ACCURATE INSTITUTE OF MANAGEMENT AND TECHNOLOGY

Summer Project Report

ON

CREDIT APPRAISAL OF PROJECT FINANCING AND WORKING CAPITAL

AT

By Kavita Mittal AIMTDM1113201 2011-2013

Contents
Guidance and Approval Certificate5 Acknowledgment..6 Executive Summary7

Chapter 1 Company Profile and Details

1.1 History of Punjab National Bank9 1.2 Corporate Profile of Bank....10 1.3 Organizational Structure of PNB..12 1.4 Departments of PNB..13

Chapter 2 Literature review

2.1 Term Loan...15 2.1.1 Features of Term Loan16 2.1.2 Term Loan Appraisal17 2.1.3 Fund Flow Statement17 2.1.4 Balance Sheet projection..18 2.1.5 Financial Ratios19 2.2.1 Working Capital.21 2.2.2 Types of Lending23 2.2.3 Data required for assessment of working capital..24

Chapter 3 About The Project

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3.1 Objective of the Study25 3.2 Scope of the Study..26 3.4 Methodology...26

Chapter 4 Data and Data Analysis

4.1 Case Study Of Term Loan.28 4.1.1 Proposal of Term Loan.36 4.1.2 Analysis of proposal.....45

Chapter 5 Conclusion, Findings, Recommendations and limitations

5.1Conclusion of Case Studies60 5.2 Findings of Working Capital Case Study.61 5.3 Findings of Term Loan Case Study62 5.4 Suggestions and recommendations.63 5.5 Limitations64 Glossary.65 List of Abbreviations..67 Bibliography69

Guidance and Completion Certificate

This is to certify that Ms. Kavita Mittal, Academic session 2011-2013, Roll no. AIMTDM1113201 has undertaken the project Credit Appraisal for Term Loan and Working Capital .under our guidance from 2 May 2012 to 29 June 2012 at Punjab National Bank and has completed the said project successfully.

Signature with Date Industry Guide Name: A.K.VIJH Gupta Designation: Chief Manager (Credit Division)

Signature with Date Faculty Guides Name: Prof. Rachna

Organizations Seal Contact Details: Tel no. 011-26192454 E-mail id [email protected] Mobile 9873937855

Acknowledgement
Many people have contributed directly and indirectly to bring this project to completion. By sharing what they know and encouraging me to pursue the answers of my own questions, there are many individuals who have helped me make this work possible. First and foremost I would like to express my gratitude towards my industry mentor Mr.A.K.VIJH Chief Manager, Credit Division, PNB (HO), for his immense contribution in making me understand the mechanism of CAD and in taking up an independent study of the same and its culmination in the form of project report. My gratitude towards faculty mentor Prof. RACHNA GUPTA, for her unending support and contribution in completion of SIP and giving an overall enriching experience of working under her valuable guidance. Thanking all the department heads for their guidance in understanding work of different departments. .

Regards, Kavita Mittal Accurate Institute of Management and Technology Greater Noida

EXECUTIVE SUMMARY
This project explains various credit facilities and policies followed by one of the most reputed banks in the country, Punjab National Bank. Each bank has its own set of policies within the overall RBI guidelines that must be followed while sanctioning a loan and care must be taken that the money provided by the bank is being used up for the intended purpose only. The task ranging from acceptance of loan proposal to sanctioning of loan is carried out at Credit Division of the bank. Moreover, each loan proposal falls under powers at different hierarchical levels for adequate decentralization & faster decision making depending on the size of the proposal.

The objective is to study in depth, the Loan Policies and its sanctioning for corporate bodies. Different corporate bodies require funds for various functions & mainly for: To finance their new projects. To meet their working capital requirements. So this project is undertaken to understand the various aspects of processing/appraisal of Term Loan, working capital assessment and Credit Risk Management carried out at PNB. With a developing economy and many multinational companies coming up, new projects are being undertaken. These projects require huge amount of fund and thus banks come forward to finance these projects depending on the feasibility of the project. PNB carries out an extensive study of the project and checks for its feasibility such as Technical, Economic and Financial Feasibility and if the project seems to be feasible, a decision is taken. This process of carrying out the feasibility test of the project is called Project Appraisal. Various companies require fund for daily operations. In order to finance these needs, a company approaches bank for credit facilities. CD at PNB takes care of these facilities and based on the credit worthiness and other useful parameters, the bank sanctions it at a particular rate of interest. In order to understand this, one must be clear with basic topics such as working capital management, balance sheet analysis and forecasting, and cash budget. However in case of working capital financing the basic task for the bank and the company is to evaluate the Net Working capital, which is done through working capital assessment. Further, the project also covers the Credit Risk Rating carried out at Integrated Risk Management Department (IRMD) of the bank. Rating is done in order to find out the capability or the willingness of the company to pay its debt. PNB uses its own model to rate a company and this model is one of its kind in the country. Depending on the type of project, a suitable model is chosen and based on financials of the company and the track record of the management, rating is
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done. This rating also helps in determining the rate of interest at which the loan should be given. Generally, a company with good ratings is gives loan at a lower ROI since the risk involved is lower. In this report we shall discuss the various aspects that PNB took into consideration before granting term loan and enhancing working capital limits through 1 case studies how Working capital loan appraisal a PBF note based on the CMA data given by the company is prepared based on which the bank decides how much contribution is to be brought in by the borrower and how much is the permissible bank finance. NOTE: Due to security/confidentiality reasons all the names in this report have been changed to fictitious

Chapter:1 Companys Profile PUNJAB NATIONAL BANK

VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

MISSION
"Banking for the unbanked"

1.1 History of Bank: Punjab National Bank (BSE: 532461, NSE: PNB), is the second
largest bank in India. It was registered on May 19, 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. PNB has the distinction of being the first Indian Bank to have been started solely with Indian Capital. Bank was nationalized in 1969 along with 13 other banks. Punjab National Bank was setup in Lahore by patriots like Lala Lajpat Rai, Dayal Singh and Mahatma Hans Raj. Today PNB is well established brand with a strong technological base touching the lives of millions of customers. The bank has been constantly re-inventing itself to keep pace with the changing banking landscape and customer preferences while successfully managing change the bank has remained deeply rooted in the principle of good banking. Based on its sound and prudent banking experience and consistent profit performance, PNB looks confidently to the future..the name you can bank upon.. Branches 5189 ATMs 5050 Customer Base 60 Million

1.2 Corporate Profile of Bank:

With its presence virtually in all the important centers in the country, Punjab National Bank offers a wide variety of banking services which include corporate and personnel banking, industrial finance, agricultural finance, financing of trade and international banking. Among the clients of the bank are Indian conglomerates, medium and small industrial units, exporters, nonresident Indians and multinational companies. The large presence and vast resources base have helped the bank t built strong links with trade and industry. The banks strength lies in corporate belief of growth and stability. With over 38 million satisfied customers and 4688 offices, PNB has continued to retain its leadership position among the nationalized banks. The banks enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of indias top service brands, PNB has remained fully commited to products, the bank has also entered the credit card and debit card business; bullion business; life and non- life insurance business; gold coins and asset management business etc. Since its humble beginning in 1895 with the distinction of being the first Indian bank to have been started with Indian capital PNB has achieved significant growth in business which at the end of march 2009 amounted to Rs. 3,64,463 crore. Today, with assets more than RS.2,46,000 crore PNB is ranked as the 3rd largest bank in the country ( after SBI and ICICI Bank) and has the 2nd largest network of branches ( 4668 including 238 extenction counters and 3 overseas offices). During the FY 2008-09, with 39% share of low cost deposits, the bank achieved a net profit of Rs. 3,091 crore, maintaining its number ONE position amongst nationalised banks. Bank has a strong capital base with capital adequacy ratio as per basel II at 14.03% with tier I and tier II capital ratio at 8.98% and 5.05% respectively as on march09. As on March09, the Bank has the gross net NPA ratio of only 1.77% and 0.17% respectively. PNB has aways looked at technology as a key facilitattor to provide better consumer service and insured that IT strategy follows the business strataegy so as to arive at BEST FIT. The Bank has made a rapid strides in this direction. Alongwith the achivement of 100% branch computrisation, one of the major achivement of bank is covering all the branches of bank under Core Banking Solution (CBS), Thus coverin 100% of its business and providing Anytime Anywhere banking facility to all customers including cutomers of more than 2000 rural branches. The bank has also been ofering internet banking services to the cutomers of CBS branches like booking of tickets, payment of bills of utilities, puchasae of airline ticket etc. Towards developing a cost effective alternative channels of delivery, the bank with more than 2150 ATM networks amongest Nationalised banks. With the help of advanced technology, the bank has been a forntrunner in the industry so far as the inintiatives for financila inclusion is concerned. With its policy of inclusive growth in the indo-Gangetic belt, the bankers mission is Banking for Unbanked. The bank has launched a
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drive for biometric smart card based technology enabled financial inclusion with the help of business corespondents/ business faicilitators (BC/BF) so as to reach out the last mile customer. The BC/BF will address the outreach issue while technology will provide cost effective and transparent services. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. The bank has already achieved 100% financial inclusion in 21,408 villages. Backed by strong domestic performance, the bank is planning to realize its global aspirations. In order to increase its international presence, the bank continues Its selective foray in international markets with presence in Hongkong, Dubai, UK, Shanghai, Singapore, Kabul and Norway. The second branch in hongkong at Kowloon was opened in the first week of April09. Bank has also in the process of establishing its presence in China, Bhutan, DIFC Dubai, Canada and Singapore. The bank also has a joint venture with Everest bank ltd (EBL) Nepal. Amongst top 1000 Banks in the world, The Banker listed PNB at 250th place. Further , PNB is at the 1166th position among 48 Indian firms making it to a list of the worlds biggest companies compiled by the US magazine FORBES.

