Developing Credit Rating

Model for Real Estate Sector

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Under the able guidance of

Ms. Salila George

General Manager
and
Mr. Santosh Bhattacharjee
Assistant General Manager
Credit Risk Management Group

Date:
June 10, 2006

Submitted by

Nitin N. Kavadia
PGDBM (2005-07)

T.A. Pai Management Institute, Manipal

 ACKNOWLEDGEMENTS
I sincerely acknowledge the immense help provided by my guides General Manager Ms.
Salila George and Asst. General Manager Mr. Santosh Bhattacharjee. They were
instrumental in clearing my doubts and sharing their insight on the subject. I also
acknowledge the suggestions and help provided by Management Trainees-CRMG Mr.
Gaurav Rateria and Mr. Akshay Chitgopekar. I would like to thank Asst. General
Manager Mrs. Preeti Yardi- Project Appraisal Department and Dypt. General Manager
Mrs. RV Paranjpe- Mumbai BO in identifying and collecting data from various database
sources.
I also appreciate the support of the Library staff in providing me with all the library
facilities and the officers of the training section, H.R.D for their continuous support.
I would also like to thank Mr. Jain, General Manager Finance – Raheja Constructions
Company and Mr. Kanhu Charan Khatai, Civil Engineer for sparing their precious time
to discuss on the practical aspects of Real Estate industry in India.

Nitin N. Kavadia

2
 EXECUTIVE SUMMARY
This project aims to develop a credit rating model for the Real Estate sector. The
scope of the project is to develop a framework, which provides internal credit rating to
the 'Project Loan Proposals' from the Real Estate industry. The model is developed using
the GMGS-Project model as the base. Thus the major categories of the risks remain the
same. The model is designed on a modular structure, which helps in categorizing similar
nature of risk in a single module
The risks inherent to a Real Estate Project are identified by studying the characteristics of
the Real Estate Industry through the following sources:
1. Cris-Infac Reports on Construction Industry
2. 5- Memorandums of the projects rated by the division
3. Interview of Real Estate industry professionals
4. Interview of employees at IDBI who have worked on the Real Estate projects
5. Draft Report of DSK builder submitted to SEBI for IPO listing.
The study reveals two major risks in any Real Estate project: Land title risk and
Execution risk. Both the risks are further sub-divided and included under the major risk
heads of the model. The risk exposures are accounted through qualitative and quantitative
parameters. Both the type of parameters are used for comprehensive evaluation of the
project.
The scales for the parameters are identified on the basis of their relative importance to
the Real Estate project. Scoring for the quantitative parameters is absolute whereas
scoring for qualitative parameters is judgmental and is the sole prerogative of the Credit
Officer evaluating the specific project. The scores for the individual modules are
calculated by summing up the scores of the individual parameters. The final score is the
calculated by the sum of the weighted score of each module. The weights to the modules
are assigned on the basis of the GMGS model, with slight modification to account for the
unique nature of the Real Estate Industry.
Finally a thirteen-grade system is followed and the grading pattern for the overall
score is determined.

3
 TABLE OF CONTENTS
1. INTRODUCTION TO THE REAL ESTATE PROJECT CREDIT
RATING MODEL......................................................................................5
1.1 About the rating model .................................................................................... 5
1.2 Applicability of the rating model ..................................................................... 5

2. BROAD FRAMEWORK OF THE RATING MODEL.....................6

3. OPERATING METHOD FOR THE RATING MODEL..................8

3.1 Introduction .................................................................................................... 8
3.2 Activation and deactivation of modules / sub-modules / parameters................. 8
3.3 Weightage and Maximum Score .................................................................... 10
3.4 Filters ........................................................................................................... 12

4. PARAMETER DESCRIPTION AND SCORING ...........................16

4.1 Industry......................................................................................................... 16
4.2 Developer / Promoter.................................................................................... 32
4.3 Management quality ...................................................................................... 38
4.4 Significant Project Party ............................................................................... 43
4.4.1 Civil Contractor................................................................................... 43
4.4.2 Architect/Structural Engineers/Consultants ...................................... 48
4.5 Project Risks ................................................................................................. 50
4.5.1 General................................................................................................. 51
4.5.2 Complexities......................................................................................... 56
4.5.3 Construction ........................................................................................ 59
4.5.4 Principal anchor/anchors .................................................................... 62
4.5.5 Operation ............................................................................................. 63
4.6 Financial Analysis......................................................................................... 65
4.6.1 Future projections ............................................................................... 66
4.6.2 Actuals versus projections................................................................... 69
4.6.3 Past financial performance.................................................................. 71
4.6.4 Definition of ratios for all sub-modules .............................................. 73

5. THE GRADING SYSTEM USED BY THE CREDIT RATING

MODEL.....................................................................................................84

6. ANNEXURES ....................................................................................87

4
1. INTRODUCTION TO THE REAL ESTATE PROJECT CREDIT
RATING MODEL

1.1 About the rating model

A credit rating model has been developed for project loans for the Real Estate sector.
This rating model covers the risks affecting Real Estate projects, such as land acquisition
risk and the execution risks. Execution risk in real estate development mainly includes
construction risk, regulatory risk, permission/building standards and environmental risk.
These risks have been categorized under the following heads in the model: industry risks,
developer risks, management quality risks, construction risks, operations risks and
financial risks during the developmental, construction, operations phases.

1.2 Applicability of the rating model

The rating model is designed for rating Real Estate project loans and will essentially
cover loans extended to following nature of projects:
• Housing projects
• Township projects; and
• Development projects including commercial premises, hotels, resorts, hospitals,
educational institutions and recreational facilities.
Real Estate projects can be categorized on the basis of revenue generating structure.
• Advance payment structure: The projects generate revenue through the advances
paid by the customer during the construction phase. Mainly housing and township
projects are based on advance payment structure.
• Lease rental payment structure: The projects generate revenue through the lease
rental paid by the company after the completion of the project. Mainly
commercial projects are marked mainly by lease rental payment structure.
The rating model caters to both the types of structures.

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2. BROAD FRAMEWORK OF THE RATING MODEL
The risks perceived in financing Real Estate projects have been categorised into various
modules and sub-modules. The credit rating for a borrower will be done by scoring each
parameter in these modules / sub-modules, based on the scales mentioned.
A diagrammatic representation of the credit rating model is given below.

Industry Developer Managem Significant Project Financial

ent Project Risk Analysis
Quality Party

Module Module Module Module Module Module

1 2 3 4 5 6
EPC
Contrac Future
tor 4a General Projecti
Risk - ons – 6a
5a

Architect/
Structural
consultan
Comple
t Actuals
xity –
4b versus
5b projecti
ons – 6b

Principal
Anchor –
5c
Past
financial
– 6c

Constru
ction –
5d

Operati
on –5e

A brief description of the modules / sub-modules in the rating model is mentioned below:
Industry: Captures the risks arising from the industry to which the borrower belongs;
Developer/Promoter: Captures the risks arising from the promoters of the project;

6
Management Quality: Captures the risks arising due to the management quality of the
project company responsible for executing the project;
Significant Project Party: Captures the risks arising out of the significant party, which
provides financial or technical support to the project. The significant party and the risks
arising from it are as follows:
Contractor: Captures the risks arising from the choice of the EPC contractor(s),
the strengths of the EPC contractor(s) and the quality of the EPC contract; and
Architect/Structural engineer/Consultant: Captures the risks arising from the
strengths of the party.
Project Risks: Captures the risks which are specific to the project being undertaken:
General: Captures the risks which are present in a project right from the
developmental phase (conception of the idea), till the construction and the
operation and maintenance phase;
Complexities: Captures the risks arising due to the complexities in-built in the
construction of the project;
Principal Anchor: Captures the risks arising due to the past performance of the
lessee.
Construction: Captures the construction / completion risks involved in project;
and
Operations & Maintenance: Captures the risks faced by the project once it
commences commercial operations.
Financial Analysis: Assesses the profitability, capitalisation / solvency, liquidity and
cash flow adequacy that affect the financial health of the borrower. This module has
been further divided into 3 sub-modules:
Future projections: Involves estimation of the level of future cash flows of the
borrower, and capturing the risks arising from the level of future cash flows;
Actuals versus projections: Involves the comparison of the financial
performance of the borrower for the latest financial year as compared to the
projections prepared for that year; and
Past financial performance: Involves an in-depth analysis of the past financial
performance of the borrower.

7
3. OPERATING METHOD FOR THE RATING MODEL

3.1 Introduction
The credit rating model operates in a logical sequence of events. This sequence has to be
followed each time the rating model is used for appraising a loan facility. The sequence,
which is followed, is broadly outlined below:
• Clearing filters in the credit rating model;
• Undertaking the appraisal by completing all the modules in the credit rating
model. Modules, sub-modules and parameters in the model will be activated / de-
activated as per the relevant phase of the appraisal.
Though the broad sequence of operation remains the same, some elements would change
depending upon the relevant appraisal phase.

3.2 Activation and deactivation of modules / sub-modules / parameters

The activation and deactivation of modules / sub-modules / parameters depends on the

stage of appraisal of the project. There are three stages of appraisal, namely, initial
appraisal, construction phase, and operations phase. The credit officer should choose the
respective stage of appraisal to evaluate the credit rating of the borrower.

Table 1: Purely Housing project

Phase
Initial Construction Operation
Module/sub module
Industry √ √ x
Developer/Promoter √ √ X
Management
√ √ X
Quality
Significant Project
√ √ X
Party
Civil Contractor √ √ X
Architect/consultant √ √ X

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Project √ √ x
General √ √ X
Complexities √ √ X
Construction X √ X
Principal Anchor X X X
Operation X X X
Financial Analysis √ √ X
Past Performance X X X
Actual vs Projected X X X
Future projection √ √ X

Table 2: Purely Commercial Project given on lease or Combination of housing &

commercial entities i.e. township project

Phase
Initial Construction Operation
Module/sub module
Industry √ √ √
Developer/Promoter √ √ X
Management
√ √ X
Quality
Significant Project
√ √ X
Party
Civil Contractor √ √ X
Architect/consultant √ √ X
Project √ √ √
General √ √ √
Complexities √ √ X
Construction X √ X
Principal Anchor X √ √

9
 Operation X X √
Financial Analysis √ √ √
Past Performance X X √
Actual vs Projected X X √
Future projection √ √ √

In the ‘Management Quality’ module, the following parameters will be deactivated

because the project in the initial appraisal phase there is no actual information to assess
the management of the project company on these parameters.

• Corporate governance;

• Diversion of funds;

• Transactions with group companies;

• Conduct of borrower’s account;

• Labour and employee relations;

• Honouring of commitments;

• Quality of financial statements;

In the ‘Construction’ sub-module of the ‘Project risks’ module, the parameter ‘ Have cost
overruns in the past been successfully funded’ will get activated only if there is a cost
overrun. The construction phase, because the testing or the start-up of the plant can be
commenced only when the construction of the plant is fully complete.

3.3 Weightage and Maximum Score

Table 3: Purely Housing project

Phase Initial Construction Operation

Module/sub module Score % Score % Score %
Industry 52 15 52 15 52 X
Developer/Promoter 64 15 64 12.5 64 X

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Management
22 5 64 5 22 x
Quality
Significant Project
Party
Civil Contractor 64 15 64 12.5 64 X
Architect/consultant 20 5 20 2.5 20 X
Project
General 58 20 58 18 58 X
Complexities 34 10 34 9 34 X
Construction 52 x 52 10.5 52 X
Principal Anchor 20 x 20 x 20 X
Operation 22 x 22 x 22 X
Financial Analysis
Past Performance 92 x 92 x 92 X
Actual vs Projected 60 x 60 x 60 X
Future projection 40 15 40 15 40 X

Table 2: Purely Commercial Project given on lease or Combination of housing &

commercial entities i.e. township project

Phase Initial Construction Operation

Module/sub module Score % Score % Score %
Industry 50 15 50 15 50 15
Developer/Promoter 64 15 64 10 64 X
Management
22 5 64 5 22 X
Quality
Significant Project
Party
Civil Contractor 62 15 62 10 62 X
Architect/consultant 20 5 20 2.5 20 X
Project

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 General 58 20 58 20 58 20
Complexities 34 10 34 10 34 X
Construction 52 x 52 10 52 X
Principal Anchor 22 x 22 2.5 22 15
Operation 22 x 22 x 22 30
Financial Analysis
Past Performance 10
Actual vs Projected 5
Future projection 40 15 40 15 40 5

There may be cases when the developer himself is contractor then the weightage of the
developer/promoter module should be the addition of the wiehtages assigned to promoter
and contractor modules.

3.4 Filters

Purpose of filters
Filters are used as a means to check if the borrower has satisfied certain minimum
requirements to avail of a loan. If the borrower has satisfied all the filters, then the credit
officer can proceed with the proposal.

Importance of filters during re-appraisal

If the borrower does not satisfy any one of the filters, during re-appraisal, then it may be
difficult to recall the loan as it may have already been sanctioned and disbursed. In such
an instance, the borrower will be penalised in order to bring out the element of risk
associated with the particular filter, which has not been satisfied. This will result in a
downward revision in the existing credit rating of the borrower.

Description of filters
The section below describes the filters, which are used in the credit rating model during
various phases of appraisal.

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1. Is the level of promoters' equity contribution above IDBI’s benchmark (25 per
cent)?
The promoters' contribution reflects the commitment of the promoters to the project.
During the initial appraisal, if the total equity contribution of the promoters is less than 25
per cent of the total project cost, then the proposal will be rejected.

2. Has the promoter / EPC contractor defaulted to any bank / IDBI / financial
institution?
The promoter and the civil contractor are entities, who have significant influence over the
project, during the construction phase. It is necessary to ensure that each of the above
entities has not defaulted on its obligations to any bank / financial institution / IDBI.

3. Do the promoter / EPC contractor have a past criminal record?

The promoter / EPC contractor should not have any history of criminal activities. This is
because a history of criminal activities reflects negatively on the integrity, ethical stance
and values system of these entities.

4. Is the promoter / EPC contractor on the RBI defaulters list / IDBI caution list?
The RBI circulates a list of willful defaulters’ once every six months to all banks and
financial institutions. Similarly, the Corporate Support Department of IDBI periodically
generates an internal caution list, which consists of borrowers who might be close to
default. The presence of any of the above-mentioned entities in either of these lists could
be detrimental to the project.

5. Is the net worth of the promoter or promoter group (where the promoters are
not companies) adequate?
It is essential to assess the total tangible net worth of each individual promoter or a group
of promoters, as they provide financial support to the project in the form of equity
contribution and funding for cost overruns. For this filter, the net worth of the promoter
group should be considered only if the promoters are a collection of individuals / Hindu
Undivided Families (‘HUF’) / partnerships. If the promoter is a company, then only the
net worth of the promoter should be considered and not that of the group to which the

13
company belongs. The total tangible net worth of each individual promoter or the group
of promoters should be at least thrice the equity contribution required.

6. Is there any litigation / stay order against the construction or operation of the
project?
The presence of any existing litigations / stay orders against the construction or the
operation of the project could hamper the timely completion / smooth operation of the
project. Therefore any project, which is under litigation, should be rejected during the
initial appraisal.

7. Would this exposure exceed IDBI’s prudential lending limits?

As per the guidelines of the Reserve Bank of India (‘RBI’), all forms of exposures by
lenders including equity exposures to a single company should not exceed 15 per cent of
the net worth of the lender. Similarly, the total exposure to a particular group of
borrowers’ for non-infrastructure project loans should be within 40 percent of IDBI’s net
worth. For infrastructure related assistance, an additional 10 percent exposure is
permitted. Besides the above, IDBI has taken the initiative to limit exposure to a
particular industry to a maximum of 20 per cent of its total portfolio as on a particular
date.

8. Is the title of the land clear and free from encumbrances?

The major risk in any Real Estate project is the availability of land with clear title and
free from any encumbrances like tax or duty payment etc. IDBI's legal department vets
the title of the land. Thus before sanctioning the loan the land for the project should be
completely free from any legal hassles. If the title is not clear the project should be
rejected in the initial appraisal.

9. If the developer has identified the land, then a memorandum of understanding

(‘MoU’) or Power of Attorney for development of land signed between the landowner
and the project company

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10. Have any of the promoters approached IDBI / other institutions for a one-time
settlement (‘OTS’) in the past?
If a promoter has approached any lender for an OTS in the past, it is an outcome of
default on a loan facility to a lender. If any of the promoters of the project have a history
of OTS in the past, then the loan proposal should be rejected during the appraisal in the
initial appraisal.

11. Has the borrower complied with all IDBI norms?

IDBI has certain eligibility norms or criteria for loan assistance, which needs to be
satisfied prior to accepting a loan application. These criteria are specific for different
loan products. The credit officer should ensure that these criteria have been complied
with before initiating an appraisal of the borrower. If any of the criteria have not been
satisfied, then the proposal should be rejected during the initial appraisal.

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4. PARAMETER DESCRIPTION AND SCORING

4.1 Industry
Industry analysis forms the core of macro economic analysis in a rating system. It is one
of the key determinants of the level and the volatility of the present and the future
earnings for any business, and consequently the level of cash generated to service debt
obligations. This will also help to assess the management quality of borrowers in terms of
their strategies, plans and proposed actions for the future in light of future economic and
industry trends, which ultimately determine the borrower’s earnings potential.
The Indian real estate market had been growing at an annual rate of 30% with steady
growth in Commercial, residential properties, hospitals, hotels, industrial buildings etc. In
the commercial space, the business opportunity is led by the unprecedented outsourcing
activity happening from India. The who's who of the IT world - Microsoft, Oracle, Dell,
Intel, GE,
Cognizant, etc. have set-up their offshore centres in India. Studies reveal that the
residential industry will also get a major boost as it gears up to house the new prosperous
workforce of the IT and BPO industries. The retail industry is also expected to get
increasingly organized, which would further increase the demand for real estate.

Commercial Real Estate

India is a pre-eminent destination for off shoring of IT and BPO services. The Indian IT
and BPO industry generated exports of USD 12.5 bn. (RS. 550 bn.) during the year 2003-
04. Going forward, India is expected to maintain its lead over other countries such as
China, Ireland and Philippines. As per Nasscom-McKinsey Report, I T & BPO services
revenues are expected to reach a level of USD 77 bn. (Rs. 3388 bn.) by year 2008.
According to their estimates ITES industry in India will provide additional jobs for over
1.1 million people by 2008, which translates into space requirement of approx. 100
million sq. ft. The Indian IT and IT-enabled services industry is on track to meet the
aspirations that were set. In fact, the industry has grown at a CAGR of 46% in the last 4
years, exceeding the 38% target set in the report. The Indian ITES industry, for example,
has grown at over 100% CAGR over the last 5 years and currently employs over 100,000
people.

16
Opportunities in the BPO industry are expected to open up in several industry verticals
such as financial services, healthcare, utilities, airlines, retailing, pharmaceuticals,
automotive and telecom industries. The expected growth of about 40% in the IT and BPO
industry will create a substantial demand for world-class infrastructure. An independent
study by Cushman and Wakefield in 2002, estimated that approximately 40 mn sq. ft. of
space would be required across the six key cities of Mumbai, Pune, Bangalore,
Hyderabad, Chennai and Gurgaon until 2007. In 2003, the IT industry accounted for 8.5
mn sq. ft., or more than 80% of office space absorption in 2003 as against 43% in 2000.

