project financial services

Guru Jambheshwar University of Science & Technology Hisar 2008-10

A Project on

“Financial Services”Submitted in partial fulfillment of the requirement

of Masters of Business Administration, Distance Education

Guru Jambheshwar University of Science & Technnology, Hisar

Research Supervisor Submitted By:

Suresh Mittal Pardeep Kumar

Chartered Accountant Enrolment No.08061402157

Session 2008-10

Directorate of Distance of Education

Guru Jambheshwar Univesity of Science & Technololgy Hisar (Hisar)

DIRECTORATE OF DISTANCE EDUCATION

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GURU JAMBHESHWAR UNIVERSITY OF SC & TECH. HISAR

FORMATE FOR RESUME OF SUPERVISOR / GUIDE

1. NAME SURESH MITTAL

2. DESIGNATION CHARTERED ACCOUNTANT

3. QUALIFICATION B.COM, CHARTERED ACCOUNTANT

4. AREA OF SPECIALIZATION TAXATION

5. EXPERIENCE 15 YEARS EXPERIENCE INCOME TAX

AUDIT,TDS & SERVICE TAX

6. OFFICIAL ADDRESS 309, MAMTA ENCLAVE

VILL-DHOKALI, ZIRAKPUR (PB)

7. TELEPHONE NO. 9876008470

8. MOBILE

9. E-MAIL [email protected]

I am willing to supervise Mr. Pardeep Kumar

Enrollment No.- 08061402157

On the topic “ Financial Services”

Countersigned by Director of Study Centre with Seal

CERTIFICATE

This is to certify that Mr.Pardeep kumar , Enrollment No.08061402157 has completed under my supervision his

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project on “Financial Services” in the specialization area “Finance”

The work embodied in this report is original and is of the standard expected of an MBA student and has not been submitted in part or full to this or any other university for the award of any degree or diploma. He has completed all requirements of guidelines for the Research Project Report and the work is for evaluation.

“ Certified that the work done by the candidate is original and is of the standard expected of an MBA student.”

NAME : SURESH MITTAL

DESIGNATION : CHARTERED ACCOUNTANT

ORGANIZATION: CHARTERED ACCOUNTANT

Forwarded by Head/ Director of Study Centre

(with signature, name & SEAL)

DECLARATION

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This is to certify that the project report entitled “ Financial Services” is my original work and this has not been submitted in part or full to this or any other university/institution for the award of any degree or diploma.

Signature of Candidate

NAME: Pardeep Kumar

ENROLLMENT NO:08061402157

SPECIALIZATION: Finance

SESSION : 2008-10

INDEX

SR.NO. CHAPTER NAME PAGE NO.

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1. Executive Summary 6-7

2. Introduction 8-9

3. Objective of the Project 10

4. Conceptual Framework 11-12

5. Types & detailed summary of Finance 13-68

6. Research Methodology 69-70

7. Conclusion 71-72

8. Bibliography 73

EXECUTIVE SUMMARY

A project report is written statement of ideas, collection of information, method of implementing an ideas & a map for the management.

Different type of financial products and services penetrate our daily activities. As a major group of

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financial instruments, banks have been expanding their services scope, and hence, universal banks, which provide a variety of financial products and services in one house, have experienced growing popularity in some industrialized countries. In India, banking instutions have assumed a key role in the simplistic financial sector. Commercial banks have made effort to diversify their products and services, but a lengthy process is expected for their transition into truly universal banks. It is argued that the current structure and practices of the local market also contribute to this lengthy transformation.

The project has been divided into two parts. In initial chapters of the project was given to general concept and fundamental principles for project financing, method of types of industries. The later chapter covers various methods of project financing and its sub methods i.e. term loan and working capital limit in project financing. Funding the requirement of the term loan and working capital by the following procedures of credit monitoring assessment (CMA) for funding of short- term loan and long term loan.

The project is the case study of “winner Nippon Electronics Ltd, Raglan Infrastructure Ltd. & Synergy Telecommunication” and also its short term loan & long term financial requirements are highlighted.

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INTRODUCION OF THE PROJECT FINANCING

Finance is the lubricant of the process of economic growth. When finance mode is available, industrial activities can be initiated which give rise to new investment apportunities towards industrialization.

Banking institutions are dominant operators in modern financial systems and important business entities in an economy. They are divided into two separate types of institutions, namely commercial banks and investment banks in some countries, while in other countries such division is vague or even non-existent. The so-called universal banks engage in all forms of commercial and investment banking, not only including lending and deposit taking, but also underwriting securities and

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securities trading. In particular, some universal banks may own significant equity interests in companies with voting rights. Germany is the typical example running the universal banking system. Canada and Switzerland, among others, are noteworthy examples moving towards universal banking.

Project finance refers to the financing of long term infrastructure, industrial project and public services based upon resourse or limited resourse financial structure where project debt and equity used to finance the project and cash flow generated by the project.

Arranging short- term financing, controlling cash, managing accounts of finance management. A thorough understanding and application of all these aspects is necessary to be able to maintain the optimum level of finance with in the firm.

The requirement of the project financing is depending upon the nature of the business. The business may be small are large, but the requirement depend on the operation of the business it means the cycle of the business. If the operating cycle is longer the requirement of finance would be longer of the business.

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OBJECTIVES

To understand the concept of project financing, it’s various components, methods and nature of project financing.

To define financial services and explain its scope.

To discus about the various innovative financial instruments.

To study of requirement of finance according to the structure and size of the industries.

To explain the present scenario of financial services sector in india.

To understand the functions of universal banking.

