Project Financing

Sources of Finance
Shares :
• A large part of fixed investments comes from different types of shares.

New Institutions for Industrial Finance:

• These institutions may be grouped under the broad heading of development
banks.
• Established with the help of the Government to fill in the gaps in industrial
finance and to promote the objectives of planning, these institutions cater to the
needs of large and small industries.
• The new institutions supplying industrial finance are SFC, IDBI etc.
 Sources of Finance
Public Deposits:
• In some parts of the country a system of public deposits prevails.
• Under this system, people keep their money as deposit with these companies for a period
of six months or a year.
• Depositors receive a fixed interest.
• They can demand the refund of money at any time.
• This money is used by the companies to meet their needs of working capital.
• But this source of finance is unreliable because depositors can seek refund at any time.
• With the growth of banking habits and increase in dealings with financial institutions, the
importance of public deposits as a source of finance is slowly declining.
 Sources of Finance
Loans from Banks:
• Commercial banks can provide funds for working capital.
• Loans are given against the guarantee of securities with companies.

Trade Credit:
• It is the credit which the firms get from its suppliers.
• It does not make available the funds in cash, but it facilitates the purchase of
supplies without immediate payment.
• No interest is payable on the trade credits.
 Institutional Financing
Industrial Development Bank of India (IDBI):
• It provides credit and other facilities for industrial development in the country.
• It provides long term finance for green field projects, as also for modernization,
expansion and diversification.
• It has structured various product such as equipment finance, asset credit and
corporate loans.

Industrial credit and investment corporation of India Limited (ICICI Ltd.):

• It played a facilitating role in consolidation in various sectors of the Indian industry,
by funding mergers and acquisitions.
Small Industries Development Bank of India (SIDBI):
• It offers refinance to SSI sector through a network of banks and
state-level financial institutions.
• It also offers direct finance for meeting specific requirements of
SSI sector.

Industrial Finance corporation of India Limited (IFCI Ltd):

• Its main financing comprises of projects finance, financial
services and corporate advisory services.
Industrial Investment Bank of India Limited (IIBI Ltd):
• It offers a variety of financial products such as Project finance, working
capital and other short term loans to companies.

Infrastructure Development finance company Limited (IDFC Ltd):

• It was incorporated in 1997 and was conceived as specialized institution to
facilitate the flow of private finance to commercially viable infrastructure
projects through innovative products and processes.
Industrial Reconstruction Bank of India (IRBI):
• It has main aim to revive sick industries and make them able to
exist and compete in market by assistance.

State financial corporation’s (SFCs):

• It provides loans to needy industries.
 Time Value for Money

• It refers to the purchasing power as well as earning power

of money with respect to time
 Simple Interest
• I= P N (r/100)
• I= PN i
• F=P+I = P+P N i= P (1+Ni)
• Where I= Simple Interest
• P= Principal Amount
• N= No. of years
• r= rate of interest per anum
• F= Total amount
 Example

• If Rs 1000 is lent for 3 yrs at a simple interest rate of 10

% per anum, the interest earn will be
 Solution

• I= P N i= 1000 * 3 * 10/100 = 300

• F = 1000+ 300 = Rs 1300
 Ex.

• If Rs 1000 is borrow for two months at simple interest

rate of 10% per anum, the amount to be repaid is
 Sol.

• F= P (1+ N i) = 1000 (1+ 2/12 * 10/100)

• = 1000 (1 + 0.01667) = Rs 1,016.67
 Compound Interest
• F= P (1+ Ni)
• For 1st year Compound interest F 1= P (1+N i)
• For 2nd year Compound interest F 2= (Principal) + (interest of 1st year)
+ (Principal + year 1 interest due) (interest rate)
• = P + P i + (P + Pi) i = P (1+2 i + i2 ) = P (1+i)2
• For N years Compound interest
• FN = P (1+i)N
 Example

