PROJECT APPROACH

INTRODUCTION

“Projects are the cutting edge of Development” - J. Price Gittinger.

Project approach finds favour, the world over in almost every type of economic activity.
Project approach would be applied for small investments like purchasing of buffaloes as also
huge dams involving several crore of rupees.
It is a flexible approach of development.
Each project is considered to be an independent unit having its own costs and benefits.
In the liberalised economic environment and in the wake of Financial Sector Reforms, the
importance of project approach has further increased.

PROJECT APPROACH

PROJECT

Means a location specific activity with specific objectives, time and cost limitations and of
non-repetitive nature.
In banking, we refer to projects as an activity in which financial resources are expended to
create capital assets that produce benefits over an extended period of time and which
logically lends itself to planning, financing and implementing as a unit.

PROJECT INCLUDES

Capital investment
Creation of capital assets
Generation of benefits over an extended period of time.

PROJECT COULD BE AN ACRONYM FOR

P - Product of Goods and Services

R - Resources - Men, Material, Money, etc.
O - Organization
J - Justification - Social benefits, wealth, jobs
E - Economic viability, profits, etc.
C - Continuity - Planning, Research & Development
T - Time bound implementation and operations

PROJECT CYCLE

IDENTIFICATION

First step in the project cycle

Several sources for identification of projects - Progressive farmers, successful entrepreneurs,
technical experts, bankers, media, national priorities and thrust areas of development.

FORMULATION

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 Preparation stage of the project
At times, the banker may have to formulate the project himself if the potential entrepreneurs
are too scattered.
Feasibility study is the first step in formulation.
In case of complex projects, even a pre-feasibility study may have to be conducted.
Specialised consultancy firms offer services for conducting feasibility studies.
Advance techniques of Project Planning like PERT (Programme Evaluation and Review
Techniques) and CPM (Critical Path Method) are used in capital intensive and complex
projects which involve long gestation periods.

APPRAISAL

Includes analysis and scrutiny of each and every aspect, details and assumptions.
Banks undertake appraisal of projects before financing.

Appraisal may involve Financial, Commercial, Managerial, Economic and Environmental

analysis.

IMPLEMENTATION

Involves three phases, viz.

Pre-development phase,
Development phase, and
Operation phase.

MONITORING

Ongoing process of keeping track of the project

Banks may undertake two types of monitoring, i.e.
ü Desk Monitoring
ü Field Monitoring

EVALUATION

Conducted ex-post for the purpose of learning lessons of success and failure from the project;
Several organizations like NABARD and its Training Establishments may conduct such
evaluation studies and publish them for wider circulation.

ESSENCE OF PROJECT APPRAISAL

Appraisal is a comprehensive and systematic review of all aspects of a project;

It is a second look at the project report by a person who is in no way involved in its
preparation;
No cut and dry formula to straightway decide a project to be acceptable or unacceptable;
Appraisal highlights the weak areas in the project with the ultimate objective of strengthening
them adequately to ensure final success of the project;
Project appraisal is an exercise in future, based on certain assumptions. Hence, it is necessary
to understand the environment in which the project has to sustain itself;
Appraisal is a joint exercise of promoters and institutions. Speed of appraisal, therefore, depends
very much on the speed with which the information is forthcoming from the entrepreneurs;

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 Project should be appraised within a time bound programme - any undue delay distorts
profitability projections and success of the project becomes a difficult proposition;
In case of technocrat and new entrepreneur, a tolerant and understanding attitude is necessary.

STEPS AND METHODOLOGY FOR APPRAISAL

Entrepreneur seeking financial assistance should furnish detailed information about the
project in prescribed form;
A team comprising say, an economist, an engineer and a financial analyst, should do the
appraisal of the project.

THE FIRST STEP

The first step in detailed appraisal is in regard to information submitted by the entrepreneur, i.e.-

Adequate data has been furnished against every item;

Prima facie, information furnished is correct;
Consistency of data and information furnished should be cross-checked;
Both in the scrutiny of preliminary information and processing of application, personal
discussions between the officials of the financial institutions and the borrowing concerns are
both necessary and desirable. This will reduce avoidable correspondence and facilitate
expeditious disposal of application;
Clarification / additional information called for wherever necessary.

A project is likely to receive favourable consideration and detailed appraisal is taken if -

It has priority according to Government guidelines;

The promoter inspires confidence;
The technology to be adopted is well proven;
The product to be manufactured has market potential;
The project cost is not unreasonably high;
The promoter’s contribution is not unduly low;
Profitability estimates are conservative and indicate repayment of the loan within reasonable
period.

