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A Project on Financial Services

Submitted in partial fulfillment of the requirement of Masters of Business Administration, Distance Education Guru Jambheshwar University of Science & Technnology, Hisar

Research Supervisor Suresh Mittal Chartered Accountant

Submitted By: Pardeep Kumar Enrolment No.08061402157

Session 2008-10 Directorate of Distance of Education Guru Jambheshwar Univesity of Science & Technololgy Hisar (Hisar)

Guru Jambheshwar University of Science & Technology Hisar DIRECTORATE OF DISTANCE EDUCATION











I am willing to supervise Mr. Pardeep Kumar Enrollment No.- 08061402157 On the topic Financial Services

Countersigned by Director of Study Centre with Seal


Guru Jambheshwar University of Science & Technology Hisar CERTIFICATE This is to certify that Mr.Pardeep kumar , Enrollment


No.08061402157 has completed under my supervision his project on Financial Services in the specialization area Finance

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

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



DESIGNATION : CHARTERED ACCOUNTANT ORGANIZATION: CHARTERED ACCOUNTANT Forwarded by Head/ Director of Study Centre (with signature, name & SEAL)

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

Signature of Candidate NAME: Pardeep Kumar ENROLLMENT NO:08061402157 SPECIALIZATION: Finance SESSION : 2008-10

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SR.NO. 1. 2. 3. 4. 5. 6. 7. 8.

CHAPTER NAME Executive Summary Introduction Objective of the Project Conceptual Framework Types & detailed summary of Finance Research Methodology Conclusion Bibliography

PAGE NO. 6-7 8-9 10 11-12 13-68 69-70 71-72 73


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A project report is written statement of ideas, collection of information, method of implementing an ideas & a map for the management. Different type of financial products and services penetrate our daily activities. As a major group of financial instruments, banks have been expanding their services scope, and hence, universal banks, which provide a variety of financial products and services in one house, have experienced growing popularity in some industrialized countries. In India, banking instutions have assumed a key role in the simplistic financial sector. Commercial banks have made effort to diversify their products and services, but a lengthy process is expected for their transition into truly universal banks. It is argued that the current structure and practices of the local market also contribute to this lengthy transformation. The project has been divided into two parts. In initial chapters of the project was given to general concept and fundamental principles for project financing, method of types of industries. The later chapter covers various methods of project financing and its sub methods i.e. term loan and working capital limit in project financing. Funding the requirement of the term loan and working capital by the

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following procedures of credit monitoring assessment (CMA) for funding of short- term loan and long term loan. The project is the case study of winner Nippon Electronics Ltd, Raglan Infrastructure Ltd. & Synergy Telecommunication and also its short term loan & long term financial requirements are highlighted.


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Finance is the lubricant of the process of economic growth. When finance mode is available, industrial activities can be initiated which give rise to new investment apportunities towards industrialization. Banking institutions are dominant operators in modern financial systems and important business entities in an economy. They are divided into two separate types of institutions, namely commercial banks and investment banks in some countries, while in other countries such division is vague or even non-existent. The so-called universal banks engage in all forms of commercial and investment banking, not only including lending and deposit taking, but also underwriting securities and securities trading. In particular, some universal banks may own significant equity interests in companies with voting rights. Germany is the typical example running the universal banking system. Canada and Switzerland, among others, are noteworthy examples moving towards universal banking. Project finance refers to the financing of long term infrastructure, industrial project and public services based upon resourse or limited resourse financial structure where project debt and equity used to finance the project and cash flow generated by the project.

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Arranging short- term financing, controlling cash, managing accounts of finance management. A thorough understanding and application of all these aspects is necessary to be able to maintain the optimum level of finance with in the firm. The requirement of the project financing is depending upon the nature of the business. The business may be small are large, but the requirement depend on the operation of the business it means the cycle of the business. If the operating cycle is longer the requirement of finance would be longer of the business.


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To understand the concept of project financing, its various components, methods and nature of project financing. To define financial services and explain its scope. To discus about the various innovative financial instruments. To study of requirement of finance according to the structure and size of the industries. To explain the present scenario of financial services sector in india. To understand the functions of universal banking.