Financial Performance of Punjab Natioanl Bank

o Bank has retained its NUMBER ONE position among the nationalised bank in terms of branches, Deposit, Advances, total business, operating and net profit in the year 2008-09. o The impressive operational and financial performance has been brought about by Banks focus on customer based business with thrust on SME, agricultural, more inclusive approach to banking; better asset liability management; improved margin management; thrust on recovery and increased effeciency in core operatons of the Bank. Profit Parameters(crore) Mar-11 Mar-12 9056 10614 4433 4884 11807 13414

PARAMETERS Operating Profit Net Profit Net Interest Income

Y-O-Y (%) 17.2 10.2 13.6

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1.3 Organizational Structure of PNB

The bank has a three tier structure comprising of head office, circle office and branch office. There are 58 circle offices and 4267 branch offices. There is decentralized power up to the branch level which has improved speed of decision making.

Head Office Circle Office

Branches

1.4 DEPARTMENTS OF THE COMPANY

Credit Administration Division

Human Resource Department Punjab National Bank

Treasury Division

International Banking Division

Risk Management Department

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Working of Credit Administration Division (CAD):

Credit Administration division looks after all the proposals for all type of loans which fall within the purview of GMs-HO/ED.CMD board. A credit proposal goes through different level of sanctioning to enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of management for action. The bank has introduced Grid/Committee system in credit sanction process where in every loan proposal falling within the vested powers of DGM and above is discussed in a credit committee, which, on the merit of the case, recommends the proposal to the sanctioning authority. Such committees have been formed both at HO and ZO levels. The credit committee at Ho includes GMs-Credit and CGM/GM-RMD. For credit proposals falling within the vested power of CGM/GM, the credit committee at HO DGM/AGM/Chief Manager-CAD and DGM/AGM/Chief Manager-RMD. The Credit Administration Division is assisted by risk management division (RMD) and industry desk for risk analysis and technical feasibility of credit proposals. includes

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Chapter 2 Literature Review 2.1 TERM LOAN

A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always mature between one and 10 years. For example many banks have term-loan programs that can offer small businesses the cash they need to operate from month to month. Often a small business will use the cash from a term loan to purchase fixed assets such as equipment used in its production process. Term loans are provided by commercial banks for an extended period of time. Typically, a term loan is provided by acquisition of fixed assets with a period of repayment not less than three years. This is against the short term loan provided by commercial banks for the purpose if meeting working capital credit requirements of borrowing enterprise. Conceptually, working capital credits are provided for a period not exceeding one year and repayable on demand, whichever is earlier. In practice, though, the reality seems to be otherwise. From the point of view of the end use of loan facilities provided by commercials banks, these may be classified as short term or long term depending upon acquisition of current (forming part of working capital) or long term (fixed) assets by the borrowing enterprise. Nevertheless, the loans are generally provide for acquisition of fixed assets, which are required to be paid of cash generated from operations over a period of time in the schedule agreed beforehand. Term loans are available in different forms. Fund based term loans are provided for outright acquisition of capital goods. On the other hand, Non fund based term loans are providing for outright acquisition of capital goods. On the other hand, non fund based term loans are in form of Deferred Payment Guaranties (DPG) where the liability to make payment crystallizes after the bill against such guarantees are presented for payment. Bank also underwrite the equity issues floated by companies, and in the process, bank assume a long term exposure in the company. Decision making in all such credit proposals require appraisals of all the aspects which have a bearing on the operation of the company over an extended time period. This scope and approach in providing term credit or another conventional form of advances. Term loan is a form of participation loan in as much as the lending institution has a stake in the unit for a fairly long time period, which is a kin to holding a share in equity or debenture issued by the bank. Longer the period of repayment, the riskier is the proposition, and therefore any appraisal of term loan should have an inbuilt method of assessment of the risk elements contained therein.

2.2 Features of Term Loan

Following are the different features of term loans:
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Currency: Financial institutions give rupee term loans as well as foreign currency term
loans.

Security: All loans provided by financial institutions, along with interest, liquidated
damages, commitment charges, expenses etc. are secured by way of: (a) First equitable mortgage of all immovable properties of the borrower, both present and future; and (b) Hypothecation of all movable properties of the borrower , both present and future, subject to prior charges in favor of commercial banks for obtaining working capital advance in the normal course of business

Interest payment and principal repayment: These are definite obligations which are payable irrespective of the financial situation of the firm. Restrictive Covenants: FIs impose restrictive conditions on the borrowers depending upon the nature of the project and financial situation of the borrower. 2.3 Term Loan Sanction Procedure
The procedure associated with a term loan sanction involves the following steps:

Submission of loan application: The borrower submits an application form which

seeks comprehensive information about the project such as: (a) Promoters background (b) Particulars of industrial concern (c) Cost of project (d) Means of financing (e) Marketing and selling arrangements (f) Economic considerations Initial processing of loan application: The loan application is reviewed to ascertain whether it is complete for processing, if it is incomplete then it is sent back to the borrower for resubmission with all relevant information. Appraisal of the proposed project: The detailed appraisal of the project covers the marketing, technical, managerial, and economic aspects. Issue of letter of sanction: If the project is accepted, a financial letter of sanction is approved to the borrower. Acceptance of terms and conditions by the borrowing unit: On receiving the letter of sanction the borrowing unit convenes its board meeting at which the terms and conditions associated with the letter of sanction are accepted and appropriate resolution is passed to the effect. Execution of loan Agreement: After receiving the letter of acceptance from the borrowers. The FI sends the draft of the agreement to the borrower to be executed by the authorized person
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 Creation of Security: The term loans and the DPG assistance provided by the financial
institutions are secured through the first mortgage, by way of deposit of title deeds, of immovable properties and hypothecation of movable properties. Disbursement of loan: Periodically, the borrower is required to submit the information on the physical progress of the projects, financial status of the projects, arrangements made for financing the projects, contribution made by the promoters, projected fund flow statement, compliance with various statutory requirements and fulfillment of disbursement conditions. Monitoring: Monitoring of the project is done at the implementation stage as well at the operational stage.

Pre-Sanction Inspection
Once the incumbent is satisfied with the information furnished by the borrower that the proposal for the term loan is worth consideration, he should inspect the factory or place of business to check the authenticity of the information supplied. Inspection can bring into light certain factors which are not revealed by mere study of financial statements. Even in case of new unit, inspection of factory site is necessary. The assets of the concern which are proposed to be charged should be verified physically and the title of the borrowers on the same should be examined. The books of the accounts and other relevant papers should be verified to see if all liabilities, claims, contingencies, disputes have been admitted by the concern. Such an inspection can focus on the unfavorable aspects or weaknesses of the unit and can help to a large extent in making an assessment of the proposal.

2.4 Term Loan Appraisal. Credit Appraisal of New Project

The appraisal system aims to determine the credit needs/requirement of the borrower taking into account the financial resources of the client. The end objective of the appraisal system is to ensure that there is no under- financing or overfinancing. Following are the aspects, which need to be scrutinized and analyzed while appraising:

A)MARKET ( DEMAND & POTENTIAL)

The market demand and potential is to be examined for cash product item and its variants/ substitutes by taking into account the selling price of the products to be marketed vis--vis prices of the competing product substitutes, discount structure, arrangement made for after sales service, competitors status and there level of operation with regard to production and products and distribution channels being use etc. critical analysis is required regarding size of the market
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for the product both local and export, based on the present and expected future demand in relation to supply of similar product and availability of the other substitutes as also consumer preferences, practices, attitudes, requirements etc. further the buy back arrangements under the foreign collaboration, if any, and influence of government policies also need to be considered for projecting the demand. Competition from imported goods, Government Import policy and Import duty structure also need to be evaluated.

B) TECHNICAL ASPECTS
In a dynamic market, the product, its variants and the product-mix proposed to be manufactured in terms of its quality, quantity, value, application and current taste/ trend requires throughout investigation Location and Site Based on the assessment of factors of production, markets, govt. policies and other factors, Location (which means the broad area) and site (which significance specific plot of land) selected for the unit with its advantages and disadvantages, if any, should be such that overall cost is minimized. It is to be seen that site selected has adequate availability of infrastructure facilities viz. Power, water, Transport, Communication, State of information technology etc. and is in agreement with the Govt. policies. The adequacy of size of land and building for carrying out its present/proposed activity with enough scope of accommodating future expansion needs to be judged. Raw Material The cost of essential/ major raw materials and consumables required their past and future price trends, quality/properties, their availability on a regular basis, transportation charges, Govt. policies regarding regulation of supplies and prices require to be examined in detail. Further, cost of indigenous and imported raw material, firm arrangement for procurements of the same etc. need to be assessed. Plant and machinery, plant capacity and manufacturing process The selection of Plant and Machinery proposed to be acquired whether indigenous or imported has to be in agreement with required plant capacity, principal inputs, investment outlay and production cost as also with the machinery and equipment already installed in an existing unit, while for the new unit it is to be examined whether these are of proven technology as to its performance. The technology used should be latest and cost effective enabling the unit to compete in the market. Purchase of reconditioned/old machinery is to be dealt in terms of laid down guidelines. Compatibility of plant and machinery, particularly, in respect of imported technology with quality of raw material is to be kept in view. Also plant and machinery and other equipment needed for various utility services, their supply position, specification, price and
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performance as also suppliers credentials, and in case of collaboration present and future support requires critical analysis. Plant capacity and the concept of economic size has a major bearing on the present and future plans of the entrepreneur(S) and should be related to the availability of raw material, product demand, product price and technology. The selected process of manufacturing indicating the adequacy, availability and suitability of technology to be used along with plant capacity, manufacturing process needs to studied in detail with capacities at various stages of production being such that it facilitates optimum utilization and ensures future expansion as and when required. It is also to be ensured that arrangements are made for inspection at intermediate/final stage of production and completion, wherever required.