Residential Real Estate

The residential property market constitutes almost 75% of the real estate market in India
in terms of value. As per the Tenth Five Year Plan there is a shortage of 22.4 million
dwelling units out of which more than 70% dwelling units are for middle and low income
brackets. Additional requirement of housing per year during the plan period 2002-2007
has been estimated at 4.5 million units per year. The Indian Government's habitat policy
envisages that by the year 2012 the housing shortage should be removed and everybody
should have a house of his own. To meet this target the estimated investment involved is
approx. Rs. 400,000 crores upto 2012.
The residential property market is growing all over the country. Increase in disposable
incomes, a pro-housing tax regime, and low interest rates have served to generate more
demand for mid and high-value apartments. According to a CRISIL Research, India's
Home financing market is expected to grow by almost 30% this year resulting in more of
the lower middle class population being able to buy houses. Due to the high demand of
land across the country, residential prices are moving up, seeing peripheral metro
locations on the rise because of the scarcity of land in central locations. So, development
of planned satellite towns and suburbs is on the rise too. Besides, growth in IT and BPO
industry in India would require investment of USD 25bn (Rs. 1,100 bn.) over the next
five-year period (PWC estimates).
A significant aspect of the Indian residential real estate segment is that, compared to
other countries India has a fairly low mortgage penetration (2% in India compared to

17
51% in USA), which is an indicator of huge potential for growth. There is also shortage
for housing in India, which will lead to tremendous potential in that segment too.

Retail Real Estate

This growth of the retail industry is credited to the increasing urban population, and the
increase in the middle class population. The social factors like the dual household income
culture has enhanced the spending power and these spends have moved into more
lifestyle products and esteem enhancing services. The media and the advertising world
have played a pivotal role in increasing consumption and altering the mix of
consumption. The lifestyle shift has resulted in development of the international formats
in retailing suited to Indian conditions. The most prominent has been the emergence of
malls, which not only fulfil the shopping requirement of the customers but also provide
them with a shopping experience. A growth in consumption levels, changing lifestyles,
the availability of quality real estate and significant investments in malls are expected to
result in an increase in the size of the organized retail business in India. The organized
retail market in India is expected to increase its share of the total retail market from 2%
as of 2004 to reach 5-6% by 2007. (Source: BW Marketing Whitebook, 2005)
The number of malls in India is expected to increase from approximately 50 as of the end
of 2004 to around 250 by the end of 2006. (Source: BW Marketing Whitebook, 2005,
attributed to KSA Technopark)

Main characteristics of the Indian real estate industry

The Indian real estate market is still in its infancy, largely unorganised and dominated by
a large number of small players, with very few corporates or large players having
national presence. The Indian real estate market, as compared to the other more
developed Asian and Western markets is characterized by smaller size and higher prices.

1. Highly fragmented market dominated by regional players

Rapid growth in the last decade has seen the emergence of larger players that have
differentiated themselves through superior execution and branding. The larger players are
able to capitalize on their early mover advantage. However, these players continue to

18
operate in local/regional markets. While these players are now initiating efforts to
develop a broader presence, their 'home' markets continue to support the majority of their
profitability.
2. Local know-how critical success factor in the development phase
One of the key reasons for emergence of local leaders is the criticality of local know how
and relationships in ensuring successful and timely development. Each development is
dependent on a number of local clearances (e.g. municipal corporation, water, electricity)
that requires strong experience and relationships.
3. High transaction costs and significant cash transactions
The industry has been burdened with high transaction cost in the form of stamp duty that
varies across the country (state wise).
These transaction costs have resulted in poor liquidity in this market. These transaction
costs have led to significant cash transactions to reduce the stamp duty burden.
4. Residential development largely financed through mortgage loans
Most developers use mortgage for their residential projects. Apart for mortgages, the
other key sources of funding are through high net worth individuals and large property
brokers.

Foreign direct investment in real estate

In March 2005, Government has permitted Foreign Direct Investment (FDI) under
automatic route in real estate industry. This will help to organise the real estate industry,
bridge demand and supply gap, create more professionalism, bring superior technology,
induce healthy competition and ensure availability of funds. This will help growth of
country's GDP. A large number of companies are looking at the opportunity to invest in
India. Some of the foreign players who have already tied up with Indian developers are
Lee Kim Tah Holdings, CESMA International Pvt. Ltd., Evan Kim, Keppel Land from
Singapore,
Salim group from Indonesia, Edaw Ltd. from USA, Emaar from Dubai, IJM, Ho Hup
Construction Co. from Malaysia, etc.
A number of real estate venture capital funds are looking at opportunities in India. Some
private funds have applied to SEBI for approval and few of them have already received

19
the approval and started investing in real estate. This will ensue more availability of
funds to the developers and faster growth of real estate industrys. Some examples are
HDFC Real Estate Fund, ICICI - Tishman Speyer, Ascends India IT Park Fund, Kotak
Mahindra Realty Fund, Kshitij Venture Fund, IDFC, Edelweiss Capital, etc.

Outlook of housing segment

In today's scenario the real estate industry is seeing a giant leap in terms of both new real
estate development and the need for quality housing. In view of the large-scale
development across the all-major cities of the country, the real estate industry is in a
prime position among various segments of the economy. The metros and mini metros are
fast making a transition from old cities into new age business destinations and this has
been brought about by factors such as population growth, growth of industries and the
overall increasing economic growth that the country has seen.
Housing and construction activity assumed predominance, particularly since 1980. Many
townships have come up in the last decade. There is always unfulfilled demand for
housing as it is one of the basic needs of ever increasing population of our country. High
rate of population has also resulted in the growth of high-rise buildings as the cost of land
is ever increasing.
One of the major price drivers is the rising income of professionals and businessmen. The
high-income group is now graduating to luxury and super-luxury apartments of Rs. 1
crore plus. 'Live it up today' is no longer restricted to the IT class more professionals look
forward to a lifestyle of luxury that includes a swimming pool for each apartment, energy
saving devices, high-end security systems, centralised and fully air-conditioned spaces, et
al. The high prices have had a domino effect with relatively lower end properties also
being priced more than there worth. Since the professional class is also growing and
willing to pay for facilities, prices in Pune are expected to rise continuously.
Another driver of prices is the switchover of the middle-class from the leasing option to
the purchase option. More and more buyers are coming forward with open minds and
purchasing what ever suits them or fits them best. Once they find a property of their
choice, they are willing to pay a premium on it if required. Mumbai is more prone to this
because of huge commuting distances in the North-South corridor.

20
The demand momentum is likely to be maintained due to the increasing middle class
families, large student community influx and the growing IT & BPO industry. Prices
across the metros & mini metros are likely to continue to maintain a steady increase due
to the large-scale imbalance in the demand: supply ratio.

4.1.1 Regulatory framework and government policies (Scale: 0-16)

This parameter assesses the impact of Government regulations/legislations/directives,

which may impact the real estate industry. These can be in form of tax and duties related
issues, concessions, subsidies and other regulations. The changes in regulations, the
impact of these changes on the industry and the degree of control on the real estate
industry are captured in this parameter. The following sub-parameters are considered
while scoring:
1) Relaxation of norms for FDI – "The Government is allowing FDI up to 100% under
the automatic route in townships, housing, built-up-infrastructure and construction
development project (which would include, but not to be restricted to housing,
commercial premises, hotels, resorts, hospitals, educational institutions and recreational
facilities), subject to following guidelines:
Min. area to be developed:
• In case of developing serviced housing plots – min. land area 100 hectares
• In case of construction development project – min. built-up area 50,000 sq m.
• In case of combination of project any of the two conditions will suffice.
• Min capitalization of US $10 million for wholly owned subsidiaries and US $ 5
million for JV with an Indian company. The funds will have to be brought in within 6
months of the commencement of the business.
• Original investment cannot be repatriated before a period of 3 years before the
completion of min. capitalization. However, the investor may be permitted to exit with
the approval of the government through Foreign Investment Promotion Board (FIPB).
• At least 50% of the project must be developed within a period of 5 years, from the
date of obtaining all the statutory clearances."1

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FDI in Real Estate industry can result in the following advantages
• Influx of capital in the industry, which is expected to attract investments at a CAGR
of 5%1 over the next 3 years.
• Introduction of new technology and subsequent improvement in quality of real
estate assets.
According to industry sources the cap on the "min land to be developed" might prove to
be a deterrent in observing the complete impact of the FDI policy because of the scarcity
in the supply of land. Thus, further relaxation on the above guidelines would be
favourable for real estate industry.

2) Impact of direct/ indirect tax laws:

1. Indirect Tax Laws: Service tax levied was increased in the previous budget.
This would result in increasing construction cost. The multiplicity of tax still persists
in Real Estate industry in the form of property tax, entertainment tax etc. this also
adds to the unfavourability of indirect tax laws to real estate industry.
2. Direct Tax Laws: Fiscal incentives are given in the form of tax breaks for
developers, tax incentives and rebates to middle and higher income households, home
building for low income households and funding supports to government bodies. The
impact of tax laws can be summarized by a factor called Boost to spend on housing
(BSH).

1 'Annual Review Construction', Feb- 2006, Cris Infac, Page B-8

22
The graph clearly shows the improvement in BSH after the changes in the general
taxation structure in which the tax-exempt limit was raised from Rs. 50,000 in 2004-05 to
Rs. 1,00,000 in 2005-06.

3) Emphasis on growth of industry in the Union/ State/ Municipality Budget:

Amendments done to the ULCRA, CRZ, Building and Construction workers’ cess act,
Transfer of property act (registration and stamp duty) and property tax. Recognising real
estate construction as industry will help in organizing the industry and availability of
institutional finance.

4) Any other regulation/incentives: Monetary policies initiated by RBI have an impact

on the real estate industry. RBI has increased the risk exposure weightage for real estate
industry from 125 to 150 points. This indicates the sensitivity of the industry to risk.
Higher the risk weightage more risky the industry.

5) Monetary policy: The benign interest rates over the past 4 years have increased the
demand for housing. Thus any change in the interest rate would definitely affect the
demand. The interest rate is firming up off late, but they are no too radical to affect the
demand in negative direction.

6) Entry policies: Change in the number of permits/clearances required for the kick-off
and operation of the project. There are no formal entry policies laid down in the industry
due to its non-industry status.

7) Level of privatization: The proportion of private players in the industry is very high
as compared to the government players like HUDA, MAHDA etc. Increase or decrease in
number of private players wouldn't unfavourable for the industry. Thus this parameter is
neutral to the industry evaluation.

23
4.1.2 Cascading effect of output from industries (Scale: 0-4)

This parameter is introduced to capture the dependence of other industries on Real Estate
industry. Following facts about Real Estate enunciates the importance of the industry in
the Indian economy.
• Real Estate accounts for 5.1% of the GDP at constant prices and 6.2% at current
prices.
• It affects many industries such as cement, steel, plumbing, electricity, ceramic ware,
paints etc and consumer durable industry such as woodwork, fitting etc. According to
Cris Infac it has linkages to over 251 industries making its coefficient of linkages to the
rest of the economy very high.
• Housing construction is labour intensive and because of its linkages it generates lots
of employment. Due to its large employment generation potential it ranks fifth in terms
of employment generation multiplier. The labourers have high Marginal propensity to
consume thus the income multiplier effect of housing industry to the economy is around
five.
This parameter must be assessed based on the following sub-parameters:
1) Dependence of other industries on Real Estate industry
2) Industrial category of the industry: This sub parameter assesses whether the industry
belongs to the core sector. Real estate industry forms the core sector of the economy
because of the reasons mentioned above.
3) Income multiplier effect on the economy
4) Employment generating potential

24
4.1.3 Cyclicality of the industry (Scale: 0-4)

PBDIT (NNRT) as % of sales

25

20

15

10

0
89

91

93

97

99

03

05
9

0
19

19

19

19

19

20

20
19

20
(Source: Prowess)
The graph depicts a cyclical trend in the Real Estate industry, which ranges from 4 to 5
years. Real estate industry inherently is not cyclical because the demand for housing
arises from the basic human necessities i.e. food, clothing and shelter. However, due to
the nature of product, real estate is considered as an investment good, which brings in the
element of speculation. Speculation, as a part of demand, is the main reason for the rise
and fall of real estate prices and thus the cyclical nature of the industry. According to
current estimates there is about 25% speculation in the total demand for real estate.
According to industry sources the rise in speculation above this levels will be a cause of
concern as there might be chances of formation of Real Bubble.
The performance of the economy also has a direct impact on the industry as its
importance is already established with the economy in the previous parameter.
Cyclicality affects the earnings stability of the borrower. Cyclicality would be
particularly harmful to medium-size and smaller players as they would not possess the
adequate level of financial strength to bear a recessionary phase.

25
Rating of this parameter has been done based on the volatility of the industry PBDIT
margins over period of 15 years. The level of cyclicality should be assessed by:
If the cyclicality trend occurs every 3 years, the industry is perceived to be highly
cyclical. Similarly, if the cyclicality trend is witnessed every 4-6 years, the industry
should be perceived to be moderately cyclical. Industry with low cyclicality is which
where a cyclicality trend is witnessed every 7 years or more.

4.1.4 Industry financials (Scale: 0-4)

The industry financial figures should be benchmarked against IDBI’s norms for those
financial parameters in order to assess the relative performance of the industry as against
IDBI’s standards.

Methodology for calculation of industry averages:

Industry aggregate financial statements i.e. profit and loss account and balance sheet
should be obtained from Prowess and converted into a standardized format for financial
analysis. This format is given in Appendix A.

Subsequently ratios should be calculated for the parameters mentioned in the paragraph
below in the same method as those calculated for individual borrowers, for ease of
comparison. The methodology for computing these ratios has been defined in the
‘Financial Analysis’ module. The following industry averages are to be computed and
benchmarked against IDBI standards, after undertaking the trend analysis exercise as
described in the ‘Financial Analysis’ module.
• Profitability:
Earnings before Interest, Tax and Depreciation (‘EBIDTA’) Margin;
Net Profit Margin (‘NPM’); and
Return on Capital Employed (‘RoCE’).
• Capitalisation / Solvency:
Total Debt / Equity (‘TDE’).
• Liquidity:
Current Ratio (‘CR’).

The financial analysis for the sector is performed using the Prowess data for the past 5
years. The following inferences can be drawn from the ratios:

26
1. The average receivable, payable and inventory days are very high more than one year,
which is, justified because of the long gestation period of the real estate projects which
normally last for more than two years.
2. The CF-ICR trend gives an insight on the functioning of the industry. Normally at the
start of a project the cash flows are negative as the advance received for the project or for
sub-contract are 25 to 20% of the total revenue. As the project nears the completion the
receivables and thus the current assets increase exponentially, due to the realisation of the
rest 75 to 80% of the revenue in the next financial year. Thus the cash flow becomes
positive and the CF-ICR ratios become more than 1.
3. For correct financial analysis of any company functioning in Real Estate sector its
advisable to take the average of past 4 to 5 years, as this is the average time period for the
completion of any real estate project. This can also be seen from the CF-ICR values of
the industry, which takes a time period of 5 years to become more than 1.

Ratios 2005 2004 2003 2002 2001

Growth in Total Income 6.42% 32.14% 9.31% 27.12% -9.93%

Growth in EBIDTA -16.70% 72.53% 83.60% 6.49% -10.56%
Growth in NOCF 377.08% -- 83.24% -53.46% 651.65%

GPM 13.11% 16.75% 12.83% 7.64% 9.12%

NPM 6.63% 3.43% 1.19% -1.12% -1.17%
RoCE 7.88% 5.76% 4.82% 4.31% 4.41%

CF-ICR 5.44 0.89 0.75 0.38 0.85

CF-DSCR 5.44 0.89 0.75 0.38 0.85

TDE (treating Def. Tax as liability) 5.51 7.10 6.98 7.63 6.53
TDE (not treating Def. Tax as liability) 5.47 7.05 6.92 7.58 6.53
CLTNW 0.86 0.58 0.68 0.99 0.80

Current Ratio 1.43 1.53 1.54 1.52 1.51

Current Assets to Total Income 2.29 2.82 3.29 3.38 4.19
Average Receivable Days 557.71 611.66 805.50 827.69 1205.16
Average Payable Days 187.78 186.84 219.63 210.26 265.78
Average Inventory Days 480.86 516.55 577.95 547.80 655.84

27
4.1.5 Industry Structure (Scale 0-6)
An organised and competitive industry structure always helps in the healthy growth of
the industry. This parameter is assessed using the following sub-parameters:
• Extent of competition: This is evaluated on the basis of entry barriers, bargaining
power of suppliers of raw material and customers, pricing flexibility, reputation equity.
Ineffective entry barriers results into many small players crowding the sector. Real Estate
industry is labour intensive. The industry is also region/city specific i.e. each region has
its own set of builders and there are few national players on the marquee. Both these
factors have resulted into crowding of the industry with many developers and contractors.

• Unorganised market structure: The industry is highly fragmented. According to

Cris Infac report the presence of unorganized players in housing sector is almost 70 to
80%. However, more and more organized players are entering into the market due to the
growth potential in the market and easy availability of institutional finance for real estate
projects in the past few years. One indication on this front is the fact that percentage of
formal houses i.e. readymade houses has increased from 35% in 2002-03 to 69% in 2005-
06. (Source: Cris Infac)
Both these factors point to the fact that Real Estate industry is unorganized with
overcrowding of players. However, consolidation is taking place in the industry with the
opening up of FDI. Players like DLF are trying to operate on a pan India basis.

4.1.6 Demand-supply gap (Scale: 0-12)

The demand-supply dynamics in an industry determines to a very large extent the

direction of growth of the industry. This assumes a high level of importance because the
demand and supply dynamics would capture issues like pricing, marketing strategy,
future demand and supply growth based on determinants, and the overall strategy of
players in the industry.
The demand –supply dynamics for Real Estate varies from region to region. For industry
module macro-economic parameters are used to explain the demand-supply interaction.
The project specific demand-supply dynamics would be evaluated in the Project module
where micro-economic factors would be taken into account.

28
There are some unique features of real estate, which has resulted into unconventional
factors influencing the normal demand supply dynamics for e.g. speculation. The features
being:
Ø Durability: The piece of real estate lasts for more than 10 to 15 years.
Ø Immobility
Ø High Transaction cost
Ø Heterogeneity: Each piece of real estate is different from the other in terms of
location, construction etc. thus pricing cannot be homogeneous.
Ø Long delay between the demand and the supply.
(Source: http://en.wikipedia.org/wiki/Real_estate_economics#Demand_for_housing)

Demand factors for the housing sector:

• Rising Income
• Demographics: population, urbanization and nuclerisation of families etc.
• Tax incentives
• Lowering interest rates and increasing tenure of the loan
• Rising penetration for housing finance
• Speculation

Demand factors for the commercial sector:

• Number of industries/sectors driving the demand
• Growth in each sector over the past 3 years
• Forecasted growth in each sector.
48% CAGR growth rate for the IT/ITES sector which is driving 75% demand for the
office space.

Demand factors for the retail sector:

• Number of industries/sectors driving the demand
• Growth in each sector over the past 3 years
• Forecasted growth in each sector.