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CONCEPTUAL FRAMEWORK

History of project financing:-

Limited recourse lending was used to finance maritime voyages in ancient Greece and Rome. Tts use in infrastructure projects dated to the development of the panama canal and was widespread in the US oil and gas industry during the early 20th century. However, project finance for high-risk infrastructure schemes originated with the development of the north sea oil fields in the 1970s and 1980s. For such investments newly created special purpose corporation (SPCs) were created for each project, with project operations. Such projects were previously accomplished through utility or government bond issuances, or other traditional corporate finance structures.

The Indian financial services has undergone a metamorphosis since 1990. During the late seventeen and eighties the Indian financial services was dominated by commercial bank and other financial institutions which makes the requirement of Indian industries.

As a result of innovation, new instruments and new market are emerged in the capital market. The capital market and the money market are getting windened and

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depended market. There has been a structural changes in the international capital market with the emergence of new products and innovative techniques. Many financial intermediaries including bank have already started expand of their activities in the financial services sector by offering variety of new products.

What is the project financing?

Types of Financial Services11


Financial Services↓

Commercial Bank Investment Services

Insurance Advisory Services

↓ ↓ ↓ ↓ •Private •Asset • Insurance •Stock brokers Banking Management Brokerage (Private Clients•Investment •Hedge Fund • Insurance Services and Banks Managers Undertaking discount•Bank Cards • Custody • Reinsurance brokers•Credit Card Services Machine Services and networks

Project financing is an innovative and timely financing

technique that has been used on many high-profile

corporate projects, including Euro Disneyland and the

Eurotunnel. Employing a carefully engineered financing

mix, it has long been used to fund large-scale natural

resource projects, from pipelines and refineries to

electric-generating facilities and hydro-electric projects.

Increasingly, project financing is emerging as the

preferred alternative to conventional methods of

financing infrastructure and other large-scale projects

worldwide.

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Project Financing discipline includes understanding the

rationale for project financing, how to prepare the

financial plan, assess the risks, design the financing mix,

and raise the funds. In addition, one must understand the

cogent analyses of why some project financing plans

have succeeded while others have failed. A knowledge-

base is required regarding the design of contractual

arrangements to support project financing; issues for the

host government legislative provisions, public/private

infrastructure partnerships, public/private financing

structures; credit requirements of lenders, and how to

determine the project's borrowing capacity; how to

analyze cash flow projections and use them to measure

expected rates of return; tax and accounting

considerations; and analytical techniques to validate the

project's feasibility.

Project financing involves non-recourse financing of the

development and construction of a particular project in

which the lender looks principally to the revenues

expected to be generated by the project for the

repayment of its loan and to the assets of the project as

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collateral for its loan rather than to the general credit of

the project sponsor.

“Project Finance” is a method for obtaining commercial

debt financing for the construction of a facility. Lenders

look at the credit-worthiness of the facility to ensure debt

repayment rather than at the assets of the

developer/sponsor. Farm biogas projects have historically

experienced difficulty securing project financing because

of their relatively small size and the perceived risks

associated with the technology. However, project

financing may be available to large projects in the future.

In most project finance cases, lenders will provide project

debt for up to about 80% of the facility’s installed cost

and accept a debt repayment schedule over 10 to 12

years. Project finance transactions are costly and often an

onerous process of satisfying lender’s criteria.

“project finance involves the creation of a legally

independent project company financed with non-recourse

debt for the purpose of financing a single purpose capital

asset, usually with a limited life”.

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Project finance is different from traditional forms of

finance because the credit risk associated with the

borrower is not as important as in an ordinary loan

transaction; what is most important is the identification,

analysis, allocation and management of every risk

associated with the project.

The purpose of this project is to explain, in a brief and

general way, the manner in which risks are approached

by financiers in a project finance transaction. Such risk

minimization lies at the heart of project finance.

In a no recourse or limited recourse project financing, the

risks for a financier are great. Since the loan can only be

repaid when the project is operational, if a major part of

the project fails, the financiers are likely to lose a

substantial amount of money. The assets that remain are

usually highly specialized and possibly in a remote

location. If saleable, they may have little value outside

the project. Therefore, it is not surprising that financiers,

and their advisers, go to substantial efforts to ensure that

the risks associated with the project are reduced or

eliminated as far as possible. It is also not surprising that

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because of the risks involved, the cost of such finance is

generally higher and it is more time consuming for such

finance to be provided.

Project finance is the financing of long-term

infrastaructure and industrial projects based upon a

complex financial structure where project debt and equity

are used to finance the project. Usually, a project

financing scheme involves a number of equity investors,

known as sponsors, as well as a syndicate of banks which

provide loans to the operation. The loans are most

commonly non-recourse loans, which are secured by the

project itself and paid entirely from its cash flow, rather

than from the general assets or creditworthiness of the

project sponsors. The financing is typically secured by all

of the project assets, including the revenue-producing

contracts. Project lenders are given a lien on all of these

assets, and are able to assume control of a project if the

project company has difficulties complying with the loan

terms.

Generally, a special purpose entity is created for each

project, thereby shielding other assets owned by a project

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http://en.wikipedia.org/wiki/Infrastructure

http://en.wikipedia.org/wiki/Special_purpose_entity

http://en.wikipedia.org/wiki/Lien

http://en.wikipedia.org/wiki/Security_interest

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Debt


sponsor from the detrimental effects of a project failure.

As a special purpose entity, the project company has no

assets other than the project. Capital contribution

commitments by the owners of the project company are

sometimes necessary to ensure that the project is

financially sound. Project finance is often more

complicated than alternative financing methods. It is

most commonly used in the mining, transportation,

telecommunication and public utility industries.