C) FINANCIAL ASPECTS
The aspect which needed to be analyzed under this head should include cost of project, means of financing, cost of production, break-even analysis, financial statements as also profitability/funds flow projections, financial ratios, sensitivity analysis which are discussed as under: 1) cost of project and means of financing The major components of any project are land and building including transfer, registration and development charges as also plant and machinery, equipment for auxiliary services, including transportation, insurance, duty clearing, loading and unloading charges etc. It also involves consultancy and know-how. Recurring annual royalty payment is not reflected under this head but is accounted for under the profitability statements. Further, preliminary expenses, such as, cost of incorporation of the company, its registration, preparation of feasibility report, market surveys, pre-operative expenses like salary, traveling, start up expenses, mortgage expenses incurred before commencement of commercial production also from part of cost of project. Also included in it are capital issue expenses which can be in the form of brokerage, commission, advertisement, printing, and stationary etc. finally the provision foe contingencies to meet any unforeseen expenses, such as price escalation or any other expenses which have been inadvertently omitted like margin for working capital requirement required to complete the project cycle, interest during construction period, etc. are also part of capital cost of project. It is to be insured while appraising the project that cost and various estimates given are realistic and there is no under/over estimation. Further these cost components should be supported by proper quotations, specifications and justifications of land, machinery and know-how expenses etc. 2) PROFITABILITY STATEMENT The profitability statement which is also known as Income and Expenditure Statement is prepared after considering the net sales figure and details of direct cost/expenses relating to raw material, wages, power, fuel, consumable stores/spares and other manufacturing expenses to arrive at a figure of gross profit. Thereafter all other expenses like salaries, office expenses, packing, selling/distribution, interest depreciation and any other overhead expenses and taxes are
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taken into account to arrive at a figure of net profit. The projections of profit and loss are prepared for a period covering the repayment of term loans. The economic appraisal includes scrutinizing all the items of cost, and examining the assumptions, if any, to insure that these are realistic and achievable. There should not be any optimism or pessimism in working out profitability projections since even a little change in the product-mix from non-remunerative to remunerative or visa-versa can distort the picture. While preparing profitability projections, the past trends of performance in an industry and other environmental factor influencing the cost and revenue items should also be considered objectively. Generally speaking, a unit may be considered as financially viable, progressive and efficient if it is able to earn enough profits not only to service in debts timely but also for future development/growth.

3) FUND FLOW STATEMENT A fund-flow statement is often describes as s Statement of Movement of Funds or where got: where gone statement. It is derived by comparing the successive balance sheet specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications of funds to ultimately give the position of net funds available with the business for the repayment of the loans. A project Fund Flow Statements helps in answering the under mentioned points: How much funds will be generated by internal operations/external sources? How the funds during the period are proposed to be deployed? Is the business likely to face liquidity problem? 4) BALANCE SHEET PROJECTIONS The financial appraisal also includes study of project balance sheet which gives the position of assets and liabilities of a unit at a particular future date. In other words, the statement helps to analyze as to projections are realistic looking to various aspects relating to the same industry. 5) FINANCIAL RATIOS While analyzing the financial aspects of project, it would be advisable to analyze the important financial ratios over a period of time as it may tell us a lot about a units liquidity position,

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managements sate in the business, capacity to service the debts etc. The financial ratios which are considered as important are disused below: Debt-Equity Ratio = Debt (Term Liabilities)

Equity (shares, free Reserves Premium on shares, development rebate Reserve etc after adjusting loss balance) There cannot be a rigid rule to a satisfactory debt-equity ratio, lower than the ratio higher is the degree of protection enjoyed by the creditors. These days the debt equity ratio of 1.5:1 is considered reasonable. It, however, is higher in respect of capital intensive projects. But it is always desirable that owners have a substantial stake in the project. Other features like quality of management should be kept in view while agreeing to less favorable ratio. In financing highly capital intensive project like infrastructures, cement, etc., the ratio could be considered at a higher level:

Net Profit (After Taxes) + Annual interest on long term Debt- Service Coverage = Ratio Annual interest on long term debt + Amount of installments of principal Payable during the year. This ratio of 1.5 to 2 is considered reasonable. A very high ratio may indicate the need of lower moratorium period/repayment of loan in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service its debts i.e. interest and principal repayment besides indicating the margin of safety. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1.5. debt + Depreciation

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Tangible Net worth (paid up Capital + Reserves and Tangible Net Worth = Outside Liabilities Ratio Total outside Liabilities (Total liability Net Worth) Surplus Intangible Assets)

This ratio gives a view of borrowers capital structure. If the ratio shows a rising trend, it indicates that the borrower is relying more on his own funds and less on outside funds and viseversa.

Profit Sale ratio =

Income from other sources Sales

This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure.

Sales- Tangible Assets = Ratio

Sales

Total Assets Intangible Assets This ratio is of a primary importance to see how best the assets are used. A rising trend of the ratio reveals that borrower has been making efficient utilization of its assets. However, caution needs to be exercised when fixed assets are old and depreciated, as in such ratio tends to be high because the value of the denominator of the ratio is very low

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Output- Investment = Ratio

Sales

Total Capital Employed (Infixed and current assets) This ratio I indicative of the efficiency with which the total capital is turned over as compared to other units in similar lines.

Current ratio =

Current Assets

Current liabilities Higher the ratio greater the short term liquidity. This ratio is indicative to short term financial position of a business enterprise. It provides margin as well as it is a measure of business enterprise. It provides margin as well as it is measure of the business enterprise to pay-off the current enterprise to pay-off the current liabilities as they mature and its capacity to withstand sudden reverses by the strength of its liquid position. Ratio analysis gives indications, their interpretations has, however, to be made with the reference to overall tendencies and parameters in relation to the project. 6) SENSITIVITY ANALYSIS While preparing and appraising projects certain assumptions are made in respect of certain critical/sensitive variables like selling price/cost price per unit of production, product-mix, plant capacity utilization, sales etc. which are assigned a VALUE after estimating the range of variation of such variables. The VALUE so assumed and taken into consideration for arriving at the profitability projections is the MOST LIKELY VALUE. Sensitivity Analysis is a systematic approach to reduce the uncertainties caused by such assumptions made. The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or sensitive elements are identified which are assigned different values and the values assigned are both optimistic and pessimistic such as increasing or reducing the sale price/sale volume, increasing or reducing the cost of input etc. and then the project viability is ascertained. The critical variables can then be thoroughly examined by generally selecting the pessimistic options so as to make possible improvements in the project and make it operational on viable lines even in adverse circumstances.

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2.2Working Capital
Working Capital
Working capital is defined as the total amount of funds required for day to day operation of a unit. It can also be referred as the current asset holding of an enterprise. It is often classified as gross working capital (GWC) and net working capital (NWC). Working capital finance is Utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). This is in contrast to term loans which are utilized for establishing or expanding a Manufacturing unit by the acquisition of fixed assets. Gross Working Capital refers to the fund required for financing total current assets of a business unit. Net working capital no other hand is the difference between current assets and current liabilities (including bank borrowings) that is nothing but the surplus of long term sources over long term uses as such it is known as the liquid surplus available in a unit that can be either positive or negative. A positive NWC is always desirable because of the fact that it provides not only margin for the working capital requirement but also improves ability of the borrower to meet its short term liabilities. Every business unit has an operating cycle which indicates that a unit procures raw material from its funds, convert into stock in process which again is converted into finished goods which can be sold for cash and thus transformed into fund. Alternatively it can be sold on credit and on realization thereof gets converted into fund. Thus every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added, after the lapse of a specific period of time. This length of time is known as operating cycle or working capital cycle.

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In order to keep the operating cycle going on, certain level of current assets are always required, the total of which gives the amount of total working capital required. Thus total working capital can be obtained by assessing the level of various components of current assets. The operating cycle is therefore measured in terms of days of average inventory held for every major category of working capital components. Table 1: Operating Cycle Stages I Raw Material Time Holding Period Value Value of RM consumed during the period

II

Stock in Process

Time taken in RM + Manufacturing converting RM into expenses during the FG period (cost of production) Holding period of FG RM + mfg. exp. + before being sold adm. Overheads for the period (cost of sales) Credit buyer allowed to RM + mfg. exp .+ adm. Exp. + profit for the period (Sales)

III

Finished Goods

IV

Receivables

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2.2.1 Types of Lending

Lending is broadly classified into two broad categories: fund based lending and non-fund based lending. Fund Based Lending: This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security. The loan can be to provide for financing capital goods and/or working capital requirements. Non-fund Based Lending: In this type of facility, the Bank makes no funds outlay. However, such arrangements may be converted to fund-based advances if the client fails to fulfill the terms of his contract with the counterparty. Such facilities are known as contingent liabilities of the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of non-fund based credit.

2.2.2 Data required for assessment of working capital requirement

For assessing the working capital needs of an organization, bank follows CMA (Credit Monitoring Arrangement). It is required by banks and other financial institutions, to introspect or study the minutes of balance sheet and other financial statements of a body corporate for financing their projects. In other words it is the detailed explanation of the balance sheet and other financial ratios of the firm or any other corporate. The CMA includes analysis of following six documents: i) ii) iii) iv) v) vi) Existing and proposed banking arrangements Operating statement Analysis of Balance Sheet Buildup of current assets and current liabilities Calculation of MPBF (Maximum Permissible Bank Finance) Fund Flow Statement

2.2.3 Assessment of Fund Based Working Capital

While public sector banks in India are nominally independent entities they are subject to intense regulation by the Reserve Bank of India (RBI). This includes rules about how much the bank should lend to individual borrowersthe so-called maximum permissible bank finance. There are multiple methods as suggested by different committees from time to time. The names of these committees are following.

1. Nayak Committee (Simplified Turnover Method)

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2.Tandon Committee 3.Chore Committee

The Chore committee recommended assessment of working capital requirements have to be mandatorily assessed based on one of the method of lending suggested by Tandon Committee except for sick/Units under rehabilitation. The Method of Lending: Bank will finance maximum up to 75% of total current assets (TCA) and borrower has to provide a minimum of 25% of total current assets as the margin out of long term sources. This will give a minimum current ratio of 1.33:1

As such, the banks are presently assessing need based WC financing under this Method of lending. Punjab National bank also refer this method for financing Working Capital.

Assessment of Non-Fund Based Working Capital Facility

The credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities'. These facilities are divided in three categories as under: Letters of credit Guarantees Co-acceptance of-bills/ deferred payment guarantees.