• What will be the compound interest on Rs 2,000/- for 10

yrs at 5% p a?
• Find the difference between the simple & compound
interest on the same principal for the same period.
 Solution
• P= Rs 2000/-
• N= 10 yrs
• i= 5% = 5/100 = 0.05
• F 10= P (1+ i) 10 = 3,257.78
• Compound total interest is CI = F 10- P = 1257.78
• Simple interest I= PN i = 1000
=Required Difference= CI- SI = Rs 257.78/-
 Money

• According to Crowther “anything that is generally

acceptable as a means of exchange and which at the
same time act as a measure & store value.
 Nature of Money
• Durability: Durability means the item must be able to exist for a long time.
• Easily Transported: Individuals can able to carry money with them &
transfer it easily to other individual.
• Divisibility: Money can easily be divided into a smaller unit of value.
• Uniformity: Uniformity means that all version of the same denomination of
currency must have the purchasing power.
• Limited Supply: Limited supply means the restrictions on the amount of
money in circulation ensure that values remain relatively constant for the
currency.
• Acceptability: Every one must be able to use the money for transaction
 Functions of Money
• Medium of Exchange: The most important function of money to serve
as a means of payment.
• Measure of Value: Money serves as a common measure of value in
terms of which the value of all goods and servicers is measured &
expressed.
• Standard of Deferred Payment: It facilitate credit transaction through its
function as a standard of deferred payment.
• Store value: By acting as store value money provides security to the
individuals to meet unpredictable emergencies.
• Transfer of Value: Value of money can be easily & quickly transfer from
one place to another place because money is acceptable everywhere
 Functions of Money
• Distribution of National Income: Money helps in distribution of
national income through the system of salary, interest, profit, rent
etc.
• Maximization of satisfaction: Money help consumers &
producers to maximize their benefits.
• Basis of Credit System: Individual deposit their money (saving) in
the banks & on the basis of the deposits, the bank create credit.
• Liquidity of Wealth: All forms of wealth can be converted into
money.
 Equated Monthly Installment(EMI)
• ‘Equated Monthly Installment’ – EMI’ A settled installment sum
made by a borrower to a moneylender at a predefined date every
schedule month.
• Equated Monthly Installments are utilized to pay off both interest
and principal each month, so that over a specified number of years,
the loan is paid off in full.
• When you take a loan, this is the amount that you are expected to pay
every month for the contracted period.
 How to calculate the EMI on your loan?
• Before we delve into how it is calculated, we need to understand what an EMI
actually constitutes.
• It needs no mention that when you take a loan, you need to pay back that
amount along with the interest.
• An EMI is therefore nothing but a combination of the principal amount and
interest.
• That is, with every EMI you pay back a portion of the loan principal and a
portion of the total interest that you are liable for the whole term.
• So what is the proportion of principal and interest that an EMI comprises?
• To understand this, you need to know the two types of interest rates that you
may be charged. They are: Flat Rate & Diminishing Balance rate.
 Flat rate
• Here, the interest is calculated on the whole of the principal amount
without considering that the principal is gradually paid over the term
period.
• This type of loan is common with short term loans like automobiles.
• The EMI here is nothing but: (Principal + Total interest) / term.
• For example, if the principal is Rs 3 lakh and the term and rate are 3
years and 12% respectively, then the EMI is:
• (300000+108000)/36=11,333
Here, every installment consists of a constant proportion of principal and interest.
 Diminishing balance rate
• This type of loan gives due consideration to the fact that the
principal reduces with every EMI payment.
• So, the first installment will pay interest on the whole capital and
the subsequent EMIs, on the loan balance as reduced by the
principal repaid by the previous EMIs.
• Long term loans like home loans typically follow this system.
• So, for a 20-year loan of Rs 30 lakh @ 8.5% p.a., the EMI in this
case would be: Rs 26,034.
As illustrated in the above graph, initially, the EMI will consist more of interest
than principal. Over time, this proportion would get reversed. This type of EMI
can be calculated easily in a spreadsheet but manual calculations could be laborious.