of 2,529 branches and 6,000 ATMs in India, and
has a presence in 19 countries, including India.
ICICI Bank offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialised subsidiaries in the
areas of investment banking, life and non-life insurance, venture capital and asset management.
The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in
United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance
Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh,
Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and
Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New
York Stock Exchange (NYSE).
ICICI Bank and ICICI, along with other ICICI gro up co mpan ies, were opera ting as a
virtual universal bank, offering a wide range of financial products and services. The
merger of ICICI and two of its subs idiar ies with ICICI Bank has c o mbined two
organ izations with complementa ry strengths and products and similar p ro ce sses
and operating architecture. The merger has co mb ined the large capital ba se of
ICICI with the strong depo sit raising capability of ICICI Bank, giving ICICI Bank
improved ability to incr ease its market sha re in banking fee s and co mmissions, while
lowering the overall co st of funding through access to lower-cost retail depo sits. ICICI
Bank would now be able to fully leverage the stro ng corporate relat ionship s that ICICI
has built, seamlessly providing the whole range of financial pro du ct s and services to
corporate clients. The merger has also resulted in the integration of the retail
finance operations of ICICI, and its two merging subsidiaries, and ICICI Bank into
one entity, creating an opt imal structure for the retail bu siness and allowing the full
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rang e of a ss et and liability products to be offered to all retail cu sto mers.
The share exchange ratio approved for the merger was one fully paid-up equity
share of ICICI Bank for two fully paid-up equity sh are s of ICICI. This was de term ined
on the basis of a comp rehensive valuation process incorporating international
best pract ices, carried out by two sepa ra te financial advisors and an independ entaccounting firm. The equity shares of ICICI Bank held by ICICI have not been
cance lled in the merger. In accordanc e with the provisions of the Sc heme of
Amalgamation, the se shar es have bee n trans ferred to a Trust to be divested by
appropriate placemen t. The pro ceed s of such divest ment would accrue to the
merge d entity. With the merger taking effec t, the paid-up share capital of the Bank
has increa sed to Rs. 6.13 billion, comprising 613 million sha re s of Rs.10 ea ch .
Inv e s tm e nt Rat iona le :
ICICI Bank will rem a in a o ne of th e m o st fa nc ie d stocks a mo ng the inves to rs
who be lie ve in Ind ia s long-term growth sto ry.
Retail ba nk ing though slow ed do w n will re m a in fo cu s area for ICICI Ba nk
Massive scale up in international banking
Inno vat e a pp ro ac h to tap pot e ntial in Rural & SME secto r
Robust no n-int ere st inco m e co m pe nsa ting for slow er growth in Ne t
Inte res t Incom e
Sangli Bank acqu isition will he lp t he ba n k to im pr ove CASA d e po sits .
B U S I N E S S R E V I E W -
Retail Banking
The retail bu siness is the key driver of ICICI Banks gro wth strategy, with the
object ive of diversifying the a ss et portfolio and building a low-co st stable resour ce
ba se . With a complete product suite across both ass et and liability pr o du ct s as well
as a wide range of banking ser vice s, ICICI Bank is today a retail financial
supermarket with the ability to cross-sell the entire range of credit and invest ment
pro du cts and other banking serv ices to our customers. The key dimensions of our retail
strategy are products, channe ls and pro cesses, unde rpinned by a strong customer
focus.
Changing demographics and the trend towards upward migration in income levels coupled
with existing low retail credit penetration levels have created a major growth
opportunity in retail finance. ICICI Banks retail assets business is capitalizing on this
opportunity with a competitive positioning and strategy comprising innovative products,
wide distribution, strong credit contro ls and high customer service standards and rapidly
growing volumes in each seg ment to achieve economies of scale. ICICI Banks retail
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portfolio (including the portfolio of ICICI Home Finance Company Limited, its wholly-
owned subsidiary) at March 31, 2008 was over Rs. 86.00 billion, as co mpared to the
co mbined retail portfolio of ICICI and ICICI Bank of about Rs. 49.00 billion at March 31,
2009.
CREDIT APPRAISAL
Introduction: Credit Appraisal is a process to ascertain the risks associated with the extension
of the credit facility. It is generally carried by the financial institutions which are involved
in providing financial funding to its customers. Credit risk is a risk related to non repayment of
the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of
the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed
in order to measure the financial condition and the ability of the customer to repay back the
loan in future. Generally the credit facilities are extended against the security known as
collateral. But even though the loans are backed by the collateral, banks are normally interested
in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows areascertained to ensure the timely payment of the principal and the interest.
The key elements of loan appraisal are assessment of theapplicants:
Repayment Capacity: Done through Cash Flow Analysis.
Character or Personal Creditworthiness.
Capital and Collateral: Determined through a Balance Sheet.
These days banks generally prefer loans to be re-paid back along with interest than to
acquire the hypothecated assets of owner because the total process of auction of thehypothecated asset involves a cost for the bank which is both in form of monitory as well as
psychic cost. After incurring these costs there occurs no surety that the amount of unpaid loan
along with the interest applicable will be recovered because there is always a probability that
none of the participants in the auction process are ready to pay the amount bank need to recover.
It is also possible that there is no demand for the hypothecated asset in market due to the
particular asset getting backdated or due to lack of purchasing power of people (economic
depression).
In this connection the example of Subprime Crisis that prevailed in America during
F.Y.2008-09 is very relevant. During this crisis period the banks seized the assets (especiallyhouses) that were hypothecated to them as most of the people who purchased those assets
against loans from banks were unable to repay back the same even after repetitive repayment
scheduling due to economic depression. At the same time the unemployment problem was
so acute in USA that interested people were not even able to purchase those assets during
auctions at prices desired by banks to discount the loans outstanding against same assets. This
lead to accumulation of considerable amount of Nonperforming Assets(NPA) in the accounts
of banks and other lending institutions which further resulted the same organizations to seize
from extending loans for projects handled by different industries (especially automobile and
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real-estate firms) which resulted in conversion of many reputed firms like General Motors to
sick organizations. This scenario has compelled the present American government to purchase
back the Toxic Assets (NPA) in hands of banks and lending institutions.
To avoid such situation an effective credit appraisal is always required for existence of any bank.The ICICI BANKBank and the ICICI bank has the lowest NPA among all banks in India which
further reflects the effectiveness of Credit Appraisal technique adopted by these banks.
The main goal of this report is to reveal the details of the Credit Appraisal system adopted by
ICICI Bank and to discover any limitation of this system along with remedy of the same
limitation so as to strengthen this system further in order to prevent any crisis related to
extension of credit to profitable projects by banks as well as to simultaneously eradicate chances
of any crisis like that of Subprime Crisis in America.
Different types of loans extended by ICICI Bank against which credit appraisal is conducted:
Term Loan for traders.
Project Finance. Loan to traders in order to meet Working Capital Requirements.
Housing Loans.
Educational Loans.
Car Loans.
Loan to professionals. Loan to Defence Personnel.
Appraisal for Term Loans:
Term loans are provided by ICICI Bank for an extended period of time and it has following
characteristics:
Term loans are sanctioned for acquiring fixed assets like land, building,
machinery, vehicles, etc. Normally payable in installments spread over a
period of three to ten years.
Repayment of term loans should be out of profit or cash inflows occurring out of
operations over a period of time in the pre-arranged schedule agreed beforehand.
However these days banks at times (on discretion of the bank authority) provide long term
loans to meet working capital requirements as well which indicates the distinct shift from the
traditional approach towards lending which negates the concept of working capital credit beingbranded strictly as a short term credit facility.