25

Chapter 4 Case Study 4.1 CASE STUDY ON TERM LOAN

Introduction ABC Logistics Ltd. is a 100% subsidiary of ABC Limited, which in turn is a 100% subsidiary of ABC International Ltd. (AIL), incorporated with the main objective to execute the Logistic Warehouse project on 105 acres of land at village Kundli, Haryana. ABC Limited (AIL), is an anchor company of the ABC group, having operations in the logistics and supply chain management in India and overseas with a turnover of INR 273.61 crore in 2009-10. The consolidated turnover of the group has been INR 525.89 crores in 2009-10. AIL has its presence in India and South East Asia and operates in third party logistic (3PL), fourth party logistic (4PL), Trucking, Warehousing. ABCD Ltd. has applied for the sanction of fresh Term Loan of Rs.125 crores out of the total debt Rs.413.26 crore. Total debt funding is to provided by a lenders consortium banking with PNB as a lead banker. The funds will be used for setting up a logistic project at Kundli, Haryana at total project cost of Rs.551.01 crores. The Promoter Company: AIL AIL is an end-to-end service and solution provider in logistics and supply chain management. The Company is headquartered in Mumbai and has operations in India, Middle East, Singapore & Hong Kong. The Company offers a gamut of products through its divisions relating to 3PL services (3rd party logistics), 4PL services, and integrated supply chain Technology, warehousing infrastructure and solutions, consultancy services, etc. The Company has also invested into Free Trade Warehousing Zones and Railway Infrastructure network, to ensure total integration by 2011 and to provide complete range of end-to-end logistics services and solutions. The Company currently offers its services in following business segments as noted below: International freight and forwarding division This division provides freight forwarding services to clients in India and South East countries. The services include air and ocean transportation, customhouse brokerage, global logistics management and logistics consulting services. The division offers end-to-end solutions from the
26

origin of the goods to the destination countries, providing full visibility and tracking of shipments, order status and inventory levels. AIL is affiliated with BI, one of the leading global logistics Company; headquartered in the United States and having a wide network of offices worldwide. BI is the seventh largest bulk logistics solutions provider in the world having yearly turnover of over USD1bn. BDP International caters to a customer base comprising of leading fortune 500 companies such as Exxon, Mc Donalds, Swatch, Dupont, Chevron, Campbell etc. 3PL (Third Party Logistic) services The Company offers a comprehensive range of third party logistics services in the air, ocean and projects segments. AIL provides services pertaining to managing, tracking, documenting and transporting the imported as well as exported goods efficiently and professionally. The Companys dedicated software wing Cyberlog enables it to ensure the use of a single software platform to access the required data in a most friendly and efficient way. 4PL (Fourth Party Logistic) services The Company has also developed and successfully highlighted its fourth party logistics solutions and services. It caters to the niche segment by offering customized consultancy and expertise in analyzing, identifying and creating a robust supply chain management solution for its clients. Rail infrastructure The Companys foray into the Rail infrastructure segment under a SPV viz. ARIL would complete the total integrated business model. Connecting the FTWZs in India, will be the panIndia ARIL (with railway sidings across the country) enabling efficient and cost effective transportation of cargo around the country. With the rail wagons and own railway sidings, the Company would be attractively placed to ensure efficient and cost-effective movement of goods from its clients place to its FTWZ for exports or vice-versa for imports. ARIL has obtained PanIndia license for Container Cargo Rail movement throughout India.

27

The Loan Proposal

1. Name of the Borrower Branch Office Controlling Office (Rs. in crore) Gist Of The Proposal Sanction of Working Capital Limits: For Term Loan: Purpose Setting up of a Project for Domestic Ware Housing & Logistic Hub Cost of Project Total Debt Promoters contribution Proposed TL (our share) DER Repayment Period Door to door tenor 551.01 413.26 137.75 125.00 3:1 8 years (32 qtly. Instalments) 10 years NIL : : : ABC Logistics Ltd. PNB House, Mumbai Circle Office: Mumbai

Whether fresh/renewal/ enhancement Asset Classification as on---and last PMS score Credit Risk Rating by Bank is BB indicating average risk

Fresh

N.A.

Rating Date of Rating

Score ABS

Reasons for

28

degradation Present BB 27.10.10 57.50 NPM Not Applicable Previous N.A.

Rating from External Agency

Facility rated

Rating

Date of rating

Rating Agency

Remarks

External rating is yet to be done. AGM (B) to ensure that external rating is done within a period of 6 months failing which penal interest @ 1% is to be charged. Whether Agriculture/Retail/ SME/Others (Please specify) a) Whether Sensitive Sector Real Estate/ Capital Market No Others Logistics ( Infrastructure)

b) Applicable Risk weight

100 % (unrated exposure)

Consortium/Multiple Banking Lead Bank PNBs Share % Receipt of complete proposal at HO Date of submission of proposal Date of last sanction & authority/In Principle Consent Customer ID No. Activity code (as per ladder)

Consortium Punjab National Bank 30%

Fresh

New Account NA, New Account

29

Business Group Evaluation

A B Group Name ABC Address of Regd./Corporate Mumbai Office C D Works/Factory Constitution Kundli, Haryana and Closely held Public Limited Company.

constitution code as per Code 35* ladder E Date of incorporation/ Establishment F G H Dealing with PNB since Industry/Sector Since 2009 Service Sector 13/05/2008

Business Activity (Product)/ Logistic Infrastructure Installed Capacity.

AIL is an India headquartered, integrated supply chain and logistics infrastructure Solutions Company. The vision of the company is to be a leading international company providing integrated supply chain management services using innovative technology solutions and infrastructure. Geographic footprint The Company has presence in Singapore, Dubai, Qatar, Oman, Hong Kong and the United States, in addition to India. AIL has also developed strong ground operational capability (including trucking and warehousing) in the Middle East, linked by sea from Mumbai, India to Sohar, Oman & Dubai, UAE. Business Verticals The Company is an amalgamation of several strategic verticals such as Free Trade Warehousing Zones (FTWZs), Rail, 3PL, 4PL, warehousing and I.T. This enables the company to possess operational expertise and solution capability across the entire supply chain spectrum.

30

Growth strategy: ABC is rapidly expanding its business capabilities through continuous internal development and aggressive acquisitions in complementary space, apart from major investments in strategic infrastructure in India and the Middle East. Currently the Company has multinational operations in the logistics and supply chain management space and has recorded a consolidated turnover of INR525.89 crores for FY20092010. Key Business Entities 1) ABCD Ltd. Provides value added hubbing zone to store and transfer cargo through skilled manpower, integrated IT facility and state of the art equipment facility for domestic Rail consolidation across India. 2) ABC FTWZ Ltd. Focused on setting up five FTWZs across India) ABCs FTWZs (five in India) or deemed foreign territory with dedicated CYs (Container Yard) provides a unique differentiator in its overall value proposition towards its customers. 3) ABC Rail Ltd. It is operating container trains on pan India basis. The pan-India network of ABC Rail (with railway sidings across the country) along with the model of customised and dedicated rakes enables transportation of long distance cargo around India. For last mile distribution, ABC uses 3rd party trucking and trailer network. Group Capabilities 140+ country and 46 year 3PL lineage of ABC Logistics through association / takeover of BDP India/Middle East starting 2005 1,200+ client acquisitions (air, ocean, project logistics, customs handling and documentation) 110+ years of lineage in 4PL in demand chain (forward & reverse supply chain) legacy underflagship of ABC Supply Chain Management (Earlier Genco India Pvt. Ltd.) Group company Cyberlog Technologies has well developed Information Technology capabilities in Supply chain and logistics software.
31

Other Projects of the Company a) AIL has set up FTWZ at Navi Mumbai on around 140 acres. Located 24 km south-east from JNPT, The Business Port of India has been designed to offer warehousing and CFS services to multinational not only for Indian Imports but also for transshipment trade. Total project cost for the project was at Rs. 532 crores wherein the following banking arrangement: Name of the Bank Axis Bank Dena Bank Bank of India Karur Vysya Bank State Bank of Patiala State Bank of Mysore Andhra Bank UCO Bank Union Bank Total Amount(Rs. in crores) 70.00 65.00 25.00 30.00 28.00 22.00 35.00 40.00 40.00 355.00

b) ABC Rail Limited to operate cargo trains on pan India basis. Company is currently operating with 10 rakes and has ordered fleet 20 Rakes which shall be operational over 2 years. Total project cost is Rs. 626 crores with debt of Rs. 400 crores. Following banks has participated for the project with State Bank of India as lead bank: Name of the Bank State Bank of India State Bank of Mysore State Bank of Travancore South Indian Bank Dena Bank
32

Amount(Rs.in crores) 100.00 20.00 35.00 35.00 30.00

Corporation bank State Bank of Patiala Bank of India Syndicate Bank PNB Karur Vysya Bank Total

35.00 10.00 50.00 30.00 40.00 15.00 400.00

Rail project shall complement the global logistics set-up of the Company catering connectivity inter-se FTWZ and Logistics Parks. c) A new FTWZ, adjoining to proposed Logistic park is being developed over 127 acres. The Project has been appraised by Punjab National Bank. Total project cost was Rs. 421 crores financed with debt equity of 2:1. Banking arrangement for the project is hereunder Name of the Bank Punjab National Bank Leader Axis Bank State Bank of Travancore State Bank of Mysore State Bank of Patiala State Bank of India Total Amount (Rs.in crores) 100.00 37.00 37.00 26.00 37.00 43.00 280.00

The aforesaid FTWZ shall compliment to the proposed logistic park and shall offer umbrella services to the group clientele.

Security
Primary A First mortgage and charge on all immovable properties (including equipments) and assets of the company, present and future;
33

First charge by way of hypothecation of all the movable assets including debtors, present and future; First charge/ assignment and/ or creation of security interest in favor of the lenders of (i) all the right, title, interest, benefits, claims and demands whatsoever of the borrower in the Project Documents, letter of credit by any off taker/ user company, guarantee or performance bond that may be provided by any party to any Project Documents in favor of the Borrower, all as amended, varied or supplemented from time to time; (ii) all the rights, title, interest, benefits, claims and demands whatsoever of the Borrower in or under the Authorizations; A First Charge on Intangibles (but not limited to Goodwill, etc); A First Charge / Assignment and / or creation of security interest in favor of the lenders on the Trust & Retention Account and Debt Service Reserve Account, to be established/ maintained by the Borrower for the revenues generated from the Project, in consultation with the Lenders; A first charge on all the Projects Bank accounts including but not limited to the Trust & Retention Account (TRA) (including DSRA) opened in a designated bank, where all cash inflows from the Project shall be deposited and all proceeds shall be utilized in a manner and priority to be decided by the lenders. The appointment of the Trustee for operating the above account shall be done by the Lenders; Pledge of 51 % of total equity, in favor of Lenders. Maintain a Debt Service Reserve Account (DSRA) for the ensuing 3 months interest payment and ensuing one quarter principal repayment due to the Lenders from the cash flows available during the moratorium period or undertake to provide a letter of credit or bank guarantee acceptable to Lenders, for an amount equivalent to ensuing 3 months principal and interest payment to the lenders, in lieu of such deposit The aforesaid security will rank pari passu with all security created / to be created in favour of the project lenders to the extent permitted by Lenders. The issuance of NOC for sharing charge with working lenders is subject to issuance of similar approval by other lenders to be participated in this project.