Risk identification and allocation is a key component of

project finance. A project may be subject to a number of

technical, environmental, economic and political risks,

particularly in developing countries and emerging

markets. Financial institutions and project sponsors may

conclude that the risks inherent in project development

and operation are unacceptable (unfinanceable). To cope

with these risks, project sponsors in these industries

(such as power plants or railway lines) are generally

completed by a number of specialist companies operating

in a contractual network with each other that allocates

risk in a way that allows financing to take place. The

various patterns of implementation are sometimes

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http://en.wikipedia.org/wiki/Financial_institution

http://en.wikipedia.org/wiki/Emerging_market

http://en.wikipedia.org/wiki/Emerging_market

http://en.wikipedia.org/wiki/Developing_countries

http://en.wikipedia.org/wiki/Public_utility

http://en.wikipedia.org/wiki/Telecommunication

http://en.wikipedia.org/wiki/Transportation

http://en.wikipedia.org/wiki/Mining

http://en.wikipedia.org/wiki/Bankruptcy


referred to as "project delivery methods." The financing

of these projects must also be distributed among multiple

parties, so as to distribute the risk associated with the

project while simultaneously ensuring profits for each

party involved.

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http://en.wikipedia.org/wiki/Profit

http://en.wikipedia.org/wiki/Project_delivery_method


Chap 2: AN OVERVIEW

2.1 Banking Sector

There have been major structural changes in the financial

sector since banking sector reforms were introduced in

India in 1992. Since then Banks have been lending

aggressively providing funds towards infrastructure

sector. Major policy measures include phased reductions

in statutory pre-emption like cash reserve and statutory

liquidity requirements and deregulation of interest rates

on deposits and lending, except for a select segment. The

diversification of ownership of banking institutions is yet

another feature which has enabled private shareholding

in the public sector banks, through listing on the stock

exchanges, arising from dilution of the Government

ownership. Foreign direct investment in the private sector

banks is now allowed up to 74 per cent.

The co-existence of the public sector, private sector and

the foreign banks has generated competition in the

banking sector leading to a significant improvement in

efficiency and customer service. The share of private and

foreign banks in total assets increased to 31.5 per cent at

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end-March 2007 from 27.6 per cent at end-March 2006

and less than 10.0 per cent at the inception of reforms.

The nationalized banks have more branches than any

other types of banks in India. Now there are about

33,627 Branches in India, as on March 2005.

Investments of scheduled commercial banks (SCBs)

also saw an increase from Rs 8,04,199 crore in March

2005 to Rs 8,43,081 crore in the same month of

2006.

India's retail-banking assets are expected to grow at

the rate of 18% a year over the next four years

(2006-2010).

Retail loan to drive the growth of retail banking in

future. Housing loan account for major chunk of retail

loan.

2.2 An Overview on Union Bank Of India

Union Bank of India was inaugurated by the father of the

nation – Mohandas Karamchand Gandhi. It commenced

operations in the year 1920.

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Union Bank has offered vast and varied services to its

entire valuable clientele taking care of their needs.

Today, with its efficient customer service, consistent

profitability & growth, adoption of new technologies and

value added services, Union Bank truly lives up to the

image of, “Good People to bank with”. Anticipative

banking is an integral ingredient of value-based services.

This ability to gauge the customer's needs long before he

realizes, best reduces the gap between expectance and

deliverance

Manpower is the key factor for the success of any

organization. Union Bank has a dedicated family of about

26,000 qualified / skilled employees who will and always

will be delighted to extend their services to the

customers with heartfelt efforts

The Bank is a Public Sector Unit with 55.43% Share

Capital held by the Government of India. The Bank came

out with its Initial Public Offer (IPO) in August 20, 2002

and Follow on Public Offer in February 2006. Presently

44.57 % of Share Capital is presently held by Institutions,

Individuals and Others.

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The Bank has over the years earned the reputation of

being a techno-savvy Bank and is one of the front runners

amongst public sector bank in the field of technology. It is

one of the pioneer public sector banks, which launched

Core Banking Solution in 2002. As of September 2005,

more than 719 branches/extension counters of Bank are

networked under Core Banking Solution, powered with

the centralized technology platform, the Bank has

launched multiple Electronic Delivery Channels and has

installed nearly 469 networked ATMs. Online Tele banking

facility is available to all its Core Banking customers. The

multi facility versatile Internet Banking Solution provides

extensive information in addition to the on line

transaction facility to both individuals and corporate

banking with the Core Banking branches of the Bank. In

addition to regular banking facilities, today customer can

also avail variety of value added services like cash

management service, insurance, mutual funds, Demat

from the bank. Today there are more than 26,000

employees in Union Bank of India.

UBI has been ranked at 5th position among the

nationalized bank in India.

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Overview on banks deposits and advances

Items 2003-04 2004-05 2005-06

2006-07 2007-08

Deposits

Investments

Advances

2.2.1 Rationale for the study

Offering credit is an operation fraught with risk. Before

offering credit to an organization, its financial health must

be analyzed. Credit should be disbursed only after

ascertaining satisfactory financial performance. Based on

the financial health of an organization, banks assign

credit ratings. These credit ratings are used to fix the

interest rate and quantum of installment.

This study aims to analyze the credit health of

organizations that approach Union Bank of India for

foreign exchange credit facilities. After analyzing credit

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health, the credit rating is determined. On the basis of

credit rating, the interest rate guidelines circular is

consulted to fix a price for the credit facilities i.e.

determine the interest rate.

2.2.2 Credit disbursement at Union Bank of India

This project was undertaken at the Industrial Finance

Branch of Union Bank of India, at the Credit Department.