Term loans are generally made available in different forms statedas under:
1. Fund based term loans: The term loans provided for outright acquisition of capital goods.
2. Non Fund based term loans: Generally occur in the form of Deferred Payment
Guarantees (DPG) where the liability to make payment crystallizes after the bills against
such guarantees are presented for payment.
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3. Underwrite equity issues floated by companies: By doing the same bank assumes long
term exposure in the company.
Hence term loan is a form of a participation loan which makes the lending institution a
stakeholder of the borrowing firm for a considerably long time period like other shareholders
and debenture holders of the firm. Longer the period of repayment, the riskier is the proposition,
and therefore any appraisal of term loan involves an inbuilt method of assessment of risk elements
involved therein.
General Guidelines for sanction of term loans by Banks
a. All banks together can provide term finance not exceeding Rs.500 crores for a
project (Not applicable for
power generation projects.).
b. For projects requiring term finance exceeding Rs.500 crores banks will participate
jointly with all India financial institutions subject to share of an individual bank not
exceeding its credit exposure limit and that of banking system not exceeding Rs.500
crores.
c. For projects in infrastructure sector (i.e. power, telecommunication, ports, and roads)
banks can provide term loan without any ceiling limit subject to credit exposure limit of
each bank.
d. The credit exposure limit of a bank towards infrastructure projects promoted by
single borrower should not exceed 25% of the banks net worth and to that of a group not
to exceed 60% of the banks net worth.
e. Refinance is available in respect to the term loan
From IDBI to industries with project cost not exceeding
Rs.500 lacs. From SIDBI to industries with project cost not
exceeding Rs.300 lacs. From NABARD to agro based
industries and rural industries in rural areas.
f. Banks prefer to sanction term loans which are eligible for refinance: To be eligible forrefinance, the term loan should be given as per the norms prescribed by RefinancingInstitution and the industry should not be one which is classified under negative list.
Fixed Assets- Accounting and Otheraspects
Valuation of fixed assets involves two common terms in banking parlance they are Gross Block
and Net Block. The gross block represents the original cost of fixed assets which includes land,
building, plant and machinery as well as other fixed assets while net block indicates the book
value (depreciated or otherwise) of these assets.
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According to Accounting Standard 10(AS-10) issued by ICAI the original cost (Gross
Block) of a tangible fixed asset include the following prices:
The purchase price.
Import duties and other non-refundable taxes payable on purchase. On the other hand
any rebates or discount on purchases and refundable tax components like CENVAT are
excluded from the cost.
The expenses that have been incurred and can be directly attributed in bringing the
asset to its working condition for its intended use. These expenses may include
professional fees, cost of site preparation, cost of handling and initial delivery,
installation costs (e.g. special foundation for the plant) etc.
The start-up and commissioning expenses of the plants / fixed assets including the
cost of trial runs experimental production etc.
The cost of borrowing (interest) or the cost of financing the fixed assetsincurred during the
construction /installation period forms a part of original cost of fixed asset. In financial
parlance this is called capitalization of interest.
The administrative and other overheads specifically incurred for construction,
acquisition and installation of fixed assets also form part of the fixed assets.
However in case the entire machinery or some parts of the same or the entire plant if
imported from abroad then payment against the same might occur in two ways. One option is
the settlement of the cost of the import in cash immediately on delivery of the machinery at the
hands of the importer. In such case the original cost of machinery is the cost of the down
payment made. While the other option is acceptance of payment by the overseas supplier in
deferred installments and the importer is provided with a foreign currency loan. However in
such case there is every probability of occurrence of a consequent foreign exchange gain
or loss. The amount of gain or loss due to exchange fluctuation is added to the original cost to
determine the gross block of the imported asset.
In order to explain the above mentioned point let us consider ahypothetical example:
A company in India has entered into a contract for purchasing machinery worth US $ 2,
00,000 in four monthly installments of US $ 50,000 each. The exchange rates (Rs. per US $)
on the dates when the payments were made were 50, 50.25, 50.50, 50.75 respectively.
The import cost of the machinery in rupee terms can now be determined in thefollowing manner:
Mont
Payment (US$) Exchange Rate Amount in Rs.1. 50,00
50.00 250000
2. 50,00
50.25 2512503. 50,00
50.50 252500
4. 50,00
50.75 253750Total 10075000
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The cost of the machine hence indicates an exchange fluctuation loss of Rs.75000/- incurred by
the promoter while making payment in four installments which has to be added to original cost of
the machinery.
Some distinguishing aspects about fixed assets which have bearing with total cost of fixed
assets as well as admissibility of the cost in balance sheet are discussed below:
Fixed assets are held with the intention of being used for the purpose of providing or
producing goods, services etc. Such assets are not held for the purpose of sale in
normal course of business (going concern concept) and are generally accounted on
historical cost basis with application of depreciation at the applicable rates. However
special considerations are applied in matter of computation of book value of the
following assets:
o Forests, plantations and similar regenerative natural resources.o Wasting assets including mineral rights, expenditure on the exploration for and
extraction of minerals, oils, natural gas, and similar regenerative resources.
o Expenditure on real estate.
o Livestock.
Business enterprises incur a considerable portion of their total expenditure for
improvement and repair of their existing fixed assets. However only that part of the
expenditure are added to gross block of fixed assets(capitalized to the gross
block) which contributes to improvement of performance (adds to future benefits)of
the same. Example of such expenses are:
o Modification of the items of plant to extend useful life, including an enhancementof capacity.
o Cost incurred in upgrading machine to achieve a substantial improvement in
quality of output.
o Expenses incurred in adaptation of new production process resulting in
reduction of operating expenses.
While the portion of the expenditure incurred in order to maintain the current
performance are considered to be of revenue nature expenses and are hence charged to
the Profit and Loss account as such expenses does not increase the gross value of the
capital asset.
Expenses incurred during the construction / project implementation period have a
bearing on the final cost of the capital asset. Hence, besides purchase price, import
duties and other non-refundable taxes any other costs which bring the capital asset to its
working condition for its intended use are added to gross block for the same. Example of
such expenses are:
o Expenses incurred against site preparation.
o Delivery and handling costs.
o Installation costs incurred.
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o Professional fees, technical knowhow fees, fees of architects and fees of engineers.
Cost of term loan i.e. interest paid to the lending institution during construction
period is usually capitalized to the gross block of assets while any outstanding interest
against the same renders a term loan NPA as per the latest instructions issued by RBI
and such expenses are treated as deferred revenue expenditure and are to be amortized
within a period of 3 to 5 years.
CENVAT Credit
Cenvat credit is a form of refundable tax and hence the cost of capital asset as shown in balance
sheet does not include this amount. As per the norms of ICAI an enterprise may show cenvat
credit against capital assets as
a receivable asset if the following conditions are fulfilled:
1. The enterprise is entitled to CENVAT credit.
2. There is a reasonable certainty that the CENVAT credit would be utilized.
APPRAISAL FOR TERM LOANS METHODOLOGY
For any bank the basic purpose of appraisal of a proposal for extension of Term Loan facility is
to ensure that the applicant can acquire the proposed/stated fixed assets and can put them to
use in producing merchandise which would have market, and generate enough cash from
operations to repay the term loan and service the interest commitments thereon over the
stipulated period of repayment. It can therefore be claimed that the appraisal process
envisages a meticulous examination of all the relevant aspects of the economics of the
project.
While appraising a term loan few questions which often comes in the mind of Credit Analyst of
the bank are as given below:
Who are the promoters and what are their credentials? Does the available information
suggest that they will be capable of promoting and managing the project successfully?