History of project financing:10

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Limited recourse lending was used to finance maritime voyages in ancient Greece and Rome. Tts use in infrastructure projects dated to the development of the panama canal and was widespread in the US oil and gas industry during the early 20th century. However, project finance for high-risk infrastructure schemes originated with the development of the north sea oil fields in the 1970s and 1980s. For such investments newly created special purpose corporation (SPCs) were created for each project, with project operations. Such projects were previously accomplished through utility or government bond issuances, or other traditional corporate finance structures. The Indian financial services has undergone a metamorphosis since 1990. During the late seventeen and eighties the Indian financial services was dominated by commercial bank and other financial institutions which makes the requirement of Indian industries. As a result of innovation, new instruments and new market are emerged in the capital market. The capital market and the money market are getting windened and depended market. There has been a structural changes in the international capital market with the emergence of new products and innovative techniques. Many financial intermediaries including


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bank have already started expand of their activities in the financial services sector by offering variety of new products.

What is the project financing?

Types of Financial Services


Guru Jambheshwar University of Science & Technology Hisar Financial Services


Commercial Bank Investment Services Insurance Advisory Services

Private Banking Investment Banks Bank Cards Credit Card Machine Services and networks

Asset Management Hedge Fund Managers Custody Services

Insurance Brokerage Insurance Undertaking Reinsurance

Stock brokers (Private Clients Services and discount brokers

Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Eurotunnel. Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects. Increasingly, project financing is emerging as the preferred alternative to conventional

methods of financing infrastructure and other large-scale projects worldwide.


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rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; provisions, issues for the host government legislative




public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to analyze cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility. Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to

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the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project Finance is a method for obtaining commercial debt financing for the construction of a facility. Lenders look at the credit-worthiness rather of than the at facility the to ensure of debt the



developer/sponsor. Farm biogas projects have historically experienced difficulty securing project financing because of their relatively small size and the perceived risks associated with the technology. However, project financing may be available to large projects in the future. In most project finance cases, lenders will provide project debt for up to about 80% of the facilitys installed cost and accept a debt repayment schedule over 10 to 12 years. Project finance transactions are costly and often an onerous process of satisfying lenders criteria. project finance involves the creation of a legally independent project company financed with non-recourse debt for the

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purpose of financing a single purpose capital asset, usually with a limited life. Project finance is different from traditional forms of finance because the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project. The purpose of this project is to explain, in a brief and general way, the manner in which risks are approached by financiers in a project finance transaction. Such risk minimization lies at the heart of project finance. In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialized and possibly in a remote location. If saleable, they may have little value outside the project. Therefore, it is not

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go to







substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided. Project finance is the financing of long-term infrastaructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project. Usually, a project financing scheme involves a number of equity investors, known as sponsors, as well as a syndicate of banks which provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project itself and paid entirely from its cash flow, rather than from the general assets or creditworthiness of the project sponsors. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the

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project company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound. Project finance is often more complicated than alternative financing methods. It is most commonly used in the mining, transportation, telecommunication and public utility industries.

Risk identification and allocation is a key component of project finance. A project may be subject to a number of
technical, environmental, economic and political risks,

particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are

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unacceptable (unfinanceable). To cope with these risks, project sponsors in these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a contractual network with each other that allocates risk in a way that allows financing to take place. The various patterns of implementation are sometimes referred to as "project delivery methods." The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved.


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Chap 2: AN OVERVIEW 2.1 Banking Sector There have been major structural changes in the financial sector since banking sector reforms were introduced in India in 1992. Since then Banks have been lending aggressively providing funds towards infrastructure sector. Major policy measures include phased reductions in statutory pre-emption like cash reserve and statutory liquidity requirements and deregulation of interest rates on deposits and lending, except for a select segment. The diversification of ownership of banking institutions is yet another feature which has enabled private shareholding in the public sector banks, through listing on the stock exchanges, arising from dilution of the Government ownership. Foreign direct investment in the private sector banks is now allowed up to 74 per cent. The co-existence of the public sector, private sector and the foreign banks has generated competition in the banking sector leading to a significant improvement in efficiency and customer service. The share of private and foreign banks in

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total assets increased to 31.5 per cent at end-March 2007 from 27.6 per cent at end-March 2006 and less than 10.0 per cent at the inception of reforms.

The nationalized banks have more branches than any other types of banks in India. Now there are about 33,627 Branches in India, as on March 2005.

Investments of scheduled commercial banks (SCBs) also saw an increase from Rs 8,04,199 crore in March 2005 to Rs 8,43,081 crore in the same month of 2006.

India's retail-banking assets are expected to grow at the rate of 18% a year over the next four years (2006-2010).