Financial requirements for Project Finance and Working

Capital purposes are taken care of at the Credit

Department. Companies that intend to seek credit

facilities approach the bank. Primarily, credit is required

for following purposes:-

1. Working capital finance

2. Term loan for mega projects

3. non fund based Limits Like Letter of Guarantee,

Letter of Credit

Companies present audited balance sheets of the current

and previous years. These are used to determine the

financial health, turnover trends and rise and fall of

profitability. Then credit rating is done.

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The financial health and credit rating are theoretical

methods for determining the right interest rate. However,

in practice, banks consider other factors such as history

with client, market reputation and future benefits with

clients. Thus, a difference exists between theory and

practice.

2.2.3 Objectives of the project

To assess the financial health of organizations that

approach Union Bank of India for credit for import

export purposes. This would entail undertaking of the

following procedures:

Analysis of past and present financial statements

Analysis of Balance Sheet

Analysis of Cash Flow Statements

Examination of Profitability statements

Examination of projected financial statements

Examination of CMA data25


To assess the suitability of the company for

disbursement of credit. This would involve the

following actions:

Use of credit rating charts

Evaluation of management risk

Evaluation of financial risk

Evaluation of market-industry risk

Evaluation of the facility

Evaluation of compliance of sanction terms

Funds Mobilization and Credit Rationing

The traditional activities of banks are deposit

taking and lending. Deposits are liabilities of

banks, while funds extended by banks to

borrowers are their assets. The fundamental

function of banks is to mobilize available funds

from the surplus units to the deficit units. A “must”

technique when banks reallocate funds is credit

rationing.

Bank credit is extended to the “good” ones, who

are more likely to settle their debt principals and

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interests. Default risk is a primary concern of

banks when financing the deficit units. Asymmetric

or imperfect information is the factor behind

default risk. In reality, financial markets are not

necessarily efficient under prefect information.

Information is costly as well as not available to

everyone. Under this circumstance, banks with

their advantages in collecting information could

minimize default risk to certain level. To a further

extent, some banks would insist to monitor their

borrowers and take certain control over their

borrowers’ businesses.

There are three basic mechanisms that banks

apply in order to monitor their borrowers.

First, a bank can directly obtain information of the

borrower’s cash flow when the bank itself handles

the borrower’s deposit account. The second

arrangement is more formal as restrictive

covenants are stipulated in a loan contract. The

borrower is required to maintain a pre-set range of

liquidity determined by the bank. Lastly, the bank

is granted the right to monitor the operation of the

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enterprises that borrow from them. Universal

banks often apply the last mechanism and

maintain a close and extensive connection with

borrowers. Such connection will promise certain

extent of lender control over those enterprises,

and hence, universal banks are argued to be in

advantageous position to overcome the problems

led by the absence of reliable information and

facilitate effective funds mobilization

Calculation of credit rating

Determination of interest rate: This would entail the

following sequence of actions.

Collect data regarding financial health evaluation

Noting down of credit rating

Referencing the banks’ interest rate guidelines

circular

Choosing the interest rate from the circular on the

basis of financial health and credit rating

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Chap 3 : Term Loan Assesment

3.1 Steps in term loan processing

Submission of Project Report along with the Request Letter.

Carrying out due diligence

Preparing Credit Report

Determining Interest Rate

Preparing and submission of Term Sheet

If not approved if approved

Preparation of proposal

Submission of Proposal to designated authority

If No queries raised If queries raised

Project Rejected Solve the queries

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Sanction of proposal on various

Terms & Condition

Communication of Sanction

Acknowledgement of Sanction

Application to comply with Sanction Terms & Condition & execution of Loan Documents

Disbursement


3.1 CONDUCTING FEASIBILITY STUDY

The success of a feasibility study is based on the careful

identification and assessment of all of the important

issues for business success. A detailed Project Report is

submitted by an enterpreneur , prepared by a approved

agency or a consultancy organisation. Such report

provides indepth details of the project requesting finance.

It includes the technical aspects, Managerial Aspect, the

Market Condition and Projected performance of the

company. It is neccessay for the appraising officer to

cross check the information provided in the report for

dtermining the worhiness of the project.

Project Details:

Definition of the project and alternative scenarios

and models.

List the type and quality of product(s) or service(s) to

be marketed.

Outline the general business model (ie. how the

business will make money).

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Include the technical processes, size, location, kind of

inputs

Specify the time horizon from the time the project is

initiated until it is up and running at capacity.

Relationship to the surrounding geographical

area.

Identifies economic and social impact on local

communities.

Identifies environmental impact on the surrounding

area.

MARKET FEASIBILITY

Industry description.

Describes the size and scope of the industry, market

and/or market segment(s).

Estimates the future direction of the industry, market

and/or market segment(s).

Describes the nature of the industry, market and/or

market segment(s) (stable or going through rapid

change and restructuring).

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Identifies the life-cycle of the industry, market and/or

market segment(s) (emerging, mature)

Industry Competitiveness.

Investigates industry concentration (few large

producers or many small producers).

Analyzes major competitors.

Explores barriers/ease of entry of competitors into

the market or industry.

Determines concentration and competitiveness of

input suppliers and product/service buyers.

Identifies price competitiveness of product/service.

Market Potential.

Will the product be sold into a commodity or

differentiated product/service market?

Identifies the demand and usage trends of the

market or market segment in which the proposed

product or service will participate.

Examines the potential for emerging, niche or

segmented market opportunities.

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Explores the opportunity and potential for a "branded

product".

Assesses estimated market usage and potential

share of the market or market segment.

Sales Projection.

Estimates sales or usage.