34

The Company is to be permitted 4 months time from the date of initial drawdown for creation of charge on immovable assets of 65 acres of land. In the event of non-perfection of the security within a period of 4 months from the date of first disbursement, the Lenders shall charge penal interest on the facility amount from the date of first disbursement at the rate of 1% p.a. Note: Most of the land is acquired in the name of holding company i.e. AIL & the cost incurred is not being reflected in the books of ABC Logistics Ltd.. AIL will transfer the land in the name of ABC Logistics Ltd.. Collateral (Information in respect of mortgage of IP to be given only in the following format): i) Hypothecation/ Mortgage of Block Assets Immovable Properties All the moveable / Immovable assets are primary security. ii) First/Second/Third charge/Paripassu charge

First Pari-passu charge on the entire Project Assets of the Company along with other term Loan Lenders with project Debt Equity of 3:1 to be created. Corporate Guarantee (Rs. in crore)

35

Name of Guarantor Relationshi p with

Net Worth

Immovable property

Date confidential report

of

borrower Prev. Present Prev. Present at

Prev.

Present

As at As 31.03 .09 M/s. AIL Group Flagship Company M/s. DDPLimited ABC Holding Company 0.05 0.05 490.1 0 496.83 31.3.10

at As at As 31.3.0 8 NA --

31.3.09

30.0 8.09

09.10.1 0

--

09.10.1 0

Personal guarantee (Rs. in crore) Name Guarantor of Relationship with borrower Net Worth As 31.03.10 on Immovable property Date of confidential report

Promoter

0.36

2.79 NA NA 7.82

---

30.08.09 09.10.10 30.08.09 09.10.10

Promoter of 7.77 AIL.

All the above guarantors (except ABC DDPL which is holding company for the proposed borrower) are also guarantors in facility (TL Rs.100 crores) sanctioned to M/s ABC

36

4.2 Data Analysis

Managerial Evaluation
a) Promoters and Directors Profile The company ABC Logistics Ltd. is closely held subsidiary companies with major share holding with Promoter Company i.e. AIL. Board of the Company consists of three directors Qualifications and Professional Experience of the Board of Directors of ABC Ltd. is detailed as below:

S No.

Name Director

of Brief Profile

Mr. ASM 1

Promoter and Chairman of the Board MBA (USA), B.Com (India)

Mr. V.S 2

Mr. V. S. is Director-Corporate Affairs and Legal, Graduate (Science and L.L.B) from Mumbai University, Associate Member of Institute of Company Secretaries (ACS).

Mr. V.N 3

He has joined ABC International Ltd in April 2009 and brings with him a wealth of HR expertise, which will help in building ABC team for accelerated expansion.

a)

If any of them, in the list of Caution Advices circulated by the Bank No

from time to time/RBI's/Willful defaulters' list/Caution List of ECGC/ b) If any one of them connected in the past with any No

NPA/OTS/Compromise/ unscrupulous defaulters

37

c) If any of them, related to Directors/Senior Officers of PNB: d) i) Management Change since last sanction, if any

No No

e) i) Report on due diligence carried out in terms of L&A Circular No. Yes 170 dated 25.10.2008 and comments on adverse features, if any ii) Confirmation that CRs have been compiled/reviewed as per extant Yes guidelines iii) Confirmation that CRs have been drawn from CIBIL Database and Yes comments on adverse features, if any:

Conclusions a) Company management is well qualified and possesses requisite experience for executing the projects of complexity for which funding has been sought. Directors have experience in the field of supply chain and infrastructure development and also in the diverse business functions such as finance, administration and personnel management. b) CIBIL reports of the above persons in the top management has been obtained and all of them have clean credit history. None of them has been notified as willful defaulter or has been connected in the past with any NPA. c) There is no conflict of interest, as none of the Directors is related to Directors or senior officers of PNB.

Compliance To Exposure Norms

Existing (Rs. crore) Company Group NIL 140.00 in

Proposed %age of Banks As per Exposure Norms Capital Funds as on 31.03.10 125.00 265.00 0.46% 0.99% Amount (%age)

3746.90 8029.07

14% 30%

38

Observations: 1) Exposure to the group and company is within the prescribed norms 2) Exposure to the Industry is as per the extant guidelines

Financial Evaluation
Financial Statement Analysis Since ABC Logistics Ltd. is a new SPV formed for setting up of the proposed project, past financials of the Company are not indicative and material. No balance sheet of the company has been prepared so far. However, the consolidated financial parameters of the group are as under (Rs. In crore): Particulars Mar-09 (Audited) Net Sales Other Income Net Profit before Tax Net Profit after Tax Depreciation Cash Accruals Paid-Up Capital Minority Interest Equity Share Warrants Equity Stock Option Scheme Reserves & Surplus Intangible assets Tangible Net Worth Long Term Liabilities Capital Employed Net Block Investments 2.99 582.91 5.35 594.86 128.84 723.7 547.6 502.92 11.56 77.4 66 7.01 73.01 11.75 2.56 1.18 656.99 5.99 666.76 570.08 1,236.84 976.39 0.34 Mar-10 (Audited) 525.89 41.93 105.5 98.14 9.63 107.77 11.75 2.83 -

39

Non Current Assets Net Working Capital Current Assets \Current Liabilities Current Ratio DER (TL/TNW) TOL/TNW

0.22 175.88 233.77 57.89 4.04 0.22 0.31

1.18 258.93 397.51 138.58 2.87 0.85 1.06

Standalone details of each group company is as given in Appendix Observations a) Consolidated DER ratio for the Group at 1.06 is within the norms and favourable for term lending purpose. This figure shows that the company is less dependent on outside sources for funds and has its own sufficient funds for operations. Moreover, it also shows that company is borrowing less in future which will decrease its cost of borrowings and thus it will increase the profitability. Additionally, company is retaining its profits and hence increasing the base of its reserves and surplus. b) Profit Margins have improved over the previous year mainly on the account of increase in Other Income c) Sales have registered a growth of 4.6% over last year. This can be used while estimating the sales projections for the new project. Usage and Sources of Fund a) Cost of Project Land - 65 Acre Particulars Land Earth Work Civil Work Warehouse 203.28 36.89% Amount (Rs. In % crore) 39.00 42.47 7.08% 7.71%

40

Container Yard Facility Buildings Infrastructure Electricals IT & Security System Equipments Pre-Operative Exps Architect/Master Planning Fees Operating exp Interest During Construction Contingency ( @ 5%) Total

6.46 4.67 31.67 12.26 32.13 107.73 4.99 15.00 29.32 22.03 551.01

1.17% 0.85% 5.75% 2.23% 5.83% 19.55% 0.90% 2.72% 5.32% 4.00% 100%

b) Sources of Funds Phase I Particulars Promoters Contribution Bank Loan Total Amount (Rs. Crores) 137.75 413.26 551.01 D/E 1.0 3.0

Out of the total project cost estimated at Rs. 551.01 crores company has already invested substantial amount of Rs. 71.43 crores in the form of capital as detailed below: Source of funds Share Application Unsecured Loan Rs. In crs 71.43 0.05 Application of funds Advance for Land Land Development Expenditure Rs. In crs 42.00 18.56

41

Debit Balance in PL

(0.03)

Civil Works including Capital 11.22 Advances Other Net Current Assets (0.33) 71.45

71.45

c) Sources of Promoters Contribution and the time schedule

The total equity requirement for the project is estimated at Rs. 137.75 Crores. The equity component for the project is being raised through promoter contribution, mainly equity from the holding company i.e. ABC International Ltd. (AIL). Sources of Funds/Equity:Equity for the Project shall be made out of internal accruals of the Group. Projected accruals of the Company for 10-11 and 11-12 are detailed below:

Company

PAT 10-11 11-12

Depreciation 10-11 11-12

Cash Accrual 10-11 11-12

AIL Existing Activity Navi Mumbai FTWZ ABC Rail Operations ABC FTWZ 17.92 21.79 40.64 17.87 58.94 41.70 27.98 40.00 0.68 16.18 15.44 13.15 5.00 0.68 28.32 15.44 15.63 5.00 18.60 37.97 56.08 13.15 35.00 160.80 160.80 21.16 130.07
42

18.55 87.26 57.14 43.61 45.00 251.56 251.56 -

Other Group Companies * 30.00 Total Total Equity Requirement April 10 to June 10 (already infused) July 10 to March 11

April 11 to March 12 Excess / (Shortfall)

9.57

117.45 134.11

* In other Group Companies we have included Singapore and Hongkong. Both these Companies have cash accrual of Rs.52.21 crores and Rs. 42.45 crores respectively in year 09-10. The financials of other group companies has been considered on conservative side. Company has already infused Rs. 71.43 crores (i.e. 52% total equity commitment upfront). Balance Equity shall be infused in pro rata basis over the loan drawdown period. It may be observed that the total cash accruals from the group companies are Rs.412.36 crores (i.e. Rs.160.80 crores and Rs.251.56 crores for 2010-11 and 2011-12 respectively). Against this, the equity requirement is Rs.268.68 crores only for the above periods against the ongoing project including the proposed one. It has been confirmed that there is no further commitment against these cash accruals. As such, there should be no difficulty in promoters bringing its balance shares of Rs.66.32 crores (48 % of balance contribution). Status of tie-up of loans Term loan funding of 413.26 will be provided by a lenders consortium. PNB is the leader of lenders consortium and will take an exposure of Rs. 125.00 crs. Balance Loan Component shall be in Consortium with other Bank & Term Lenders. Current status of other sanctions are as below:

Bank

Amount Proposed

Present Status

ROI

UCO Bank

75

Sanctioned and disbursement Effective ROI of 12 of Rs.45 crores % pa.