Retail loan to drive the growth of retail banking in future. Housing loan account for major chunk of retail loan.

2.2 An Overview on Union Bank Of India Union Bank of India was inaugurated by the father of the nation Mohandas Karamchand Gandhi. It commenced

operations in the year 1920.


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Union Bank has offered vast and varied services to its entire valuable clientele taking care of their needs. Today, with its efficient customer service, consistent profitability & growth, adoption of new technologies and value added services, Union Bank truly lives up to the image of, Good People to bank with. Anticipative banking is an integral ingredient of valuebased services. This ability to gauge the customer's needs long before he realizes, best reduces the gap between expectance and deliverance Manpower is the key factor for the success of any organization. Union Bank has a dedicated family of about 26,000 qualified / skilled employees who will and always will be delighted to extend their services to the customers with heartfelt efforts The Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Follow on Public Offer in February 2006. Presently 44.57 % of Share

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Capital is presently held by Institutions, Individuals and Others. The Bank has over the years earned the reputation of being a techno-savvy Bank and is one of the front runners amongst public sector bank in the field of technology. It is one of the pioneer public sector banks, which launched Core Banking Solution in 2002. As of September 2005, more than 719 branches/extension counters of Bank are networked under Core Banking Solution, powered Bank with has the centralized multiple





Electronic Delivery Channels and has installed nearly 469 networked ATMs. Online Tele banking facility is available to all its Core Banking customers. The multi facility versatile Internet Banking Solution provides extensive information in addition to the on line transaction facility to both individuals and corporate banking with the Core Banking branches of the Bank. In addition to regular banking facilities, today customer can also avail variety of value added services like cash management service, insurance, mutual funds, Demat from the

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bank. Today there are more than 26,000 employees in Union Bank of India. UBI has been ranked at 5th position among the nationalized bank in India. Overview on banks deposits and advances Items Deposits Investments Advances 2003-04 2004-05 2005-06

2006-07 2007-08


Rationale for the study

Offering credit is an operation fraught with risk. Before offering credit to an organization, its financial health must be analyzed. Credit should be disbursed only after ascertaining satisfactory financial performance. Based on the financial health of an organization, banks assign credit ratings. These


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credit ratings are used to fix the interest rate and quantum of installment.

This study aims to analyze the credit health of organizations that approach Union Bank of India for foreign exchange credit facilities. After analyzing credit health, the credit rating is determined. On the basis of credit rating, the interest rate guidelines circular is consulted to fix a price for the credit facilities i.e. determine the interest rate.


Credit disbursement at Union Bank of India

This project was undertaken at the Industrial Finance Branch of Union Bank of India, at the Credit Department. Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes:1. Working capital finance

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2. Term loan for mega projects 3. non fund based Limits Like Letter of Guarantee, Letter of Credit Companies present audited balance sheets of the current and previous years. These are used to determine the financial health, turnover trends and rise and fall of profitability. Then credit rating is done.

The financial health and credit rating are theoretical methods for determining the right interest rate. However, in practice, banks consider other factors such as history with client, market reputation and future benefits with clients. Thus, a difference exists between theory and practice.


Objectives of the project

To assess the financial health of organizations that approach Union Bank of India for credit for import

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export purposes. This would entail undertaking of the following procedures:

Analysis of past and present financial statements Analysis of Balance Sheet Analysis of Cash Flow Statements Examination of Profitability statements Examination of projected financial statements Examination of CMA data









disbursement of credit. This would involve the following actions: Use of credit rating charts Evaluation of management risk Evaluation of financial risk Evaluation of market-industry risk Evaluation of the facility Evaluation of compliance of sanction terms

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Funds Mobilization and Credit Rationing The traditional activities of banks are deposit taking and lending. Deposits are liabilities of banks, while funds extended by banks to borrowers are their assets. The fundamental function of banks is to mobilize available funds from the surplus units to the deficit units. A must technique when banks reallocate funds is credit rationing. Bank credit is extended to the good ones, who are more likely to settle their debt principals and interests. Default risk is a primary concern of banks when financing the deficit units. Asymmetric or imperfect information is the factor behind default risk. In reality, financial markets are not necessarily efficient under prefect information. Information is costly as well as not available to everyone. Under this circumstance, banks with their advantages in collecting information could minimize default risk to certain level. To a further extent, some banks would insist to

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monitor their borrowers and take certain control over their borrowers businesses.