Identifies and assess the accuracy of the underlying

assumptions in the sales projection.

Projects sales under various assumptions (ie. selling

prices, services provided).

Access to Market Outlets.

Identifies the potential buyers of the product/service

and the associated marketing costs.

Investigates the product/service distribution system and

the costs involved.

ORGANIZATIONAL/MANAGERIAL FEASIBILITY

Business structure.

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Outline alternative business model(s) (how the

business will make money).

Identify the proposed legal structure of the business.

Identify any potential joint venture partners, alliances

or other important stakeholders.

Identify availability of skilled and experienced

business managers.

Identify availability of consultants and service

providers with the skills needed to realize the project,

including legal, accounting, industry experts, etc.

Outline the governance, lines of authority and

decision making structure.

Managerial Personnel

Managerial Personnel play a key role in directing the

working of the company. It is important for an

organisation to have a pool of eficient personnel who

bear the capacity to bail the company out from crisis

situation and work towards optimum utlisation of

organisational resources. Such capacity of the personnel

can be determined by having complete details on

following key aspects:

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Market reputation on the promoter / management of

the company

Hands on experience of the management personnel in

the industry / Business managed by qualified personnel

Ability of the promoters / management to bail out the

company in case of crisis (for example, this could be

derived from a strong group company)

Decision making – Is it concentrated ?

Organisation structure / Succession planning / Labour

relations

Is any group company in default / Any Directors on

RBI’s negative list / Borrower’s track-record in

honouring financial commitment

Length of relationship with the bank

TECHNICAL FEASIBILITY

Technology plays an important role in maintaining a

competitive position in this highly competitive market

conditions. Investing in the proper technology is the key

to success it irrespective of size of business thus for

achieving its projected performance, it is important for it

to have sound technological background. Such technical

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competence of the project can be determined by having

detailed study done on following key aspects:

Determining Facility Needs.

Estimates the size and type of production facilities.

Investigates the need for related buildings,

equipment, rolling-stock

Suitability of Production Technology.

Investigates and compare technology providers.

Determines reliability and competitiveness of

technology (proven or unproven, state-of-the-art).

Identifies limitations or constraints of technology.

Availability and Suitability of Location.

Access to markets.

Access to raw materials.

Access to transportation.

Access to a qualified labor pool.

Access to production inputs (electricity, natural gas,

water, etc.).

Investigate emissions potential.

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Analyze environmental impact.

Identifies regulatory requirements.

Explores economic development incentives.

Explores community receptiveness to having the

business located there.

Raw materials.

Estimates the amount of raw materials needed.

Investigates the current and future availability and

access to raw materials.

Assesses the quality and cost of raw materials and

markets of easily substituted inputs.

Other inputs.

Investigates the availability of labor including wage

rates, skill level, etc.

Assesses the potential to access and attract qualified

management personnel.

FINANCIAL FEASIBILITY

Estimate the total capital requirements.

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Assesses the capital needs of the business project

and how these needs will be met.

Estimates capital requirements for facilities,

equipment and inventories.

Determines replacement capital requirements and

timing for facilities and equipment.

Estimates working capital needs.

Estimates start-up capital needs until revenues are

realized at full capacity.

Estimates contingency capital needs (construction

delays, technology malfunction, market access delays,

etc.

Estimates other capital needs.

Estimated equity and credit needs.

Identifies alternative equity sources and capital

availability -- producers, local investors, angel

investors, venture capitalists, etc.

Identifies and assess alternative credit sources --

banks, government (ie. direct loans or loan

guarantees), grants, local and state economic

development incentives.

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Assesses expected financing needs and alternative

sources -- interest rates, terms, conditions, covenants,

liens, etc.

Establishes debt-to-equity levels.

Budgets expected costs and returns of various

alternatives.

Estimates expected costs and revenue.

Estimates the profit margin and expected net profit.

Estimates the sales or usage needed to break-even.

Estimates the returns under various production, price

and sales levels. This may involve identifying "best

case", "typical", and "worst case" scenarios or more

sophisticated analysis like a Monte Carlo simulation.

Assesses the reliability of the underlying assumptions

of the financial analysis (prices, production,

efficiencies, market access, market penetration, etc.)

Creates a benchmark against industry averages

and/or competitors (cost, margin, profits, ROI, etc.).

Identifies limitations or constraints of the economic

analysis.

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Determines project expected cash flow during the

start-up period.

Identifies project an expected income statement,

balance sheet, etc. when reaching full operation.

Study Conclusions

The study conclusions contain the information you will

use for deciding whether to proceed business. The major

categories this section should include are:

Identify and describe alternative business scenarios

and models.

Compare and contrast the alternatives based on their

business viability.

Compare and contrast the alternatives based on the

goals of the producer group.

Outline criteria for decision making among

alternatives.

Next Step

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After the feasibility study has been completed and

presented, a carefully study and analysis the conclusions

and underlying assumptions. Next, you will be faced with

deciding which course of action to pursue.

Potential courses of action include:

Choosing the most viable business model, for

investment

Identifying additional scenarios for further study.

Deciding that a viable business opportunity is not

available and moving to end the business assessment

process.

41


3.2 CREDIT REPORT AND CREDIT RATING

The credit report is an important determinant of an

individual's financial credibility. They are used by lenders

to judge a person's creditworthiness. They also help the

person concerned to narrow down on the financial

problem areas.

Credit report is a document, which comprises detailed

information about the credit payment history of an

applicant. It is mostly used by the lenders to determine

the credit worthiness of an applicant. The business credit

reports provide information on the background of a

company. This assists one to take crucial business related

decisions. People can also assess the amount of business

risk associated with a company and then decide whether

they would be comfortable in providing them with credit

facilities. The degree of interest that would be shown by

investors in their company can also be gauged from the

business credit reports as they can get an idea of the

conception of their customers regarding themselves.