Whether the finished goods produced would have an assured market (it involves athrough demand/supply analysis)?
Whether the technology proposed to be employed is adequate (in terms of
effectiveness and feasibility)?
Whether the plant capacity is adequate or in other words whether it will be
commensurate with existing and future demand pattern.Whether the projections relating to operations and profitability of the project over
the repayment period (as submitted by applicant) are realistic?
Whether the amount of proposed loan is adequate as per the term requirements of theproject?
Whether the projected cash generation is adequate to service the loan?
Last but the most important question- If the term loan is not repaid by the entrepreneur in
terms of the agreed schedule, whether proper risk hedging mechanism is in place so that
the interest of the lending institution is not jeopardized.
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These are some of the indicative questions that must be answered in course of the termloan appraisal.
Hence it can be concluded that the entire process of term loan appraisal can be divided into
distinct appraisal areas in order to execute the entire process in a very structured and acceptable
manner. These areas are:
Human Appraisal or Appraisal of Managerial Competence. Appraisal of the market and economic scenario and examination of technical
feasibility aspects.
Examination of Financial and Commercial viability.
Risk appraisal of the proposal.Human Appraisal or Appraisal of Managerial Competence
A thorough study is required in order to determine the capability of entrepreneurs in
implementing and managing the project by examining the attributes mentioned below:
y Past Experience of bank about the Promoter- The bank officials (usually
credit analyst) try to investigate about the current creditworthiness of the
promoter/applicant by analyzing the repayment history of the same promoter
about other loans if any with the bank as well as the same for other banks. If the
applicant is a new customer then the bank officials ask for feedback from other
banks (where the applicant or his/her associates are having any term loan) regarding
creditworthiness of the customer. In other word the total debt history of the applicant
comes under scanner.
y Qualification of the applicant- The bank officials investigates the academic
background of the promoter in order to determine whether the promoter is
having sufficient knowledge to handle technical intricacies of the business against
which term loan has been sought for.
y Technical and Managerial skills-The bank officials in many cases encounter
situation where the promoter might not have required technical knowledge but has
long experience of the business against which term loan has been applied for and
in such situation after investigating the skill sets of the promoters and his
managers/ employees the bank officials might come to conclusion that their
experience is much desired for the said business to function effectively.
y Entrepreneurial Skills- To judge the same the bank officials try to analyze thefollowing attributes related to applicant ;
o Ambition.
o Tenacity
o Risk taking aptitude.
o Family Background.
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y Character of the promoter/applicant- The analysis of character of applicant is
mainly based on the following:
Honesty.
Integrity.
y Capability of the promoter to arrange funds in contingencies.- Thecapability of promoter(applicant) to arrange for funds is done by analyzing the
capital structure of his/her company and capital reserves of the organization. Along
with this the credit analyst analyze the balance sheet of the company in order to
know the unsecured loans of the company as according to norms of ICICI BANK the
applicant cannot pay any principle or interest against unsecured loans (quasi
equities) without permission of the bank.
Hence, the most important and difficult of all the steps involved in an appraisal is accessing the
credibility of the man/lady behind the project and judging his/her competence in successfullypromoting/managing the project. As per the feedback from credit analyst of the bank it is quite
clear that one might acquire great skill in accurately forecasting the future behavior of a financial
parameter, or may have become well conversant with dynamics of a particular sector which
may result in excellent appraisal of technical, economic, financial and commercial aspects of
a credit proposal, but this provides no assurance that his/her assessment about promoters
would be correct.
From this above written feedback of the credit analyst of the bank (ICICI Bank) it is quite
clear that one of the most important reasons for huge accumulation ofNon Performing Assets
(NPA) in the hands of lending sector is poor human appraisal by credit analysts. However, quitefortunately with the passage of securitization bill and many bills on the cards, the incidence of
willful default may tilt downwards and
human appraisal may work out to be manageable exercise for the
lending bankers.
Support Extended By Finance Ministry towards Effective Human Appraisal
As per the directives of the Finance Ministry of India the RBImaintains an updated list of suit
filed accounts
(Rs. 1 crore and above) in its website (www.rbi.org.in). The credit analyst of the bank oftenbrowses through this site for preliminary appraisal whether the promoter or any of his/her
associates for the stated project figures in this list. Similarly, the RBI also circulates a list of
willful defaulters of Rs.25 lakhs and above to individual banks. As per guidelines of the bank
the credit analyst is bound to consult this list before he/she undertake technical, economic and
financial appraisals of the proposal.
Side by side with the emergence ofCredit Information Bureau of India Ltd. (CIBL)collection
of information related to creditworthiness of a promoter (applicant) is no longer a cumbersome
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task. Banks need to subscribe for membership with the CIBL (ICICI BANK is already a member
of the same). This organization provides the desired
information in this regard to member banks (lending
institutions also).
Appraisal of Technical Feasibility AspectsExamination of technical feasibility aspects of a proposal is one of the most important areas
where any credit appraising officer has to satisfy him/her before going into the examination of the
financial viability of the same proposal. This part of credit appraisal has extra significance
because it is always possible that the credit analyst
may not have an in-depth knowledge of the technical process employed in the
proposed project.
How credit analysts at ICICI Bank deal with such a situation?
In case the promoter (applicant) opts for a change in existing technology being used in businessto a modern, effective and proven one then the credit analyst need not have to go for detailed
feasibility study.
However, in case the technology is new or emerging one then a detailed report on examination
of technical feasibility aspects is necessary. In such situations the credit analyst usually knocks
doors of outside agencies of proven competence like CSIR (Council of Scientific & Industrial
Research, Govt. of India).
These organizations (e.g. CSIR) have patented the process designs in their respective
activities and they actively associate themselves with industrial production of these products.These technological innovations made by these laboratories often suit the Indian conditions
better than latest foreign technologies in the same area of activity. However, the credit analyst
need to ensure effectiveness of the same technology under industrial conditions also side by
side with laboratory conditions and for ensuring the same he/she needs to
understand every lines of report submitted by the
CSIR.
Factors Ensure Technical Feasibility of a Project
Licenses, Permits Required-The credit analyst need to ensure that the proposedprojects and technologies to be employed are having required Licenses and Permits for
designated authorities.
Location of the ProjectThe location of a project with respect to structural, legal and
infrastructural aspects has considerable significance in project appraisal. A particular
location might have strategic advantage over others if it has ready accessibility to
critical inputs and utilities required for the product to be manufactured and marketed.
Hence, the credit analyst needs to investigate these aspects in depth before proceeding to
other phases of credit appraisal.
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Product and Process The credit analyst is bound to tender undivided attention on
analysis of process adopted in terms of technology implemented (in comparison
with modern technology available) as well as the standing of supplier of technology and
his/her stake in the organization of the applicant. These days to ensure an effective
technical feasibility analysis the bank usually ask for performance guarantee from the
supplier of technology.Plant andMachinery The credit analyst need to personally investigate the plant and
machinery of the applicant in coordination with others having knowledge of the same.
The investigation generally
comprise of examination of suitability, capacity, standing of supplier of inputs
(especially raw materials). In order to ensure an effective technical feasibility
analysis and prevent chances of development of any NPA (non performing asset) at
any later stage (due to non-repayment of loan extended) the bank authority generally
seeks for a performance guarantee from the applicant of term loan. However this days
ICICI BANK has subscribed as a client ofCRISIL (CREDIT RATING
INFORMATION SERVICE OF INDIA LTD.)which does necessary vetting and
provides feedback about effectiveness of machineries used in different industries .