There are three basic mechanisms that banks apply in order to monitor their borrowers. First, a bank

can directly obtain information of the borrowers cash flow when the bank itself handles the borrowers deposit account. The second arrangement is more formal as restrictive covenants are stipulated in a loan contract. The borrower is required to maintain a preset range of liquidity determined by the bank. Lastly, the bank is granted the right to monitor the operation of the enterprises that borrow from them. Universal banks often apply the last mechanism and maintain a close and extensive connection with borrowers. Such connection will promise certain extent of lender

control over those enterprises, and hence, universal banks are argued to be in advantageous position to overcome the problems led by the absence of reliable information and facilitate effective funds mobilization

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Calculation of credit rating

Determination of interest rate: This would entail the following sequence of actions. Collect data regarding financial health evaluation Noting down of credit rating Referencing the banks interest rate guidelines circular Choosing the interest rate from the circular on the basis of financial health and credit rating


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Chap 3 : Term Loan Assesment

3.1 Steps in term loan processing

Submission of Project Report along with the Request Letter.

Carrying out due diligence Preparing Credit Report

Determining Interest Rate

Preparing and submission of Term Sheet If not approved if approved

Preparation of proposal

Submission of Proposal to designated authority If No queries raised If queries raised

Project Rejected

Sanction of proposal on various

Solve the queries

Communication of Sanction

Acknowledgement of Sanction

3.1 CONDUCTING FEASIBILITY STUDY Application to comply with

Sanction Terms & Condition & execution of Disbursement


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The success of a feasibility study is based on the careful identification and assessment of all of the important issues for business success. A detailed Project Report is submitted by an enterpreneur , prepared by a approved agency or a consultancy organisation. Such report provides indepth details of the project requesting finance. It includes the technical aspects, Managerial Aspect, the Market Condition and Projected performance of the company. It is neccessay for the appraising officer to cross check the information provided in the report for dtermining the worhiness of the project. Project Details: Definition of the project and alternative scenarios and models.

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


Outline the general business model (ie. how the business

will make money).


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Include the technical processes, size, location, kind of


Specify the time horizon from the time the project is

initiated until it is up and running at capacity. Relationship to the surrounding geographical area.








communities. Identifies environmental impact on the surrounding area. MARKET FEASIBILITY Industry description.

Describes the size and scope of the industry, market

and/or market segment(s).

Estimates the future direction of the industry, market

and/or market segment(s).

Describes the nature of the industry, market and/or

market segment(s) (stable or going through rapid change and restructuring).


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

market segment(s) (emerging, mature) Industry Competitiveness.

Investigates industry concentration (few large producers

or many small producers).

Analyzes major competitors. Explores barriers/ease of entry of competitors into the

market or industry.

Determines concentration and competitiveness of input

suppliers and product/service buyers.

Identifies price competitiveness of product/service.

Market Potential.









differentiated product/service market?

Identifies the demand and usage trends of the market or

market segment in which the proposed product or service will participate.


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Examines the potential for emerging, niche or segmented

market opportunities.

Explores the opportunity and potential for a "branded


Assesses estimated market usage and potential share of

the market or market segment. Sales Projection.

Estimates sales or usage. Identifies and assess the accuracy of the underlying

assumptions in the sales projection.

Projects sales under various assumptions (ie. selling

prices, services provided).

Access to Market Outlets.

Identifies the potential buyers of the product/service

and the associated marketing costs.


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Investigates the product/service distribution system and the costs involved. ORGANIZATIONAL/MANAGERIAL FEASIBILITY Business structure.

Outline alternative business model(s) (how the business

will make money).

Identify the proposed legal structure of the business. Identify any potential joint venture partners, alliances or

other important stakeholders.

Identify availability of skilled and experienced business


Identify availability of consultants and service providers

with the skills needed to realize the project, including legal, accounting, industry experts, etc.

Outline the governance, lines of authority and decision

making structure. Managerial Personnel


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Managerial Personnel play a key role in directing the working of the company. It is important for an organisation to have a pool of eficient personnel who bear the capacity to bail the company out from crisis situation and work towards optimum utlisation of organisational resources. Such capacity of the personnel can be determined by having complete details on following key aspects: Market reputation on the promoter / management of the company Hands on experience of the management personnel in the industry / Business managed by qualified personnel Ability of the promoters / management to bail out the company in case of crisis (for example, this could be derived from a strong group company) Decision making Is it concentrated ? Organisation structure / Succession planning / Labour relations


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Is any group company in default / Any Directors on RBIs negative list / Borrowers track-record in honouring financial commitment Length of relationship with the bank TECHNICAL FEASIBILITY Technology competitive plays an in important this role in maintaining a





conditions. Investing in the proper technology is the key to success it irrespective of size of business thus for achieving its projected performance, it is important for it to have sound technological background. Such technical competence of the project can be determined by having detailed study done on following key aspects: Determining Facility Needs.