43

Union Bank of 75 India Bank of India 50

MC Meeting held, resolution Effective ROI of 12 awaited. Sanctioned % pa. Effective ROI of 12 % pa.

Andhra Bank

75

Marked for MCB to be Effective ROI of 12 scheduled % pa.

Federal Bank

50

MC Meeting held, resolution Effective ROI of 12 awaited. % pa.

Total

325

Proposals of all the above banks are in advanced stage as mentioned above. They have relied upon the Information memorandum submitted by company (appraisal done by Ernst & Young).

Financial Viability Analysis

Financial Viability of the project is ascertained by through sales, profitability and balance sheet future projections. Critical ratios like DSCR for the project has been calculated on the basis of these projections. Moreover sensitivity analysis has been done to gauge the impact of deviations from projections. Calculation of DSCR Particulars Year Year Year 2013 PAT Add Depreciation Add Interest 50.73 47.52 43.70 38.95 32.85 25.31 16.12 5.71 0.00 2014 2015 47.69 22.21

Year 2016 60.89 22.21

Year 2017 88.36 22.21

Year 2018 94.93 15.96

Year 2019

Year 2020

Year 2021

18.28 36.84 22.21 22.21

130.56 146.83 171.73 14.70 14.70 14.70

44

A. Total Cash 91.22 106.57 113.60 122.05 143.42 136.20 161.38 167.24 186.43 accrual TL Instalments Interest TL B. Total DSCR (A/B) Average DSCR 70.57 73.97 1.29 1.44 78.41 1.45 80.28 1.52 89.05 1.61 1.80 89.78 1.52 98.77 1.63 93.32 1.79 0.00 on 50.73 47.52 43.70 38.95 32.85 25.31 16.12 5.71 0.00 19.84 26.45 34.71 41.33 56.20 64.47 82.65 87.61 0.00

Conclusion 1) Yearly DSCR and Average DSCR is well above the minimum stipulated DSCR values. This signifies that project will be able to generate enough funds for repayment of interest and principal as per the repayment schedule The summary of Financial Projections is as under : Stand Alone Project Debt-Equity Ratio Average DSCR Minimum DSCR 3:1 1.80 1.29

Comments a) Company will commence the partial operations in FY 2011-2012 in open storage yard & container freight station yard.
45

b) Full operation year will be from FY 2012-2013, when all of the facilities considered become operational. c) The projection indicates net profit of Rs.1.24 Crores in the first partial year of operations and net profit of Rs.18.28 Crores in 2012-13 which is full year of operations. d) The estimated revenue generation is considered reasonable & achievable in view of the potential available as well as the fact that rate for various facilities are considered very competitive. Further, there are very few such service providers in the area and the concept of providing complete logistic support under one roof is likely to gain momentum as the economy of country grows. Detailed Sensitivity Analysis The project profitability is most sensitive to revenues generation, rate of interest, capital cost of project. Since the project is planned to be completed in time bound schedule of 12 months and cost of most of the project elements are almost firmed up, necessary provision of escalation contingencies is also made, there are negligible chances of increase in capital cost of the project. However, sensitivity analysis is worked out with three scenarios, where: a) Revenue is reduced by 5% b) Interest cost increased by 1% c) Operating cost increase by 5% Factor Factor Project Min. DSCR Base Case Increase in Operating Cost by Reduction in Revenue by Increase in Interest Rate by 5% 5% 1% 1.29 1.22 1.12 1.22 Avg. DSCR 1.80 1.72 1.64 1.75

Observations
46

In all the scenarios for which sensitivity analysis is carried out, all the parameters remain broadly within satisfactory levels. This analysis shows that the project has sufficient strength to withstand adverse market situations. Security Margin (Fixed Asset Coverage Ratio for term loans) Existing Nature Book value FACR Proposed Book Value FACR on project completion Primary Collateral Total NA NA NA NA NA NA 518.01 518.01 1.25 1.25*

* FACR to be maintained 1.25 times during the concurrence of the facility. FACR = Security --------- = Debt 518 ----- = 1.256 413.26

While calculating FACR, pre op expenses and software have been deducted from the cost of project

Technical Evaluation
Costing Analysis a) Land The company estimates a total land requirement of 65 acres for the proposed domestic warehousing project in the Ist phase. The land, which is non agriculture in nature, has been acquired by the holding Company AIL and is to be transferred in the name of ABC Logistics
47

Ltd. at Kundli and cost of land is Rs. 39.00 crore, inclusive of all land acquisition expenses like stamp duty etc. Prevailing land rate in the area are ranging from 0.60 crores to 1.00 crore per acre, which justify the purchase cost. The parent company is negotiating the land price at around Rs.1 crore per acre as the prices of land have gone up due to dedicated corridors intersecting at Kundli. Since the land has been purchased by AIL, it shall be transferred in the name of ABC Logistics Ltd. and all the transfer deeds be made available in due course of time. b) Infrastructure develpoment The estimated cost for the infrastructures for the project is Rs. 31.67 crores. c) Electricals The estimated cost of electrical equipments, fittings, lighting etc. is Rs. 12.26 crores. d) IT security and Systems The requirement of various latest IT gadgets & security system is estimated at Rs.32.13 crore. e) Equipments & Machinery The equipment, software and vehicles - account for 18% of the total project cost. Most of the equipment is required towards the warehouse operations. f) Pre-Operative Expenses Other expenditures include pre-operative expenses, Contingencies and interest during construction. Operating cost includes expenses towards Project Launch, EIA Study Fees, Pre Operative marketing expense, consultants fees and financial closures charges. Statutory Approvals The Company has secured all the necessary statutory approvals like diversion of land uses, permission for domestic warehousing, layout plan for the proposed project from the relevant authorities.The status of all necessary approvals/clearances required for the project is as under:

Approval Required
48

Status

PWD NOC NOC from State Electricity Board Fire NOC Consent to Establish Forest NOC NOC from LMC (Land Management Committee) Gram Samaj NOC NOC from Town Planning Certificate required from Municipal Authority showing that this area does not belong to Municipal Deptt. Certificate for showing non ecologically fragile area

NOC Obtained NOC Obtained NOC Obtained NOC Obtained NOC Obtained NOC Obtained NOC Obtained NOC Obtained

NOC Obtained

NOC Obtained

Present physical condition The Cleaning & Scrubbing work for warehouses is in progress and till date 55% progress is been achieved. The Earth filling for the warehouses is in progress and till date 58% progress is achieved. The Piling work for the warehouses is in progress and till date 30% progress is achieved. Foundation work for Electrical substation is started. The Precast panels for compound wall is in progress and till date 94% progress is achieved. Batching Plant is erected and commissioned at site.

Economic Analysis
Market Analysis Based on the analysis of value proposition for different transaction flow, Group has identified the following Industries of NCR region as most likely to use the proposed Logistics Park:-

49

Food Products Pharma Products Cosmetics Books and Publishing Garments, Apparels and Fabrics Crockery Sanitary ware Glassware Iron & Steel Construction Equipments

Textile Machinery Oil Field Equipments IT Hardware/Office Equipments Automobile and Auto Spare parts Telecom Equipments Electrical Appliances Furniture Toys Artifacts

Group has built up strong and diversified customer base in its existing container freight forwarding and Project Logistics business. The services to be provided by proposed Project would seamlessly integrate with the services being provided by current operation. In last 6 years AIL has successfully acquired 1200+ clients with no single customer contributing to more than 3% of revenues. AIL is in process of pitching the value proposition of FTWZ, Rail Operation and Logistics Park to the existing customers as well as new customers. They have identified advantages for these companies based in the nature of Industry and nature of transactions being carried out by them. Company is setting up similar structure in North, Eastern, Western, Central and Southern India. With this way companies can have a hub-spoke model from with Nagpur at the centre. Hub and spoke system will reduce the multiple transport and thereby reducing the over all cost of transportation for the companies. Prospective Customers of BDP International / Genco that the Project is trying to target for utilizing Warehousing complex in FTWZ are presented in the table below. Segment Names of target customers

50

Retails segments

and

apparel Wal-Mart, Reebok, Swatch, Globus, Pantaloon, Madura Garments, Gillette, Rohm and Haas, Levis, Bombay Dyeing etc.

Pharmaceutical Industries Roche, Johnson & Johnson, Glen mark, Lupin White goods and Dell, Sony, Honeywell, Carrier Aircon, Bajaj, Philips, Whirlpool, Videocon GM, Saint Gobain, Tata Automobiles, Mahindra ABB, Alstom

electronics industries Automobiles Industries Other Industrial Products

. Draw Down Schedule Quarter-wise (Rs. in crore) Quarter No. 1 2 3 4 5 6 June 10 Sep 10 Mar 11 Jun 11 Sept 11 Dec 11 Period Debt Drawdown --75.00 216.06 73.96 48.24 413.26 Companys Contribution 39.00 19.25 23.24 17.97 30.00 8.29 137.75 Total Capital

Expenditure 39.00 19.25 98.24 234.03 103.96 56.53 551.01

The above draw down schedule and implementation schedule are tentative ones based on the assumption that the financial closure will be achieved in quarter ending December 2010.
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However only at the time of reaching the financial closure, the implementation schedule & date of commencement of commercial production and draw down of the debt of the project shall be finalized and clearly spelt out at the time of consortium documentation and the same will be kept on record. Disbursement and ratio of promoters contributions : 50 % of the promoters contribution will be brought and spent upfront. The debt disbursement will be thereafter in the ratio of 3:1 ( debt : promoters contribution). Promoters contribution for this ratio will include 50 % upfront spent. Based on the CA certificate the debt will be released in Escrow account and as far as possible, the payment will be made directly to vendors to the debit of TRS account. Tolerance level of commitment charges: Sometimes due to unforeseen circumstances, like rains, delay in arrival of equipments, technicians, etc, there may be some delay in completion of project. Such contingencies are accepted by the regulators also in case of grace period of COD. Accordingly, there may be lower draw down of debt from the lenders. As such we propose that a tolerance limit of 30 % may be allowed for calculation and levy of commitment charges.