Energy Requirements During technical feasibility analysis the credit analyst need
to investigate about the type of the energy source (coal, natural gas, electricity, liquid
fuel etc.) needed as inputs for the production to commence and continue
uninterruptedly. The applicant needs to ensure local availability of the energy
requirements. The ICICI Bank prefers applicants with captive power generation
systems installed at their respective production units to ensure effective utilization of
by-products. Along with this the bank officials also ask for adequate availability of water
if found important for specific activities related to production and handlecontingencies like any accident in plant. Hence, during the course of technical
feasibility analysis the credit analyst ensure that the stated propositions fit well with
location aspects of the project.
Raw Material andManpower-The credit analyst need to investigate on quality, cost
and regularity of supply of raw material. The ICICI Bank prefer applicant with
dedicated supplier network present in vicinity of the project location. Along with this
proper workforce is another aspect of investigation as non availability of suitably
skilled workforce often works as a bottleneck for a project to continue.
Commercial Viability orMarket Appraisal
The viability of a credit proposal for providing long-term finance depends on whether the
enterprise is in a position to generate adequate surplus over a period of time. This, further,
depends on whether the production/sales of goods produced by the enterprise (applicant)
registers the desired rate of growth, on which its profit earning capacity depends. Validation of
the demand-supply gap and the estimated growth of demand for the product is therefore an
important aspect of proposal of term loan.
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In ICICI BANK validation of projection/rate of growth of demand has been a bone of
contention amongst among the promoter (applicant) and credit analyst. However, till last few
couple of years a longstanding relationship with bank was the most important parameter which
had helped clients (applicant) in earning banks confidence. In other words, a long-standing
relationship of client with the bank enriches the probability that the credit analyst of the bank
would accept the projected growth rate submitted by the applicant, perhaps with minor changeif at all required. Though this days with advancement of dissemination of information in all areas
now the credit officer relay on a number of well research studies published by reliable agencies
having expertise in different industries..One of such agencies the ICICI BANK is subscribed
with is CRIS-INFAC which publishes its studies on major activities/industries e.g. cement,
steel, sugar etc. both in electronic form as well as hardcopy. These studies are based are based
on trend of actual historical data available for respective industries and domestic as well as
international market trend in the economy.
In addition to this ICICI BANK is having its own database of credit portfolio handled by them in
electronic form. The database contains historical data in relation in respect of sales and other
operational data of various units engaged in a particular business activity. The ICICI Bank
(ICICI BANK) estimates future sales on basis of given historical trend by incrementing
sales each year by 25% over that of previous yearestimate.
In short the major intricacies involved in determination of commercial viability of a product
i.e. market appraisal are as under (on the basis of information obtained from credit analyst of
ICICI BANK):
The credit analyst need to examine whether the goods can be sold in quantity and price asprojected by the applicant (entrepreneur) as unless the products are sold at or near the
projected level the expected cash flow will suffer and the unit will become sick causing a
rise in Nonperforming assets of the bank.
Estimation of futuristic demand of the product on basis of present demand of the same.
Knowledge of level of competition from similar products and substitutes and the
strength of the competitors. ICICI BANK makes extensive use of the prowess database in
this connection.
The capability of the product to penetrate the market. In order to ensure the same the
credit analyst need to keep market strategies of the entrepreneur under scanner. In
ICICI BANK preference is given to entrepreneurs with aggressive and innovative
marketing strategies.
The present stage in life cycle of the product. Products at growth stage (e.g.
laptops) have high demand while products at maturity stage (e.g. personal computers)
have a very stable demand with a constant rate of decline.
Price of the product with reference to the same of its competitors (substitutes) as well
as the price elasticity of demand. Price elasticity is a determinant of demand of a
particular product as it determines the percentage change in quantity of a product with
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that of price of the same product. Generally in case of goods which people need in their day
to day life on a very regular basis (necessity goods) the no significant change in demand with
price is noticed (relatively inelastic) while for luxury goods the change in demand with price
is very significant (relatively elastic). Hence, price elasticity of demand is a determinant is
cash flow estimation.
Appraisal of Financial Feasibility aspects or Determination of Financial Viability of
Project
The technical feasibility study followed by a commercial viability analysis of a project reveals a
strong idea to credit analyst about whether the project passes the test of feasibility in respect of
technical, economic, market and demand-supply related aspects in long term context. The
next logical step in appraisal process is to examine the financial feasibility aspects of the
project. Appraisal of financial feasibility is however dependent on the feedback obtained from
next step of appraisal of term loan i.e. the determination of the cost of project and means of
financing the project.
In short it can be concluded that the Appraisal of Financial aspects of a Project is dependent
on analysis of following aspects by the credit analyst:
The credit analyst needs to be confident over the issue that the project is having sufficient
finance at a reasonable cost to continue execution in long run. The calculation of cost of a project
is determined by following parameters:
y Land and Buildings.
y Plant and Machinery.
y Technical Know-how, engineering and consultancy fees. Cost of technology.
Patents.
y Expenses on account of foreign technicians and training of Indian technicians abroad- if any.
y Miscellaneous fixed assets which may include boilers, power distribution system, electrical
installations, furniture, fixture etc.
y Preliminary and pre-operative expenses
y Salary,Interest on term loan before commencement of production.
y Provision for contingencies (unforeseen contingencies).
y Margin of Working Capital.
The distinct sources of finance are also a subject of analysis by the credit analyst. The distinct
sources of finance are as under:
y Owners Equity based finance.
y Preferential share capital.
y Quasi equities.
y Reserve and Surplus.
y Term credits.
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After examination of the sources of finance for a project the credit analyst need to calculate the
debt- equity and ensure whether it is satisfactory as per the banks guidelines. If the debt-
equity ratio is found satisfactory then only the project is supposed to be financially viable.
The credit analyst need to ensure that the average cost of finance for the project is commensuratewith the return from the project.
Determination of Cost of the Project- Feedback to Financial Appraisal
Cost of Land and Buildings - The credit analyst at ICICI Bank mainly examines the legal status
of the land while performing the financial appraisal of the project. According to the credit analyst
at ICICI BANK if there occurs any legal dispute over the land on which the project is proposed t
be built then it would not only vitiate the prospect of smooth functioning of the project, but also
creates hurdles against providing a clear primary security to the lending banker against the term loan
provided by the same.However, for lease hold land the credit analyst has to perform a proper scrutiny of the
following aspects in order to protect the interest of lending bank:
y The terms of lease deed must provide for the mortgage of the lease rights in favor of
the lender.
y The unexpired lease period should be sufficiently long so that it is valid till the dues to
the lender/mortgagee are finally settled.
y The lease deed should not contain any clause which is prejudicial to the lenders rights.
The cost of the land include cost of registration, expenses incurred towards leveling the same
land, cost of fencing the compound wall as also the cost of fabrication and installing the gates. The
cost of land is often found to be one of the low cost elements of the project because from point
of view project appraisal no depreciation is charged against the cost of land and hence promoters
dont receive any tax incentive by employing more funds towards acquisition of the land and related
expenses.
If the land is leasehold, cost of land is recorded at capitalized value of future lease rentals. The
credit analyst however also consults the lease deed in order to determine cost of the leasehold land
as a part of the project cost.
The cost of building requirements and the cost of core building are always validated by a
reputed consultant (cost accountant) in order to eliminate any chances of overestimation.
Plant andMachinery From the point of view of the lending banker, plant and machinery is
perhaps the most important part of a project because they lend mostly against plant and machinery.