Estimates the size and type of production facilities. Investigates the need for related buildings, equipment,


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Suitability of Production Technology.

Investigates and compare technology providers. Determines reliability and competitiveness of technology

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

Identifies limitations or constraints of technology.

Availability and Suitability of Location.

Access to markets. Access to raw materials. Access to transportation. Access to a qualified labor pool. Access to production inputs (electricity, natural gas,

water, etc.).

Investigate emissions potential. Analyze environmental impact. Identifies regulatory requirements. Explores economic development incentives.


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Explores community receptiveness to having the business

located there. Raw materials.

Estimates the amount of raw materials needed. Investigates the current and future availability and

access to raw materials.

Assesses the quality and cost of raw materials and

markets of easily substituted inputs. Other inputs.

Investigates the availability of labor including wage

rates, skill level, etc.

Assesses the potential to access and attract qualified

management personnel. FINANCIAL FEASIBILITY Estimate the total capital requirements.


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Assesses the capital needs of the business project and

how these needs will be met.

Estimates capital requirements for facilities, equipment

and inventories.

Determines replacement capital requirements and timing

for facilities and equipment.

Estimates working capital needs. Estimates start-up capital needs until revenues are

realized at full capacity.

Estimates contingency capital needs (construction delays,

technology malfunction, market access delays, etc.

Estimates other capital needs. Estimated equity and credit needs. Identifies alternative equity sources and capital

availability -- producers, local investors, angel investors, venture capitalists, etc.

Identifies and assess alternative credit sources -- banks,

government (ie. direct loans or loan guarantees), grants, local and state economic development incentives.

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Assesses expected financing needs and alternative

sources -- interest rates, terms, conditions, covenants, liens, etc.

Establishes debt-to-equity levels. expected costs and returns of various



Estimates expected costs and revenue. Estimates the profit margin and expected net profit. Estimates the sales or usage needed to break-even. Estimates the returns under various production, price

and sales levels. This may involve identifying "best case", "typical", and "worst case" scenarios or more sophisticated analysis like a Monte Carlo simulation.

Assesses the reliability of the underlying assumptions of

the financial analysis (prices, production, efficiencies, market access, market penetration, etc.)

Creates a benchmark against industry averages and/or

competitors (cost, margin, profits, ROI, etc.).


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Identifies limitations or constraints of the economic


Determines project expected cash flow during the start-

up period.







balance sheet, etc. when reaching full operation.

Study Conclusions The study conclusions contain the information you will use for deciding whether to proceed business. The major categories this section should include are:

Identify and describe alternative business scenarios and


Compare and contrast the alternatives based on their

business viability.

Compare and contrast the alternatives based on the goals

of the producer group.


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Outline criteria for decision making among alternatives.

Next Step After the feasibility study has been completed and

presented, a carefully study and analysis the conclusions and underlying assumptions. Next, you will be faced with deciding which course of action to pursue. Potential courses of action include:

Choosing the most viable business model, for investment Identifying additional scenarios for further study. Deciding that a viable business opportunity is not

available and moving to end the business assessment process.


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The credit report is an important determinant of an individual's financial credibility. They are used by lenders to judge a person's creditworthiness. They also help the person concerned to narrow down on the financial problem areas. Credit report is a document, which comprises detailed information about the credit payment history of an applicant. It is mostly used by the lenders to determine the credit worthiness of an applicant. The business credit reports provide information on the background of a company. This assists one to take crucial business related decisions. People can also assess the amount of business risk associated with a company and then decide whether they would be comfortable in providing them with credit facilities. The degree of interest that would be shown by investors in their company can also be gauged from the business credit reports as they can get an idea of the conception of their customers

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regarding themselves. Since these records are updated at regular intervals of time they enable people to identify the risk levels associated with a business as well as its future. These reports also allow businesses to get detailed

information about the financial status of business partners and suppliers.

What Is A Corporate Credit Rating?

Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans, preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of a country's investment surroundings and/or a company's ability to honor its debt responsibilities. . The ratings therefore assess an entity's ability to pay debts. There are various organization who perform credit rating for various business organization.


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Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model asses various aspects of the projects and assigns scores against them thereby determining the risk level involved with the project. It is divided in Four Sections: 1. Rating of the Borrower

Financial Risk Management Risk

2. Market Condition/ Demand Situation 3. Rating of the Facility 4. Business Consideration 5. Cash Flow related parameters

1) Rating of the Borrower: This part of credit rating model deals with assessing the financial and managerial ability of the borrower. The financial ability of the firm is derived by


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calculating ratios that determine the short term and long term financial position of the firm Short term ratios include Current Ratio, determines the liquidity position of the company over a period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. It is excess of current assets over current liability. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term

obligations. If the current ratio is too high, then the company may not be efficiently using its current assets. According to the guidelines given to UBI the ideal level is at 1.33:1 however the acceptable level is at 1.17:1. However at times current ratio may not be a true indicator, the current ratio for road projects is very high but this does not indicate that the company is not using its assets well but the ratio is high because the activity involves more in dealing


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with current assets. Hence it is important for the evaluator to understand the nature of the industry. Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the company already has aquired high amount of funds from market thereby reducing the investor share over the securities available, inreasing the risk. It is aslo important for the lender bank to assess the firms debt paying capacity over a period. Such capacity is derived by calculating ratio like Debt minimum acceptable level is 1.50. It also necessary for the lender to determine the ability of the firm to achieve the projected growth by evaluating the projected sales with actuals. However such parameter remains non applicable if the business is new. Service Coverage Ratio


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Financial risk evaluation is only one of the parameter and not the only parameter for determining the risk level. It is

important to evaluate the Management Risk also while evaluating the risk relating to borrower. It is the management of the company that acts as guiding force for the firm. The key managerial personnel should bear the capacity to bail out the company firm crisis situation. In order to remain competitive it is essential to take initiatives. Such skills are developed over years of experience, thus for better performance it is required to have a team of well qualified and experienced personnel.

2) Market potential / Demand Situation A Company does not operate in isolation there are various market forces that acts in either favourable or unfavraouble manner towards its performance. Thus the rating would not give true picture if does take market or demand situation in consideration.

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The demand supply situation / market Potential plays an important role in determining the growth level of the company like i) Level of competition : monolpoly , favourable , unfavourable ii) seasonality in demand : affected by short term

seasonality, long term seasonality or may not be affected by seasonality in demand. iii)Raw Material Availablity: iv)Locational Issues like proximity to market, inputs,

infrastructure: Favourable, neutral, unfavourable. v)Technology ie, proven Technology- not to be changed in immeditate future, technology undergo change, outdated technology. vi)Capacity utilisation 3)Rating of the Facility: The company can start functioning only after completing statutary obligations laid down by the governing authority.

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Such statutary obligation involves obtaining licenses, permits for ensuring smooth operations. Perparation and Submission of Finacial Statements, Stock statements in the standard format within the given time schedule.

4)Business Consideration: The length of relationship with the bank enables the lender to assess the previous performance of the account holder. A good track record acts in the favour of the applicant,

however a under perfomance make the lender more vigiliant. The income value to the bank also given due consideration.

Thus Credit Rating of the Business takes into consideration various aspects that directly or indiretly bears an effects the performance of the business. After evaluating the risk level involved the lender bank decided on lending Interest Rate.

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In UBI they are catagorised in 9 segements 1. lowest Risk CR-1 2. Low Risk CR-2 3. Medium Risk CR- 3 4. Moderate/ Satisfatory Risk CR- 4 5. Fair Risk CR- 5 6. High Risk CR- 6 7. Higher Risk CR- 7 8. highest risk CR- 8 9. NPA CR- 9 In UBI, a business receiving Credit Rating above level 6 are not considered good from point of investment and thus are avoided.


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The interest rate is determined from the interest rate guidelines circular. This circular is regularly updated to reflect the banks latest credit policies. The rupee credit is based on BPLR and the foreign exchange loans are based on LIBOR.

The guidelines define how much interest rate is to be assigned for a particular credit rating and credit duration. However, credit rating and its use in determining interest rate is a theoretical concept and the bank may allow a reduction in interest rate under the following conditions:

Good Client The organization is a long term client and brings good business to the bank.

