Presentation on
Appraisal of Project Report Banks Perspective
Appraisal?
A structured analytical tool to take a credit decision The basic premises of an appraisal are to assess/ analyze: The Promoters. Viability of the business Macro & Micro Environment of the Business. Business financials Various Risk & its mitigation. Permission & Approvals from Regulatory Bodies.
Promoter evaluation
Track record of promoters - Net worth/Availability of funds Management - Experience of Management - Ownership Pattern Check RBI Defaulters List Check CIBIL Records
Viability of the Business
SWOT Analysis
Strengths & Weaknesses Internal Opportunities & Threats - External
Strengths (Areas to Look for)
Weaknesses (Areas to Look for)
Competent Management Distinctive competitive edge in terms of cost, product differentiation, R&D, skills etc Good Brand Image Strong & growing customer base. Industrial relations low attrition rate. Sufficient Financial Resources.
Lack of Management Depth/ Talent Deteriorating competitive position Newcomer with unproven track record. Short on Financial Resources Technology Obsolescence.
Opportunities (Areas to Look for)
Threats (Areas to Look for)
Industrial Scenario Faster market growth Enter new market/ customer segments. Expand product line/ Move up in the value chain to meet the growing aspirations of customers Vertical Integration.
Growing competitive pressures. Growing bargaining power of customers/ suppliers Changing buyers needs/ tastes Rising sale of substitute products Adverse Govt Policies. Vulnerability to recession/ business cycle.
Business Financials
What are we looking at?
Manufacturing efficiency Operating efficiency Is the unit turning over the assets efficiently. Cash Flow pattern. Liquidity to meet day to day operations What is the quality of current assets Can the unit sustain in difficult times Can it service our interest and repayments
Key Financial Ratios
Growth in sales - It shows prosperity RM Content in sales It indicates cost efficacy Gross profit/sales It indicates mfg. efficacy PBDIT/sales It indicates operating efficacy Cash accruals/Sales Ultimate earnings Current ratio Will it meet commitments TOL/TNW Resilience in difficult times Sales/TTA Asset turn around capacity ROCE Overall efficacy
Assessment of Right Quantum & Type of Debt
Broadly Debt is required by the Corporates for
Capital Investment (Project Finance) Working Capital
Forms of Advances
Fund Based Facilities Term Loans Cash Credit Bills Discounted/ Purchased Demand Loans, Overdraft etc Non Fund Based Facilities Letter of Credit (Domestic/ Foreign) Guarantee Deferred Payment Guarantee/ Co- Acceptance of Bills
Project Financing
A funding structure that relies on future cash flows from a specific development as the primary source of repayment with that developments assets, rights and interests legally held as collateral security. The Key Areas are Management Analysis Market & Demand Analysis Technical Analysis Financial Analysis
Project Financials
Focus Areas
Capital Structure a) Desired Debt/Equity Ratio < 2:1 b) Min. Promoter Contribution at 20-25% Fixed Asset Coverage Ratio (Fixed Assets (WDV)/Term Liabilities) Fixed Asset Coverage >1.25 is preferred. Debt Service Coverage Ratio (DSCR) EBIDA/(Interest + Principal Amount) Desired DSCR is >1.50
Project Financials
Focus Areas
Break Even Point Lower the level, the better it is for the project. Sensitivity Analysis Impact study on the cash flows due to adverse changes in the Cost or the Sales side.
Repayment Period Normally repayment term of 7 years is preferred.
Working Capital Financing
What we look for?
Focus on Volumes/ Sales growth Operating efficiency Liquidity Gearing Quality of current assets. Efficiency in asset turn over.
Methods of WC Assessment
As per Nayak committee (Turnover Method) Working Capital Gap Method Cash flow method
Turnover Method
For Working Capital Limits up to Rs. 5.00 Crore 1. Annual turnover as projected by borrower. 2. Turnover as accepted by Bank. 3. Working Capital requirements [25% of sales i.e. item 2]. 4. Minimum margin required [5% of sales i.e. item 2]. 5. Actual margin available (Net Working Capital). 6. Maximum permissible Bank Finance is lower of the (item 3 item 4) and (item 3 item 5).
Working Capital Gap Method
1st Method of Lending CA CL excl Bank WC Gap Min. Stipulated NWC Bank Finance 1000 400 600 2nd Method of Lending (MPBF) 1000 400 600
150 250 (25% of WC Gap) (25% of CA) 450 350
Cash-flow Method
Prepare a cash flow statement for the next 12 months Arrive at the maximum requirement. Obtain documents for the max. amount. Operation based on monthly requirements. Monitoring at periodical intervals.
Challenges Faced by Risk and Providers of Capital
Risk Head Promoter Risk Market Risk Financing Risk Construction Risk Description Capability to implement projects Ability to Infuse Capital Demand Risk Tariff Risk Financial Closure Risk Equity Infusion Risk Capability to construct Technology Used, Equipment Quality Land Acquisition Risk, Environmental Risks Availability of Requisite quantity and Quality of Fuel at Budgeted Cost Risk of not getting approvals Risk of Change in Policy
Fuel Supply Risk Regulatory Risk Policy Risk
Operations and Maintenance Risk
Risk of unsatisfactory O & M,