First of all the credit analyst need to validate the requirement of the machine in tune with the
observations made in the technical feasibility report of the project. In financial appraisal,
machinery procured indigenously and imported from abroad should be reported separately as
the imported machines include import duties as an extra cost of promoter.
However, promoters of the project import plant and machinery under the EPCC (Export Promotion
of capital goods) scheme under the EXIM policy of government. Such capital goods attract less
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than usual custom duty, which is subject to the fulfillment of a specific quota of export obligations.
During financial appraisal the credit analyst need to ensure that such machines are used for
production of export goods only and not for production of domestic products because this would
lead to withdrawal of lower incidence of duty resulting in increase of project cost.
Technical Know-how, engineering and consultancy fees The component consultancy
fees includes expenses on account of foreign technicians working on the project in India as well astraining of Indian technicians abroad. For reasonable estimation of expenses on Technical
know-how, engineering and consultancy fees the credit analyst has to rely on different
contract document available with the promoter (applicant) of the project. In order to ensure that
expenses incurred on account of training Indian technicians abroad the credit analyst need to
understand the present trend in the same regard and decide accordingly. Apart from this the cost
of miscellaneous fixed assets are validated on the basis of invoices and comparison with cost
incurred on the specific assets in similar projects, if any.
Preliminary Expenses Preliminary expenses are those which are incurred before incorporationof a company. Such expenses are broadly in nature of flotation cost. These expenses include the
following:
Expense incurred on drafting and printing Memorandum and Article of association of the
company.
Consultancy charges in respect of preparation of project reports, feasibility reports, market
surveys etc.
Expenses on account of engineering services viz. design etc. relating to the project during the
initial stage.
Other incorporation charges incurred before the incorporation of the company including
registration charges, legal fees, travelling expenses, telephone bills and administrative
expenses during the pre-incorporation period.
Sometimes, capital issue expenses which includes fees of managers to public issue, underwriting
commission, brokerage and other issue expenses incurred by the company.
The preliminary expenses are usually written off/ amortized over a period of time by a company.
The balance of the preliminary expense appearing in the balance sheet is the unamortized
amount of preliminary expense. This expense does not create any physical or similar tangible assets
which can be charged to a lender. The expenses incurred on this account are usually met by
the promoter himself/herself.
In most cases the time by which the promoter approach the lending bank for financing their term
requirements, the preliminary expenses have already been incurred and statutory requirement
have been met.
Hence, the credit analyst need not have to validate the preliminary expenses as a part of the
project cost.
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Pre-Operative Expenses Pre-operative expenses are incurred during post-incorporation period
but before commencement of the commercial production and has direct bearing with cost of
the fixed asset. The different components of Pre-Operative expenses are as under:
y Interest during the construction period.
y Cost on account of mortgaging/ charging the securities including immovable properties
in favor of lending bank.y Other miscellaneous expense incurred during the period includes insurance,
stationary, travelling expenses.
y Trial run expenses incurred before commencement of the commercial production.
Cost incurred in respect of a few components of pre-operative expenses (e.g. interest cost
during construction period) are capitalized i.e. added to fixed assets. Pre-Operative expenses have
a bearing on the future profitability of the project on account of the fact that there is a additional
depreciation cost per annum over the life of the assets.
Hence the pre-operative expenses impact the project in two ways:
1. The project cost.
2. The yearly cost of operation.
Hence, a proper estimation of pre-operative expenses is required to be done by the creditanalyst.
Provision For Contingencies In course of implementation, the cost of the project may
escalate on account of following reasons:
Cost of the main items including fixed assets may be subject to upward fluctuation due to
increase in basic prices, increase in various taxes like customs duty, excise tax and sales taxetc., transportation charges.
Where fixed assets or services are imported and the terms and conditions of the contract
include payment by the importer in foreign exchange over a period of time or in deferred terms,
the cost of the fixed asset may fluctuate on account of fluctuations in foreign exchange rates at the
time of making payments.
Implementation of a project may get delayed on account of technical factors, non availability
of certain key sanctions from the government departments and many other factors. A delay in
implementation automatically gets translated to escalation of project cost. Moreover, there might
be certain unforeseen expenses that were not initially envisaged as a part of project cost.
The RBI guidelines do not provide any standard prescription on what should be the right
amount of provision to e maintained against the above contingencies. However, provision for
contingencies should generally bear a reasonable proportion to the amount of non-firm items
(items which are subject to fluctuation) of the project cost. However, on the basis of information
obtained from the credit analyst of ICICI BANK it can be concluded that if the
provision for contingencies goes beyond 10-15 % of such items there is perhaps a reason to have
a re-look on the entire project cost.
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Margin on Working Capital Margin on the working capital requirements is required to
be borne by the promoters. This is their stake in the process of building up current
assets required for long-term operations. In view of long term nature of this component,
the total margin requirements against the working capital requirements are included in
the total project cost. ICICI Bank include whole of the working capital requirements
as part of cost of the project. Though conventionally margin requirement againstworking capital corresponding to first full year of commercial production is
considered in the total project cost.
Projection and Analysis of the Profitability Statement
A credit analyst can declare a project as financially viable and suitable for being extended
with term loan facility only after the projections in respect of the various operating and financing
parameters are validated and the relative indicative ratios fall within the range of acceptability of
the lending bank.
The very first step in making financial projections for a project is firming up the acceptable level
of capacity utilization for various years, usually covering the proposed period of repayment of a
term loan. The sale value of production and the main items of expenses (directly related to
production) flow from the capacity utilization determined by the credit analyst.
The credit analyst calculates the indirect expenses like depreciation, interest on long term loan
and other loans, sales and administrative expenses separately. These expenses are then factored
on profitability projections to work out the accounting profit and profit after tax. The yearly cash
accruals are then calculated by adding back depreciation and other non-cash expenses.
The process of validation of repayment program is undergone at this stage. Usually the credit
analysts at Oriental Bank of Commerce perform a stress test method in order to project
the operation parameters. According to the stress testing method no price escalation is assumed
in respect of sale of goods produced by the borrowing unit, whereas moderate price rise is
assumed with respect procurement of raw materials and consumables and other services like
labor, power, fuel etc. This testing is done in order to project the operating parameters.
However, first of all the credit analyst need to design the Projected Profitability Statement on a
Restructured Financial Statement and then on the basis of the same projection the analysis of
financial parameters is done through Ratio Analysis.
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Restructuring of Financial Statements
The restructuring of various items of financial statement submitted by the applicant is done in
order to have a format meaningful for the purpose of the credit analyst.
The very first step in this process is to classify various assets into current, noncurrent, fixed
and intangible assets. The liabilities are also classified into current, deferred, net worth etc.Classification of items in this manner helps the lending banker to rearrange the items as per its
priority.
The guidelines of RBI for Restructuring the Financial Statements are as under
(prescribed by Tandon Committee):
If investments are made in shares and advances to other firms which are not connected
with activity of the enterprise, such investments are classified as noncurrent expenses.
The deposits kept with public bodies (e.g. deposits made against telephone and powerconnections etc.) for normal business activities, security deposits kept by construction
companies and tender deposits etc., whether maturing within one or not should be treated
as non-current assets.
The slow moving or obsolete items of inventory (also known as dead items) should not be
classified as current assets.
In respect of construction companies and turnkey projects, the net work-in-progress, i.e.
gross work- in-progress minus the advance/progress payments outstanding, may be
considered as current assets/ liabilities, for the purpose of determining the promoters
contribution.
Deposits accepted from the dealers and selling agents etc. may be treated as term
liabilities irrespective of tenure, if such deposits are repayable only when the
dealership/agency is terminated. Others are treated as current liabilities.