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The organizations actions show that it intends to become a long term customer of the bank Banking Consortium The organization is seeking credit from a consortium of banks. In some cases like this, the lead bank might decide the interest rate and all the member banks of the consortium follow this interest rate.

3.4 TERM SHEET Following a favrouable feasibility check, credit rating the next step is preparing term sheet . A Term Sheet is breif document that provides details on aspects like:

Account Details Financial highlights for immediate previous two audited years and projection for proceeding year

Nature of Project Cost of Project Means of finace


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1. Nature of Facility 2. Purpose 3. Tennure of Term Loan 4. Interest rate Reset 5. Margin 6. Interest Rate, Commission Door to Door Tenor ie.the period within which the entire amount I sto be disbursed. o Repayment Terms o Prime Security o Collateral Security o Upfront fees ie the charges levied by the bank for processing the documents.

3.5 PROPOSAL An approved term sheet leads to preparation proposal. A proposal is prepared in standard format, this enables the bank to keep a proper track record and also facilitates proper comparision. A proposal a full fledged document providing

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details on project submitted and requesting finance from bank. A proposal contains information on following aspects:

* Details of Account: It includes name of the Account Holder, Date of incorporation, Line of Activity, Internal Credit Rating level, Address of the Registered Office, Name of Directors, Share Holding Pattern, Purpose of the Loan. Asset Classification,

* Securities:Lenders often feel more confident about a loan if they are given a security interest in the assets of a business. Then, if the borrower does not repay the loan as promised, the lender can take the property the borrower pledged, sell it and use the proceeds to repay (or partially repay) the borrowed amount.it provides detailed information on nature of securities given in lieu of the Loan.they are of two types Prime securities, Collateral Secuties


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Prime Securities: Pari Passu is a term used in banking transactions which means that the charge to be created is in continuation of an earlier charge which might be held by the same institution or by an other institution. Collateral Securities: In lending agreements, collateral is a borrower's asset that is forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which case the lender becomes the owner of the collateral. It includes details on Nature / Description of collateral security indicating area & location of property Value in Rupees. Date of valuation along with name of Valuer Insurance Amount & Date of Expiry Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor, Value of Guarantee.

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* Financial Highlights: It provides details of important financial elements over a period of years. It includes Details on Paid capital, Tangible Net worth, Net working Capital, Current Assets, Current Liabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Assets, Long Term Liabilities, Fixed Assets, Investments, Non -current Assets like guarantees , Cash Accruals, Capital employed. It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio and so. The interpretation of the financial data presented provides information on the performance trend of the company also of the Projections made. Such financial highlight play an important role in assessing the financial strength and weakness of the business.


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* Status of the project: A brief of Project In this part of proposal a brief about the project is explained, it includes information on nature, type of project, purpose of the project, commencement details, the promoters and related details of the project. If it is a on-going project it also gives details on progress and status of progress

* Evaluation of Industry : This Section gives brief details on the 1. Scope of the industry 2. Growth industry 3. Recent Developments and Trend Evaluation level and overall performance of the


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* Conduct of the Account: This section provides details on : Regularity in Submission of

Stock Statements / Book Debt Statement

QPR Statements / Half Yearly Statement Financial Statements CMA Data

* Compliance to Terms of Sanction It furnishes information on following aspect: Completion of Mortgage formalities

Registration of Charges with ROC

Whether documents valid and in force Compliance of RBI guidelines Whether consortium meetings held at prescribed

periodic intervals where the Bank is the leader.


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* Exposure details from banking system (existing) (Incl. Our Bank) The sharing pattern of the banks is mentioned in this section of proposal. It includes Name of the bank

Percentage of share for the fund based and non Fund based Limits

Amount in Rs. Non Fund based credit are in form of guarantees like Letter of Credit (L/c), Letter of guarantee (L/g)

Letter of Credit A Letter of credit also known as documentary credit is the most commonly accepted instrument of settling international trade payments. A letter of credit is an arrangement whereby a bank, acting at the request of a customer, undertakes to pay

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a third party by a given date, on documents being presented in compliance with the conditions laid down.

