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INTRODUCTION
With a view to harnessing advancements in S&T
to economic development, GoI laid emphasis on industrialisation through successive Five Year Plans.
Rapid industrial development needed massive
investment.
Prior
INTRODUCTION
GoI,
the
following
Indl. Finance Corporation of India (1948) Indl. Credit & Inv. Corpn. of India (1955) Indl. Development Bank of India (1964) & Indl. Reconstruction Bank of India (1971) Similarly, State Governments also established
INTRODUCTION
For long, commercial banks confined their
lendings to meet WC requirements only and they did not play any active role in extending term finance.
However, with increasing proportion of Term
Deposits in their deposit portfolio and the paucity of resources in the country, it was felt that banks could enter the field of term finance, in a role complementary to that of Term Lending Institutions.
PROJECT BACKGROUND
The purpose of term assistance is to meet a
to be done during a specified period in future for deriving expected benefits under certain assumed conditions.
A project may be in the nature of setting up a
PROJECT BACKGROUND
To set up a project, certain capital expenditure
needs to be incurred in acquiring assets such as L&B, P&M and other infrastructural facilities like roads, water supply, railway sidings, etc., in addition to the Preliminary / Pre-Operative Expenses and margin on WC Limits.
meet the entire capital expenditure out of their own resources, Term Loans are sanctioned to supplement the promoters contribution.
PROJECT BACKGROUND
Promoters
of an industrial project can constitute themselves into any of the following forms of business organisations to implement the project : Sole Proprietorship, JHF, Partnership, Co-operative Society & Joint Stock Company. around Joint Stock Company as promoter.
PROJECT BACKGROUND
The Promotion Stage is a crucial stage in the
entire life cycle of a project. Promotion in relation to a project will comprise broadly the following functions:
I] Identification of a project II] Feasibility investigation III] Assembling the proposition IV] Financing the proposition
I] Identification of a Project
The first step in the project promotion is the
identification of a project. An industrial project originates as an idea in a promoter when he observes the existence of a potential market for a certain product.
The promoter, on the basis of his experience,
background and ability, then considers the feasibility of manufacturing and marketing the product at a remunerative price.
It is, therefore, desirable that, before it is undertaken, marketability of the product to be manufactured is firmly established.
There are agencies, specialising in market
research, which conduct such market studies. Promoters may take advantage of their services.
A market study aims at assessing the aggregate
aspects: Location of the project Lay-out of the Plant Size of the Plant Factory construction Manufacturing process / Technology Process Design Product Design Scale of Operation Infrastructural facilities
itself with matching of economic resources with the physical requirements of a project and determining the viability of investment therein.
a promoter is satisfied about the technical feasibility and economic viability of a project, the next task is to work out the Cost of the Project and the Means of financing it. (a) L&B (b) P&M (c) Misc. Fixed Assets (d) Technical Know-how, Engg. & Consultancy fees (e) Preliminary and Pre-operative expenses (f) Provision for contingencies (g) Margin on WC Limits
Fixed Assets which facilitate the process of production. Fixed Assets have a relatively longer life and are generally not meant for resale. They are required to be retained over a period of time to exploit their productive potential. and FG, which when sold bring in cash. This cycle is generally completed in a short period of less than one year.
pay for themselves, the promoter should raise suitable long term funds to finance a project.
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financing a project is referred to as Capital, comprising two components (a) Owned Capital and (b) Borrowed Capital.
The other sources of long term funds are:
(a) Capital Subsidy applicable to projects coming up in certain notified backward areas, and (b) Interest free sales tax loans offered by State Governments.
sources of finance, the promoter will decide about a suitable financial structure for the Company.
It will depend upon the financial leverage
envisaged in the combination of sources of finance under the two categories, viz., Owned Capital and Borrowed Capital.
Few projects can be financed entirely by equity
brought into alignment by the concept of Debt / Equity gearing which determines the level of debt that can be supported by a given quantum of equity.
For this purpose, Debt means Funded Debt
including all term liabilities and equity will include Share Capital and retained earnings, if available.
promoter will examine the attractiveness of the project, vis--vis alternative sources of investment.
The process which assists the management in
the period of time required for recovering the entire amount of investment made in a project.
The cash flows (Net Profit + Depreciation +
Other non-cash write-offs) are compared with the outlay on the project to determine the payback period. Years to pay back would be: Total Investment Cash Flow per annum
concept of compounding which involves reinvesting the simple interest earned each year along with the principal so that the principal grows each year by the amount of interest earned during the previous year and interest being calculated on the increased principal also grows.
Future Value = Principal x (1+i)
discounted cash flow technique and uses the concept of discounting which is just the opposite of compounding.
of a future sum to which the original amount (which we want to find out), invested at a particular compound rate of interest has grown. (1+i)
PV = Future sum
at which the sum of the discounted cash flows is equal to the investment outlay. In other words, IRR is the rate which makes the Present Value (PV) of benefits equal to the Present Value of costs or reduces the Net Present Value (NPV) to zero. The object of this method is to find the rate of return which a project is likely to earn over its useful life.
