COURSE WORK 2 - International Finance

MODULE NAME : International Finance

MODULE CODE : 7AG518
STUDENT ID NUMBER :
DATE OF SUBMISSION : 23/08/2019
WORD COUNT : 2500
SUBMITTED TO : THOMAS ADEYEMI

the required rate of return on foreign projects should be higher, lower, or the same
as that for domestic projects.

Critically evaluate the application of the capital asset

pricing model in estimating the cost of capital for foreign projects.

Introduction: Your introduction should state your overall aims and say how
you intend to meet the aims of the report. – DONE HO GAYA
2. Literature review – DONE HO GAYA
3. Analysis section – DONE HO GAYA
4. Future Outlook
5. Conclusion: Your conclusion should summarise what you have found from
your analysis in each section. Clearly state your overall findings and
conclusions in relation to the aims been given. DONE HO GAYA

6. References – DONE HO GAYA

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  INTRODUCTION-

Financing is an innovative and time consuming financing method that has been used for many
high-profile foreign and local projects, including giving loans varying from small to big projects.
Analyzing a careful engineered financing mix, it has been used to fund large-scale projects, from
loans like education loan to hydroelectric projects. Moreover, increasingly, project financing is
emerging as the best & preferred alternative to conventional methods of financing business
and other large-scale projects worldwide as well as locally.

Project financings are very complex. It takes a much longer period of time to give loan, figure
out all documentations , preparing a document on project and the legal fees and related costs
associated with a project. Because the risks assumed may be greater in a project.

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  LITERATURE REVIEW :

Financing whether a local or international project the loan can be commonly used as a financing
method in capital-intensive for projects requiring large investments of funds, such as the
construction of power plants, pipelines, transportation systems, mining facilities, industrial
facilities and heavy manufacturing plants. Such projects frequently are not sufficiently
creditworthy to obtain finance but are unwilling to take the risks and assume the debt
avoidance obligations associated with it. Financing permits the risks associated with such
projects to be allocated among a number of parties at certain levels.
The interest rates for financing the project varies from project type , project capital required ,
repayment process time , is there any risk associated with project , lender is capable of repay or
not. There are many criteria’s associated with it. Like -

 Description of project.
 Description of lender(s).
 Sponsors' / Lenders’Agreements.
 Project site.
 Governmental arrangements.
 Source of funds.
 Feedstock Agreements.
 Off take Agreements.
 Construction Contract.
 Management of project.
 Capital costs.
 Working capital.
 Equity sourcing.
 Debt sourcing.
 Financial projections.
 Market study.
 Assumptions.

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Project financing consist financing of the development and construction of a particular project
in which the lender looks mainly to the revenues expected to be generated by the project for
the repayment of its loan and to the assets of the project as collateral for its loan rather than to
the general credit of the project.

The SBI has a dedicated Project Finance Strategic Business Unit to assess all proposals from
undertaken for local or international project and check their credibility for the required
projects. Apart from this, project loans for medium sized projects and smaller clients are
delivered through the CAG and the NBG units.

Project finance is quite often channeled through special purpose vehicles and arranged against
the future cash streams to emerge from the project. The loans are approved on the basis of
strong in-house appraisal of the cost and viability of the ventures as well as the credit standing
of promoters.

In some cases bank may charge fees for project-appraisal, legal services, premium fee etc. .

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  Analysis:-

State bank of India is following the strict guidelines on any type of project financing.
Sanctioning for the projects is approved by the bank authority. The bank finances the projects
only to small , medium and long term loans. Interest rates are fixed depending upon the projects
which is known as State Bank advance rate.

When the clients fail to pay the interest, 3 months from the due date the term loan granted will be
treated as Non Performing Assets. If the interest is due further 3 more months then it will be
treated as doubtful assets and interest rates becomes zero. Again for further 3 months it goes as
loss assets and the bank write off the account.

Every firm starting up a new project should make an insurance policy with the same bank itself.

Main purpose of having a financial analysis (scan) of a project is to lookout the

project's profitability chance or cost-related or is it relative to upto project or not. Moreover,
the results of the financial analysis are used to compare it with other projects.

Above figure is a financial analytical method that compares the difference between the profit
value and the cost of investment that can be earned and lose in a project .

This is calculated as a percentage value. Higher the percentage, more the profit to bank.

This analysis part is related to the financial viability of the project Flow Controls:-

Through ratio & market analysis bank has analyzed that the liquidity position of the
firm is good and it is maintaining the standard ratio..

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Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its liability
portion by paying the previous loan taken year on year so the financial risk is less.
Profitability ratios related to sales and capital employed are in increasing trend, it
shows that the future sales may increase and the firm using its resources efficiently.
Debt Service Coverage Ratio is also in increasing trend, it shows that the firms ability
to make the loan repayments on time over the debt life of the project.
The payback period is within the debt life of the project.
The net present value of the project is positive, The positive net present value will
result only if the project generates cash inflows at a rate higher than the opportunity
cost of capital . Since the Net Present Value of the above project is positive, the
proposal can be accepted.
The internal rate of the return is higher than what accepted so the project is
accepted.

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 FUTURE OUTLOOK :
Recommendations:-

Bank check only financial, technical and commercial feasibility of the project and it
should not consider sensitivity analysis and social cost benefit analysis of the project
so bank should consider this because these are also important from the point of view
of risk and economy growth.
Bank should be caution about the availability of security and ensure honesty of both
borrower and guarantor so as to avoid the account becoming the loss assets.

Limitation of the study:-

Some of the information are confidential in nature that could not divulged for study.

Conclusion:-

The project undertaken has helped a lot in understanding the concept of project financing in
nationalized bank with reference to state bank of India. The project financing is an important
aspect which helps in increasing the profit of the banks.

Project financing is a vast subject and it is very difficult to apply all the aspect in all type of
project when bank want to finance, and it is very difficult to cover all aspect in this project.

To sum up it would not be out of way to mention here that the state bank of India has given a
special impetus on “Project Financing” .the concerted efforts of the management and staff of
state bank of India has helped the bank in achieving remarkable progress in almost all important
aspects.

Finally the success of project financing would mostly depend on the proper analysis of the projects
before financing.