Letter of Guarantee A letter from a bank stating that a customer owns a particular security and that the bank will guarantee delivery of the security. A letter of guarantee is used by an investor who is writing call options when the underlying stock is not in his or her brokerage account. A Call Option is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. Financial Guarantee: A non-cancelable indemnity bond guaranteeing the timely payment of principal and interest due on securities by the maturity date. If the issuer defaults, the insurer will pay a fixed sum of money to holders of the securities. Financial guarantees are similar to a Standby Letter of Credit, but

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are issued by an insurance company. A Standby Letter of Credit is a form of insurance on an underlying agreement or obligation (contract), insuring all parties to the contract against failure to perform or pay on the part of one or another party to the contract. Standbys are issued by banks. Assessment of Non Fund Based Limit

Non Fund Based Limits are normally to be sanctioned for existing customer only who already enjoy fund based limits

2. If new borrower full processing as applicable to Fund Based Limits to be carried. 3. Borrowers background and experience of meeting

commitments to be examined in details.


L/c limit to be considered as per terms of Purchase or contract, lead period and minimum economical quantity of supply of stocks


Non Fund based Limits are to be supported by necessary fund based limits.

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Past experience of payment of bills under L/c to be verified before considering new request.


While Assessing the L/g Limit contract or agreement which is the base for L/g, should be examined in details for any ambiguous clauses.

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

* Details of Sister/ Allied Concerns: This section provides information about the Sister/ Allied Concerns aspects like the performance, promoters, share

holding pattern, operation exposure and experience from various banks.

* Terms and Condition: It is important both for the bank and the applicant to safeguard its interest, this could be achieved by settling at mutually acceptable terms and condition in order to ensure

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that both the parties the lender and borrower perform their part of obligation thereby not putting other party at loss. All loans are subject to regulations and conditions. The legal information relating to these regulations and conditions can be viewed in this section. It is advisable for both the parties to read this information carefully before approval.

METHODOLOGY OF PROJECT Sources of Data Collection:Data collection is key part of project work. There are two types of data collection, first is primary source and second is secondary of data collection. Primary Sources:The primary data includes profile, financial statement, and case study has been obtained from project of Winner Nippon Electronics Ltd., Raglan Infrastructure Ltd. & Synergy Telecommunication

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Secondary Sources:The secondary data relating to the procedures of assessment of project financing in small-scale industry (SSI) and largescale industry, RBI guidelines etc. have been sourced from reference books and websites.

Hypothesis:Project finance is the one of the biggest source of borrowing the debts. Scope of the project:Company has given various guidelines, advice and projection for obtaining the finance form the banks and other financial services. And developing of the company keeping in the view economic of the country. I have under taken the study of fast developing company with reference to its financial position. It is necessary to under taken the impact of Financial Services and various services provide to their clients.

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Limitation of the study:The time, limitation is the most important problem to collect the various information.

Lack of technical knowledge of project financing, I could not understand some technical terms of the project financing. CONCLUSION

Finance has very close ties with most people. Numerous financial products and services have penetrated our lives. The globe is ever-changing and financial products and services have to keep up with the pace of peoples demand. Banks, which assume a leading position in most financial systems, have to be prepared for the growing need of their customers. In some countries, universal banks, which offer a wide range of financial services, have proved responsive to customer demand and helpful in facilitating economic developments.


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Indias financial sector is relatively bank-oriented, and banks are the primary supplier of financial services. With the regulatory allowance for universal banking, Indian banks continue to expand its coverage of financial services in response to customer demand and profitability concerns. In countries with universal banking system, banks usually serve as an important source of external finance for enterprises. Indias banking sector follows closely the global trend of financial developments. It is believed that the concept of financial supermarkets could play a significant role in future given that an increasing number of transnational companies have been set up in the region and also by the opening of Indian Banking sector to foreign players. It is totally based on our logical skill and even it has to depend upon our analytical skill. In the projection I have learn how to build the companys position and how would the company rich their turnover?. And in that to perceive the achievable turnover of the company

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and to put the comments on it, and to find out why company has not achieved their goals. So, the above case study shows really position of the company and this case study is really helping me to build my analytical skill. This is the very well experienced for me and it absolute, it helps me to rich my goal. BIBLIOGRAPHY NAME OF BOOKS REFER
Book Name Financial management Financial Management Auther I.M.Panday C.Choudhury Edition 9th edition 3 edition

Publication Vikas Publishing housing Ltd. Tata Mcgraw Hill Publishing Co. Ltd.

Source of information:
www.Worldbank.org www.rbi.org http://www,ilustrados.com/publicationes/EpyAuVZyFGlwOIAq.php. http://www.greentie.org/finance/pftypes.php

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http://www.hyflux.com/hyfux_b_model.html www.eagletraders.com/loans/loans_what_is _project_finance.htm