A proposal is rejected without detailed appraisal if it has some of the following features -

Banker’s report on the promoters is not satisfactory;

Promoters reported to have indulged in illegal and anti-social activities;
Financial position of the promoter company is not satisfactory;
Cost of the project is unduly high;
Promoter’s contribution unusually low and promoters decline to increase it;
Debt-Equity Ratio is abnormally adverse;
Location of the proposed unit has apparent disadvantages, i.e. far away from sources of raw
materials, market, etc.;
Collaborators have inadequate experience;
Equipment supplied by the proposed machinery suppliers to some other units has not been
performing satisfactorily;
Second hand equipment to be acquired is too old and will not have trouble-free residual life;

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 Process know-how / technology to be adopted has not been proved successful on a
commercial scale;
Process know-how / technology has become obsolete;
Availability of raw material in adequate quantity and on steady basis is doubtful;
There is no certainty that utilities like power, water, etc. will be available by the time the
project will need them;
Products to be manufactured do not have sufficient market potential.

Preference is given to proposals / projects

Which utilise any industrial waste or agricultural surplus as raw materials;

Are export oriented or import substitutes;
Are employment oriented;
Are located in specified backward or less backward areas;
Would help in setting up of ancillary small-scale units.

THE SECOND STEP

Involves site inspection by appraisal team;

Sufficient notice of site inspection to be given to the promoters;
Inspection team to pay attention regarding suitability of the site, distance from railway
station, national highway, source of raw materials; market for end-products, timely
availability of utilities;
Scanning the environment protection arrangements;
Ascertaining sources of skilled and unskilled manpower;
Availability of social infrastructure, etc.;
Most importantly, collect market reports on the promoters, their financial strength, credibility
and capacity.

NEXT STEP

Before providing financial assistance to a unit, it becomes necessary for a financial institution to
examine -

Viability of the project;

It should ensure that the project will generate enough funds;

Some of the basic tests adopted to examine various aspects of appraisal are -

Technical Appraisal
Commercial Appraisal
Financial Appraisal
ü Cost of the project and means of finance
ü Profitability estimate and cash flow
ü Ratio analysis
ü BEP analysis

ü DCF - Calculation of NPV, BCR and IRR

Management Appraisal
Environmental Appraisal

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 Social Appraisal - Stakeholder analysis

TECHNICAL APPRAISAL

Technical appraisal will focus on the following areas -

Manufacturing process / technology

Technical arrangement like parting know-how, etc.
Size of the plant (minimum economic size)
Product mix (various items to be manufactured by the unit)
Selection of the plant and machinery (whether any unit purchased, reputed - no trouble,
service back-up)
Procurement of plant and machinery (seller’s name, cost, etc.)
Plant layout
Location of the project
Land
Raw material
Market
Labour
Utilities such as water, power, fuel, etc.
Effluent disposal
Transportation
Development of other industries

COMMERCIAL APPRAISAL

In the commercial appraisal the following aspects will be looked into -

Demand - techniques of forecasting

ü Import substitution
ü Past trend
ü End use - whom are we going to cater
ü Export market
Supply and depth of competition
Pricing policy - whether price will be lower when compared to the competitors
Life cycle of the product
Brand name
Packing and advertisement
Sales promotion
ü Salesmen
ü Advertising
ü Servicing
Sources of market information and publications useful to study various aspects of marketing.

FINANCIAL APPRAISAL

In the financial appraisal the following aspects will be kept in view -

ü Capital cost of the project

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ü Land and site development
ü Building
ü Plant and machinery
ü Technical know-how and engineering fee
ü Miscellaneous fixed assets
ü Preliminary and pre-operative expenses
ü Provision for contingencies
ü Margin money for working capital Sources of finance and
Financial projections
ü Profitability estimates
ü Cash-flow statements
ü Projected balance sheet
Ratio analysis
ü Debt equity ratio
ü Current ratio
ü DSCR
ü Margin on security
ü Other ratios
Break-even analysis
Discounted cash flow
ü NPV
ü BCR
ü IRR

MANAGEMENT APPRAISAL

The most important aspect of project appraisal is the management appraisal. Some of the points
to be considered while appraising the management are -

Qualities of entrepreneur
ü Honesty and integrity
ü Involvement in the project
ü Financial resources in case of overrun, whether he can arrange resources
ü Competence
ü Risk taking
ü Initiative
ü Intelligence
ü Drive and energy
ü Self confidence
ü Frankness
ü Patience
Types of organisation
ü Sole proprietorship
ü Partnership
ü Corporate sector
9 Board of Directors
9 Committee of the Board

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9 Chief Executive
9 Other Executives
Organizational set-up
Management problems

ENVIRONMENTAL APPRAISAL

One of the concerns of the policy makers is to have sustainable development.