29
 Organised retail is increasing at CAGR of 43%. The change in perception of brands,
rising disposable income, growth in retail malls, entry of international players are the
key drivers for the growth of organized retail.
(Source: Cris Infac)

Supply Factors:
• Cost of raw materials: Building materials, labour, electricity, etc.
• Office vacancy rate.
• Regulations: Real estate is a state matter where each state has its own regulation for
the developers, transfer of property, ownership of property and the terms of relationship
between the tenants and landlords.
o ULCRA: This act was passed to prevent the hoarding of the land and increase the
supply of land, by imposition of ceiling on ownership and possession of vacant land.
However, the act failed in its objective and accounted for only 47550 acres of the
available 550000 acres of vacant land in 64 cities. Thus creating a shortage of supply.
In order to release the remaining land the act was repealed in 1999 by an ordinance
and ULCRA replaced the initial ordinance.
o CRZ notification: This regulation imposed restriction on construction activities in
the Coastal Regulation Zone.
o Building and Construction workers cess act: This act is to provide for the levy and
collection of cess on the construction cost incurred by the developer/owner in order to
increase the resources of the construction workers’ welfare board.
o Transfer of Property act: This includes the registration act and the stamp duty.
Stamp duty varies from state to state and is as high as 14% in some of the states. This
is said to be the main reason for avoiding the registration of land.
o Property Tax: Charged by the Municipal Corporation for the basic upkeep of the
facilities. This is to be paid by the owner.
o Rent Control Act: It encompasses the issues such chargeable rents, recovery and
possession of property and tenancy rights. This act is cited as the chief reason for
decrease in supply of housing stock because of its main premise i.e. “neither the
tenant nor the landlord owns the property”. (Source: Cris Infac)

30
 Analysis: The supply constraints and the increasing end-user demand have resulted
into shortage of supply. The supply constraint is the result of the archaic regulations
mentioned above.

4.1.7 Volatility of raw material prices (Scale: 0-4)

Real estate industry cost structure is marked 50 to 60% by the cost of the land. Thus the
cost of other raw materials like cement and steel does not have significant impact on the
cost structure of the project. However, cement and steel have a history of volatility
because of their cyclical nature. And this volatility does impact the project cost to a
certain degree. Thus volatility of raw material prices cannot be completely discarded
from the real estate industry.

31
4.2 Developer / Promoter

A Real Estate Project involves following entities, responsible for its successful execution
and implementation:

1. Land Owner: Many projects are executed where the landowner brings in the land
and contracts the developer/contractor to develop the property.
2. Developer: Developer develops the complex (residential/township/commercial) on
the land owned by the landowner (third party) or himself. In many cases the developer
himself constructs the complex and does involve a civil contractor for the same.
3. Contractor: Undertakes construction of the complex on a contractual basis with the
landowner or developer.
4. Consultant/Architect/Structural Engineers: Provide the technical inputs, in terms
of feasibility, in-time completion, design etc., to the developer

In this module the developer/promoter is assessed as he is one of the entities responsible

for successful completion of the project and thus factors in a major risk element for the
project. Hence it becomes more important to assess the quality of promoters through
parameters such as financial health and technical capabilities. For the purpose of
appraisal, the word ‘promoter/developer’ refers to an entity that has 5 per cent or more
equity stake in the project and has a significant participation in the day-to-day
management of the project. In this module the following parameters must be evaluated
for each promoter based on the scales provided in Annexure 2. This module will be
assessed separately for each promoter.

4.2.1 Analysis of financial health of promoter (Scale: 0-12)

The analysis of the past financial performance of the promoter is used to capture the
operational and financial performance of the promoter. In this parameter the credit
officer must evaluate the promoter on the following sub-parameters:
• Profitability (using EBIDTA margin, NPM and RoCE);
• Solvency (using TDE and Contingent Liabilities / Total Tangible Net Worth
(‘CLTNW’)); and

32
• Cash flow (‘CF’) adequacy (using CF Interest Coverage Ratio (‘ICR’) and CF Debt
Service Coverage Ratio (‘DSCR’)).

The methodology for computing these ratios has been defined in the ‘Financial Analysis’
module. The financial analysis of the promoter should be conducted over a 4-year
period, using the trend analysis method defined in the ‘Financial Analysis’ module. The
profitability ratios and the TDE ratio must be compared to industry averages, while the
CLTNW and the CF adequacy ratios must be compared to IDBI benchmarks. Each ratio
must then be scored as per the scales provided in the Annexure 2.

4.2.2 Group performance (Scale: 0-8)

The performance of the group to which the promoter belongs will impact the ability of
the promoter to honour commitments to the project. For example, if the group has a
number of loss making companies, the promoter might not be successful in providing the
desired financial support to the project. Also, there might be instances of funds diversion
from the project company to support some poorly performing group companies. Hence it
is important to assess the performance of the group to which the promoter belongs. The
key areas of concern are:

• Non-performing companies within the group;

• Group companies with a negative net worth; and

• Financial position of the flagship company / companies of the group.

Each of the above sub-parameters is rated individually. The first two sub-parameters
must be rated as per the scales provided in Annexure 2. For the third sub-parameter, the
credit officer must perform the financial analysis of the flagship company / companies. In
order to assess the financial health of the flagship company / companies of the group the
credit officer must assess the following key ratios:

− Profitability (using EBIDTA margin, NPM and RoCE);

− Solvency (using TDE and CLTNW); and

− CF adequacy (using CF ICR and CF DSCR).

33
The final score for this parameter will be computed in the following manner:

• Compute the arithmetic mean of the scores for the first two sub-parameters;

• Compute the score for the third sub-parameter;

• The sum of the above two scores shall constitute the score for this parameter.

4.2.3 Project management skills (Scale: 0-8)

The project management skills of the promoter will determine the probability of
successful implementation of the project. A promoter with a good track record in project
implementation is likely to be more successful in implementing the new project than a
promoter with inadequate skills and experience in project management. In this parameter
the credit officer must assess the project management / implementation skills of the
promoter in projects undertaken. The following sub-parameters should be evaluated:

1) Adherence to time schedules of the past and the ongoing projects

2) Usage of scientific tools viz. Work break down method, PERT/CPM and MS Project.
3) Composition of projects undertaken: This will capture experience of developer in
undertaking complex and varied construction projects.

4.2.4 Relevance of experience to project (Scale: 0-6)

The promoter’s past experience and the current type of project undertaken determine the
relevance of the promoter’s experience to the project. For example, for developing a
project in the hotel segment, a promoter with past experience in developing a
restaurant/entertainment center would be given a higher score than a promoter with past
experience in developing a housing complex. The key issues which a credit officer must
consider while assessing this parameter are:
• Number of similar types of the projects: If the developer has developed more than one
similar project he should be given a higher weightage.
• Number of projects in the city/region: Real estate industry being very region specific,
local know-how is key determining criteria for successful completion of the project.

34
 Thus a promoter developing his first project in the city would be rated lower than a
promoter developing his second or third project in the city/region.

4.2.5 Strategic initiatives in the past (Scale: 0-2)

The promoter may have taken some strategic initiatives in the past, which may have had a
positive or a negative impact on the performance of the promoter’s business. Such
strategic efforts illustrate the initiatives taken by the management to grow, meet new
challenges, to face competition and to set operational standards in the past. The success
in such initiatives is demonstrated in the financial performance of the promoter. These
strategic efforts by the promoter have an impact on the future growth and performance of
the project. The promoter shall be given a score based on the level of strategic initiative
and success.
For example, the initiative taken by Raheja group of builders in developing a discount
mall, which is deviating from the norm of developing high-end malls, may prove
beneficial for the growth as discount mall concept goes well with the middle class psyche
of lower price and quality shopping of branded products.

4.2.6 Group strategy and commitment to project (Scale: 0-4)

In this parameter the credit officer must assess whether the project in consideration is in
line with the core business and overall strategy of the promoter’s group. This will help
the credit officer in determining the importance of the project to the promoter group and
its commitment towards its successful implementation of the project. For example, if the
Larsen & Toubro Group, whose core line of business is engineering and construction,
were to undertake a project to construct a road they would be given a higher score on this
parameter than the Reliance Group, whose core lines of business are textiles and
petrochemicals.
The other issue to be addressed in this parameter is the future strategy of the group and its
impact on the project. The future strategy and plans of the group give direction to the
efforts of the group and hence will have a significant impact on the project, during the
construction and operations & maintenance phases.

35
4.2.7 Conduct of promoter’s account (Scale: 0-8)
This parameter assesses the promoter’s reputation in the context of honouring financial
and non-financial commitments to its lenders in normal and difficult times. The sub-
parameters on which the borrower must be assessed are:

• Timely payment of interest and principal to IDBI (for an existing borrower); and

• Payments to other financial institutions / banks.

If the promoter is not an existing borrower, then the assessment would be in the context
of honouring financial and non-financial commitments to other financial institutions /
banks.

4.2.8 Past Project Quality Record (Scale 0-8)

The quality of past project is considered to be a major factor in assigning quality rating
for the future projects, as the reputation of the developer in terms of delivering quality
product is always benchmarked against his past work.
1. Safety measures taken at the construction sites and the number of accidents on
site in the past.
2. Quality standards being followed: ISO certification, BIS standards etc. Using
standardized raw materials reduces the cost and increases the quality of
construction.

4.2.9 Reputation (Scale 0-4)

In Real Estate industry reputation of the developer or builder plays a significant role in
driving the demand for the project under consideration. Thus it is included as a separate
parameter and will be evaluated using the following sub-parameters.
• Dispute and Litigation (Civil court cases) track record is the means through which
contract composition and clarity, adherence to the agreement with the customers for the
past project and thus customer satisfaction can be evaluated.
• Stay orders in the past on the construction
• Market position will be given by the relative number of projects of the company
as compared to that of the company which has developed more number of projects than

36
the company under appraisal: Real Estate industry is marked by fragmentation and is
region specific. Thus there is no company, which can be termed as market leader in terms
market share. This trend is observed worldwide where the maximum market share is in
tune of 1%. Thus comparison based on market share will not give the correct picture.
Companies from different locations cannot also be used for comparison. For e.g.
Hiranandani construction group has predominance in Mumbai and Ansal Properties in
Delhi, rendering their comparison illogical. Thus one criteria that can be used for
comparison is the number of projects completed by the company as compared to its rival
in the same city/region

37
4.3 Management quality

The management of the project company makes the basic policy decisions, arranges the
financing, provides information to lenders and investors and is responsible for the overall
monitoring and administering of the project. For the project to be successful, the
management team must be experienced, have good working relationships with lenders,
workers, suppliers, customers etc and implement strong internal controls for the effective
and efficient operations of the project. This module assesses the management quality and
to an extent the willingness of the borrower to repay its debt obligations through
parameters such as the technical expertise of management personnel, corporate
governance, labour and employee relations, timely honouring of financial and other
commitments etc.

The scales for rating the parameters given in the module are provided in Annexure 3.

4.3.1 Technical expertise of key personnel (Scale: 0-12)

This parameter assesses the technical expertise of key management personnel. The level
of technical expertise of the personnel determines the skill of the human resources to
operate efficiently, solve problems and complete difficult tasks in a time bound manner.
The borrower should be evaluated on the following two sub-parameters:

• Qualifications of key personnel (assess the level of theoretical knowledge in the same
sector); and

• Hands-on experience of the key personnel (extent of practical working experience in

the sector): This can be evaluated by the number of years, the person under
consideration, has spent in the Real Estate industry.

The sum of the scores of the above sub-parameters should be the final score to evaluate
this parameter.

4.3.2 Presence of collaboration / joint venture (Scale: 0-4)

The presence of collaboration or a joint venture enhances the management’s ability either
to market the product or to strengthen its financial position. Besides, a technical tie-up

38
can prove beneficial to the firm in terms of having a competitive advantage over its peers.
An organisation with a collaboration / joint venture will receive a score of 4, while an
organisation with no collaboration / joint venture will receive a score of 0. Company like
DLF is an example which will receive 4 in this parameter.

4.3.3 Organisation structure (Scale: 0-4)

A broad based organisation structure delegates responsibility by function to various
people. This avoids the risk of concentration of power in the hand of a key individual(s).
A well-defined organisation structure also emulates the future strategy of the company
and hence it indicates the direction in which the company is headed. In this parameter the
credit officer should evaluate the organisation structure based on the following sub-
parameters:

• Clear demarcation of roles and responsibilities of personnel (to avoid over

dependence on one or two personnel and to ensure that key tasks are assigned to key
personnel);

• Structured and articulated process flows within the organisation; and

• Well-defined succession plan to assess the presence of a well-defined succession plan

and not the quality of the successors.

4.3.4 Corporate governance (Scale: 0-8)

The borrower may undertake certain initiatives, which underline the management’s
commitment towards the setting of and following certain well-accepted standards and
practices. This might help the borrower to become efficient in operations or might help
to establish a good standard of management and administration. If the borrower has
undertaken such initiatives, then scores should be assigned as per the type of initiatives
undertaken. This parameter cannot be assessed during the initial appraisal of the project,
since the company is not in operation. However, it must compulsorily be evaluated at
each subsequent appraisal. The borrower should be scored on the following sub-
parameters:

• Broad-based board composition (for example having independent directors with full
voting rights);

39
• Presence of disaster management / contingency plans;

• Presence of an audit committee; and

• Strong reporting and control systems: Now a days many big construction companies
are using IT for efficient intra-organsiation reporting and documentation, thus
enhancing their control systems. Presence of IT infrastructure can be one of the
factors to evaluate this parameter.

4.3.5 Diversion of funds (Scale: 0-8)

Diversion of funds for uses other than those that are earmarked for is an indication of the
borrower’s deviation from pre-set norms or agreements with the provider of funds.
Diversion of funds is a serious issue because a project might suffer from lack of funds
due to a diversion. There are two issues, which must be assessed by the credit officer:

• Diversion of short-term funds for long-term uses; and

• Siphoning of funds to group companies / affiliates.

4.3.6 Transactions with group companies (Scale: 0-2)

This parameter is relevant for organisations that purchase and sell raw materials to group
companies. The dichotomy in this parameter is that there can be overinvoicing and
mismanagement of inventory on one hand; while on the other hand, the raw materials
could be an economic resource of input for a group company. The credit officer needs to
assess whether the transaction is at arm’s length. This can be done by assessing whether
purchases / sales are carried out at market rates. This parameter can be given a score of 2
if there are no transactions with group companies or if there are transactions with group
companies at arm’s length. Alternatively, if there are transactions with group companies,
which are not at arm’s length, this parameter will get a score of 0.

4.3.7 Conduct of borrower’s account (Scale: 0-8)

This parameter assesses the borrowers’ willingness and ability to honour financial and
non-financial commitments to IDBI in normal and difficult times. This parameter cannot
be assessed during the initial assessment for making a lending decision, as the borrower
is not an existing borrower of IDBI and hence no information will be available to score

40
this parameter. However this parameter must be compulsorily chosen for each
subsequent appraisal. The areas on which the borrower must be assessed are:
1) Timely re-payment of interest and principal to IDBI;
2) Timely submission of information such as quarterly progress reports, audited
accounts, reports from independent consultants / engineers (during the
construction phase) and other information, as and when required; and
3) Timely completion of security documentation, renewals of insurance policies
covering security pledged with the bank.
If the borrower has defaulted on the repayment of interest or principal, the credit officer
should automatically assign a score of ‘0’ to this parameter, irrespective of whether the
information requirements and security documentation has been provided on time.

4.3.8 Labour and employee relations (Scale: 0-4)

The management of labour is a crucial determinant of management quality since labour is

a key input for Real Estate project. The quality of labour employed, the ability to retain
employees, non-occurrence of labour disputes and presence of employee welfare schemes
are some of the determinants of good labour and employee relations and hence must be
assessed while scoring this parameter.

4.3.9 Honouring of commitments (Scale: 0-8)

This parameter reflects the borrower’s commitment with respect to honouring financial
and non-financial commitments to lenders (other than IDBI), creditors, employees,
regulatory authorities etc. This parameter would not be assessed during the initial
appraisal since a new borrower cannot be assessed on this parameter during the initial
assessment for making a lending decision. However this parameter must be compulsorily
chosen for each subsequent appraisal. The areas on which the borrower must be assessed
are:
• Timely payment of dues to EPC contractor;
• Timely payment of dues to employees and labour force;
• Timely payment of regulatory dues such as taxes, duties etc; and

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 • Payment of interest and repayment of principal to other financial institutions /
banks.

4.3.10 Quality of financial statements (Scale: 0-4)

The quality of financial statements reflects on the integrity of the management. In this
parameter the credit officer should evaluate the accounting quality of the financial
statements in respect to the use AS7, the accepted accounting policies (‘GAAP’) for
"Construction Contract" i.e. "Percentage completion method" which is normally used in
the construction industry. The borrower should be evaluated on the following:
• Transparency of accounts, which is reflected in the extent and level of disclosures
made in the financial statements: For example when the company uses "Percentage of
completion method" for revenue recognition, the percentage of work for which revenue
is booked is given but along with that if the company also discloses the competent
authority by which the percentage was certified, it is considered as transparent
accounting practice.
• Presence of qualifications in the auditors’ report.

4.3.11 Foreign exchange management policy (Scale: 0-2)

This parameter is relevant for organisations that inherit foreign exchange risk by their
way of business transactions, i.e. imports of machinery etc. or through the presence of
foreign currency loans. In such cases, the management should have a well-defined
foreign exchange management policy in place, which includes documented hedging
strategies, rather than ad-hoc tactical solutions.

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4.4 Significant Project Party

This module will evaluate the remaining two entities involved in any Real Estate project.

4.4.1 Civil Contractor

The main civil contractor should be considered for the appraisal. The contractor would
provide technical and operational support to the project. Thus, in view of it’s
significance to the project, it becomes very important to have strong contractual
relationships between the borrower and the contractor.
The scope of work of a civil contractor generally includes:
• Procuring;
• Constructing;
• Commissioning;

The contractor is responsible for all civil works including water, roads, drainage systems,
and electricity and plumbing works, which are part of construction activities. The
contractor is pivotal in completing the project within stipulated time schedule and
according to the design given by the architect.
In many cases the developer or promoter himself will be the constructing the project, thus
there will be no civil contractor in such cases. Civil contractor module will not be
activated in such cases and the weightage of the developer/promoter module will increase
by the percentage points assigned to the civil contractor module. In this module the
following parameters must be evaluated for each contractor based on the scales provided
in Annexure 4. This module will only remain active during the initial and construction
phases. It will be deactivated in the operations and maintenance phase.

4.4.1.1 Technical expertise and past track record (Scale: 0-12)

This parameter assesses the technical expertise of the contractor(s) and their level of past
experience. The level of technical expertise of the personnel determines the skill of the
human resources to operate efficiently, ensure proper construction as per requirements,
solve problems and complete difficult tasks in a time bound manner. The contractor
should be evaluated on the following two sub-parameters:

• Technical qualifications; and

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• Hands-on experience in the past (extent of practical working experience): Number of
years of experience is one of the evaluation criteria.

The contractor(s) should be scored on each of the above sub-parameters. The sum total
of the scores of each of the above sub-parameters should be taken as the final score.

4.4.1.2 Financial health (Scale: 0-12)

The financial performance of the contractor should be analysed based on the profitability,
solvency and cash flow adequacy ratios of the contractor. The analysis of the financial
health must be done in the same way as that for a promoter and the methodology for
scoring the same has been provided in the ‘Promoter’ module as shown in Annexure 2.

4.4.1.3 Basis of selection (Scale: 0-2)

The contractor can be selected in the following manner:

• On a preferential basis; or

• By a competitive bidding process.

Under the preferential basis of selection of the contractor, there could be an underlying
risk that the selection of the contractor was not done in an objective manner. This could
be because of the contractor’s close links with the promoter company arising from a
familial or a fiduciary relationship. Such a method of selection could lead to the selection
of an inexperienced or technically incompetent contractor for the project.
However, in the Real Estate industry normally the contractor has a long-standing
relationship with the developer. Thus more weightage cannot be given to this parameter,
as the contractor on preferential basis cannot be considered technically incompetent.