Since these records are updated at regular intervals of

42


time they enable people to identify the risk levels

associated with a business as well as its future. These

reports also allow businesses to get detailed information

about the financial status of business partners and

suppliers.

What Is A Corporate Credit Rating?

Ratings can be assigned to short-term and long-term debt

obligations as well as securities, loans, preferred

stock and insurance companies. Long-term credit ratings

tend to be more indicative of a country's investment

surroundings and/or a company's ability to honor its debt

responsibilities. . The ratings therefore assess an entity's

ability to pay debts.

There are various organization who perform credit rating

for various business organization.

Union Bank of India follows a finely defined Credit Rating

Model for assessing the creditworthiness of the applicant.

The credit rating model asses various aspects of the

43

http://www.investopedia.com/terms/p/preferredstock.asp

http://www.investopedia.com/terms/p/preferredstock.asp


projects and assigns scores against them thereby

determining the risk level involved with the project.

It is divided in Four Sections:

1. Rating of the Borrower

Financial Risk

Management Risk

2. Market Condition/ Demand Situation

3. Rating of the Facility

4. Business Consideration

5. Cash Flow related parameters

1) Rating of the Borrower: This part of credit rating model

deals with assessing the financial and managerial ability

of the borrower. The financial ability of the firm is derived

by calculating ratios that determine the short term and

long term financial position of the firm

Short term ratios include Current Ratio, determines the

liquidity position of the company over a period of one

year. The current ratio is an indication of a firm's market

liquidity and ability to meet creditor's demands. It is

excess of current assets over current liability. If current

44

http://en.wikipedia.org/wiki/Market_liquidity

http://en.wikipedia.org/wiki/Market_liquidity


liabilities exceed current assets (the current ratio is below

1), then the company may have problems meeting its

short-term obligations. If the current ratio is too high,

then the company may not be efficiently using its current

assets.

According to the guidelines given to UBI the ideal level is

at 1.33:1 however the acceptable level is at 1.17:1.

However at times current ratio may not be a true

indicator, the current ratio for road projects is very high

but this does not indicate that the company is not using

its assets well but the ratio is high because the activity

involves more in dealing with current assets. Hence it is

important for the evaluator to understand the nature of

the industry.

Long term ratio include Debt Equity Ratio is a financial

ratio indicating the relative proportion of equity and debt

used to finance a company's assets. This ratio is also

known as Risk, Gearing or Leverage. A high debt equity

ratio is not preferable by an investor as the company

already has aquired high amount of funds from market

45

http://en.wikipedia.org/wiki/Debt

http://en.wikipedia.org/wiki/Shareholders'_equity

http://en.wikipedia.org/wiki/Financial_ratio

http://en.wikipedia.org/wiki/Financial_ratio


thereby reducing the investor share over the securities

available, inreasing the risk.

It is aslo important for the lender bank to assess the firms

debt paying capacity over a period. Such capacity is

derived by calculating ratio like Debt Service Coverage

Ratio minimum acceptable level is 1.50.

It also necessary for the lender to determine the ability of

the firm to achieve the projected growth by evaluating

the projected sales with actuals. However such parameter

remains non applicable if the business is new.

Financial risk evaluation is only one of the parameter and

not the only parameter for determining the risk level. It

is important to evaluate the Management Risk also while

evaluating the risk relating to borrower.

It is the management of the company that acts as guiding

force for the firm. The key managerial personnel should

bear the capacity to bail out the company firm crisis

situation. In order to remain competitive it is essential to

take initiatives. Such skills are developed over years of

experience, thus for better performance it is required to 46


have a team of well qualified and experienced

personnel.

2) Market potential / Demand Situation

A Company does not operate in isolation there are

various market forces that acts in either favourable or

unfavraouble manner towards its performance. Thus the

rating would not give true picture if does take market or

demand situation in consideration.

The demand supply situation / market Potential plays an

important role in determining the growth level of the

company like

i) Level of competition : monolpoly , favourable ,

unfavourable

ii) seasonality in demand : affected by short term

seasonality, long term seasonality or may not be

affected by seasonality in demand.

iii)Raw Material Availablity:

iv)Locational Issues like proximity to market, inputs,

infrastructure: Favourable, neutral, unfavourable.47


v)Technology ie, proven Technology- not to be changed

in immeditate future, technology undergo change,

outdated technology.

vi)Capacity utilisation

3)Rating of the Facility:

The company can start functioning only after completing

statutary obligations laid down by the governing

authority. Such statutary obligation involves obtaining

licenses, permits for ensuring smooth operations.

Perparation and Submission of Finacial Statements, Stock

statements in the standard format within the given time

schedule.

4)Business Consideration:

The length of relationship with the bank enables the

lender to assess the previous performance of the account

holder. A good track record acts in the favour of the

applicant, however a under perfomance make the lender

more vigiliant.

48


The income value to the bank also given due

consideration.

Thus Credit Rating of the Business takes into

consideration various aspects that directly or indiretly

bears an effects the performance of the business.

After evaluating the risk level involved the lender bank

decided on lending Interest Rate.