Importance is now attached to Environmental Impact Assessment (EIA).
Essence of EIA is prediction of the consequences to the natural environment from the project.
Elaborate analysis called Environmental Risk Assessment (ERA) is used to assess the
probabilistic element of the impact, which is not considered in EIA.

MAJOR ASPECTS TO BE COVERED IN NABARD’S APPRAISAL OF HIGH VALUE /

EXPORT ORIENTED / INNOVATIVE PROJECTS

APPRAISAL OF PROJECT COSTING

Costing of the project investments has to be done with special reference to the structural
designs, equipments and other structures proposed to be imported / procured from local
sources.

APPRAISAL OF TECHNOLOGY

Appraisal of new, innovative, imported technology has to be done with reference to its
soundness, productivity and adaptability.

APPRAISAL OF ENTREPRENEURSHIP AND MANAGERIAL SKILLS

When the projects are promoted by first generation entrepreneurs, the success or failure
depends not only on the projects and products proposed to be produced but also the
entrepreneurial capabilities and managerial skills of the promoters. Therefore, a
comprehensive appraisal of their strengths and weaknesses has to be done.
While discussing the credentials of the promoters, a paragraph should be incorporated giving
details in regard to the various companies / undertakings in which the promoters are
interested and the turnover and the working results of these companies. In respect of the
companies which are quoted in the stock exchange, the latest share price also will have to be
incorporated in the paragraph.

APPRAISAL OF INFRASTRUCTURE AND RELATED ASPECTS

Adequacy or otherwise of infrastructure right from procurement of inputs, production,

processing, transport and export upto the point of marketing in the global markets has to be
appraised with special reference to maintaining a continuous cold chain for several products
exported to the world markets.
While discussing the availability of the requisite infrastructure such as power, water, etc. the
actual quantity required for running the unit and the arrangements that are being made vis-a-
vis requirements will have to be clearly indicated. For example, in case of water requirement,
daily quantity of water required and its availability will have to be commented upon as also

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 quality of water. In case, water is to be treated, this also should find a mention in the
paragraph.

APPRAISAL OF ENVIRONMENTAL ASPECTS

The impact of the project on the ecology of the area and environmental problems, if any,
likely to generate due to it have to be analyzed and presented in detail.

APPRAISAL OF THE PERFORMANCE OF THE SECTOR

The performance of the sector in the country in general and in the respective state in
particular to which the concerned project pertains has to be analysed keeping the potential
and the problems of the sector in view and suggesting remedial measures needed, if any, for
development in future with a special reference to exports.

APPRAISAL OF MARKETS AND MARKETING

In respect of sophisticated high-value projects, the products are usually marketed in foreign
countries. At times, a part of the production is marketed in the domestic market also.
Therefore, the demand and supply of the products in the global market as also in the domestic
market has to be assessed. Local demand and supply position will have to be highlighted.
While discussing aspects relating to marketing, mere mention about buy-back arrangements
with foreign collaborator would be inadequate. Analysis has to be made about the global
demand for exportable products and supply by different countries in this regard. The
percentage of growth of the particular product over a period in the international market
should find a mention. In case where selling arrangements have been made with the foreign
parties, the details in this regard along with the selling commission to be paid should find a
mention.

TECHNO-FINANCIAL STUDY

Apart from other details, the techno-financial study should indicate the dates on which the
studies were conducted and the names of the officers who were associated with the study.
The report should invariably mention whether the joint appraisal was done along with bank’s
representatives.
Air lifting capacity in the concerned airport for that particular product will have to be
mentioned in the appraisal report.

COLLABORATORS

While discussing the aspects relating to import of technology, full details in regard to foreign
collaborator, Indian companies for which they have rendered technical assistance, etc. will
have to be recommended. As far as possible, the standing of the foreign collaborators will
have to be collected and incorporated.

MAN POWER REQUIREMENTS

Man power requirements will have to be classified into three categories, viz. professional
management at senior level, skilled and unskilled labour and specific number of personnel in
each of these categories will have to be indicated vis-a-vis availability.

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PROJECT OUTLAY

The project outlay and the source from which this is being met will have to be incorporated.
The percentage of individual items to the total outlay has to be worked out.