Proposed repayment schedule

Scheduled date of Completion of Project Tentative Commercial Operations Date (COD) Part Tentative Implementation period (in months) Moratorium (in months) Repayment period in months/quarters/ Half year No. of Instalment Dec 2011 Sept 2011 12 12 8 years (quarterly) 32 step up Instalment

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Starting Date End Date (Last Instalment) Door to door tenor

March 2013 Dec 2020 10 years

Since the project is not a manufacturing project, the part operation like functioning of 2 warehouses may start in Sept 11 and other works may continue up to Dec 2011. However, the final COD will be documented at the time consortium documentation. Repayment will start from 12 months from the date of first disbursement after consortium documents. The step up instalments are as under: Repayment Schedule of Total Debt (Rs.413.26 Crores)

Year

Amount

of

quarterly Total in year

instalment) amt in Crs Ist year II nd year III rd year IV th year V th year VI th year VII th year VIII th year 4.96 6.61 8.68 10.33 14.05 16.12 20.66 21.90 19.84 26.44 34.72 41.32 56.20 64.49 82.65 87.60 413.26

One year will envisage 4 quarters not necessarily starting from April. First year will start from March 2013.
53

Pricing
Facility Rate of interest TL Existing ----Proposed Applicable rate

12.% (BR+3.00% 14% (BR + 5 % + + 0.5 %TP) 0.5%TP) 1.25 %+ ST As per extant

Upfront fee

TL

----0.60% p.a.

0.25% + ST 0.50% p.a.

Commission on ILC/FLC NFB (DA/DP)

guidelines.

Project Implementation and NIL monitoring fee

100 per lac with 100 per lac with max Rs.7.5 p.a. lac max Rs.7.5 p.a. lac

Security Agency fee (One time)

NIL

Rs.100/- per lac Rs.100/- per lac on project loan on project loan subject Rs. 5 lac to max subject Rs. 5 lac Rs. 1 lac p.a Rs.25000 to max

Escrow a/c maintenance fee Documentation charges

NIL NIL

Rs. 1 lac p.a Rs.25000

Apart from above, the branch has also received appraisal fee of Rs.40 lakh for TEV study. Comments Rate of interest has been proposed at 12 % at present linked to BR, i.e. BR + 3% + 0.5 % term premia. ROI will be fixed at 12 % till the COD, thereafter the same will be reset. ROI and upfront fee is in line with other lenders. Project Implementation and monitoring fee will be charged as applicable. Security Agency fee (One time) is charged as per banks rate
54

Escrow a/c maintenance fee is as per card rate. Other group company is dealing with us. AGM (B) expects further business from the company as they will be expanding in the other parts of the country. Keeping in view business volume being received from the group and satisfactory conduct of the group account, above relaxation in ROI, upfront fee be approved. However ROI of PNB shall not be less then ROI of any other Bank / Financial Institutions.ROI will be in line with other lenders.

Appendix a) Profitability Projections Revenues estimated as per the components described above and estimates of operating expenses along with other detail have been used to determine profitability. Profitability projections are as given below: MarMar-12 13 Mar14 249. Total Sales Operating Expenses 87.04 180.44* 227.46 48 122. 114.21 14 122. Total 87.04 114.21 14 127. EBDITA 93.41 113.25 34 Mar- Mar- Mar- Mar- Mar- Mar- Mar15 263. 40 132. 53 132. 53 130. 87 16 277. 67 137. 58 137. 58 140. 09 17 341. 24 163. 82 163. 82 177. 42 18 359. 53 174. 44 174. 44 185. 09 19 432. 56 203. 96 203. 96 228. 60 20 456. 95 214. 10 214. 10 242. 84 21 512. 27 237. 42 237. 42 274. 85

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22.2 Depreciation 22.21 22.21 1 105. EBIT 71.20 91.05 14 47.5 Interest 51.66 50.73 2 57.6 EBT Prov For Tax 20.7 18.31 22.04 7 36.8 PAT Dividend Dividend Tax Trf to Reserve 36.8 Retained Earnings 1.24 18.28 4 1.24 18.28 4 19.54 40.32 1

22.2 1 108. 66 43.7 0 64.9 6

22.2 1 117. 88 38.9 5 78.9 3

22.2 1 155. 21 32.8 5 122. 36

15.9 6 169. 13 25.3 1 143. 82

14.7 0 213. 91 16.1 2 197. 79

14.7 0 228. 15

14.7 0 260. 16

5.71 222. 44

0.00 260. 16

(including Deferred tax)

17.2 7 47.6 9

18.0 4 60.8 9

34.0 0 88.3 6

48.8 8 94.9 3

67.2 3 130. 56

75.6 1 146. 83

88.4 3 171. 73

47.6 9

60.8 9

88.3 6

94.9 3

130. 56

146. 83

171. 73

* Year 2013 is for 6 months.

Balance Sheet Projections

Mar Liability -10

Mar -11

Mar -12

Mar -13

Mar -14

Mar -15

Mar -16

Mar -17

Mar -18

Mar -19

Mar -20

Mar -21

56

Mar Liability Promoters Contribution -10

Mar -11

Mar -12

Mar -13

Mar -14

Mar -15

Mar -16

Mar -17

Mar -18

Mar -19

Mar -20

Mar -21

39.0 137. 137. 137. 137. 137. 137. 137. 137. 137. 137. 137. 0 75 75 75 75 75 75 75 75 75 75 75

19.5 56.3 104. 164. 253. 348. 478. 625. 797. Retained Earnings 1.24 2 6 05 94 30 23 79 63 36 (0.0 0.00 0)

413. 413. 393. 366. 332. 290. 234. 170. 87.6 Bank Loan 26 26 42 97 26 93 73 26 1

11.3 16.0 18.3 21.7 Provision(Net) Deferred Liability Tax 0.86 2.83 3.20 2.85 3.46 7.80 0 4 7 8

14.8 25.6 33.5 39.4 43.6 46.4 50.1 53.2 55.3 56.7 8 1 8 6 8 8 7 4 8 1

39.0 551. 567. 579. 597. 616. 640. 680. 717. 773. 837. 1,01 Total Assets Fixed Assets 39.0 551. 551. 551. 551. 551. 551. 551. 551. 551. 551. 551. Gross 0 01 01 01 01 01 01 01 01 01 01 01 0 01 99 13 86 37 76 06 72 44 13 3.59

22.2 44.4 66.6 88.8 111. 133. 149. 163. 178. 193. Less:Depn 1 1 2 2 03 23 20 90 59 29

39.0 551. 528. 506. 484. 462. 439. 417. 401. 387. 372. 357. Net 0 01 80 60 39 19 98 77 81 11 42 72

39.1 72.5 113. 154. 200. 262. 315. 386. 464. 655. Cash & Bank 8 3 47 18 78 28 91 33 71 87

57

Mar Liability Deferred Assets Tax -10

Mar -11

Mar -12

Mar -13

Mar -14

Mar -15

Mar -16

Mar -17

Mar -18

Mar -19

Mar -20

Mar -21

39.0 551. 567. 579. 597. 616. 640. 680. 717. 773. 837. 1,01 Total 0 01 99 13 86 37 76 06 72 44 13 3.59

Projected Cash Flow Statement

Particulars

Mar10

Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

Mar 16

Mar 17

Mar 18

Mar 19

Mar 20

Mar -21

Inflow Promoters Contributio n Bank Loan 413. 26 0.00 39.00 98.7 5 0.00 -

Revenue

180. 44

227. 249. 46 48

263. 277. 40 67

341. 24 341. 24

359. 432. 53 56

456. 512. 95 27

Total Inflow 39.00

512. 01

180. 44

227. 249. 46 48

263. 277. 40 67

359. 432. 53 56

456. 512. 95 27

Outflow

58

Capex

39.00

512. 01

0.00

Operating Exps Interest

87.0 4

114. 122. 21 14

132. 137. 53 58

163. 82 32.8 5 56.2 0 26.8 6 279. 74 61.5 0 200. 78 262. 28

174. 203. 44 96

214. 237. 10 42

51.6 6

50.7 47.5 3 2

43.7 38.9 0 5

25.3 16.1 1 2

5.71 0.00

Loan Repayment Adv tax

19.8 26.4 4 5

34.7 41.3 1 3

64.4 82.6 7 5

87.6 0.00 1 71.1 83.7 4 0

2.57

9.34 12.4 3

11.7 13.2 4 2

41.6 59.4 9 2

Total Outflow Surplus/(De ficit) Opening

39.00

512. 01

141. 26 39.1 8

194. 208. 11 55

222. 231. 68 07

305. 362. 91 14

378. 321. 56 12

33.3 40.9 5 4

40.7 46.6 2 0

53.6 70.4 2 2

78.3 191. 8 16

39.1 72.5 8 3

113. 154. 47 18

262. 315. 28 91

386. 464. 33 71

Closing

39.1 8

72.5 113. 3 47

154. 200. 18 78

315. 386. 91 33

464. 655. 71 87

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Chapter5: Conclusion, Interpretation of Financial Indicators, Suggestions and Limitation of study

5.1Conclusion
Credit is a wide subject, which requires industrious efforts to be placed in, to get acquainted with it. However, in the limited span of project work, an effort has been made to comprehend the rationale behind various credit decision taken under Term Loan financing. It is observed that, the assessment of Term Loan requirement is a dynamic process as the banker on one side has to ensure that the Term Loan requirement is not over assessed, as it would give undue benefits to the co. in form of excess limits which is not in commensuration with the business activity of the activity of the co. & thus co. could deploy the excess limit to some other uses like long term uses which defeat the basic spirit of Term Loan capital financing. While on the other side, the banker has also to ensure that the Term Loan requirement is not under assessed, as would expose co. to risk of lower funds & hence it would lead it to access the other source of short term financing which could have impact on the financials of the co. or in some cases on the viability of the co. also. In PNB, appraisal is done by thorough study of the project which involves the following: 1) Evaluation of management: A detailed study about the promoters is carried out in order to ensure promoters are experienced in the line of business and are capable to implement and run the project. 2) Technical feasibility: A detailed study about the technical aspect is done to determine the technical soundness of the project.