Advance payments received from customers should be treated as current liabilities.
However, some enterprises (e.g. automobiles) may accept deposits while booking orders
for new vehicles. There may be statutory requirements which necessitate earmarking a
portion of such amount for investment in certain approved securities. In these cases,
such deposits may be treated as net of such investments and only the balance may be
classified as current liability.
Many other information carry important message to a credit analyst, though inclusion of such
information in the financial statement may not be an statutory requirement. Sometimes cleaver
accounting maneuvers are resorted in order to hide meaningful information behind
window-dressed financial statements. Before restructuring the credit analyst has to arrive at
the actual figures. According to the information obtained from the credit analyst at ICICI
BANK manipulations are usually seen in areas of sales, depreciation, valuation of
inventories, realization of receivables, investments on current assets, accounting of pro-period
expenses and income, recognition of not related business operation, valuation of fixed assets etc.
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Hence, in order to recognize such hidden and fictitious information following actions are
taken by a credit analyst:
The portion of sales representing sale of raw materials should be deducted from
total sales. A corresponding amount should also be deducted from expenses againstconsumption of raw materials/consumables etc.
Generally, the analyst examines whether the management has adopted any change in
method of charging depreciation during the year. If any such change is done (usually
from SLM to WDV and vice-versa) and the new depreciation charged goes lower than
the earlier rate then the amount of depreciation written back by credit analyst should be
shown as below the line entry with a proper explanation.
Similarly, any sudden drop in the amount of depreciation charged during a year should
be critically examined. This becomes very relevant when the applicant shows net profit
but refrains from declaring dividend and also does not provide for managerial
remuneration in P/L account. The credit analyst needs to analyze this under
absorption of depreciation and managerial remuneration in order to calculate the
correct amount of profit earning.
Sometimes, grants from government representing capital subsidy are routed through
P/L account in order to improve reported profit earnings. The credit analyst usually
credits the same to balance sheet as a part of net worth of the company.
Prior period and extraordinary expenses if charged to P/L account are usually
adjusted as otherexpenses below the operating results.
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Projected Profitability Statement
Projected Profitability Statement is to be prepared for all the years covering the repayment period of the
term loan. The Projected Profitability Statement along with Projected Cash Flow statement is used in
designing the furcated Balance Sheet. It helps in the determination of projected sales, different costs
involved, depreciation, etc.
Steps for designing the Projected Profitability Statement are as under:
1. The starting point for preparing a Projected Profitability Statement is estimation of sales in units
which is based on demand forecast. In ICICI Bank however the sales (in units) of future years (total
duration of repayment of term loan) are estimated on the basis of sales at the base year (year of
application for loans) guided by the growth of company in past (generally growth of the company over
last five years are taken into account). Usually if growth of company remains satisfactory then the
sales of future years is incremented by 20% over that of the preceding year. Hence, for ICICI BANK
the estimation of future sales of the enterprise (applicant) is determined by present sales and growth of
company in past.
2. After calculation of sales (in units) the capacity utilization of the machinery (against which term loan
has been provided) is calculated. As per the ICICI BANK guidelines the capacity utilization has to
remain within the range of 40%-45% initially. Then it should increase year after year to reach an
optimal level of around 75%-80%.
3.Then the amount of sales should be determined by multiplying the forecasted sales in units with the
current market price of the product. Banks uses the present market price of the product because the
increase in sales price will be offset by increase in cost and need not be taken into account.
4.The next step of Projected Profitability Statement is to determine all costs incurred in manufacturing
the end products. Raw material costs are kept constant i.e. calculated at the present actual cost while other
costs are incremented by 20% over that of its preceding year if the growth of the company remains
satisfactory as per the guidelines of ICICI Bank.
5.Wages are calculated by multiplying the number of workers with wages to be paid. Wages should
include bonus, perquisites, etc. to be paid. As per the information received from the credit analyst at
ICICI BANK the wage level should increase by a minimum of 5% to a maximum of 10% depending on
the growth of the enterprise.
6. While calculating the cost the Repair and Maintenance cost should be around 2% of the machinery
cost as per the ICICI BANK guidelines.
7. Other costs like the insurance, Rent, Stationary should be realistically projected for the first year and
then increased by 5% to 10% every year based on the growth of the company.8. Depreciation should be as per the actual calculation. Pre-Operative expenses and contingencies
involved in the project should be added proportionally to the fixed assets for calculating depreciation.
9. Interest on borrowing should be decided by the credit rating of the enterprise prescribed by CRISIL
and the repayment schedule should be decided in the next phase i.e. ratio analysis (based on the value of
DSCR). Preliminary expenses in excess of 2.5% of project cost should be added to machinery for
calculating depreciation.
10. The next step is to calculate Profit before Tax (PBT) and Profit after Tax (PAT).
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Ratio Analysis
The relevant ratios analyzed by the credit analyst during the course of term loan appraisal are as under:
To Financial Ratio UsedLiquidity Current
Total Liabilities vis--vis the stake
of the Total Gearing Ratio.Term liability vis-a-vis the stake of the Debt-Equity Ratio.
Servicing capability to interest obligations. Interest Coverage Ratio.Whether the required margin is maintained
by the (Net fixed asset) / (Balance in the term loan
Servicing capability to repayment Debt Service coverage ratio.The extent to which the financials can bear
adverseimpact of movement in sale price, cost
Break EvenLevel, Margin
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I/We submit our application for facilities as detailed below:
Tenure (Months):
Original Investment (cost / price) in Plant and Machinery (Rs. Lacs)... ...... ...... ...... ...... ...... .(If Applicable).
MOBILE NO :
:
:
:
12. Sales Tax registration date :
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14. Details of Bank accounts of Entity not having credit facilities
15. Details of credit facilities enjoyed by the Entity from other institutions/banks
16. Details of existing credit facilit ies enjoyed by the Entity from ICICI Bank
17. Details of associate/group entities (Rs. in lacs)
18. Key Financial Information (Rs. in lacs)
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APPRAISAL FOR PROJECT FINANCE
Project finance is the financing of long-term infrastructure and industrial projects
based upon a complex financial structure where project debt and equity are used to
finance the project, rather than the balance sheets of project sponsors. Usually, aproject financing structure involves a number of equity investors, known as
sponsors, as well as a syndicate of banks that provide loans to the operation.
The loans are most commonly non-recourse loans, which are secured by the project
assets and paid entirely from project cash flow, rather than from the general assets
or creditworthiness of the project sponsors, a decision in part supported by financial
modeling.
The financing is typically secured by all of the project assets, including the
revenue-producing contracts. Project lenders are given a lien on all of these assets,
and are able to assume control of a project if the project company has difficulties
complying with the loan terms.
Generally, a special purpose entity is created for each project, thereby shielding
other assets owned by a project sponsor from the detrimental effects of a project
failure. As a special purpose entity, the project company has no assets other than the
project.
Capital contribution commitments by the owners of the project company aresometimes necessary to ensure that the project is financially sound. Project finance
is often more complicated than alternative financing methods.
Traditionally, project financing has been most commonly used in the
mining, transportation, telecommunication and public utility industries. More
recently, particularly in Europe, project financing principles have been applied to
public infrastructure under public-private partnerships (PPP) or, in the UK, Private
Finance Initiative (PFI) transactions.
Risk identification and allocation is a key component of project finance. A project
may be subject to a number of technical, environmental, economic and political risks,
particularly in developing countries and emerging markets.