The competitive bidding process (through invite of tenders) considers the following
parameters for the selection of the contractor:

• Contract price for the entire procurement and construction activities;

• Project and technical management capabilities of the contractor;

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• Experience of the contractor;

• Scheduled completion of the project; and

• Extent of performance guarantees offered.

Thus, a contractor selected through the competitive bidding process will get a higher
score as compared to one selected on a preferential basis.

4.4.1.4 Quality of contract (Scale: 0-8)

The contract between the project company and the contractor is instrumental in
transferring the construction / completion risk from the management of the project
company to the contractor. This means that the contractor hands over the project to the
management of the company only after the successful construction within the timelines
agreed upon, for a fixed consideration agreed upon in advance.

Significant clauses present in the contract can be clubbed into the following areas:

• Scope of work: For example, overall responsibility for the co-ordination and
communication between the contractors, right to appoint approved sub-contractors
and consultants, tenure of the contract and provision for extending the validity of the
contract, determination of performance guarantees (operational and efficiency
parameters);

• Terms of payment: For example, advance payments, retention money, pattern of

payment, level of incentives; and

• Legal coverage: For example, liquidated damages / penalties for non-adherence to the
implementation schedule, non-performance with respect to guaranteed levels and
non-adherence to emission limits as guaranteed, limitation of liabilities, force majeure
risks, termination of the contract, insurance, arbitration and resolution of disputes;
The contract specific clause should be obtained from the legal department on case-to-case
basis. However, some common clauses in construction contracts are:
• Clause for liquidated damages/ bonus payment: already explained in legal
coverage.

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 • Suspension of work: In cases where the work has to be suspended for unavoidable
circumstances, then the contract should cater to this delay in work and the
payment discrepancies which arise thereon.
• Variation in estimated quantities: It is generally observed in the construction
industry that there is a mismatch between the technical calculations for the raw
material required and the actual usage. To share or transfer the risk of this
variation the contract should stipulate the price of the extra quantity of raw
material required than stated in the contract.

It is of utmost importance for the credit officer to ensure that the contract is:

• A Bankable contract; and

• A Balanced contract.
Bankable contract: The contract should lay down the role and responsibilities of each
party to the contract, to avoid confusion and conflict on breach of the terms of the
contract. Unclear terms and conditions of the contract can lead to litigations between the
project company and the contractor, thus stalling the construction o. A ‘bankable’ or an
‘enforceable’ contract will ensure that the contract is valid, legal and a binding obligation
for the parties involved in accordance with the terms and conditions as specified. The
credit officer, with assistance from IDBI’s legal department, should score the sub-
parameter based on the assessment of the ‘enforceability’ of the clauses (as mentioned
above and also those identified subsequently) contained in the contract.
Balanced contract: This means that transferring them to other parties adequately mitigates
all risks arising in the contract. For example, any penalties paid by the project company,
due to the lack of efficiency or non-performance of the contractor should be adequately
recovered from other parties (for example through an insurance cover). Thus, a
‘balanced’ contract, along with other agreements, ensures that all risks faced by the
project company during the construction phase are transferred / allocated in a ‘balanced’
manner, fixing responsibilities and ownership for these risks.
The sum of the scores given to each of the sub-parameters shall be taken as the final
score for this parameter.

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4.4.1.5 Terms of payment (Scale: 0-4)

One of the most significant components of the project cost is the contract value payable
to the contractor for undertaking the construction of the project. The factors to be
considered by the credit officer while assessing the terms of payment to the contractor
should be, but not limited to:

• Extent of advance granted;

• Pattern of payments, i.e. either on proof of performance (shipping / construction /

services rendered) or on a pro-rated time basis (monthly, quarterly, half-yearly);

• Extent of money retained for meeting future unforeseen events; and

• Presence of escalation clauses in the contract price.

4.4.1.6 Project Management Skills (Scale 0-8)

This parameter should be graded in the same manner as for the developer's project
management skills. All the sub-parameters will remain the same. This parameter is
essential for the contractor, as it will determine the ability of the contractor to complete
the kind of project under consideration.

4.4.1.7 Project Quality record (Scale 0-8)

Same as developer

4.4.1.8 Reputation (Scale 0-4)

All the parameters are same as Developer's including the flowing parameter.
Liquidated Damages: The credit officer should also try to get information, if possible
about the quantum of liquidated damages given and the frequency of the same.

4.4.1.9 Labour relations (Scale 0-6)

Real estate projects are labour intensive, thus good labour relations play pivotal role in
timely completion of the project. The following factors can be used to evaluate the labour
relations:
• Number of cases in labour court in the past 3 years.

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 • Frequency of labour disputes

4.4.2 Architect/Structural Engineers/Consultants

The last entity involved in the Real Estate project is Architect/Structural
Engineers/Consultants. All of them are clubbed in one group, as their functionalities are
restricted to provide technical support to the developer in intialising, developing and
transferring the Real Estate property to the customers.
During evaluation every entity should be scored individually i.e. architect, structural
engineer and each consultant should be scored individually and then the mean score
should be assigned to this module.

4.4.2.1 Technical expertise and past track record (Scale 0-8)

This parameter assesses the technical expertise of the contractor(s) and their level of past
experience. The level of technical expertise of the personnel determines the skill of the
human resources to operate efficiently, ensure proper construction as per requirements,
solve problems and complete difficult tasks in a time bound manner. The contractor
should be evaluated on the following two sub-parameters:

• Technical qualifications; and

• Hands-on experience in the past (extent of practical working experience).

The contractor(s) should be scored on each of the above sub-parameters. The sum total
of the scores of each of the above sub-parameters should be taken as the final score.

4.4.2.2 Past achievement in the relevant field (Scale 0-4)

Many architects/consultants win accolades for innovative work in their fields. There are
institutional awards also in the field of construction. Thus any award won by the
architects/consultants contracted by the project company gives, some credibility to their
choice as the project party. The credit officer can find about the achievements of the
project parties and give the scoring accordingly.

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4.4.2.3 Relevance of experience to project (Scale 0-8)
The past experience and the current type of project undertaken determine the relevance of
the project patry's experience to the project. The key issues which a credit officer must
consider while assessing this parameter is number of similar types of the projects.

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4.5 Project Risks

Project risks are those risks, which are specific to the project being undertaken. These
project risks are divided into the following sub-modules:

• General: General risks are those, which are present in a project right from the
developmental phase (conception of the idea), till the construction and the operation
and maintenance phase. Since general risks are present in all the phases of the project,
this sub-module will be activated during each phase of the project.

• Complexities: These are risks in the project, which arise due to the complexities in-
built in the construction of the project. Complexities can arise on account of the
design of the project, the justification of project cost or the extent of incompletion of
the project. The complexities in a project play a significant role in the manner in
which the construction of the project progresses and therefore these need to be
assessed closely. Complexities are only relevant till the completion of construction;
thus sub-module remains activated only during the initial appraisal and the
construction phases of the appraisal process.

• Construction: Construction risk is one of the most important risks in project financing.
This is because the project receives funding (both debt and equity) at the construction
stage and the level of success in constructing / completing the project on time and
within budget has a significant impact on the financial performance of the borrower
and its debt servicing capacity. Significant risks assessed during the construction
phase include (but are not limited to) the adherence to implementation schedule, level
of cost overruns and the successful funding of cost overruns. Construction risks need
to be assessed during the construction phase only and therefore this module shall be
activated during the construction phase only.

• Principal Anchor(s): Principal anchor risk is assessed for commercial projects given
on lease. This sub module is the evaluation of lessee acquiring more than 35% of the
space in the project. The principal anchor(s) will be the main source of revenue in the

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 form of lease rentals. Significant risks assessed for principal anchor are the financial r,
reputation, tenure of loan etc.

• Operations: Risks faced by the project once it starts commercial operations are
assessed in this sub-module. During the operations & maintenance phase the project
begins to function as a regular operating business. Risks to be assessed during
operations & maintenance phase would include the obtaining statutory clearances etc.
This sub-module shall be activated only after the completion of construction.

4.5.1 General

In this sub-module the following parameters must be evaluated as per scales provided in
Annexure 5A

1) Clear title of the land (Scale 0-4)

Clarity of title is vetted at the 'Filters' stage. However, many projects have a clear title to
land but do not have complete ownership of the land. For e.g. The MOU is such that one
portion of the land is released for development of one phase of the project. Rest of the
land will be released once the phase I of the project is completed. In such cases the score
given would be between 0 and 4 as the total land is not available for the project in the
initial stages and forms a risk to the completion of the project.

2) Price/ Rental risk (Scale 0-6)

Price for the real estate is location specific as demand and supply factors are governed by
the location of the project. One of the major supply factors is regulation, which is
State/Municipal Corporation specific. Thus any changes in regulation will affect the
supply. The demand is also driven by the local economic conditions. For e.g. Mumbai,
Delhi, Bangalore has high financial growth as compared to other cities due to the large
presence of companies. This leads to higher income and employment opportunities in
these cities and thus a higher demand for real estate. However, there is also speculation,
which drives demand and is principal in escalation of prices. Thus there always is price
risk. Following sub parameters should be used for scoring this parameter.

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 i. Speculation: Cities like Gurgaon where the Real Estate activities are at its peak;
speculation of about 30 to 40% is estimated. Such high levels of speculation is
detrimental to the project as there is a risk of price/rentals crashing down once the
speculation reaches unsustainable level. The credit officer should get the current
estimates of the speculation from the industry sources and should rate the parameter. If
the speculation is higher than sustainable level then a low score should be given.
ii. Relaxation of regulations: The local authorities govern Regualtions in Real Estate.
If the state or municipal corporation relaxes the regulations like Rent Control Act etc.,
which are the main reasons for creating the artificial shortage of supply of land, the
supply would increase resulting in supply of land nearby the project under consideration.
This might lead to fall in prices, as many new projects would compete with the project.

3) Location of the project (Scale 0-6)

Location of the project also bears the risk. For example a commercial project is in central
business district (CBD) or suburban business district (SBD) should be given more score
as the external infrastructure required for profitable operation of the commercial property
is developed in CBD.

4) Cost of project – IBDI benchmark (Scale 0-2)

The cost of the project is an important indicator of the inherent risk in a project. As it is
essential for projects of different magnitude to get approved by different levels of
authority, similarly it is also essential to give higher risk grade to projects having a higher
project cost as the quantum of money involved directly impacts the risks inherent in a
project. In this parameter the credit officer should evaluate the total project cost against
benchmarks defined in the scales.

5) Means of financing the debt (Scale 0-4)

In this parameter the credit officer must evaluate the other sources from which the
borrower has raised debt. Traditionally, it has been observed that most projects are
financed through consortiums since it may be difficult and risky for a single financial
institution to finance the entire debt requirement of a large project. Further, debt
requirements may also be met through secured / unsecured loans from group companies /

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affiliates / unrecognised institutions. If the debt requirements are funded by financial
institutions / banks, it adds a level of credibility to the project. On the other hand,
unsecured loans from group companies may not be a reliable source of funds for the
entire life of the project, as these loans may be recalled at any time during the life of the
project. Hence it becomes important to assess the quality of debt i.e. source and tenure of
debt.

6) Vulnerability to force majeure risks (Scale 0-4)

Force majeure risks are those risks, which result from certain events beyond the control
of the project parties. These events commonly include:
• War (declared or undeclared) or other military activity;
• Strikes, lockouts and other labour disturbances;
• Riots or public disorder;
• Expropriation, requisition, confiscation or nationalisation;
• Changes in law;
• Blockades;
• Severe storms and other natural disasters; and
• Epidemics or quarantines.
Although in most projects the project company will seek to mitigate all force majeure
risks through contractual obligations and insurance protection, it is important to assess
the vulnerability of the project to such event risks. For example, the location of the
project could be a cause of concern if it is situated in areas prone to natural catastrophes
such as earthquakes or floods. Alternatively, it would be unreasonable to lend to a
project near the border or in a terrorist prone area, where the probability of destruction is
high, in the event of a war or a terrorist attack. In this parameter the credit officer must
score the vulnerability of the project to each of the above event risks on a 3-point scale,
not vulnerable, moderately vulnerable and highly vulnerable. The final score for the
parameter would be the rounded-off arithmetic mean of the scores of each of the above
sub-parameters.

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7) Nature of project (Scale 0-2)
The repayment of loan, in case of Real Estate projects, is done either through advance
payment received by the customers or through lease rentals payment received from the
lessee. Advance payment structure is followed in the housing/township projects where
the buyers of residential complexes have to furnish certain advance at the time of booking
the house. Whereas, in lease rental structure, followed in commercial projects, lessee
furnishes the lease rentals once he has taken the charge of the property i.e. after the
construction of the project. Thus in case of housing projects the repayment of loan starts
within one or two years of the commencement of construction and in commercial projects
the same starts after the construction of the project and commencement of the operations
by the commercial player.
Commercial projects are more risky than housing project and should be given lesser
score.

8) Marketing Strategy (Scale 0-20)

The debt obligation of a borrower will be ultimately repaid by the future cashflow
generated by the operations of the borrower. The future cashflow generation is highly
dependent on the marketability of the Real Estate property. Therefore, the credit officer
should examine the property and its sustainability in the market in considerable detail by
critically examining the marketing strategy of the borrower. The credit officer should
specifically examine the sub-parameters mentioned below to assess the marketing
strategy of the borrower.
• Pricing Strategy: This parameter should assess the rationality behind the price of
the developed Real Estate property. Studying the micro demand and supply dynamics can
assess it. The rating officer should use the “Detailed Appraisal Note” to get the project
specific details. The demand factors change according to the nature of the project i.e.
housing, office space, hotel, mall etc.
Factors for housing complex:
• Availability of external infrastructure like schools, market place, parks etc.
• Sustainability
Factors for Office Space:

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 • Easy availability of manpower.
• Developed infrastructure for IT.
• Office vacancy rate.
Factors for mall:
• Nearness to future human catchments.
• Ample parking space.
• Frontage provided.

• Nature of Product: This parameter assesses the risk exposure in terms of customer
default. If the property is catering to only one type of customer i.e. IT office space then
the developer faces the risk of default from the customer, which in turn would affect the
repayment of loan. Thus a project, which derives demand from various categories of
customer, mitigates this risk for e.g. a township project or a commercial project including
mall and office space etc.

• Promotion strategy: Should be in sync with the positioning and targeting strategy.
A project taken under Slum Rehabilitation Act cannot be positioned and targeted to
middle class segment. It would be best suited for segment moving from ‘kuchha house to
pucca house’.

9) Systems for support facilities (Scale 0-4)

This parameter captures the use of organisation support systems that determine efficiency
of operations. The support systems would include payroll systems and accounting
packages, management information systems, project management systems etc. An
organisation that actively uses the latest systems would get a high score as compared to
one, which depends on manual processes / obsolete systems for support.

10) Reputation or established player (Scale 0-6)

As already mentioned Real Estate project are region specific. Thus, even an established
developer would find it difficult to initiate and execute a project in a new city. The local
contact required for all the clearances are built by many years of operation in the city.
Customers also take into consideration the reputation of the developer due to transfer of

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ownership risk. Thus first project of the developer will be scored lower as compared to
his second or third project.

4.5.2 Complexities
In this sub-module the following parameters must be evaluated based on the scales
provided in Annexure 5 B.

1) Design of the project (Scale 0-12)

The promoter(s) ability to assess the technical feasibility of the project is one of the key
success factors of a project. Prior to the construction phase, the promoter(s) must
undertake extensive engineering studies to verify the design of the project. The detailed
design and engineering of the project provides a basis for estimating the precise level of
construction costs. The credit officer, while assessing the above parameter should
consider the following sub-parameters:
• Topography and terrain in relation to project requirement: This is a physical
check done by the Project Appraisal department. In many cases the land being developed
is undulating requiring additional leveling cost other than the construction cost estimated
by the developer. The scoring of this parameter is dependent on the report submitted by
the PAD and an undulating land will get lower score.
• Feasibility analysis: This parameter will evaluate the technical feasibility of the
project. Developers contract third party consultants and structural engineers to conduct
feasibility study for the project in terms of soil analysis, structural analysis,
environmental study etc. The credit officer should check for the feasibility through these
reports.
• Social factors: The design of the project should take into account any social
requirements, which would be required for restoring the balance in the lives of the people
directly, affected by the project. All of these environmental and social requirements add
to the cost of the project for example measures taken to ease the flow of traffic in front of
a shopping mall is the growing concern for the municipal corporation and the developer
should incorporate such measures in the design of the mall.

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2) Extent of incompletion (Scale 0-8)
In this parameter the credit officer must rate the risk due to the extent of incompletion of
a project. Extent of incompletion refers to the amount of work remaining for completing
the construction of the project. Inherently, the maximum risk in the project lies at the
inception of the construction phase, since the entire project needs to be constructed from
scratch. As the project progresses and certain parts of the project are constructed the risk
starts to decline. If a project is 90 per cent complete, the risk is only to the extent of the
balance 10 per cent that remains to be completed. Hence a project, which is 90 per cent
complete, will get a higher score in this parameter, than a project, which is 50 per cent
complete, even if it is on schedule.

3) Revenue & Cost justification (Scale 0-10)

The developer submits the projected cash inflows and outflows for the project life. This
parameter assesses the cost and revenues of the project in terms of economic viability.
The loan officer should appraise the above based on the following sub-parameters with
the help of information given through Detailed Appraisal Note submitted by PAD.
• Comparison of cost determinant: Major cost in Real Estate project is land valuation.
It can be done by following two methods:
§ Discounted method: In this valuation method the future cash inflows in the
form of sales price of the flats or lease rentals for the commercial space are
discounted to the present value. The margin and the cost are subtracted from the
value to get the present value of the land.
§ Comparison method: The demand-supply dynamics of the location determines
the cost of land and the valuation is done on the prevalent market rate basis.
Basic construction cost, and consultancy and supervision charges forms the second part
of the cash outflow. Comparison of cost between two projects is difficult due to
individuality of the projects. This can be partially overcome by comparing two similar
projects located near each other and the unit for comparison can be taken as per square
foot of approved floor space area.
• Comparison of the occupancy levels with normal levels prevalent in the local
market. The developer assumes an occupancy level to make the predictions for the future

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revenues. Thus it becomes necessary to validate the occupancy levels, as any decrease in
the actual levels as compared to the projected ones will result in lesser revenue
recognition.
• Comparison of the escalation of lease rentals with the market levels: In case of
commercial property given on lease, the developer predicts the future revenue based on
the lease rentals and the escalation of the same year-on-year basis. The escalation
percentage has to be benchmarked against the current market levels.

4) Project IRR (Scale 0-4)

One of the commonly used approaches to establish a project’s feasibility is to compare
the project’s IRR to the cost of capital for the project. This comparison will help the
credit officer to determine whether the project is generating a threshold level of return,
which is more than the cost of the capital invested in the project. If the comparison
points out that the IRR is higher than the cost of capital, then the project is feasible, as it
would give an investor returns, which adequately cover all costs, including the cost of
capital, invested in the project.
The cost of capital should be computed by using the Weighted Average Cost of Capital
(‘WACC’) the current practice in IDBI. The WACC gives a comprehensive figure for
the cost of capital by combining the cost of debt and cost of equity relative to their
individual shares in a project.
The cost of equity as per the CAPM is:
Ke = Rf + β * (Rm – Rf)
Where:
Ke = Cost of Equity;
Rf = Risk Free Rate of Return (usually the Yield To Maturity on a benchmark
government security);
Rm = Rate of return from investing in the stock market (usually measured using the
benchmark index such as the Bombay Stock Exchange Sensitive Index or the S&P 500);
and
β or beta = the covariance of stock returns to market returns.