FIRST GENERATION ENTREPRENEURS

While preparing appraisal reports in respect of bigger projects for commercial banks, the
promoter’s experience in the particular line should be kept in view. Besides, if the projects
are to be implemented by first generation entrepreneurs even if they have the required
background in the proposed line of activity, bigger outlays should not be considered for such
entrepreneurs, to start with. The projects could be implemented in phases by the entrepreneur
in view of the inherent risk involved in implementation of large outlay projects.

BUILDING UP OF DATA BANK

For realistic appraisal of the projects on hi-tech, export oriented, agro-processing, etc. there is
a need to collect, update and maintain adequate data on the size of the domestic / foreign
markets, product prices and fluctuations, the sources and credibility of technology suppliers,
demand and supply of products in domestic as well as foreign markets, availability of
alternative technologies and relative costs, raw materials, cost of various components of the
investments, freight rates, import duties, market fees, etc. We have to collect reliable data on
product prices for the part 2 to 3 years in the international market by writing to various
agencies like APEDA, MPEDA, Ministry of Commerce, Ministry of External Affairs,
Embassies and other related agencies to build up a reliable data base for day-to-day use of
project appraisal.

MEANS OF FINANCE

Whenever the project outlay is reduced, the reasons for the reduction in the various
components of the outlay should be given item-wise. The reduction in the outlay effected
should be reflected in the bank loan retaining the margin as originally proposed.

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 ANIMAL HUSBANDRY - DAIRY DEVELOPMENT / FINANCING OF MILCH
CATTLE AND BUFFALOES

1. GENERAL

a. Specifications of the scheme area, location of unit(s)

b. Nature of objective of proposed development, type of breed and quality of milch
cattle and buffalo. Number of beneficiaries likely to be covered
c. Names(s) of the financing bank(s) / branch(es)
d. Approval of the scheme by the competent authority, including State Government
in the case of SLDB, coverage of the loans under the Guarantee Schemes of
Deposit Insurance and Credit Guarantee Corporation
e. Status of beneficiaries (individuals / partnership firm / company / corporation /
cooperative society) and the coverage of borrowers of weaker sections like
landless labourers / small (as per norms given by National Bank) or marginal
farmers / SC / ST, etc.
f. Capability / experience of the persons / institutions implementing the scheme.

2. TECHNICAL ASPECTS

a. Breed and production criteria, e.g.. lactation period, dry period, inter-calving
period, average milk yield/day, etc.
b. Housing needs, category-wise (adults, calves, etc.) space requirement, equipments
needed and arrangements for supply of electricity and water.
c. Civil structures like feed store, fodder godown, milk processing room, etc. if
required, with site maps and detailed estimates. District Schedule of Rate (PWD),
trace maps and blue prints of construction approved by Architect / Civil Engineer.
d. Feeding conditions : Availability of green and dry fodder and concentrate feed and
arrangements for their production supply and procurement. Give feeding schedule
per day (requirement of feed and fodder).
e. Marketing facilities : Arrangements for collection of milk, capacity of processing
plant and potential for handling additional milk. Distance of the milk collection
centre from the scheme area.
f. Animal breeding facilities : Distance of AI centre from the scheme area and type
of semen available or chilled of frozen semen, F-1 or F-2 crossbred to all semen
with 50% or 75% exotic blood level respectively.
g. Veterinary aid facilities : Location of veterinary hospitals / centres in scheme area
and distance from the scheme area. Details of facilities available at the veterinary
and centre and staff position at the veterinary aid centre / hospital and issue of
health certificates for animals to be purchased.
h. Plant and machinery, e.g.. feed plant, chilling plant, tractor, mini truck / van, chaff
cutter, etc. and recent quotations in support of costs.
i. Average unit cost of milch cattle quality / breed-wise, housing, etc. unit cost
approved by Unit Cost Committee.
j. Comments on technical feasibility of the project.

3. FINANCIAL ASPECTS

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 a. Lending terms : Rate of interest, grace period, repayment period, down payment,
nature of security, availability of Government guarantee for bank loan / refinance
(if necessary), source and extent of availability of subsidy, etc.
b. Year-wise physical and financial programme, bank loan and refinance
requirement.
c. Comments on the financial viability of the project along with milk flow chart and
cash flow with assumptions / techno-economic norms, B/C Ratio, net present
worth, financial rate of return (IRR), etc.
d. Comments on the financial positions of the borrowers / implementing agency. In
the case of partnership firm / company / corporation or society, an analysis of their
financial position, debt-equity ratio and profitability along with copies of audited
financial statements, for the last three years.