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3) Financial viability: A detailed study relating to financial viability of the project is done, thereby ensuring that the project will generate sufficient surplus to repay the loan instalments and interest. 4) Risk Analysis: It determines the risk associated with the project. This is done by performing a Sensitivity analysis and credit rating. With sensitivity analysis the projects capacity to service the debt under worsened conditions is determined. Credit rating provides rating for various parameters like management, financial market and so on, thereby determining the credit worthiness of the borrower. It is on the basis of the credit risk level, collateral securities to be given by the borrower are determined. This shows that Punjab National Bank of India has a sound system for credit appraisal.

5.2 Findings of Financial Indicators Term Loan

DSCR - Debt Service Coverage Ratio(DSCR) shows the repayment capacity of the borrower. DSCR above 1 is considered good for the borrower, in terms of its repayment capacity, it means internal accruals are sufficient to repay the interest & installments. As per the proposal, the average DSCR is 1.80 which is satisfactory more than minimum DSCR Ratio and which shows that company can easily pay off its debt. If DSCR is below 1, it can be adjusted by increasing repayment period and vice-versa. FACR - It is the ratio of fixed assets of the company to its debt. An FACR above 1, is considered better, as it means that more fixed assets of the company are available with the lender for liquidation in case of winding up of the company and according to the case let the company FACR is 1.25 which shows good FACR so Bank can pass the loan to the borrower. Sensitivity Analysis - It shows the impact of movement in the cost and sales components on the repayment capacity of the borrower. As per the proposal, an increase in the interest rate does not make a significant impact on the DSCR of the company as seen in the base case. On the other hand, a decrease in Revenue and Increase in Operating Profit the average DSCR is still more than 1.5 and Minimum DSCR is more than 1 which means such fluctuations do not impact the repayment capacity of the borrower.

5.3 Suggestions/Recommendations
Social cost benefit analysis: In SCBA the focus is on the social cost and benefits of the project. These tend to differ from the monetary cost and benefits of the project. SCBA helps in
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evaluating the individual project within the planning frameworks which spells out national economic objectives and broad allocation of resources. The social cost is quantified in terms of employment generation, railways, road, forex etc. It is done by certain banks like World Bank etc.* (This is more discussed in glossary section) Comparison with peers: Companys operating cycle and other key financials should be compared with that of competitors and peers in the same industry. This is to check inefficiency on the part of company if any. For e.g. the borrower company has operating cycle of 5 months but peer companies have that of 3 months. This shows the inefficiency of the borrower company which can only be highlighted if we compare it with peers. Similarly Cost comparison should be done with peers. Consortium Banking: Banks should go for consortium banking rather than other forms of lending, for better monitoring of the borrowers account. As under consortium system there are: 1)Common platform for all member banks. 2)Complete, easy & mandatory exchange of information 3)Same set of terms, conditions & Procedural norms. 4)Continuous monitoring in the form of quarterly consortium meetings to discuss the financial performance of company, to take any remedial actions etc. 5)No conflict of interest for the pari-passu charge among the member banks Personal Guarantee: Personal guarantee does not give any physical asset to the bank. It is for the moral binding on the part of borrower. Hence, bank should prefer to use this type of guarantee as this will reduce the default rate on the part of borrower. CMA and Real Growth Index: CMA does not give real growth index. So it is better to compare the quantitative production, capacity utilization to ascertain real growth productivity rather than sales volume alone as sales growth can only be on account of inflation during the review period.

5.4 Limitation of Study

The data availability is proprietary, not readily shared for dissemination and is highly confidential. Assumptions and projections are based on current market conditions and have not taken into account the price volatility. Financial statements of the proposed project are subject to risks and uncertainties that could cause actual results to differ materially from those mentioned in the report. The risks and uncertainties include, but are not limited to, the following: (i) Changes in Indian laws
62

(ii) (iii) (iv)

Changes in Indian in global economic conditions Changes in government regulations Introduction of new technologies

The staff although are very helpful but are not able to give much of their time due to their own work constraints. The study is being done keeping in mind the policies of the Head Office. Due to the ongoing process of globalization and increasing competition, no single model or method will suffice over a long period of time and constant up gradation will be required

Glossary

Borrowing Entity: It is the entity that borrows money. For instance Videocon, Reliance borrowed money against their share of future production of oil from another company owned by them as a joint venture. Commercial Lenders: Providers of debt both foreign and local. Arranging bank: Bank that syndicate loan from various lenders as single bank cannot provide the entire loan. Lead Bank: Coordinator for all banks for credit administration and compliance of covenants. Rating Agency: Provide credit rating services for public debt (CRISIL, ICRA). Technical Consultant: Consultants to the projects on technical matters such as energy, environment etc. Also analyses all technical aspects of the project.

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Credit Enhancement: Improvement of rating through structuring extra collateral, guarantees from sponsor, debt service reserve fund etc. Escrow A/C: Channelling of funds through a special account with a third party to be utilized in consultation with the lender. Force Majeure: Occurrence of a type of risk outside the control of the participants like cyclone war etc. Loan Amortization/ Loan Tenor: The repayment schedule of loans. Pari Passu: A legal term that denotes equality of payment and security for all senior lenders. Loan Agreement: Agreement entered into between the lenders and the project company. Cost overruns: Unplanned cost incurred over the budgeted cost.

Cash Credit (CC) system: Cash credit method of delivery allows drawings by a borrowing enterprise to the extent of value chargeable assets less margin. This system dominates the scenario of credit dispensation by Indian banks. Consortium System of credit delivery: In consortium lending, several banks pool together their banking resources and expertise in credit management and provide to a single borrower with a common appraisal, common documentation and a system of joint supervision and follow up. The consortium selects a leader which is called lead bank. Lead bank takes maximum exposure and carries out certain task like appraising the various aspects of credit proposal, convenes the consortium meeting etc. Multiple Banking system: In multiple banking system, a company can arrange multiple finances through multiple banking arrangements. Under this system every bank has its own procedures, norms and different sets of documentation which the borrowing company has to follow. Unlike consortium system of financing there is no lead bank framing policies and procedures for other banks. Syndication of credit: A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. At the most basic level, arrangers serve the investment-banking role of raising investor funding for a company in need of credit. The
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company pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. This is a preferred mode of credit delivery especially when the amount of credit is large and is ling term in nature. Thus, syndication of credit is most suitable for long term cross border financing and long gestation period infrastructure projects. Social Cost Benefit Analysis (SCBA) In SCBA the focus is on the social cost and benefits of the project. These tend to differ from the monetary cost and benefits of the project. SCBA helps in evaluating the individual project within the planning frameworks which spells out national economic objectives and broad allocation of resources. In SCBA the focus is on the social costs and benefits of the project. These often tend to differ from the monetary costs and benefits of the project. The principal sources of differences are: Market Imperfections Externalities Taxes and subsidies Concern for savings Concern for redistribution Merit wants

One principal approach for SCBA is UNIDO approach. It provides a comprehensive framework for SCBA in developing countries. This method of project appraisal involves 5 stages: 1. Calculation of the financial profitability of the project measured at market prices. 2. Obtaining the net benefit of the project measured in terms of economic (efficiency) prices. 3. Adjustment for the impact of the project on savings and investment. 4. Adjustment for the impact of the project on income distribution. 5. Adjustment for the impact of the project on merit goods and demerit goods whose social values differ from their economic values. Pledge: It is delivery of goods by a borrower to a lender as security for the payment of a debt or the performance of a promise. The ownership remains with the borrower but the possession of the goods is with the lender until the debt is paid. Hypothecation: It is a mode of creating an equitable charge on a property to secure payment of a debt in which the property itself continues to be in the possession of debtor. It is a legal transaction whereby a merge charge is given on the goods for amount of the debt but the hypothecated goods remain in the actual possession of the the the the

65

borrower. And neither possession nor ownership passes to the lender. The instrument which creates a charge is known as Letter of Hypothecation.

Lien: It is the right of one person to retain the goods or a security belonging to another person until a debt due from the latter is paid to the former. After a lien has been obtained the debtor remains the legal owner of the property although he loses his right to sell. Mortgage: It is the creation or transfer of a legal or a equitable interest in property by the borrower to the lender as security for the payment of a debt or the discharge of some other obligation.

Moratorium: It is an agreement between a creditor and a debtor to allow additional time for the settlement of a debt

List of Abbreviations
1. BG: Bank Guarantee 2. CAD: Credit Administrative Division (Now it has been changed to Credit Division) 3. CARE: Credit Analysis and Research Ltd. 4. CBS: Core Banking Solution 5. CIBIL: Credit Information Bureau (India) Ltd. 6. CM: Chief Manager 7. CMA: Credit monitoring arrangement 8. CMD: Chairman & Managing Director 9. CRISIL: Credit Rate and Information Services of India Ltd. 10. DE: Debt Equity 11. DSCR: Debt Service Coverage Ratio 12. ED: Executive Director 13. FG: Finished Goods 14. GDP: Gross Domestic Product 15. GM: General Manager 16. HO: Head Office 17. ICRA: Investment Information and Credit Rating Agency of India Ltd.
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18. IRD: Industrial Rehabilitation Department 19. IRR: Internal rate of return 20. MC: Management Committee 21. MPBF: Maximum Permissible Bank Finance 22. NBFC: Non Banking Financial Companies 23. NFB: Non Fund Based 24. NPA: Non Performing Assets 25. NWC: Net working capital 26. PMS : Preventive Monitoring System 27. RBI: Reserve Bank of India 28. RM: Raw Materials 29. RMD: Risk Management Division 30. TL: Term Loan 31. TNW: Tangible Net Worth 32. TOL: Total Outside Liabilities 33. WCG: Working Capital Gap 34. WIP: Work in Progress

BIBLIOGRAPHY
Loan compendium by PNB Credit policy of PNB RBI Guidelines PNB annual Report 2011-12 PNB website http://www.loanuniverse.com/letters.httml http://www.investopedia.com/terms/letter.html

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