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The credit officer should first compute the project IRR from the projected cashflows and
then compute the cost of capital using the models as mentioned above. The scores for the
parameter would be allocated as per the scales in Annexure 5. If the IRR is less than the
cost of capital, then the project should be rejected.

4.5.3 Construction
In this sub-module the following parameters must be evaluated based on the scales
provided in Annexure 5 C.

1 Clearance risk (Scale 0-6)

Permits are required at the time of construction like water connection before and after
construction, dumping of excavated material, water disposal, etc. The risk of delay in
obtaining these clearances/permits from the local authority will result in time overrun of
the project.

2 Quality (Scale 0-4)

The borrower may undertake certain initiatives, which underline the management
commitment towards establishing and following certain well-accepted standards and
practices. This might help the borrower to become efficient in certain operations or
might help to establish a good standard of management and administration. If the
borrower has undertaken such initiatives, then scores should be assigned as per the type
of initiatives undertaken. The borrower should be scored on the following sub-
parameters:
§ Design as per seismic zones
§ Construction as per BIS & NBC standards
§ ISO 9001-2000 quality standards

3 Control & Safety systems (Scale 0-4)

This parameter assesses the effectiveness of the control and safety systems used by the
developer on the construction site. Any accident, in the past, on the construction site

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would cause delay, causing time over run and thus add to the project completion risk. The
credit officer can score the parameter using the following two factors:
• Number of accidents on the construction site
• Frequency of the accidents

4 Cost overrun (Scale 0-8)

Cost overrun can be defined as the difference between the actual cost incurred and the
projected cost. Cost overrun could adversely affect the economic viability of the project,
as additional funds would be required to be brought in to cover such a contingency.
During each appraisal in the construction phase, the credit officer should compare the
actual cost spent to the cost originally projected and analyse the positive variances, if any.
Overrun in the project due to controllable factors is considered a serious development and
is indicative of management lacunae. Projects with a cost overrun become much riskier
and are hence scored lower as compared to projects with no overrun.
Taking into consideration the risk involved, it is imperative to assess whether the actual
cost of construction / completion is as originally projected. Cost overrun could arise due
to the following reasons:
• Controllable reasons: Those that are under the control of management e.g. Faulty
design
• External reasons: Those that are not under control of management e.g. raw
material prices.

5. Have the cost overrun in the past been successfully funded (Scale 0-8)
The successful funding of cost overruns by the management of the project company in
the past reflects the ability of the management to raise additional capital for the project
and thus strengthen their commitment to the completion of the project. In order to
mitigate this risk, lenders normally prescribe the arrangement of standby equity by the
promoters, as a pre-disbursement condition, in a form and manner acceptable to the
lenders, to be utilized towards overrun, if any.
The credit officer should make a note of any cost overruns that the project had in the past
and also whether such an overrun was funded in time. Projects, where a cost overrun was

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funded on time, would be scored high as compared to those projects where the cost
overrun was not funded at all or was funded after a considerable delay.

6. Adherence to implementation schedule (Scale 0-6)

The progress of a project can be assessed by its adherence to the implementation schedule
as originally envisaged. The credit officer during the appraisal should score this
parameter on the percentage of delay as compared to the implementation schedule. A
high score would be awarded to the project if it adheres to the implementation schedule.

7. Other results of reports from independent/ lenders engineers/consultants

(Scale 0-4)
The independent engineers, who check the progress of the construction, submit reports to
the developer/lending institution. The scope of duties of the engineers include:
• Monitoring the construction progress (site visits);
• Attending the construction progress meetings;
• Preparation and submission of the completion report.
The scoring is based on the satisfactory review.

8. Managing price volatility of raw materials/ inputs. (Scale 0-6)

The risk of volatility in price of raw material like steel, cement etc. can be mitigated by a
long-term contract with the supplier. Credit officer should check for the contract with the
suppliers and the project mitigating the price risk through the above-mentioned clause
should be giver higher score.

9. Infrastructure availability (Scale 0-6)

The infrastructure around the project should be well developed as it helps in successful
completion of the project. For example any construction site should have at least two
approach roads for easy influx and out-flux of raw material. These roads will also be the
approach roads for the completed project. Any customer investing in the property takes
the above factor into consideration. Thus a project having only one approach road should
be given lesser score.

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4.5.4 Principal anchor/anchors
This module should be initiated when principal anchor is occupying more than 35% of
space in the commercial project. The module should evaluate each anchor (if more than
one company occupies more than 35% of the commercial space) individually. For
example in a shopping mall if Pantaloons and BigBazzar occupy more than 80% of the
space then both will be considered as Principal Anchor and will be scores based on the
following sub-parameters:

1) Past Financial Analysis (Scale 0-4)

The analysis of the past financial performance of the promoter is used to capture the
operational and financial performance of the promoter. In this parameter the credit
officer must evaluate the promoter on the following sub-parameters:
• Profitability (using EBIDTA margin, NPM and RoCE);
• Solvency (using TDE and Contingent Liabilities / Total Tangible Net Worth
(‘CLTNW’)); and
• Cash flow (‘CF’) adequacy (using CF Interest Coverage Ratio (‘ICR’) and CF Debt
Service Coverage Ratio (‘DSCR’)).
The methodology for computing these ratios has been defined in the ‘Financial Analysis’
module. The financial analysis of the promoter should be conducted over a 3-year
period, using the trend analysis method defined in the ‘Financial Analysis’ module. The
profitability ratios and the TDE ratio must be compared to industry averages, while the
CLTNW and the CF adequacy ratios must be compared to IDBI benchmarks. Each ratio
must then be scored as per the scales provided in the Annexure 2.

2) Tenure of the lease (Scale 0-8)

The tenure of the lease should be equal to the time period for repayment of the loan. The
risk of non-repayment of loan would arise if the tenure of the lease were lesser than the
tenure of the loan. For example if the tenure of lessee is 5 years and tenure of the loan is
6 years then the risk of non-payment of loan installment in the 6th year might arise if new
lessee is not found during that time period.

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3) Market position (Scale 0-4)
This parameter can be evaluated by comparing market share and turnover with the
corresponding industry leader. For e.g. while assessing an IT company Infosys can be
used the benchmark.

4) Honouring the commitments (Scale 0-6)

This parameter reflects the lessee's commitment with respect to honouring financial and
non-financial commitments to lessor. The lessee should be evaluated on the front of
timely payment of lease rentals.

4.5.5 Operation
This module will be functional for the commercial real estate, which is on lease basis.

1) Actual Performance (Scale 0-12)

The operating efficiency ratios are evaluated to evaluate the operational performance of
the lessee. Some of the operational ratios are: (Scale 0-4)
• Sales per square foot (retailing industry)
• Average room rate (hospitality industry)
• Revenue per employee (software industry)

2) Clearances (Scale 0-4)

Many commercial activities require clearances from the state/local authority for e.g.
liquor permit for pubs in the hotels etc. Credit officer should check for such clearances as
it would affect the future operations of the project.

3) Comparison of the projected occupancy level with the actual. (Scale 0-4)
This parameter is important for malls and office space where there is more than one
lessee. The developer makes projection at the construction phase for the occupancy levels
and predicts the cash inflows. At the operations phase its imperative to compare the
projected and actual occupancy levels, as it would affect the repayment of loan.

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4) Quality assurance and initiatives (Scale 0-2)
The lessee may undertake certain initiatives, which underline the management
commitment towards establishing and following certain well-accepted standards and
practices. This might help the lessee to become efficient in certain operations or might
help to establish a good standard of management and administration. If the lessee has
undertaken such initiatives, then scores should be assigned as per the type of initiatives
undertaken. The borrower should be scored on the following sub-parameters:
• Quality certification (e.g. ISO 9000 or SEI CMM levels for software companies);
• Collaborations and marketing alliances;
• Awards for management excellence and strategic moves by the borrower.

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4.6 Financial Analysis

Concepts underlining the Financial Analysis Module:

The credit rating model is based on the ‘through the cycle’ philosophy. ‘Through the
cycle’ means the assessment of a debt facility taking into account the various economic
cycles (boom phase or recession) during the tenure of the loan. ‘Through the cycle’
philosophy captures the volatility in the earnings of the business, which would ultimately
have an impact on the level of future cash flows and the safety for servicing the debt
obligations for the loan.
The credit rating model is entirely cash flow based and does not consider security or
collateral in the evaluation of credit quality of a facility. Cash in business serves several
purposes. Firstly, it is used for meeting normal cash obligations (i.e. paying expenses).
Secondly, it is held as a precautionary measure for unanticipated problems. Thirdly, it is
held for potential investment purposes. Cash flow analysis shows whether the operations
of the borrower have generated enough cash to meet its obligations, and it shows how
major outflows relate to major inflows. As a result, cash flow analysis can tell if inflows
and outflows from the operations will combine to result in a positive cash flow from
operations or in a net drain. Hence, the importance of cash flow analysis in the analysis
of the financial performance of the borrower cannot be over emphasized.
For undertaking analysis, financial statements need to be converted into an analytical
format, which facilitates ease in analysis by:
• Recasting and separating revenues and costs from operations from those not related to
operations;
• Recasting the income statement to show operating profits before interest, depreciation
and tax;
• Re-classifying assets as current or non-current, depending on their nature;
• Re-classifying liabilities based on the nature of the liability; and
• Computing common size percentages to review trends over a period of time.

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The ‘Financial Analysis’ module aims to assess the profitability, capitalisation / solvency,
liquidity and cash flow adequacy (parameters) that affect the financial health of the
borrower.
Main components of the financial analysis module:
The ‘Financial Analysis’ module has been further divided into 3 sub-modules, namely:
• Future projections: This sub-module involves estimating the level of future cash
flows of the borrower. This sub-module is very important since the level of safety for the
servicing of a debt facility (in terms of interest and principal) is determined by the level
of generation of cash flows in the future.
• Actuals versus projections: This sub-module involves the comparison of the
financial performance of the borrower for the latest financial year as compared to the
projections prepared by the credit officer for that year. This is to enable the credit officer
to estimate the borrower's ability to realistically meet the targets set in the projections.
The actual performance can be compared to projections only after the project is in
operation and actual results of operation are available, hence this sub-module will be
activated only when the project has been in operation for at least 1 year.
• Past financial performance: This sub-module involves an in-depth analysis of the
past financial performance of the borrower. This sub-module will be activated only after
the project has been in operation for certain period of time. The time will be determined
individually for each project based on the time envisaged initially by the borrower for the
project to achieve break-even status.

4.6.1 Future projections

The borrower will repay the obligations relating to the loan (interest and principal) in the
future from the cash flows generated by the business in the future. Since the credit rating
model is cash flow based, it becomes imperative to ascertain the future levels of cash
generation of the borrower by preparing projected financial statements (income
statement, balance sheet and cash flow statements).
The projections must capture the expected earnings potential and the future level of cash
generation of the borrower. The credit officer should closely look at some of the

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following parameters, as well as industry dynamics and macro economy factors, while
making a set of financial projections:
• Assumptions for increase in occupancy rate/booking rate for commercial property
and housing property respectively.
• Impact of changes in sales price;
• Impact of regulatory changes;
• Assumptions on construction costs which will also include contractual obligations
to the contractor;
• Future funding sources - debt or internal accruals, and the consequent levels of
gearing;
• Future share holding pattern.
It should be noted that the above is only an illustrative list and not an exhaustive one.
Specific parameters will need to be considered which may be different from project to
project for e.g. assumption for the escalation of lease rentals year-on-year basis.
The projected set of financial statements prepared by the credit officer or supplied by the
developer should form the ‘base case’ scenario, i.e. a situation that incorporates the most
possible outcomes on the key variables affecting the macro economic environment, the
industry and the project. The base case projections prepared for the future should be
subjected to ‘stress testing’ or ‘sensitivity analysis’ to ascertain the degree of variance
under ‘key variables’. This assesses the maximum ‘downside’ possibility of the
borrower’s repayment ability and thus allows the credit officer to take a comprehensive
view on the risk involved in sanctioning a loan for the project.
Sensitivity analysis also becomes more important in view of the fact that borrowers exist
in a dynamic external environment. Due to the industry dynamics and macro economic
factors, sudden changes take place in the external environment which can have either
positive or negative effects on the performance of any project / organisation. This would
result in a substantial change in the borrower’s financial performance, and these changes
would alter the future level of cash generation of the borrower and thus its ability to repay
debt obligations, either partly or completely.
‘Sensitivity analysis’ can be done on the following parameters:
• Expected occupancy rate/booking rate

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 • Expected revenue generated through lease/advance booking.
The most conservative set of projected of financials prepared by the credit officer after
performing such sensitivity analysis will form the ‘worst case’ scenario.
After the projections have been prepared, they should be assessed on the following
parameters (for base case and worst case):
• Cash flow (‘CF’) adequacy; and
• Capitalisation / Solvency.
In these parameters the following ratios need to be computed:

Table 1: Ratios for parameters for base case projections

Parameter Ratio Scale
CF adequacy CF Interest Coverage Ratio (‘ICR’) (average) 0-4
CF Debt Service Coverage Ratio (‘DSCR’) 0-12
(average)
Capitalisation / TDE 0-8
Solvency

Table 2: Ratios for parameters for worst-case projections

Parameter Ratio Scale
CF adequacy CF DSCR (average) 0-12
Capitalisation / TDE 0-4
Solvency

If the CF DSCR computed for the ‘base case’ or ‘worse case’ scenarios for any year is
less than 1 then the project should be rejected. Further, if in any subsequent appraisal the
projected / actual CF DSCR for any year is less than 1 then, it should act as an ‘exit filter’
for the loan. The formulae for computing these ratios have been defined subsequently.
The scoring of these ratios is to be done as per the scales provided in Annexure 6A. The
sum of the scores of all the ratios will constitute the score for the sub-module.

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4.6.2 Actuals versus projections

The objective of undertaking the exercise of the comparison of the actual financial
performance with past projections is to enable the credit officer to understand the
achievement of the targets set by the borrower for the latest financial year. The credit
officer should compare the actual financial performance of the borrower to the
projections prepared by IDBI The comparison of the projections to actual financial
performance would enable the credit officer to ascertain deviations from the projections
and the reasons for the deviations. The comparison should be done on the following
parameters

• Achievement of revenues;

• Achievement of profitability;

• Capitalisation / Solvency;

• CF adequacy; and

• Liquidity and activity.

Since the deviations in these parameters are to be ascertained, the following ratios need to
be worked out on the above parameters:

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Table: Ratios for parameters for comparison of actuals with projections

Parameter Ratio Scale

Achievement of revenues Actual revenues / Projected revenues 0-8

Achievement of Profitability Actual EBIDTA margin / Projected 0-8

(EBIDTA margin, NPM, EBIDTA margin 0-4

RoCE) Actual NPM / Projected NPM 0-8
Actual RoCE / Projected RoCE

Capitalisation / Solvency Actual TDE / Projected TDE 0-12

(TDE)

CF adequacy Actual CF ICR / Projected CF ICR 0-4

(CF ICR, CF DSCR) Actual CF DSCR / Projected CF DSCR 0-12

Liquidity CR Actual CR / Projected CR 0-4

0-4

0-4

0-4

The unit of measurement for all the ratios is ‘times’.

The parameters should be scored as per the scales given in Annexure 6B. The sum of the
scores of all the ratios will constitute the score for the sub-module.

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4.6.3 Past financial performance

As mentioned earlier, the past financial analysis section will be activated only after the
project has achieved break-even status. The sub-module comprises the following
parameters:

• Growth in revenues;

• Profitability;

• Capitalisation / Solvency;

• CF adequacy; and

• Liquidity and activity ratios

In these parameters the following ratios need to be computed:

Table 3: Ratios for parameters for analysis of past financial performance

Parameter Ratio Scale

Growth in CAGR growth for the past 3 years – revenue 0-8

revenues/ Gross Gross profit 0-8
profit/ NOCF
NOCF 0-8

Profitability EBIDTA Margin 0-8

NPM 0-4

RoCE 0-8

Capitalisation / TDE 0-12

Solvency Contingent Liabilities / Total Tangible Net Worth 0-4
(‘CLTNW’)

CF adequacy CF ICR 0-4

CF DSCR 0-12

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Liquidity and Current Ratio 0-4
activity ratios Average Receivables Days 0-4

Average Payables Days 0-4

Average Inventory Days 0-4

After picking the ratios for the last three years, the credit officer should observe the trend
in the ratios (trend analysis must be done for all ratios, other than CLTNW, CF ICR and
CF DSCR). If a ratio like NPM has been declining constantly, then the latest financial
year’s ratio should be picked for scoring. If there has been an increasing trend, then the
average ratio of the last three years should be taken, as a conservative measure. If there
is no trend, then the last financial year’s ratio should be taken. This method should be
applied for all ratios in this sub-module, except for the following ratios, where the exact
opposite should be done TDE;

− Average Receivables Days; and

− Average Inventory Days.

For example, if the TDE shows a decreasing trend, then the average ratio of the last 3
years should be taken as a conservative measure. If there is an increasing trend or if there
is no trend, then the last year’s ratio should be considered.

− After this process is completed, the credit officer is now ready to score the
borrower on ‘Past financial performance’ sub-module. All formulae for ratios
mentioned in this sub-module are provided subsequently.

The scales for scoring the above parameters is given in Annexure 6C. The sum of the
scores of all the parameters will constitute the score for the sub-module.
IDBI has fixed benchmarks for certain ratios, outlined in the following table:

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4.6.4 Definition of ratios for all sub-modules

Profitability

Ratio 1 - Earnings before Interest, Depreciation, Tax and Amortisation Margin

The EBIDTA assesses the profitability of the main operations of the borrower, arising
from the income from the primary sources of revenue. Non-operating income like
investment income is not taken into account, as it is not a sustainable and stable source of
income. The level of operations of the project and the level of competition existing in the
industry are some of the factors, which influence this ratio.

The EBIDTA also captures the cost structure of a borrower for all cost items except
interest, depreciation, taxes and amortisations. This can help the credit officer assess the
cost efficiency of the operations of the borrower and benchmark it to either industry
standards or against other borrowers for comparison. A borrower may be able to
command a significant premium for its products and services in the market, but an
inefficient cost structure will restrict the borrower’s profitability. For example, Air India
charges approximately Rs 50,000 for a round-trip ticket, economy class, for the Mumbai-
London-Mumbai sector. Its competitors such as Air France or Lufthansa sometimes
charge a lower fare for the same sector on the same class, but are more profitable than Air
India which is a loss making airline. The reason is that Air India is saddled with un-
economic capacities, a large work force and old aircraft (resulting in high maintenance
expenses), all of which have resulted in a high cost of sales. This ratio is computed as
follows:

EBIDTA margin {Operating profit before interest, depreciation and tax} X 100
=
Operating income

Operating income includes revenue generated from the main operations of the borrower
i.e. revenues from sales / turnover / services and other related income, net of excise duty.

The unit for measurement of the EBIDTA margin is ‘percentage’.

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Ratio 2 – Net Profit Margin

The NPM assesses the total profitability of the operations of the borrower, after providing
for interest, depreciation and taxes. It provides a measure of net profits earned as a
percentage of the revenues. In that sense the NPM is very similar to the EBIDTA
margin. The key differences in these two ratios are:

• In the EBIDTA margin only operating revenues are considered for assessing
profitability, whereas in the NPM all sources of income (both operating and non-
operating) are considered for assessing profitability; and

• In the EBIDTA margin, operating revenues before providing for interest,

depreciation, tax and amortisation are considered, whereas in the NPM earnings after
providing interest, depreciation, tax and amortisation will be considered.
The NPM hence provides a measure of the final profits earned by the borrower after
meeting all liabilities and expenses. This ratio is computed as follows:
NPM Profit after tax
=
(Operating income + Non-operating income)

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The unit for measurement of the NPM is ‘percentage’.