4. INFRASTRUCTURAL FACILITIES

a. Source of availability of animals, places and markets, the approximate distance

and arrangements for procurement of animals and disbursement of loans.
b. Training of the beneficiaries.
c. Availability of technical staff for implementation of the scheme with the bank /
implementing authority.
d. Details of technical guidance, training facilities, veterinary health cover,
marketing of milk, government support / extension service available and whether
budgetary provision has been made for the same.
e. Tie-up arrangements for recovery of loans through the marketing agency, tripartite
agreements, etc. if any, for the purpose.
f. Mode of providing insurance cover for mortality including Permanent Total
Disability, type of policy, e.g.. general or master policy, premium, etc.

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 POULTRY DEVELOPMENT

1. GENERAL

a. Specification of the scheme area, location of unit(s)

b. Nature of objective of proposed development, whether layer unit, broiler unit,
hatchery unit or pureline poultry project. Number of beneficiaries likely to be
covered
c. Names(s) of the financing bank(s) / branch(es)
d. Approval of the scheme by the competent authority, including State Government
in the case of SLDB, coverage of the loans under the Guarantee Schemes of
Deposit Insurance and Credit Guarantee Corporation
e. Status of beneficiaries (individuals / partnership firm / company / corporation /
cooperative society) and the coverage of borrowers of weaker sections like
landless labourers / small (as per norms given by National Bank) or marginal
farmers / SC / ST, etc.
f. Training of beneficiaries in poultry farming. Capability / experience of the persons
/ institutions implementing the scheme and availability of technical staff with
them.

2. TECHNICAL ASPECTS

a. Availability of one-day old quality chicks, foundation stock, equipment, etc. and
arrangements for procurement, distance of hatcheries and their capacities for
supplying the chicks.
b. Breed of proposed birds, age of birds, source of availability, vaccination of the
birds, etc.
c. Production criteria of birds : Average hen-housed egg production, average body
weight at culling time, average body weight of broilers, marketable age, mating
ratio in breeding farm / hatchery, suitability of eggs and hatchability, livability of
chicks, sex ratio, supply of free chicks, etc.
d. Mortality estimates during growing and laying stages.
e. Calendar for replacement and production of chicks (batch-wise and shed-wise).
f. Housing needs (deep litter / cage system) for growing and laying stages and
distances between the sheds. Distance between sheds and hatchery, feed mill,
quarters, etc. as per Bureau of Indian Standards (ISI) specifications.
g. Civil structure like feed, medicines and eggs stores, office buildings, roads, etc.
with site maps and plan estimates. PWD - Dist. Schedule of Rate, trace map and
blue print of construction approved by Architect / Civil Engineer.
h. Equipment needed (with quotations) e.g.. feeders, waterers, nests, etc.
i. Plant and machinery, e.g.. standby electric generator, de-beaker, vaccinator, feed
plant, deep freezer, incubators, vehicles, etc. with recent quotations in support of
costs. Clearance from State Electricity Board for availability of electricity and
Central Ground Water Board for feasibility of wells.
j. Arrangements of supply of electricity, water, etc. with source of supply and cost
assessment of connected load, essential load, water requirement, etc.
k. Training needs of farmers, if required (agency and facilities available).
l. Size / type of the units, physical components, their unit cost breakup and whether
the same has been approved by the Unit Cost Committee.
m. Comments on technical feasibility of the project.

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3. FINANCIAL ASPECTS

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 a. Lending terms : Rate of interest, grace period, repayment period, down payment,
nature of security, availability of Government guarantee for bank loan / refinance
(if necessary), source and extent of availability of subsidy, etc.
b. Year-wise physical and financial programme, bank loan and refinance
requirement.
c. Income with reference to the representative size (s) of the unit and the estimate of
net income.
d. Comments on the financial viability of the project along with cash flow with
assumptions / techno-economic norms, B/C Ratio, net present worth, financial rate
of return (IRR), etc.
e. Comments on the financial positions of the borrowers / implementing agency. In
the case of partnership firm / company / corporation or society, an analysis of their
financial position, debt-equity ratio and profitability along with copies of audited
financial statements, for the last three years.

4. INFRASTRUCTURAL FACILITIES

a. Arrangements for availability of working capital till the income generation stage.
b. Source of availability of feed, the approximate distance and arrangements for
procurement / supply.
c. Distance of veterinary aid centre from the scheme area.
d. Arrangement for marketing of eggs and culled birds (broilers and spent hens).
e. Details of technical guidance, training facility, veterinary health facility and
marketing support available from Government and whether budgetary provision
has been made for the same.
f. Mode of providing insurance cover.
g. Supervision and monitoring arrangements available with the financing
institutions.

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