In UBI they are catagorised in 9 segements

1. lowest Risk CR-1

2. Low Risk CR-2

3. Medium Risk CR- 3

4. Moderate/ Satisfatory Risk CR- 4

5. Fair Risk CR- 5

6. High Risk CR- 6

7. Higher Risk CR- 7

8. highest risk CR- 8

9. NPA CR- 9

In UBI, a business receiving Credit Rating above level 6

are not considered good from point of investment and

thus are avoided.49


3.3 DETERMINATION OF INTEREST RATE

The interest rate is determined from the interest rate

guidelines circular. This circular is regularly updated to

reflect the bank’s latest credit policies. The rupee

credit is based on BPLR and the foreign exchange

loans are based on LIBOR.

The guidelines define how much interest rate is to be

assigned for a particular credit rating and credit

duration. However, credit rating and its use in

determining interest rate is a theoretical concept and

the bank may allow a reduction in interest rate under

the following conditions:

50


Good Client

The organization is a long term client and brings good

business to the bank.

The organization’s actions show that it intends to

become a long term customer of the bank

Banking Consortium

The organization is seeking credit from a consortium

of banks. In some cases like this, the lead bank might

decide the interest rate and all the member banks of

the consortium follow this interest rate.

3.4 TERM SHEET

Following a favrouable feasibility check, credit rating the

next step is preparing term sheet . A Term Sheet is breif

document that provides details on aspects like:

Account Details

Financial highlights for immediate previous two

audited years and projection for proceeding year

Nature of Project

Cost of Project

51


Means of finace

1. Nature of Facility

2. Purpose

3. Tennure of Term Loan

4. Interest rate Reset

5. Margin

6. Interest Rate, Commission

Door to Door Tenor ie.the period within which the

entire amount I sto be disbursed.

o Repayment Terms

o Prime Security

o Collateral Security

o Upfront fees ie the charges levied by the bank

for processing the documents.

3.5 PROPOSAL

An approved term sheet leads to preparation proposal. A

proposal is prepared in standard format, this enables the

bank to keep a proper track record and also facilitates

proper comparision. A proposal a full fledged document

providing details on project submitted and requesting

52


finance from bank. A proposal contains information on

following aspects:

* Details of Account: It includes name of the Account

Holder, Date of incorporation, Line of Activity, Internal

Credit Rating level, Address of the Registered Office,

Name of Directors, Share Holding Pattern, Asset

Classification, Purpose of the Loan.

* Securities:Lenders often feel more confident about a

loan if they are given a security interest in the assets of a

business. Then, if the borrower does not repay the loan

as promised, the lender can take the property the

borrower pledged, sell it and use the proceeds to repay

(or partially repay) the borrowed amount.it provides

detailed information on nature of securities given in lieu

of the Loan.they are of two types Prime securities,

Collateral Secuties

Prime Securities: Pari Passu is a term used in banking

transactions which means that the charge to be created

53


is in continuation of an earlier charge which might be

held by the same institution or by an other institution.

Collateral Securities: In lending agreements,

collateral is a borrower's asset that is forfeited to the

lender if the borrower is insolvent --- that is, unable to

pay back the principal and interest on the loan. When

insolvent, the borrower is said to default on the loan, in

which case the lender becomes the owner of the

collateral. It includes details on

Nature / Description of collateral security indicating

area & location of property

Value in Rupees.

Date of valuation along with name of Valuer

Insurance Amount & Date of Expiry

Personal guarantee / Corporate Guarantee if any,

includes Name of the guarantor, Value of Guarantee.

* Financial Highlights:

It provides details of important financial elements over a

period of years. It includes

54

http://en.wikipedia.org/wiki/Default_(finance)


Details on Paid capital, Tangible Net worth, Net working

Capital, Current Assets, Current Liabilities, Net Profit, Net

Sales, Reserves and Surplus, Intangible Assets, Long

Term Liabilities, Fixed Assets, Investments, Non -current

Assets like guarantees , Cash Accruals, Capital employed.

It also includes ratios like Debt Equity Ratio, Current

Ratio, Debt Service Coverage Ratio and so.

The interpretation of the financial data presented

provides information on the performance trend of the

company also of the Projections made. Such financial

highlight play an important role in assessing the financial

strength and weakness of the business.

* Status of the project:

A brief of Project

55


In this part of proposal a brief about the project is

explained, it includes information on nature, type of

project, purpose of the project, commencement details,

the promoters and related details of the project. If it is a

on-going project it also gives details on progress and

status of progress

* Evaluation of Industry :

This Section gives brief details on the

1. Scope of the industry

2. Growth level and overall performance of the

industry

3. Recent Developments and Trend Evaluation

* Conduct of the Account:

This section provides details on :

Regularity in Submission of—

Stock Statements / Book Debt Statement

QPR Statements / Half Yearly Statement

Financial Statements56


CMA Data

* Compliance to Terms of Sanction

It furnishes information on following aspect:

Completion of Mortgage formalities

Registration of Charges with ROC

Whether documents valid and in force

Compliance of RBI guidelines

Whether consortium meetings held at prescribed

periodic intervals where the Bank is the leader.

* Exposure details from banking system (existing)

(Incl. Our Bank)

The sharing pattern of the banks is mentioned in this

section of proposal. It includes

Name of the bank

Percentage of share for the fund based and non Fund

based Limits

Amount in Rs.

57


Non Fund based credit are in form of guarantees like

Letter of Credit (L/c), Letter of guarantee (L/g)

Letter of Credit

A ‘Letter of credit’ also known as documentary credit is

the most commonly accepted instrument of settling

international trade payments. A letter of credit is an

arrangement whereby a bank, acting at the request of a

customer, undertakes to pay a third party by a given

date, on documents being presented in compliance with

the conditions laid down.