Financial institutions and project sponsors may conclude that the risks inherent in
project development and operation are unacceptable (non financeable). To cope with
these risks, project sponsors in these industries (such as power plants or railway
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lines) are generally comprises of a number of specialist companies operating in a
contractual network with each other that allocates risk in a way that allows financing to
take place.
The various patterns of implementation are sometimes referred to as "project delivery
methods." The financing of these projects must also be distributed among multiple
parties, so as to distribute the risk associated with the project while simultaneously
ensuring profits for each party involved.A riskier or more expensive project may require limited recourse financing secured by
a surety from sponsors. A complex project finance structure may incorporate
corporate finance, securitization, options, insurance
provisions or other types of collateral enhancement to mitigate
unallocated risk.
APPRAISAL FOR WORKING CAPITAL
FINANCE Introduction
Working capital, also known as net working capital, is a financial metric which
represents operating liquidity available to a business. Along with fixed assets such as
plant and equipment, working capital is considered a part of operating capital. It is
calculated as current assets minus current liabilities. If current assets are less than
current liabilities, an entity has a working capital deficiency, also called a working
capital deficit.
Current assets and current liabilities include three accounts which are of
special importance. These accounts represent the areas of the business where managershave the most direct impact:
Account receivable (current asset)
Inventory (current assets), and
Accounts Payable (currentliability)
The current portion of debt (payable within 12 months) is critical, because it represents
a short-term claim to current assets and is often secured by long term assets. Common
types of short-term debt are bank loans and lines of credit.
An increase in working capital indicates that the business has either increased current
assets (that is received cash, or other current assets) or has decreased current
liabilities, for example has paid off some short-term creditors.
Implications on M&A: The common commercial definition of working capital for the
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purpose of a working capital adjustment in an M&A transaction (i.e. for a working
capital adjustment mechanism in a sale and purchase agreement) is equal to:
Net Working Capital=Current Assets - Current Liabilities excluding deferred tax
assets/liabilities, excess cash, surplus assets and/or depositbalances.
Decisions relating to working capital and short term financing are referred to as
working capital management. These involve managing the relationship between a
firm's short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that the firm is able to continue its operations and that it hassufficient cash flow to satisfy both maturing short-term debt and upcoming operational
expenses.
Decis
ion
crite
ria
By definition, working capital management entails short term decisions - generally,
relating to the next one year period - which is "reversible". These decisions are
therefore not taken on the same basis as Capital Investment Decisions rather they will
be based on cash flows and / or profitability.One measure of cash flow is provided by the cash conversion cycle - the net number of
days from the outlay of cash for raw material to receiving payment from the
customer. As a management tool, this metric makes explicit the inter-relatedness of
decisions relating to inventories, accounts receivable and payable, and cash.
Because this number effectively corresponds to the time that the firm's cash is tied
up in operations and unavailable for other activities, management generally aims at a
low net count.
In this context, the most useful measure of profitability is Return on capital (ROC). The
result is shown as a percentage, determined by dividing relevant income for the 12
months by capital employed; Return on equity (ROE) shows this result for the firm's
shareholders. Firm value is enhanced when, and if, the return on capital, which results
from working capital management, exceeds the cost of capital, which results from
capital investment decisions as above. ROC measures are therefore useful as a
management tool, in that they link short-term policy with long-term decision making.
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Management of working capital
Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing the
current assets (generally cash and cash equivalents, inventories and debtors) and the
short term financing, such that cash flows and returns are acceptable.
Cash management. Identify the cash balance which allows for the business to
meet day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and minimizes
reordering costs - and hence increases cash flow.
Debtors management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers, such that any impact on cash flows and the cash
conversion cycle will be offset by increased revenue and hence Return on Capital (or
vice versa).
Short term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors
to cash" through "factoring".
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MARKETING OF BANK PRODUCTS-
Channels
ICICI Bank has the following channels through which it offers its products and services toits customers.
yBranchesyATMsyInternet BankingyMobile BankingyPhone Banking
Products and Services
ICICI Bank offers a host of products and services to its clients, which include Deposits,
Loans, Cards, Investments, Insurance, Demat, NRI Services and Online Services etc.
Deposits
Following deposits are offered:
ySavings AccountyAdvantage DepositySpecial Savings AccountyLife Plus Senior Citizens Savings AccountyFixed Deposits
ySecurity DepositsyRecurring DepositsyTax-Saver Fixed DeposityYoung Stars Savings AccountyChild Education PlanyBank@CampusySalary AccountyAdvantage Woman Savings AccountyEEFC AccountyResident Foreign Currency (Domestic) AccountyPrivilege Banking
yRural Savings AccountyPeople's Savings AccountySelf Help Group AccountsyOutward RemittanceyFreedom Savings AccountyFamily Banking
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Loans
ICICI Bank offers following loan facilities:
yHome LoansyLoan Against PropertyyPersonal LoansyCar Loans
yTwo Wheeler LoansyCommercial Vehicle LoansyLoans Against SecuritiesyLoan Against Gold OrnamentsyPre-approved Loans
Cards
ICICI Bank is India's largest issuer of credit cards. It also offers other types of cards. Thevarious cards offered by ICICI bank are as below:
y
Consumer CardsyCredit CardsyTravel CardsyDebit CardsyCommercial CardsyCorporate CardsyPrepaid CardsyPurchase CardsyDistribution CardsyBusiness CardsyMerchant Services
Investments
ICICI Bank facilitates a range of investment products including:
yICICI Bank Tax Saving BondsyMutual FundsyGovernment of India BondsyInitial Public Offers (IPO) by CorporatesyForeign Exchange ServicesyICICI Bank Pure Goldy
Senior Citizens Savings Scheme, 2004
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Insurance
ICICI Bank offers various types of insurance. Customers can choose from the following:
yHome InsuranceyHealth InsuranceyHealth Advantage Plus
yFamily FloateryPersonal AccidentyTravel InsuranceyIndividual Overseas Travel InsuranceyStudent Medical InsuranceyMotor InsuranceyCar InsuranceyTwo Wheeler InsuranceyLife InsuranceyICICI Pru LifeTime GoldyICICI Pru LifeState RP
NRI Services
Following services are offered to the NRIs:
yMoney TransferyBank AccountsyInvestmentsyHome LoansyInsuranceyLoans Against FD
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Marketing Strategy for Financial Products
The strategy implemented by ICICI Bankfor making its products acceptable to its target
customers is described in this section.
The products of the bank range from deposit accounts to insurance policies. The framing of
marketing strategy begins with discovering the target segment against the product proposed to
be introduced. In order to discover this segment banks go through an extensive survey usually
conducted by marketing research organizations like IMRB, AC NIELSON etc. These
surveys reveal not only the demographic conditions of the segment discovered but also
the need of that segment as well as the degree to which these needs have been fulfilled by the
similar products of other banks. In case it is discovered that needs of a considerable portion
of the target segment is still uncovered by existing products of the same product category then
only ICICI BANK plans to introduce a new product but before that it definitely analyses
whether it will be able to earn desired profit out of that product. For estimating the profit
they consider the stage of life cycle of the product as the same is a determinant of
revenue expected out of the product. For example DEMAT account is currently at growth stage
by virtue of the growing interest of people in the share market and so if any bank comes
up with some DEMAT account schemes they can definitely earn desired profit.
After determining the target segment for a particular financial product the next task is
promotion of the particular product. Promotion of the product include not only advertising
for the product but also making the product available to desired segment through distribution
channels (branches of the bank) and that to at a bearable investment from the target
customers. The advertising for financial products can be done through emails, websites of
bank, making customers aware of the product through telephonic conversation, organizing
stalls at road sides to draw attention of customers towards the products of bank, television. As
a result of these different promotion strategies an information set is developed in mind of
people from which one selects the
most suitable product as per onesrequirement.