Ratio 3 - Return on Capital Employed

The RoCE is one of the most important parameters of profitability. It assesses the return
on the ‘investment’ made in the borrower’s business by the main stakeholders who
provide capital i.e. the shareholders and the lenders (banks or financial institutions).
Ideally, the RoCE should be more than the weighted average cost of capital for the
borrower. Only if it is more than the weighted average cost of capital, then the suppliers
of capital can hope for adequate level of rewards from investing in the borrower’s
business. If the RoCE is lower than the cost of capital, the business is not generating
enough returns for the amount of capital invested. It represents an opportunity loss for
the capital providers, as the business does not generate enough value for adequate returns.
This ratio is computed as follows:

RoCE {Profit after tax + (Interest X (1-Tax Rate1))} X 100

=
(Debt + Total Tangible Net Worth)

For computation of the above ratio, the term ‘Debt’ and ‘Total Tangible Net Worth’ must
be computed as follows:

Debt

− Long term debt including preference share capital, debentures, foreign currency term
loans and all other term loans (repayable after twelve months);

− Short term debt including fixed deposits, inter-corporate borrowings and loans /
advances from affiliate companies and subsidiaries; and

− Bank borrowings or cash credit.

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Debt Long term debt + Short term debt + Bank borrowings /
=
cash credit

Total Tangible Net Worth (‘Equity’)

− Ordinary paid-up share capital (including share application money);

− Amount of capital subsidy;

− Premium on issue of shares;

- Free reserves (including surplus in profit and loss account) less accumulated losses,
assets of an intangible nature of expenditure not written off (for example, goodwill,
preliminary / miscellaneous expenditure); and
- Any other reserves.

Total tangible Equity share capital + Reserves – Accumulated losses –

net worth = Intangible assets

The unit for measurement of the RoCE ratio is ‘percentage’.

Capitalisation / Solvency

Ratio 1 - Total Debt / Equity ratio

The overall objective in determining the total debt equity ratio is to ensure that there is a
proper balance between the owned funds and borrowed funds and that there is no eroding
impact on the profitability by disproportionate burden of long term debt. This ratio is the
most important parameter of solvency because it captures the capitalisation or the level of
‘gearing’ of the borrower. The level of gearing indicates the level of financial risk faced
by the borrower on account of the level of debt employed by the firm. A high level of

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debt can lead to high gearing which is financially risky, as the borrower would have to
service fixed obligations on the debt taken (in the form of interest or principal)
irrespective of whether the business is making a profit or a loss.

The Total Debt / Equity Ratio, has been developed for IDBI considers total long term and
short term debt and all current liabilities are also included in the figure of total debt. This
is a conservative stand because in the event of liquidation, the borrower will have to
repay all the outside liabilities, including debt from banks and outstanding on account of
payables or other liabilities from the total tangible net worth of the company. This ratio
is computed as follows:

TDE Total Debt

=
Equity

‘Total Debt’ includes ‘Debt’ as defined earlier plus any other outside liabilities and
provisions. ‘Equity’ means the same as ‘Total Tangible Net Worth’.

The unit of measurement for this ratio is ‘times’.

Ratio 2 – Contingent liabilities / Total tangible net worth

A borrower can have two main types of liabilities. Liabilities, which have accrued and
are repayable immediately or at some point of time in the future, are shown in the balance
sheet on the liabilities side. There are other liabilities, which may or may not devolve
upon the borrower in the future, which are called contingent liabilities. Some examples
of these liabilities can be guarantees given, tax claims under dispute etc. If a contingent
liability devolves on the borrower, then the borrower’s tangible net worth might be
reduced to the extent of the amount of the contingent liability. The Bank might not want
a situation where a contingent liability devolving upon the borrower erodes the entire
tangible net worth of the borrower. This ratio measures the amount of contingent
liabilities as a proportion of the total tangible net worth.

This ratio is computed as follows:

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CLTNW Contingent liabilities
=
Total Tangible Net
Worth

The unit of measurement for this ratio is ‘times’.

Cash flow adequacy

Ratio 1 - Cash flow interest coverage ratio

This ratio calculates the cash coverage for interest payments generated from the
operations of the project. Here cash flow from operations is taken in the numerator and
the amount of interest paid is taken in the denominator. The amount of interest paid may
be different from the amount of interest charged in the Profit and Loss Account as the
amount of interest paid may include interest paid in the current financial year, relating to
accruals in the previous financial year. To compute the average CF ICR for the entire
period of the loan, sum of the cash flow from operations for each year is taken in the
numerator and the sum of the amount of interest paid during the tenure of the loan is
taken in the denominator. The average CF ICR is only required for scoring the parameter
on Cash flow adequacy in the ‘Future projections’ sub-module.

These ratios are computed as follows:

CF ICR (annual) Net Operating Cash Flow (‘NOCF’)

=
Interest paid

n
∑(NOCF1 )
CF ICR (average)
=
Total interest paid during the tenure of the loan

‘n’ is the year in which the loan is due for repayment

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For computation of the above ratio ‘NOCF’ must be computed as follows:

NOCF Operating inflow – Operating outflows

=
Operating inflows includes sales and other related income (net of changes in receivables).
Operating outflows includes cost of goods sold (after adjustment for changes in working
capital, other than receivables) and taxes paid.
The unit for measurement of this ratio is ‘times’.

Ratio 2 - Cash flow debt service coverage ratio

This ratio calculates the cash coverage for the entire debt obligation, generated by the
cash from the operations of the borrower. Here, cash flow from operations is taken in the
numerator and the amount of interest paid and the amount of debt repaid (for all types of
loans) is taken in the denominator. If at the time of the initial appraisal the projected CF
DSCR for any year is less than 1 then the proposal should be rejected.

To compute the average CF DSCR for the entire period of the loan, sum of the cash flow
from operations for each year is taken in the numerator and the sum of the amount of debt
repayments and interest paid during the tenure of the loan is taken in the denominator.
The average CF DSCR is only required for scoring the parameter on Cash flow adequacy
in the ‘Future projections’ sub-module.

These ratios are computed as follows:

CF DSCR (annual) NOCF

=
(Long term debts repaid + Short term debts repaid
+ Interest paid)

n
∑(NOCF1 )

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CF DSCR (average)
=
(Total debts repaid during the tenure of the loan +
Total interest paid during the tenure of the loan)

‘n’ is the year in which the loan is due for repayment

The unit for measurement of this ratio is ‘times’.

Liquidity and activity ratios

Ratio 1 - Current ratio

Any business requires free cash flow to survive and conduct its daily operations, and also
for future capital expansion. Inflows from receivables, payments to suppliers, and
inventory holdings determine the levels of liquidity in any organisation. It is crucial to
maintain good levels of liquidity in order to serve the operational needs of the business.
Some businesses are working capital intensive, and have long receivables periods, while
some hold high inventory levels due to the uncertain nature of customer demands. To
fund working capital requirements, many borrowers approach banks, which give them
finance in the form of cash credit, which has a cost in terms of interest. Some indicators,
which can give an idea about the levels of liquidity prevalent in the business, are current
and quick ratios. The credit rating model uses the current ratio as a measure of liquidity.

The current ratio is an important measure of liquidity as it measures a borrower’s ability

to meet short-term obligations. It compares short-term obligations (or current liabilities)
to short term resources (or current assets) available to meet these obligations. A lot of
insight can be obtained about the immediate cash solvency of the borrower and the

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borrower’s ability to remain solvent in the event of adversity, by the use of the current
ratio. Generally, a high current ratio indicates a high level of liquidity for the borrower.
Banks in India have fixed a benchmark of 1.33 times for an indicative current ratio, based
on the Tandon Committee Recommendations. However, different industries have
different levels of current ratios, and the credit officer should compare the borrower’s
current ratio with the industry average for a more accurate assessment.

This ratio is computed as follows:

CR Current assets
=
Current liabilities

Current assets mainly comprise inventories (raw material, work-in-process, finished

goods and stores and spares), receivables (also called debtors) and other items like cash
and bank balances, loans and advances to subsidiaries and affiliate companies etc.

Current assets Inventories + Receivables + Cash and bank balances +

=
Loans and advances + Other current assets

Current liabilities mainly comprise bank borrowings / cash credit, payables (or creditors),
other liabilities like security deposits; payments accrued to government agencies etc and
provisions such as provision for tax and dividend.

Current Bank borrowings / cash credit + Payables + Interest

=
liabilities accrued + Advances / deposits received + Other current
liabilities + Provisions

The unit of measurement of this ratio is ‘times’.

Ratio 2 - Average Receivables Days

This ratio measures the quality of the borrower’s receivables and the success of the
borrower in collections. The credit officer can also gauge the bargaining power of the
borrower with customers, as the ratio indicates the type of credit terms offered to

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customers. A borrower with a high level of bargaining power may be able to offer
stringent credit terms to customers and vice versa. The ratio indicates the amount of time
(in days) that the receivables are outstanding, before they are collected. For example, an
average receivables collections period of 30 days means that on an average the
receivables are collected only after 30 days after the date of sale. The ratio takes into
account the average level of receivables for the calculation of the ratio, as the year-end
receivables figure may not be representative of the level of the receivables during the
course of the financial year. This ratio is computed as follows:

Average Receivables Days {(Opening balance of receivables + Closing

= balance of receivables) / 2} X 365
(Gross sales + Traded sales)

The unit of measurement for this ratio is ‘days’.

Ratio 3 - Average Payables Days

This ratio measures the promptness of the payment made by the borrower to suppliers of
raw materials and stores. It can also enable the credit officer to gauge the bargaining
power of the borrower with its suppliers, in terms of the credit terms enjoyed. A
borrower with a high level of bargaining power may be able to enjoy a high level of
credit from its suppliers and vice versa. The ratio takes into account the average level of
payables for the calculation of the ratio, as the year-end payables figure may not be
representative of the level of payables during the course of the financial year.

This ratio is computed as follows:

Average payables2 days {(Opening balance of payables + Closing balance

= of payables) / 2} X 365
Raw materials and stores consumed

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The unit of measurement for this ratio is ‘days’.

Ratio 4 – Average Inventory Days

This ratio measures the effectiveness of the borrower’s management of inventory. The
ratio indicates the amount of time (in days) that the borrower holds inventories, right
from the time the raw materials are purchased till the time the finished goods are sold.
For example, an average inventories holding period of 30 days means that the inventory
is held for 30 days, from the time raw material is purchased till the time it is converted
into finished goods and sold in the market. Generally, a lower inventory-holding period
indicates a faster manufacturing or conversion cycle for the borrower. The borrower also
avoids the risk of obsolescence or perishability by holding the inventories for a shorter
period of time. A lower period also indicates that the borrower’s reliance on working
capital for inventories is low, thus increasing the financial flexibility for the borrower.
The ratio takes into account the average level of inventories for the calculation of the
ratio, as the year-end inventories figure may not be representative of the level of the
inventories during the course of the financial year. This ratio is computed as follows:

Average inventory days {(Opening balance of inventories + Closing balance

= of inventories) / 2} X 365
Cost of sales

The unit of measurement for this ratio is ‘days’.

83
5. THE GRADING SYSTEM USED BY THE CREDIT RATING MODEL
A 13 grade grading system is used in IDBI and the same has been used for this credit
rating model. The grading system uses a 100-point scale, starting from 0 and ending in
100. Alphabetical symbols are used to denote each risk grade. For ease of comparison,
the entire system has been compartmentalised into three categories. These categories are:
• Accept or grow;
• Hold or reject or monitor closely; and
• Exit or reject.

The distribution of grades within each category is as follows:

Category Number of grades
Accept or Grow Eight Grades
Hold or reject One Grade
Exit Four Grades

Category Grade Score Range

Accept or grow PAAA+ 85-100
PAAA 81-84
PAA+ 78-80
PAA 75-77
PAA- 72-74
PA+ 69-71

84
 PA 65-68
PA- 60-64
Hold / Reject / Close Monitoring PB 45-59
Exit (not under default) PC 35-44
Exit (default) PD+ 31-34
PD 21-30
PD- 00-20

Grade Definition
PAAA Excellent credit quality, with negligible number risk factors, not at all materiali
+ in nature. Timely servicing of debt obligations can be reasonably assured in the
long term.
PAAA Very good credit quality, with the number of risk factors only marginally higher
than those for loans facilities in the AAA+ grade. Timely servicing of debt
obligations can be reasonably assured in the long term.
PAA+ Good credit quality, with an acceptable number of risk factors, not at all
material in nature. Timely servicing of debt obligations can be reasonably
assured in the long termii.
PAA Good credit quality, with the number of risk factors only marginally higher than
those for loan facilities in the AA+ grade. Timely servicing of debt obligations
can be reasonably assured in the long term.
PAA- Reasonably good credit quality, with a tolerable number of risk factors, not at all
material in nature. Timely servicing of debt obligations can be reasonably
assured in the long term.
PA+ Adequate credit quality, with a few risk factors, though not highly material in
nature. Timely servicing of debt obligations can be reasonably assured in the
long term.
PA Adequate credit quality, with the number of risk factors marginally higher than
those for loan facilities in the A+ grade. Timely servicing of debt obligations
can be reasonably assured in the long term.
PA- Adequate credit quality, with a high number of risk factors, some of which may
turn out to be material in nature. Timely servicing of debt obligations can be

85
 reasonably assured in the long term.
PB Inadequate credit quality, with a high number of risk factors, which may turn
out to be material in nature. Though the servicing of debt obligations may be
reasonably assured, the level of severity of materiality of the risk factors may
impair the servicing of debt obligations in the medium term.
PC Inadequate credit quality, with a very high number of risk factors, which may
turn out to be material in nature. Though the servicing of debt obligations in the
short term may be reasonably assured, the high level of severity of materiality of
the risk factors can impair the servicing of debt obligations in the medium or
long term.
PD+ Bad credit quality, with a very high number of risk factors, which are material in
nature. The materiality of these risk factors has led / can lead to default on the
servicing of debt obligations. However in case of default, the probability of
recovery is high.
PD Poor credit quality, with a very high number of risk factors, which are material
in nature. The materiality of these risk factors has led / can lead to default on
the servicing of debt obligations. However, the probability of recovery is
moderate.
PD- Extremely poor credit quality, with an extremely high number of risk factors,
which are highly material in nature. The materiality of these risk factors has led
/ can lead to default on the servicing of debt obligations and the probability of
recovery is also very low.

86
6. ANNEXURES

87
ANNEXURE 1: SCALES FOR THE
INDUSTRY MODULE
1. Regulatory framework and 3. Cyclicality of the sector (‘C’)
government policies
Description Score
• Scale to be used for the scoring of
C > 6 (Low) 4
the main and each parameter.
3 < C < = 6 (Moderate) 2
• Final score for the main parameter
will be obtained as a mean of the C < = 3 (High) 0
scores for all sub-parameters.

Description Score 4. Industry financials

Favourable to the sector 16 • Scale to be used for scoring
‘Profitability’

EBIDTA margin

IDBI benchmark for EBIDTA margin

‘25%’
Neutral effect on the sector 8
If EBIDTA margin is > = 25% 4

18.75% < = EBIDTA margin < 3

25%
12.5% < = EBIDTA margin < 2
Unfavourable to the sector 0 18.75%

0 < EBIDTA margin < 12.5% 1

2. Cascading effect of output EBIDTA margin < = 0% 0
from industries
• Scale to be used for the scoring of
Net profit margin (NPM)
the main and each parameter.
• Final score for the main parameter IDBI benchmark for NPM ‘X=10%’
will be obtained as a mean of the If NPM is > = X% 4
scores for all sub-parameters.
75% of X < = NPM < X% 3
Description Score
50% of X < = NPM < 75% of X 2
High 4
0 < NPM < 50% of X 1
Moderate 3
NPM < = 0% 0
Low 2

Very low 0
 • Final score for the main parameter
will be obtained as a mean of the
Return on Capital Employed (RoCE)
scores for all sub-parameters.
IDBI benchmark for RoCE ‘12.5%’
Description Score
If RoCE is > = 12.5% 4
High score 4
9.38% < = RoCE < 12.5% 3
3
6.25% < = RoCE < 9.38% 2
Moderate score 2
0 < RoCE < 6.25% 1
1
RoCE < = 0% 0
Low score 0

• Scale to be used for scoring

5. Industry Structure
‘Solvency’
• Scale to be used for the scoring of
Total Debt / Equity (TDE)
the 'Unorganised market structure'
IDBI benchmark for TDE ‘1.5’ times parameter
If TDE is < = 1.5 times 4 Description Score
2.25 times > = TDE > 1.5 times 3 Absence of parallel or 3
3 times > = TDE > 2.25 times 2 unorganised market structure

3.75 times > = TDE > 3 times 1 Presence of unorganised 0

market structure
TDE > 3.75 times 0

• Scale to be used for the scoring of

• Liquidity
the 'Extent of Competition' parameter
Current ratio (CR)
Description Score
IDBI benchmark for CR level ‘1.33’
Low competition 3
times
Moderate competition 2
If CR is > = 1.33 times 4
High competition 0-1
1.2 times < = CR < 1.33 times 3
1 times < = CR < 1.2 times 2
• Final score for the main parameter
0 < CR < 1 times 0
will be obtained as a sum of the
scores for all sub-parameters.
 6. Demand-supply gap
• Scale to be used for the final
scoring of the main parameter

Description Score

Positive demand-supply gap 12

Moderate demand-supply gap 6

Negative demand-supply gap 0

7. Volatility of raw material prices

Description Score

Low volatility 4
Moderate volatility 2

High volatility 0
ANNEXURE 2: SCALES FOR THE
PROMOTER MODULE
1. ANALYSIS OF FINANCIAL
HEALTH OF PROMOTER

• Scale to be used for scoring • Scale to be used for scoring

‘Profitability’ ‘Solvency’
EBIDTA margin Total Debt / Equity (TDE)

Average EBIDTA margin of the Average TDE of the industry ‘1.5’ times
industry ‘14.23’ %
If TDE is < = X times 4
If EBIDTA margin is > = X% 4
1.5 times X > = TDE > X times 3
75% of X < = EBIDTA margin < 3
2 times X > = TDE > 1.5 times 2
X%
X
50% of X < = EBIDTA margin < 2
2.5 times X > = TDE > 2 times 1
75% of X
X
0 < EBIDTA margin < 50% of X 1
TDE > 2.5 times X 0
EBIDTA margin < = 0% 0

NPM
Contingent Liabilities / Total Tangible Net
Average NPM of the industry ‘3.75’ % Worth

If NPM is > = X% 4 Description Score

75% of X < = NPM < X% 3 If coverage is < = 0.25 times 4

50% of X < = NPM < 75% of X 2 0.50 times > = coverage > 0.25 3
times
0 < NPM < 50% of X 1
0.75 times > = coverage > 0.50 2
NPM < = 0 0
times
Return on Capital Employed (RoCE)
1 times < = coverage > 0.75 1
IDBI benchmark for RoCE ‘12.5%’ times

If RoCE is > = X% 4 Coverage > 1 times 0

75% of X < = RoCE < X% 3

50% of X < = RoCE < 75% of X 2

0 < RoCE < 50% of X 1

RoCE < = 0 0
• Scale to be used for scoring ‘Cash The score for this parameter will be
flow adequacy’ computed in the following manner:

Net Operating Cash flow to Interest • The rounded-off arithmetic mean

Paid (CF ICR) of the EBIDTA margin, NPM and
RoCE will constitute the score for
IDBI benchmark for CF ICR ‘2’ times
Profitability;
If CF ICR is > = 2 times 4
• The rounded-off arithmetic mean
1.7 times < = CF ICR < 2 times 3 of the TDE and CLTNW will
1.3 times < = CF ICR < 1.7 2 constitute the score for Solvency;
times and

1 times < = CF ICR < 1.3 times
CF ICR < 1 times
1 • The rounded-off arithmetic mean
of the CF ICR and CF DSCR will
0
constitute the score for CF
adequacy.