IRR =
Lower Discount Rate + Diff. Between the two discount rates x NPV at lower discount rate Abs. diff. between the two NPVs.
of not less than one year, intended normally for financing fixed assets acquired / to be acquired, carrying interest at a specified rate, and scheduled for repayment in instalments.
Depending on the term for which the said terms
loans are granted, they could be classified into (a) Short Term Loans (b) Medium Term Loans and (c) Long Term Loans.
Payment Guarantee (DPG) is a contract to pay to the supplier the price of machinery, supplied by him on deferred terms, in agreed instalments with stipulated interest on the respective due dates in case of default in payment thereof by the buyer. Term Loan and, as far as the buyer of P&M is concerned, it serves the same purposes as a Term Loan.
deferred payment basis, the balance remaining to be paid after the initial down payment represents the deferred receivables of the seller.
Thus, the funds of the seller get blocked for
unduly long periods and the seller requires finance against such deferred receivables to replenish his Working Capital.
deferred receivables, the seller usually draws a series of usance bills with graded maturities to coincide with the due dates of payment of the relative instalments (including applicable interest).
The usance bills drawn by the seller will be
accepted by the buyer before they are discounted by the sellers banker.
arises only in the case of a Public Limited Company resorting to raise through the capital issue market, a part of the Share Capital for part-financing a project. agrees, in consideration, to take up a specified number of shares or debentures or amount of debenture stock to be offered to the public, in the event of the public not subscribing for them.
point of view of earnings on the investment as from the consideration that no viable project enjoying national priority should suffer for want of underwriting support.
Project Appraisal
The purpose of Project Appraisal is to ascertain
whether the project will be sound technically, economically, financially and managerially and ultimately viable as a commercial proposition. examination of:
The appraisal of a project will involve the a) Technical Feasibility : To determine the
suitability of the technology selected and the adequacy of the technical investigation, and
Project Appraisal
b)
Economic Feasibility : To determine the conduciveness of economic parameters to setting up the project and their impact on the scale of operations. cost estimates, suitability of the envisaged pattern of financing and general soundness of the capital structure. profitability of the project and its sufficiency in relation to the repayment obligations pertaining to term finance.
Project Appraisal
e) Managerial Competency : To ascertain that
competent men are behind the project to ensure its successful implementation and efficient management after commencement of commercial production. appropriate, from the point of view of its value to the national economy in terms of socioeconomic benefits like generation of employment opportunities, forex earnings, the quantum of import substitution, etc.
Project Appraisal
The first step in Project Appraisal is to find out
whether the project is prima facie acceptable by examining salient features such as:
The background and experience of the applicants,
Project Appraisal
The original application may not contain all the
basic data / information. In such cases, it may be necessary to interview the applicants and elicit all the necessary data / information with a view to forming an overall idea about the general feasibility of the project. acceptability of the project, the Branch should call for from the promoters, an Application, containing the following essential data / information, such as:
Project Appraisal
a) Particulars of the project along with a copy
of the Project Report furnishing details of the technology, manufacturing process, availability of construction / production facilities, etc.
b) Estimates of cost of the project detailing the
itemised assets acquired / to be acquired, inclusive of Preliminary / Pre-operative Expenses and WC margin requirements.
Project Appraisal
c)
Details of the proposed means of financing indicating the extent of promoters contribution, the quantum of Share Capital to be raised by public issue, the composition of the borrowed capital portion with particulars of Term Loans, DPGs, Foreign Currency Loans, etc. level of Gross Current Assets is at the peak) during the first year of operations after the commencement of commercial production and the banking arrangements to be made for financing the WC requirements.
Project Appraisal
e) Project Implementation Schedule. f) Organisational set up along with a list of
Board of Directors and indicating the qualifications, experience and competence of (i) The key personnel to be in charge of implementation of the project during the construction period and (ii) The executives to be in charge of the functional areas of purchase, production, marketing and finance after commencement of commercial production.
Project Appraisal
g) Demand projection based on the overall
Projected P&L Account and B/S for the operating years during the currency of the Banks term assistance. Proposed amortisation repayment programme. schedule, i.e.,
j)
Project Appraisal
k) Projected Funds Flow Statement covering
both the construction period and the subsequent operating years during the currency of the Term Loan.
l) Details of the nature and value of the
securities offered.
m) Consents from the Government / other
Project Appraisal
In respect of existing concerns, in addition to
this information, particulars regarding the history of the concern, its past performance, present financial position, etc., should also be called for.
The Application completed in all respects and
duly signed by the authorised signatories of the Company will form the basis for the detailed appraisal of the project.
Project Appraisal
An inspection of the project site (or factory in
perspective having due regard to its nature, size and scope. appraising the viability of various projects are more or less the same, there could be no standard or uniform approach for appraising all projects.
Project Appraisal
The
ultimate objective of the appraisal exercise is to ascertain the viability of a project with a view to ensuring the repayment of the borrowers obligations under the Banks term assistance. proposed term assistance as the prospects of its repayment that should weigh with the Branch while appraising a project.
Project Appraisal
In project appraisal, nothing should be assumed
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