Marketing Strategy for Deposit Accounts
The Deposit Accounts are categorized into Current Accounts and Savings Accounts. Thecurrent accounts are owned by different companies operated by various businessmen. In
case of these current accounts the customers generally get attracted to the same of a
particular bank usually on the basis of a long term relationship with the same bank.
Generally as derived out of the survey whenever a trader comes up with a new business unit
in an area he/she prefer to open a new current account for the new unit with a bank to which
he/she is already related as a customer rather than opting for a new bank mainly because
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of a sense of reliability for the existing bank. Moreover, it is also easier for an existing
customer of a bank earn facilities like term loans and loans against working capital and also
to make rescheduling of repayment of existing loans compared to that of a new trader
because of strong relation of reliability which already stands between the bank and customer.
In case of both current account and savings account the new customer base is generally
created by reference from existing customers. To make these deposit accounts more lucrative
compared to other players the bank can consider proposals like proving better interest to
customers and proving some commission to existing customers who refer new customers by
crediting certain amount to their account.
Marketing Strategy for Insurance Products
In case of insurance products however the strategy should be targeting the rural
population. In cities the insurance products of organizations like Life Insurance Corporation
and SBI Life are mostly popular but in rural areas LIC is the only dominant player. In order
to make its insurance product popular the bank should recruit more and more agents in order
to strengthen its distribution channel and should provide better commission and other
facilities to its agents on successful closure of each deal but before this it should impart an
extensive training to its agents in order to make them capable of negotiating with rural people
and enhance their reliability among the same.
ICICI Lombard-
Family Floater Health Insurance
Family Floater Health Insurance from ICICI Lombard offers you the best of both worlds by
taking care of your familys health while helping you save on your taxable income.
Secure your family against financial emergencies during sudden illness, surgery and accidents as
well as against terrorist activities.
Family Floater Health Insurance plan lets you share the entire sum insured among the family
members covered under the policy, without any individual upper limits.
Policy Details
Key Benefitsy Comprehensive coverage for your family with floater benefity Cashless claims facility at over 4,000+ network hospitals across Indiay Continue to enjoy quality service even during claim settlements with - ICICI LombardHealth
Care - our own in-house health claim processing and wellness teamy No sub-limits on room rent, doctor fees, and hospital charges or for
any disease (except Cataract where 20,000 per eye is applicable).y No co-payments for any disease or any hospitalisation expensesy Now get a Free health check-up coupon for any one insured family member, valid forthe policy
period.
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Individual Overseas Travel Insurance-
Single Round trip-
A comprehensive Travel Insurance policy that covers unexpected medical and non-
medical expenses when you are travelling abroad. Avail of benefits like Checked-in
Baggage loss/ delay and unique facilities such as Cashless hospitalisation, worldwide.
Our Travel Insurance plans are the most preferred among others because we coverPre-
Existing diseases in life-threatening emergency situations.
Frequent Flier (Multi-Trip)-
A comprehensive Travel Insurance policy that covers unexpected medical and non-
medical expenses when you are travelling abroad. Avail of benefits like Checked-in
Baggage loss/ delay and unique facilities such as Cashless hospitalisation, worldwide.
The Multi-Trip Plan is specially designed for the frequent international traveller. The
policy is valid for 1 year and you can choose between 2 options of 30 or 45 days as the
maximum duration per trip.
Our Travel Insurance plans are the most preferred among others because we cover Pre-
Existing diseases in life-threatening emergency situations.
MOTAR INSURANCE-
Car Insurance-
Car Insurance Premium is calculated based on the car's Model, Age and the Registration
City. Due to this Pricing Model, in some cases, the premium for similar cars could be
higher as well.
y A digitally signed policy is issued immediately through our online facility.y Access to over2700+ network garages for cashless claims servicing across India.y Optional Personal Accident cover of up to 2 Lakhs for co-passengers.y Doorstep surveyor facility to cover your car with a gap in insurance.
Two wheeler Insurance-A comprehensive Motor Insurance policy for your two-wheeler that keeps it secureagainst damage caused by natural and man-made calamities, including acts of terrorism.Avail of Own Damage, Personal Accident and Liability cover all in one policy.Policy Key Features
Key Benefits
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y A digitally signed policy is issued immediately through our online facility.y Access to over 2700+ network garages for cashless claims servicing across India.y Optional Personal Accident cover for co-passengers
STUDENT MEDICAL INSURANCE-
Overseas Student Travel Insurance
ICICI Lombard provides you with medical and non-medical insurance coverage through
our Overseas Student Travel Insurance Plan. View the benefits which can make your stay
abroad a happier experience.
y Affordable Pricing: 1/3rd the cost of similar insurance policies bought abroad.y Accessibility: Database of over500 universities and issuance of instant digitally
signed policy.y Global Tie-ups: Tie-up with UnitedHealth International, the global arm ofUnitedHealth Group, one of the largest and most diverse health care companies in theUnited States.y Comprehensive Coverage: Overseas Student Travel Insurance plans introducedby ICICI Lombard cover unexpected medical and non-medical expenses during yourstudy abroad.y Non-medical benefits: Covers Study Interruption and provision for a Two-wayCompassionate Visit cover for parents.y Time saver: Saves time by enabling online extension of policy and quick cashlessclaim settlement through our tie-up's with a vast network of hospitals across the globe.
ICICI SECURITIES- For the purpose of sale of other financial products it has its
devision named as ICICI Securities under ICICI Bank.
CICI Securities Ltd is an integrated securities firm offering a wide range of services
including investment banking, institutional broking, retail broking, private wealth
management, and financial product distribution.
ICICI Securities sees its role as 'Creating Informed Access to the Wealth of the
Nation' for its diversified set of client that include corporates, financial institutions, highnet-worth individuals and retail investors.
Headquartered in Mumbai, ICICI Securities operates out of 66 cities and towns in India
and global offices in Singapore and New York.
ICICI Securities Inc., the stepdown wholly owned US subsidiary of the company is a
member of the Financial Industry Regulatory Authority (FINRA) / Securities Investors
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Protection Corporation (SIPC). ICICI Securities Inc. activities include Dealing in
Securities and Corporate Advisory Services in the United States.
ICICI Securities Inc. is also registered with the Monetary Authority of Singapore (MAS)
and operates a branch office in Singapore.
ICICI Securities Institutional- CICI Securities facilitates access to capital for the growth
engine of the Indian economy which is the corporate sector including large, medium and small
enterprises; both from the public and private markets.
ICICI Securities Retail-ICICI Securities empowers over 2 million Indians to seamlessly
access the capital market with ICICIdirect.com, an award winning and pioneering online broking
platform.
PERFORMANCE OF ICICI (31 March 2010)
Performance Review Quarter and year ended March 31, 2010
y 35% year-on-year increase in standalone profit after tax to Rs. 1,006 crore for the
quarter ended March 31, 2010 from
Rs. 744 crore for the quarter ended March 31, 2009
y Highest ever consolidated profit after tax of Rs. 4,670 crore for the year ended
March 31, 2010;31% increase from Rs.
3,577 crore for the year ended March 31, 2009
y Current and savings account (CASA) ratio increased to 41.7% at March 31, 2010
from 28.7% at March 31, 2009
y Net non-performing asset ratio decreased to 1.87% at March 31, 2010 from 1.96%
at March 31, 2009 and 2.19% at
December 31, 2009
y Strong capital adequacy ratio of 19.4% and Tier-1 capital