Net Operating Cash Flow to Debt Finally the score for this parameter will
Obligations Paid (CF DSCR) be obtained as a sum of the scores for
IDBI benchmark for CF DSCR ‘1.5’ Profitability, Solvency and Cash flow
times adequacy.

If CF DSCR is > = 2 times 4

Description Score
1.7 times < = CF DSCR < 2 3
High score 12
times
11
1.3 times < = CF DSCR < 1.7 2
times 10

1 times < = CF DSCR < 1.3 1 9

times 8
CF DSCR < 1 time 0 7

Moderate score 6

Low score 0
2. Group performance 1. Project management skills
• Scale to be used for scoring ‘Non - • Adherence to time schedules of the
performing companies within the past and the ongoing projects
group’ and ‘Companies with a Description Score
negative net worth’ Successful implementation of 4
Description Score projects (without significant
overrun)
Does not exist 4
Successful implementation 2
Exists 0
with either cost or time
overrun

• Scale to be used for scoring Successful implementation 1

‘Financial position of the flagship with both cost and time
company / companies of the group’ overrun

The scales for scoring the ratios used Unsuccessful implementation 0

for assessing the financial health of the
Flagship Company / companies have • Usage of scientific tools viz. Work
been provided in Annexure 2, ‘1. break down method, PERT/CPM and
Analysis of financial health of MS Project.
promoter’. Description Score

• Scale to be used for the final Usage of tools 2

scoring of the main parameter after
Tools not used 0
scoring each sub-parameter

Description Score
• Composition of projects undertaken:
High score 8
This will capture experience of
7 developer in undertaking complex and
varied construction projects.
6

5 Description Score

Moderate score 4 Different nature of projects 2

undertaken
3
Not undertaken 0
2

1
• Finally the score for this parameter
Low score 0
will be obtained as a sum of the scores
for the above parameters.
2. Relevance of experience to project 3. Strategic initiatives in the past

• Scale to be used for scoring ' Number Description Score

of similar types of the projects'.
High 2
Description Score
Moderate 1
More than one similar project 3
Low / absent 0
undertaken

4. Group strategy and commitment to

No such project undetaken 0
project

Description Score
• Scale to be used for scoring ' Number
Project undertaken in an 4
projects in the city'.
industry which is a core line of
Description Score business for the promoter
group
More than one project 3
undertaken Project undertaken in an 2
industry which is a secondary
First project in the city 0
thrust area for the promoter
group
• Finally the score for this parameter Project undertaken in an 0
will be obtained as a sum of the industry which is different
scores for the above parameters. from the core line of business

Description Score of the promoter group

High level of experience to 6

project 5. Conduct of promoter’s account

• Scale to be used for scoring ‘Timely

payment of interest and principal to
IDBI’

Description Score
Moderate relevance of 3
experience to project On time 8

Delayed 4

Not paid 0

Low relevance of experience 0 • Scale to be used for scoring

to project ‘Payments to other financial
institutions / banks’
Description Score • Scale to be used for scoring ‘Any other
Quality initiative undertaken,.
Satisfactory 8
Description Score
Not satisfactory (adverse 0
remark by existing bankers’) Quality initiative undertake n 4

No such initiative 0

• Scale to be used for the final scoring

of the main parameter after scor ing
• Scale to be used for the final
each sub-parameter
scoring of the main parameter after
Description Score scoring each sub-parameter.
Finally the score for this parameter
Good conduct 8
will be obtained as a sum of the
7 scores for the above parameters
6

5 Description Score
Average conduct 4 Good quality 8
3 7
2 6
1 5
Poor conduct 0 Average quality 4

3
8. Past Project Quality record 2
• Scale to be used for scoring ‘Quality 1
standard being followed.
Poor quality 0
Description Score

Construction based on BIS 4

9. Reputation
standards along with the ISO
certification • Scale to be used for scoring
‘Litigations/disputes’ parameter
Only one of the standards 2
either BIS or ISO being Description Score
followed
No litigations 8
Standards not followed 0
No. of litigations decreased 4
over the previous year

No. of litigation increased 0

over the previous year
• Scale to be used for scoring ‘Stay Description Score
order’ parameter
Good reputation 8
Description Score
7
No stay order 2
6
One more than one stay order 0
5

Average reputation 4
• Scale to be used for scoring ‘Market 3
position’ parameter
2
No. of projects (NP) for Market Leader
1
‘X’
Poor reputation 0
If NP is > = X% 6

75% of X < = NP < X% 4

50% of X < = NP< 75% of X 2

0 < NP < 50% of X 1

NP < = 0 0

• Scale to be used for the final

scoring of the main parameter after
scoring each sub-parameter. Finally the
score for this parameter will be
obtained as a mean of the sum of
scores for the ‘stay order’ and ‘market
position’ parameters and ‘litigation’
parameter.
ANNEXURE 3: SCALES FOR THE
MANAGEMENT QUALITY MODULE

1. Technical expertise of key

2. Presence of collaboration / joint
personnel
venture
• Scale to be used for scoring
Description Score
‘Qualifications of key personnel’
Presence of collaboration / 4
Description Score
joint venture
Highly qualified 6
Absence of collaboration / 0
Adequate qualifications 4 joint venture

Inadequate qualifications 0

3. Organisation structure

• Scale to be used for scoring ‘Hands- • Scale to be used for scoring each sub -
on experience of key personnel’ parameter

Description Score Description Score

Very high (> 5 yrs) 6 Well defined policy present 4

High (2 – 5 yrs) 4 Policy absent 0

Moderate (< 2 yrs) 2

Absent 0

• Scale to be used for the final

scoring of the main parameter after
scoring each sub-parameter. Finally the
score for this parameter will be
obtained as sum of scores for the sub
parameters.
• Scale to be used for the final scoring
Description Score of the main parameter after scoring
each sub-parameter
High score 12
Description Score

High score 4

Moderate score 6 3

Moderate score 2

Low score 0 Low score 0

4. Corporate governance Description Score

• Scale to be used for scoring each sub - High score 8

parameter
7
Description Score
6
Initiative taken 2
5
Absence of initiative 0
Moderate score 4

3
• Scale to be used for the final scoring 2
of the main parameter after scoring
1
each sub-parameter
Low score 0
Description Score

High score 8

6
6. Transactions with group companies
5

Moderate score 4 Description Score

3 No transactions with group 2

companies
2
Transactions at arm’s length 2
1
with group companies
Low score 0
Transactions not at arm’s 0
length with group companies

5. Diversion of funds

• Scale to be used for scoring each sub - 7. Conduct of borrower’s account

parameter
• Scale to be used for scoring each sub -
Description Score parameter

Absent 8 Description Score

Taken place with consent 4 On time 8

Taken place without consent 0 Delayed 2

Not paid / provided 0

• Scale to be used for the final scoring

of the main parameter after scoring
• Scale to be used for the final scoring
each sub-parameter
of the main parameter after scoring
each sub-parameter
Description Score Description Score

Good conduct 8 High score 8

7 7

6 6

5 5

Average conduct 4 Moderate score 4

3 3

2 2

1 1

Poor conduct 0 Low score 0

8. Labour and employee relations 10. Quality of financial statements

Description Score • Scale to be used for scoring

‘Transparency of accounts, which is
Low attrition rate 4
reflected in the extent and level of
Moderate attrition rate 2 disclosures made in the financial

High attrition rate 0 statements’

Description Score

High level of transparency 4

9. Honouring of commitments Moderate level of 2

transparency
• Scale to be used for scoring each sub -
parameter Low level of transparency 0

Description Score

Honoured on time 8 • Scale to be used for scoring ‘Presence

of qualifications in auditors’ report’
Honoured but delayed 2
Description Score
Not honoured 0
No qualification 4

Other qualification 2
• Scale to be used for the final scoring
of the main parameter after scoring Qualification due to non - 0
each sub-parameter compliance with accounting
standards
• Scale to be used f or the final scoring
of the main parameter after scoring
each sub-parameter

Description Score

Good quality of financial 4

statements

Average quality of financial 2

statements

Poor quality of financial 0

statements

11. Foreign exchange management

policy

Description Score

Presence of well defined 2

foreign exchange
management policy

Absence of foreign exchange 2

exposure (leading to absence
of foreign exchange
management policy)

Absence of well defined 0

foreign exchange
management policy despite
having foreign exchange
exposure
ANNEXURE 4a: SIGNIFICANT
PROJECT PARTY – CIVIL
2. Financial health
CONTRACTOR
• Scale to be used for scoring
1. Technical expertise and past track
‘Financial position of the
record
contractor’
• Scale to be used for scoring ‘Technical
The scales for scoring the ratios used
qualifications’
for assessing the financial health of the
Description Score Flagship Company / companies have
been provided in Annexure 2, ‘1.
Highly qualified 6
Analysis of financial health of
Adequate qualifications 4 promoter’.
Inadequate qualifications 0

3. Basis of selection

• Scale to be used for scoring ‘Hands - Description Score

on experience in the past’ Competitive bidding 2

Description Score Preferential basis 0

Very high (> = 5 yrs) 6

High (2 – 5 yrs) 4 4. Quality of EPC contract

Moderate (< 2 yrs) 2 • Scale to be used for scoring ‘Bankable

No prior experience 0 contract’

Description Score

Satisfactory (Enforceable, 4
• Scale to be used for the final scoring
with remote possibility of
of the main parameter after scoring
future litigation / conflict)
each sub-parameter
Tolerable (Enforceable, with 2
Description Score
moderate possibility of future
High score 12 litigation / conflict)

Unsatisfactory (Enforceable, 0
with high possibility of future
litigation / conflict)

Moderate score 6

Low score 0
• Scale to be used for scoring ‘Balanced Description Score
contract’
High score 4
Description Score
3
Satisfactory (All significant 4
Moderate score 2
risks transferred / mitigated)
1
Tolerable (Few significant 2
risks transferred / mitigated) Low score 0

Unsatisfactory (None of the 0

significant risks transferred / 6. Project Management Skills
mitigated
• The scales for scoring the Project
Management Skills have been
• Scale to be used for the final scoring provided in Annexure 2, ‘3.Project
of the main parameter after scoring Management Skills of promoter’.
each sub-parameter

Description Score o Past Quality Record

High score 8 • The scales for scoring the Past
Project Quality record have been
6
provided in Annexure 2, ‘8.Past
Moderate score 4 Project Quality record of promoter’.
2

Low score 0 6. Reputation

• The scales for scoring the
5. Terms of payment Reputation have been provided in
Annexure 2, ‘9. Reputation of
• Scale to be used for scoring each sub -
promoter’.
parameter
9. Labour Relation
Description Score
• Scale to be used for scoring
Favourable 4 parameter
Tolerable 2
Description Score
Unfavourable 0
No dispute 6

No. of disputes decreased 4

over the past 3 years years

• Scale to be used for the final scoring No. of disputes increased 0

of the main parameter after scoring over the past 3 years
each sub-parameter
ANNEXURE 4b: SIGNIFICANT 2. Past Achievement in the field
PROJECT PARTY –
• Scale to be used for scoring the
Architect/Consultant
parameter.
1. Technical expertise and past track
Description Score
record
Any award or recognition 4
• Scale to be used for scoring ‘Technical
qualifications’ No award 0

Description Score

Highly qualified 4 3. Relevance of experience to project

Adequate qualifications 2 • Scale to be used for scoring ‘Nature of

projects undertaken’
Inadequate qualifications 0
Description Score

Projects undertaken in the 8

• Scale to be used for scoring ‘Hands -
same industry
on experience in the past’
Projects undertaken in related 4
Description Score
/ similar industries
Very high (> = 5 yrs) 4
Projects undertaken in 0
High (2 – 5 yrs) 3 industries unrelated to the
industry in question
Moderate (< 2 yrs) 2

No prior experience 0
• Scale to be used for scoring
‘Complexity of projects’
• Scale to be used for the final scoring
of the main parameter after scoring Description Score

each sub-parameter High level of complexity 8

Description Score Moderate level of complexity 4

High score 8 Low level of complexity 0

Moderate score 4

Low score 0
• Scale to be used for the final scoring
of the main parameter after scoring
each sub-parameter

Description Score

High level of experience to 8

project

Moderate relevance of 4
experience to project

Low relevance of experience 0

to project
ANNEXURE 5a: SCALES FOR
PROJECT RISK MODULE -GENERAL

1. Clear Title of land

Description Score
• Scale to be used for scoring
No price risk 6
parameter

Description Score
Moderately risk 3
Land completely available 4

3
Highly risky 0
Land Partially available 2

1
3. Location of the project
Land not available 0
Description Score

Favourable 6
2. Price/Rental Risk

• Scale to be used for scoring

Speculation parameter Moderately favorable 3

Description Score

Speculation less than 10% of 3 Unfavourable 0

the demand

Speculation more than 30% of 0 4. Cost of project

the demand
Description Score
• Scale to be used for scoring
Cost of project < Rupees 500 2
Regulation parameter
crores
Description Score
Rupees 1000 crores > Cost of 1
Regulation not relaxed 3 project > Rupees 500 crores

Regulation relaxed 0 Cost of project > Rupees 0

1000 crores

• Scale to be used for the final scoring

of the main parameter after scoring
each sub-parameter

• Finally the score for this parameter

will be obtained as sum of scores for
the sub parameters.
5. Means of financing debt 7. Nature of project

Description Score Description Score

Debt wholly f inanced by 4 Housing/ Township project 2

financial institutions / banks
Lease based commercial 0
Upto 50 per cent of debt 2 project
financed through secured /
unsecured loans from group
companies / affiliates / 8. Marketing strategy
unrecognised institutions • Scale to be used for scoring ‘Nature of
Greater than 50 per cent of 0 Product mix’
debt financed through Description Score
unsecured loans from group
companies / affiliates / Caters to more than two 6

unrecognised institutions categories of customers

Caters to two or less than two 3

categories of customers
6. Vulnerability to force majeure risks
Caters to single category of 0
• Scale to be used for scoring each sub - customer
parameter

Description Score
• Scale to be used for scoring ‘Pricing
No vulnerability 4 strategy’
Moderately vulnerable 2 Description Score
Highly vulnerable 0
Pricing strategy superior to 10
market

Pricing strategy similar to 5

market
• Scale to be used for the fin al scoring
of the main parameter after scoring
each sub-parameter Pricing strategy inferior to 0
Description Score market

No vulnerability 4

Moderately vulnerable 2

Highly vulnerable 0
• Scale to be used for scoring 6
‘Promotional strategy’
2
Description Score
Low score 0
Promotional strategy in sync 4
with the segmentation and
targeting strategies 9. Systems for support facilities

General promotional strategy 2 Description Score

i.e. commonly followed
Superior support systems as 4
practices in the industry
compared to others
Inferior promotional strategy 0
Average support systems as 2
compared to others

• Scale to be used for the final scoring Inferior support systems as 0

of the main paramet er after scoring compared to others
each sub-parameter

Description Score 10. Reputation of the developer

High score 20 Description Score
18
More than one successful 6
14 project in the city

12 One project in the city 3

Moderate score 10 First project in the city 0

8
ANNEXURE 5b: SCALES FOR
PROJECT RISK MODULE -Complexities

1. Complexity of design of project • Scale to be used for the final scoring

of the main parameter after scoring each
• Scale to be used for scoring
sub-parameter
‘Topography and terrain in relation to
project requirements’ Description Score

Description Score High level of design complexity 12

Uniform or even terrain 4

Uneven or rugged terrain 0

• Scale to be used for scoring ‘social Average level of design 6

factors’ complexity

Description Score

Negligible / mild social 4

hazards

Causes moderate social 2 Low level of design 0

hazard complexity
Extreme social hazards 0

2. Extent of incompletion
• Scale to be used for scoring Description Score
‘Feasibility Analysis’
Construction fully complete 8
Description Score (‘CFC’)
Positive result of the feasibil ity 4 75% < = Construction 6
analysis completed < CFC (i.e. < 25%
Any concern raised over the 2 incomplete)
feasibility 50% < = Construction 4
Negative result of the 0 completed < 75%

feasibility analysis 25% < = Construction 2

completed < 50%

Construction not commenced 0

or construction completed <
25%
3. Cost justification

• Scale to be used for scoring Description Score

‘Comparison of cost determinants with
EL < 0.90 times 10
other competitors in the same industr y’
0.90 times < = EL < = 1.30 5
Description Score
times
C < 0.90 times the cost 10
EL > 1.30 times 0
incurred in another similar
project

0.90 times the cost incurred in 5 • Scale to be used for the final scoring
another similar project < = C of the main parameter after scoring
< = 1.30 times the cost each sub-parameter
incurred in another similar Description Score
project
High score 10
C > 1.30 times the cost 0
incurred in another similar
project

• Scale to be used for scoring Moderate score 5

‘Comparison of occupancy level with other
competitors in the same industry’

Description Score

O < 0.90 times the occupancy 10

Low score 0
in another similar project

0.90 times the occupancy in 5

another similar project < = O
< = 1.30 times the occupancy
4. Project IRR (compared to the cost
in another similar project
of capital)
C > 1.30 times the 0
Description Score
Occupancy in another similar
project IRR > cost of capital 4

IRR < cost of capital 0

• Scale to be used for scoring

‘Comparison of escalation level of lease
rental with other competitors in the same
industry’
ANNEXURE 5C: SCALES FOR THE Description Score
PROJECT RISK MODULE -
High score 8
CONSTRUCTION

1. Clearance risk

Description Score

All clearances obtained 6

Moderate score 4
All the clearances not 0
obtained

2. Quality
Low score 0
• Scale to be used for scoring ‘Design
as per seismic zones'

Description Score 3. Control and safety systems

As per standard 4 Extent of cost overrun Score

Not as per standards 0 No accidents 4

• Scale to be used for scoring Accidents 0

‘Construction as per BIS standard'

Description Score
4. Cost overrun
As per standard 4
Extent of cost overrun Score
Not as per standards 0
No overrun 8
• Scale to be used for scoring ‘ISO
Cost overrun 0
certification'

Description Score
5. Have cost overruns in the past been
Present 4
successfully funded?
Absent 0
Description Score

Fully funded 4
• Scale to be used for the final scoring
Partly funded 2
of the main parameter after scoring
each sub-parameter Not funded at all 0
6. Adherence to implementation 9. Infrastructure Availa bility
schedule

Description Score Description Score

On time (no Delay) 6 Two or more than two 6

approach roads to the
Delay < = 10% of X 4
construction site
10% of X < delay < = 20% of 2
One approach road 0
X

20% of X < delay < = 30% of 1

X

Delay > 30% of X 0

‘X’ is the total time to construct the project

(in months), as originally planned. Delay
in adhering to the implementation
schedule should be expressed in terms of
months.