Letter of Guarantee

A letter from a bank stating that a customer owns a

particular security and that the bank will guarantee

delivery of the security. A letter of guarantee is used by

an investor who is writing call options when the

underlying stock is not in his or her brokerage account. A

Call Option is an agreement that gives an investor the

right (but not the obligation) to buy a stock, bond,

58


commodity, or other instrument at a specified price

within a specific time period.

Financial Guarantee:

A non-cancelable indemnity bond guaranteeing the

timely payment of principal and interest due on

securities by the maturity date. If the issuer defaults,

the insurer will pay a fixed sum of money to holders of

the securities. Financial guarantees are similar to a

Standby Letter of Credit, but are issued by an

insurance company. A Standby Letter of Credit is a

form of insurance on an underlying agreement or

obligation (contract), insuring all parties to the

contract against failure to perform or pay on the part

of one or another party to the contract. Standbys are

issued by banks.

Assessment of Non Fund Based Limit

1. Non Fund Based Limits are normally to be sanctioned

for existing customer only who already enjoy fund

based limits

2. If new borrower full processing as applicable to Fund

Based Limits to be carried.

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3. Borrower’s background and experience of meeting

commitments to be examined in details.

4. L/c limit to be considered as per terms of Purchase or

contract, lead period and minimum economical

quantity of supply of stocks

5. Non Fund based Limits are to be supported by

necessary fund based limits.

6. Past experience of payment of bills under L/c to be

verified before considering new request.

7. While Assessing the L/g Limit contract or agreement

which is the base for L/g, should be examined in

details for any ambiguous clauses.

Any request for financial Guarantee to be critically examined before takin decision.

* Details of Sister/ Allied Concerns:

This section provides information about the Sister/ Allied

Concerns aspects like the performance, promoters, share

holding pattern, operation exposure and experience from

various banks.

* Terms and Condition:60


It is important both for the bank and the applicant to

safeguard its interest, this could be achieved by settling

at mutually acceptable terms and condition in order to

ensure that both the parties the lender and borrower

perform their part of obligation thereby not putting other

party at loss. All loans are subject to regulations and

conditions. The legal information relating to these

regulations and conditions can be viewed in this section.

It is advisable for both the parties to read this information

carefully before approval.

METHODOLOGY OF PROJECT

Sources of Data Collection:-

Data collection is key part of project work. There are two

types of data collection, first is primary source and second is

secondary of data collection.

Primary Sources:-

The primary data includes profile, financial statement, and

61


case study has been obtained from project of “Winner Nippon

Electronics Ltd., Raglan Infrastructure Ltd. & Synergy

Telecommunication”

Secondary Sources:-

The secondary data relating to the procedures of assessment

of project financing in small-scale industry (SSI) and large-

scale industry, RBI guidelines etc. have been sourced from

reference books and websites.

Hypothesis:-

Project finance is the one of the biggest source of borrowing

the debts.

Scope of the project:-

Company has given various guidelines, advice and projection

62


for obtaining the finance form the banks and other financial

services. And developing of the company keeping in the view

economic of the country. I have under taken the study of fast

developing company with reference to its financial position. It

is necessary to under taken the impact of “Financial Services”

and various services provide to their clients.

Limitation of the study:-

The time, limitation is the most important problem to collect

the various information.

Lack of technical knowledge of project financing, I could not

understand some technical terms of the project financing.

CONCLUSION

63


Finance has very close ties with most people. Numerous

financial products and services have penetrated our lives.

The globe is ever-changing and financial products and

services have to keep up with the pace of people’s

demand. Banks, which assume a leading position in most

financial systems, have to be prepared for the growing

need of their customers. In some countries, universal

banks, which offer a wide range of financial services,

have proved responsive to customer demand and helpful

in facilitating economic developments.

India’s financial sector is relatively bank-oriented, and

banks are the primary supplier of financial services. With

the regulatory allowance for universal banking, Indian

banks continue to expand its coverage of financial

services in response to customer demand and profitability

concerns. In countries with universal banking system,

banks usually serve as an important source of external

finance for enterprises.

India’s banking sector follows closely the global trend of

financial developments. It is believed that the concept of

financial supermarkets could play a significant role in

64


future given that an increasing number of transnational

companies have been set up in the region and also by the

opening of Indian Banking sector to foreign players.

It is totally based on our logical skill and even it has to

depend upon our analytical skill.

In the projection I have learn how to build the company’s

position and how would the company rich their turnover?.

And in that to perceive the achievable turnover of the

company and to put the comments on it, and to find out

why company has not achieved their goals.

So, the above case study shows really position of the

company and this case study is really helping me to build

my analytical skill. This is the very well experienced for

me and it absolute, it helps me to rich my goal.

BIBLIOGRAPHY

NAME OF BOOKS REFER

Book Name Auther Edition Publication

Financial

management

I.M.Panday 9th edition Vikas Publishing

housing Ltd.

65


Financial

Management

C.Choudhury 3rd edition Tata Mcgraw Hill

Publishing Co.

Ltd.

Source of information:

www.Worldbank.org

www.rbi.org

http://www,ilustrados.com/publicationes/EpyAuVZyFGlwOIAq.php.

http://www.greentie.org/finance/pftypes.php

http://www.hyflux.com/hyfux_b_model.html

www.eagletraders.com/loans/loans_what_is _project_finance.htm

66

http://www.eagletraders.com/loans/loans_what_is%20_project_finance.htm

http://www.hyflux.com/hyfux_b_model.html

http://www.greentie.org/finance/pftypes.php

http://www.rbi.org/

http://www.Worldbank.org/

project financial services

Documents

winner nippon electronics

guru jambheshwar university

fund based limits

pardeep kumar enrollment

universal banking system

indian financial services

financial services sector

special purpose entity