7. Other results of reports from

independent / lenders engin eers

Description Score

Satisfactory 4

Neutral 2

Unsatisfactory 0

8. Managing the price volatility

Description Score

Long term single price 6

contract with the supplier

Long term floating price

contract 3

No such contract 0
ANNEXURE 5D: SCALES FOR
PROJECT RISK – PRINCIPAL ANCHOR

1. Past Financial Analysis Description Score

• Scale to be used for scoring Ratio > = 1 4

‘Financial position'
0.75 < = Ratio < 1 3
The scales for scoring the ratios used
0.50 < = Ratio < 0.75 2
for assessing the financial health of the
Principal Anchor have been provided 0.25 < = Ratio < 0.5 1
in Annexure 2, ‘1. Analysis of financial 0 < = Ratio < 0.25 0
health of promoter’.
• Scale to be used for the final scoring
of the main parameter after scoring
2. Tenure of the lease each sub-parameter

Description Score Description Score

Tenure of lease more than 8 High score 4

tenure of the loan

Tenure of lease less, but the 4

Moderate score 2
adjustment has been made
for next lessee

Tenure of lease less than 0 sLow score 0

tenure of the loan, without any

adjustment for the future
4. Honouring the co mmitments

• Scale to be used for scoring

3. Market position parameter

• Ratio of the Principal anchor's turnover Description Score

to that of the market leader's.
Honoured on time 6
Description Score
Honoured but delayed 3
Ratio > = 1 4
Not honoured 0
0.75 < = Ratio < 1 3

0.50 < = Ratio < 0.75 2

0.25 < = Ratio < 0.5 1

0 < = Ratio < 0.25 0

• Ratio of the Principal anchor's market

share to that of the market leader's.
ANNEXURE 5E: SCALES FOR
PROJECT RISK - OPERATIONS
Description Score
1. Actual Performance
High score 4
• Scale to be used for scoring each
3
performance criteria
Moderate score 2
• Ratio of the lessee's operating ratio to
that of the market leader's. 1

Description Score Low score 0

Ratio > = 1 4
3. Comparison of projected
0.75 < = Ratio < 1 3 occupancy levels with the projected
0.50 < = Ratio < 0.75 2 Description Score
0.25 < = Ratio < 0.5 1 If Actual / Projected > = 1 4
0 < = Ratio < 0.25 0
0.80 < = Actual / Projected < 3
• Scale to be used for the final scoring 1
of the main param eter after scoring 0.60 < = Actual / Projected < 2
each sub-parameter 0.80
Description Score 0.40 < = Actual / Projected < 1

High score 4 0.60

3 Actual / Projected < 0.40 times 0

Moderate score 2

1 4. Quality assurance and initiatives

Low score 0 • Scale to be used for scoring each sub -

parameter

2. Clearances Description Score

• Scale to be used for scoring each Major certification / initiatives 2

individual statutory clearance taken

Normal certification / 1
Description Score
initiatives taken
Obtained 4 No certification / initiatives 0
Not obtained 0 taken

• Scale to be used f or the final scoring • Scale to be used for the final scoring
of the main parameter after scoring of the main parameter after scoring each
each sub-parameter sub-parameter
Description Score

Major certification / initiatives 2

taken

Normal certification / 1
initiatives taken

No certification / initiatives 0
taken
ANNEXURE 6A: SCALES FOR 1.2 times < = CF DSCR < 1.3 3
THE FINANCIAL ANALYSIS times
MODULE – FUTURE
1.1 times < = CF DSCR < 1.2 2
PROJECTIONS (Base case)
times

1 times < = CF DSCR < 1.1 1

1. Cash flow adequacy times

• Scale to be used for scoring ‘CF ICR CF DSCR is < 1 times 0

(average)’

IDBI benchmark for CF ICR ‘2’ times

2. Total Debt / Equity
If CF ICR is > = 2 times 4
IDBI benchmark for TDE ‘1.5’ times
1.7 times < = CF ICR < 2 times 3
If TDE is < = 1.2 times 8
1.3 times < = CF ICR < 1.7 2
2.25 times > = TDE > 1.5 times 6
times
3 times > = TDE > 2.25 times 4
1 times < = CF ICR < 1.3 times 1
3.75 times > = TDE > 3 times 2
CF ICR < 1 times 0
TDE > 3.75 times 0

• Scale to be used for scoring ‘CF

DSCR (average)’

IDBI benchmark for CF DSCR ‘2’ times

If CF DSCR is > 2 times 12

1.9 times < = CF DSCR < = 2 10

times

1.8 times < = CF DSCR < 1.9 9

times

1.7 times < = CF DSCR < 1.8 8

times

1.6 times < = CF DSCR < 1.7 7

times

1.5 times < = CF DSCR < 1.6 6

times

1.4 times < = CF DSCR < 1.5 5

times

1.3 times < = CF DSCR < 1.4 4

times
ANNEXURE 6A: SCALES FOR THE

FINANCIAL ANALYSIS MO DULE –

FUTUREP ROJECTIONS (worst case)

1. Cash flow adequacy

• Scale to be used for scoring ‘CF

DSCR (average)’

Description Score

If CF DSCR is > 2 times 12

1.4 times < = CF DSCR < 2 8

times

1 times < = CF DSCR < 1.4 4

times

CF DSCR is < 1 times 0

2. Total Debt / Equity

Description Score

If TDE is < = 1.5 times 4

3.75 times > = TDE > 1.5 times 2

TDE > 3.75 times 0

 3
ANNEXURE 6B: SCALES FOR THE • Scale to be used for scoring ‘NPM’
FINANCIAL ANALYSIS MODULE –
Description Score
ACTUALS VS. PROJEC TIONS
If Actual NPM / Projected NPM 4
1. Achievement of revenues
>=1
Description Score
0.90 < = Actual NPM / 3
If Actual revenues / Projected 8 Projected NPM < 1
revenues > = 1
0.80 < = Actual NPM / 2
0.90 < = Actual revenues / 6 Projected NPM < 0.90
Projected revenues < 1
0.60 < = Actual NPM / 1
0.80 < = Actual revenues / 4 Projected NPM < 0.80
Projected revenues < 0.90
Actual NPM / Projected NPM < 0
0.60 < = Actual revenues / 2 0.60 times
Projected revenues < 0.80

Actual revenues / Projected 0 4

• Scale to be used for scoring ‘NPM’
revenues < 0.60 times
Description Score

If Actual NPM / Projected NPM 4

2. Achievement of profitability
<=1
• Scale to be used for scoring ‘EBIDTA
1 < = Actual NPM / Projected 3
margin’
NPM < 1.1
Description Score
1.1 < = Actual NPM / Projected 2
If Actual EBIDTA margin/ 8 NPM < 1.20
Projected EBIDTA margin > =
1.20 < = Actual NPM / 1
1
Projected NPM < 1.40
0.90 < = Actual EBIDTA margin 6
Actual NPM / Projected NPM > 0
/ Projected EBIDTA margin < 1
1.40 times
0.80 < = Actual EBIDTA margin 4
/ Projected EBIDTA margin <
0.90

0.60 < = Actual EBIDTA margin 2

/ Projected EBIDTA margin <
0.80

Actual EBIDTA margin / 0

Projected EBIDTA margin <
0.60 times
3
This scale is to be used if the Projected NPM
> 0%.
4
This scale is to be used if the Projected NPM
< 0% i.e. there is a projected loss

2
 5
• Scale to be used for scoring ‘RoCE’ 3. Capitalisation / Solvency

Description Score Description Score

If Actual RoCE / Projected 8 If Actual TDE / Projected TDE 12

RoCE > = 1 <1

0.90 < = Actual RoCE / 6 1 < = Actual TDE / Projected 9

Projected RoCE < 1 TDE < 1.25

0.80 < = Actual RoCE / 4 1.25 < = Actual TDE / 6

Projected RoCE < 0.60 Projected TDE < 1.50

0.60 < = Actual RoCE / 2 1.50 < = Actual TDE / 3

Projected RoCE < 0.80 Projected TDE < 1.75

Actual RoCE / Projected RoCE 0 Actual TDE / Projected TDE > 0

< 0.60 times 1.75 times

6
• Scale to be used for scoring ‘RoCE’ 4. Cash flow adequacy

Description Score • Scale to be used for scoring ‘CF ICR

(annual)’
If Actual ROCE / Projected 8
ROCE < = 1 Description Score

1 < = Actual ROCE / Projected 6 If Actual ICR / Projected ICR > 4

ROCE < 1.1 =1

1.1 < = Actual ROCE / 4 0.75 < = Actual ICR / Projected 3

Projected ROCE < 1.20 ICR < 1

1.20 < = Actual ROCE / 2 0.50 < = Actual ICR / Projected 2

Projected ROCE < 1.40 ICR < 0.75

Actual ROCE / Projected 0 0.25 < = Actual ICR / Projected 1

ROCE > 1.40 times ICR < 0.50

Actual ICR / Projected ICR < 0

0.25 times

5
This scale is to be used if the Projected RoCE
> 0%
6
This scale is to be used if the Projected RoCE
< 0% i.e. there is a projected loss

3
• Scale to be used for scoring ‘CF
DSCR (annual)’

Description Score

If Actual DSCR / Projected 12

DSCR > = 1

0.75 < = Actual DSCR / 9

Projected DSCR < 1

0.50 < = Actual DSCR / 6

Projected DSCR < 0.75

0.25 < = Actual DSCR / 3

Projected DSCR < 0.50

Actual DSCR / Projected 0

DSCR < 0.25 times

5. Liquidity and activity

• Scale to be used for scoring ‘Current

ratio’

Description Score

If Actual CR / Projected CR > = 4

1

0.75 < = Actual CR / Projected 3

CR < 1

0.50 < = Actual CR / Projected 2

CR < 0.75

0.25 < = Actual CR / Projected 1

CR < 0.50

Actual CR / Projected CR < 0

0.25 times

4
ANNEXURE 6C: SCALES FOR THE ‘X’ % = Average NPM of the industry
FINANCIAL ANALYSIS MODULE – PAST
If NPM is > = X % 4
FINANCIAL
75% of X < = NPM < X% 3
1. Growth in revenues/Gross profit/
NOCF 50% of X < = NPM < 75% of X 2

Description Score 0 < NPM < 50% of X 1

IDBI Benchmark – 25% for all NPM < = 0 0

the three parameters

x > = 25% 8 • Scale to be used for scoring ‘RoCE’

20% < x < 25% 6 ‘12.5’ % = IDBI benchmark for RoCE
10% < x <= 20% 4
If RoCE is > = 12.5% 8
5% < x <= 10% 2
75% of 12.5% < = RoCE < 6
0% < x < = 20% 1 12.5%

x <= 0% 0 50% of 12.5% < = RoCE < 4

75% of 12.5%

0 < RoCE < 50% of 12.5% 2

2. Profitability
RoCE < = 0 0
• Scale to be used for scoring ‘EBIDTA
margin’

‘X’ % = Average EBIDTA margin of the

industry

If EBIDTA margin is > = X% 8

75% of X < = EBIDTA margin < 6

X%

50% of X < = EBIDTA margin < 4

75% of X

0 < EBIDTA margin < 50% of X 2

EBIDTA margin < = 0 0

• Scale to be used for scoring ‘NPM’

1
3. Capitalisation / Solvency

• Scale to be used for scoring ‘TDE’ 4. Cash flow adequacy

‘1.5’ times = IDBI benchmark for TDE • Scale to be used for scoring ‘CF ICR’

If TDE is < = X times 12 IDBI benchmark for CF ICR ‘2’ times

1.5 times X > = TDE > X times 9 If CF ICR is > = 2 times 4

2 times X > = TDE > 1.5 times 6 1.7 times < = CF ICR < 2 times 3
X
1.3 times < = CF ICR < 1.7 2
2.5 times X > = TDE > 2 times 3 times
X
1 times < = CF ICR < 1.3 times 1
TDE > 2.5 times X 0
CF ICR < 1 times 0

• Scale to be used for scoring ‘CLTNW’

• Scale to be used for scoring ‘CF DSCR’
Description Score
IDBI benchmark for CF DSCR ‘1.5’
If coverage is < = .25 times 4 times

0.50 times > = coverage > 0.25 3 If CF DSCR is > 1.5 times 12
times
1.45 times < = CF ICR < = 1.5 10
0.75 times > = coverage > 0.50 2 times
times
1.4 times < = CF ICR < 1.45 9
1 times < = coverage > 0.75 1 times
times
1.35 times < = CF ICR < 1.4 8
Coverage > 1 times 0 times

1.3 times < = CF ICR < 1.35 7

times

1.25 times < = CF ICR < 1.3 6

times

1.2 times < = CF ICR < 1.25 5

times

1.15 times < = CF ICR < 1.2 4

times

1.1 times < = CF ICR < 1.15 3

times

2
1.05 times < = CF ICR < 1.1 2 • Scale to be used for scoring ‘Average
times Payables Days’

1 times < = CF ICR < 1.05 1 Description Score

times
If period is > = Y days 4
CF DSCR is < 1 times 0
Z days < = period < Y days 2
5. Liquidity and activity ratios Period < Z days 0
• Scale to be used for scoring ‘CR’

‘1.33’ times = IDBI benchmark for CR

• Scale to be used for scoring ‘Average
If CR is > = X times 4 Inventory Days’

0.75 times of X < = CR < X 3 Description Score

times
If period is < = Y days 4
0.50 times of X < = CR < 0.75 2
Z days > = Period > Y days 2
times of X
Period > Z days 0
0 < CR < 0.50 times of X 1

CR < = 0 0

• Scale to be used for scoring ‘Average

Receivables Days’

Description Score

If period is < = Y days 4

Z days > = Period > Y days 2

Period > Z days 0

‘Y’ days is the industry average

‘Z’ days is a tolerance level pre-determined by

EIRD for each industry

3
ANNEXURE A: ANALYTICAL FORMAT FOR FINANCIAL STATEMENTS:
P&L, BALANCE SHEET, CASH FLOW STATEMENT

REAL ESTATE INDUSTRY

Analysis of Profit & Loss A/c
(Rs. Lakh)
For the year ended March 31, 2005 % ot TI 2004 % ot TI 2003 % ot TI

Gross Sales
Trading Sales
Total Gross Sales
Less: Excise Duty
Net Sales
Other Operating Income
Total Income

Raw Materials consumed

Purchase of Traded goods
Subcontracting charges
Equipment charges
Sub Total
(Increase)/ Decrease in stocks
Electricity
Other Manufacturing Exp.
Personnel exp.
Administrative & Misc. exp.
Selling & Distribution exp.
Misc. exp./ DRE written off
Cost of Sales

EBIDTA
Interest & Finance charges
Depreciation
Operating Profit
Other Income (Non-operating)
Extra Ordinary Income
Extra Ordinary Expenses
PBT
Tax
Deferred Tax Liability/ (Asset)
PAT
Prior period Income/ (Expenses)
Dividend - Equity (incl. tax)
Dividend - Pref. Sh. (incl. tax)

Gross Cash Accruals

Net Cash Accruals
Retained Earnings
Check

PAT as per Annual Report

Add/ Less: Adjustments made
i)
ii)
Adjusted PAT as per Annual Report

Balance Sheet Analysis

(Rs. Lakh)
As at March 31, 2005 2004 2003

Liabilities
Equity Share Capital
Preference Share Capital (treated as equity)
Reserves & Surplus (Excl. revaluation reserve)
Share Premium
General Reserve
Profit & Loss A/c (credit balance)
Others
Sub Total
Less: Losses brought forward
Less: Intangibles/ Misc. exp./ DRE not w/off
Less: Deferred Tax Assets (net)
Sub Total (Net Reserve & Surplus)
Tangible Net Worth

Preference Shares (treated as LT loans)

Long Term Loans
Debentures
Others
Total Long Term Loans & Pref. Shares
Unsecured Loans
Loan from Promoters/ Directors
Loan from Group Companies/ Associates
Fixed Deposits
Others
Total Unsecured Loans

Total Loans

Deferred Tax Liability

Current Liabilities
Bank borrowings for working capital
Sundry Creditors/ Bills Payables/ Acceptances
Other current liabilities
Proposed dividend - Equity
Proposed dividend - Pref. Sh.
Other Provisions
Total current liabilities

Total Liabilities

As at March 31, 2005 2004 2003

Assets
Gross Fixed Assets
Less: Revaluation Reserve
Less: Accumulated Depreciation
Net Fixed Assets
Capital Work in progress
Sub Total

Investments - In Group Co.s and subsidiaries

Investments - Others
Total Investments

Current Assets and Loans & Advances

Raw materials
Other
Work-in-process
Stock Real estate
Finished Goods
Total Inventories

Receivables - More than 6 months old

Other receivables
Total Receivables

Other current Assets

Loans & Advances - Group Co s & subsidiares
Loans & Advances - Others
Total Loans & Advances
Sub Total

Cash & Bank Balances

Total current assets

Total Assets
Difference

Continget Liabilities
(incl. unprovided gratuity, leave etc., if any)

Future Lease Rentals Payable

Capital Employed

TNW (excl. def. tax liability)

Total outside liabilities (incl. def. Tax)
Total outside liabilities (excl. def. Tax)

Cash Flow Statement

(Rs. Lakh)
For the year ended March 31, 2005 2004

Operating Cash Flow

Gross Cash Accruals
Add: Interest
Add: Deferred Tax Liab./ (Assets)
Add: Adjustments for Extra ordinary itmes
Less: Other Income (non -operating)
Sub total

(Increase)/ Decrease in Inventories

(Increase)/ Decrease in Receivables
(Increase)/ Decrease in Loans & Advances
(Increase)/ Decrease in Other current assets
Increase/(Decrease) in Bank Borrowings
Increase/(Decrease) in Sundry Creditors
Inc./(Dec.) in Oth. Current Liab. & Provisions
(Excluding proposed dividend)
Net changes in working capital

Net operating cash flows

Cash Flow from Investments

(Increase)/ Decrease in Fixed Assets
(Increase)/ Decrease in Investments
Adj. for Extra ordinary and prior period items
Other Income (non-operating)
Increase in Intangibles/ DRE/ Misc. exp. w/off
Net cash flow form investments

Cash Flow from Financing

Increase/ (Decrease) in Equity Share Capital
Increase in Pref. Share Capital (treated as
equity)
Cash flow changes in Res & Surplus (if any)
Increase/ (Decrease) in LT Loans & Pref. Sh.
Increase/ (Decrease) in Unsecured Loans
Changes in Def Tax Liab./ DTA out of
Reserve
Dividend paid - Equity
Dividend paid - Preference
Interest
Net cash flow from financing
Net Surplus/ (Deficit)

Opening Cash & Bank Balance

Add: Surplus/ (Deficit)
Closing Cash & Bank Balance

Check

Repayment of Loans & Pref. Sh.

(without netting off fresh borrowings)

Interest and Preference Dividend

Total Repayments
7. Reference:

• Cris-Infac – Construction Annual Report 2006

• Cris-Infac – Housing Annual Report 2006
• http://www.sulekha.com/blogs/blogdisplay.aspx?contributor=civil%20enginee
r
• http://www.mortgage-investments.com/borrow-money/commercial-real-
estate-financial-ratios.htm
• http://www.outlookmoney.com/olmoneym/news/detail_news.asp?Date=4/17/2
006&story=1
• Offer Document Dated: March 13, 2006 DS Kulkarni Developer's Ltd. –
dskfin.pdf
• ICRA grading feature- Grading of Real Estate and Construction Entities –
ICRA.pdf
• CRISIL Ratings – Methodology for Rating Real estate projects – Crisil.pdf
• Tenth Five Year Plan by Planning Commission – v2_ch7_6.pdf
i
Material can be defined as that which a very high level of importance from a debt servicing
perspective.
ii
Long term is defined as three years or more; medium term is defined as between one to three years
and short term is defined as less than one year.