Executive Summary

Executive Summary

Considering the growing use of project finance, we undertook this project with an objective

of understanding the salient features of project finance. It is a method of financing very large

capital intensive projects, with long gestation period, where the lenders rely on the assets

created for the project as security and the cash flow generated by the project as source of

funds for repaying their dues.

As project financing is adopted by a majority of companies at least once in their lifetime, we

decided to study this concept in detail. Banks as well as non-banking financial companies

provide project financing.

Banks enjoy a major market share among the borrowers and the NBFC firms are lagging far

behind and will slowly loose their market share if adequate steps are not taken. Banks are

usually preferred over NBFC firms due to the security aspect and brand name. also the

documentation process is one such aspect which the borrowers find lengthy and tiresome in

both the banks and NBFC.

Awareness regarding the nationalized banks providing project finance is more than the NBFC

firms providing the same. Also a borrower chooses a project finance provider mainly due

reference and time frame within which the loan would be approved.

The NBFC firms need to take adequate steps to improve their position in the minds of the borrowers so as to stay in the market. The NBFC firms should try to inculcate in the minds of the borrowers that NBFC is as safe as any bank and should try and develop a feeling of security among borrowers with regard to NBFC.

INTRODUCTION TO PROJECT FINANCE

Origins of project finance

Project financing is generally sought for infrastructure related projects. Its linkages to the

economy are multiple and complex, because it affects production and consumption directly,

creates negative and positive externalities, and involves large flow of expenditure.

Prior to World War I, private entrepreneurs built major infrastructure projects all over the

world. During the 19th century ambitious projects such as the Suez Canal and the Trans-

Siberian Railway were constructed, financed and owned by private companies. However the

private sector entrepreneur disappeared after World War I and as colonial powers lost control,

new governments financed infrastructure projects through public sector borrowing. The state

and the public utility organizations became the main clients in the commissioning of public

works, which were then paid for out of general taxation. After World War II, most

infrastructure projects in industrialized countries were built under the supervision of the state

and were funded from the respective budgetary sources of sovereign borrowings.

This traditional approach of government in identifying needs, setting policy and procuring

infrastructure was by and large followed by developing countries, with the public finance

being supported by bond instruments or direct sovereign loans by such organizations as the

world Bank, the Asian Development Bank and the International Monetary Fund.

Development In the early 1980s

The convergence of a number of factors by the early 1980s led to the search for alternative

ways to develop and finance infrastructure projects around the world.

These factors include:

Continued population and economic growth meant that the need for additional

Infrastructure- roads, power plants, and water-treatment plants-continued to grow.

The debt crisis meant that many countries had less borrowing capacity and fewer

budgetary resources to finance badly needed projects; compelling them to look to the

private sector for investors for projects which in the past would have been constructed

and operated in the public sector.

Major international contracting firms, which in the mid-1970s had been kept busy,

particularly in the oil rich Middle East, were, by the early 1980s, facing a significant

downturn in business and looking for creative ways to promote additional projects.

Competition for global markets among major equipment suppliers and operators led

them to become promoters of projects to enable them to sell their products or services.

Outright privatization was not acceptable in some countries or appropriate in some

sectors for political or strategic reasons and governments were reluctant to relinquish

total control of what maybe regarded as state assets.

During the 1980s, as a number of governments, as well as international lending institutions,

became increasingly interested in promoting the development for the private sector, and the

discipline imposed by its profit motive, to enhance the efficiency and productivity of what

had previously been considered public sector services. It is now increasingly recognized that

private sector can play a dynamic role in accelerating growth and development. Many

countries are encouraging direct private sector involvement and making strong efforts to

attract new money through new project financing techniques.

Such encouragement is not borne solely out of the need for additional financing, but it has

been recognized that the private sector involvement can bring with it the ability to implement

projects in a shorter time, the expectation of more efficient operation, better management and

higher technical capability and, in some cases, the introduction of an element of competition

into monopolistic structures.

However, the private sector, driven by commercial objectives, would not want to take up any

project whose returns are not consumer ate with the risks. Infrastructure projects typically

have a long gestation period and returns are uncertain. What then are the incentives of private

capital providers to participate in infrastructure projects, which are fraught with huge risks?

Project finance provides satisfactory answers to these questions.

DEFINITION OF PROJECT FINANCE

Project finance is typically defined as limited or non-recourse financing of a new project

through separate incorporation of vehicle or Project Company. Project financing involves

non-recourse financing of the development and construction of a particular project in which

the lender looks principally to the revenues expected to be generated by the project for the

repayment of its loan and to the assets of the project as collateral for its loan rather than to the

general credit of the project sponsor.

In other words the lenders finance the project looking at the creditworthiness of the project,

not the creditworthiness of the borrowing party. Project Financing discipline includes

understanding the rationale for project financing, how to prepare the financial plan, assess the

risk, design the financing mix, and raise the funds.

A knowledge base is required regarding the design of contractual arrangements to support

project financing; issues for the host government legislative provisions, public/private

infrastructure partnerships, public/private financing structures; credit requirements of lenders,

and how to determine the projects borrowing capacity; how to prepare cash flow projections

and use them to measure expected rates of return; tax and accounting considerations; and

analytical techniques to validate the projects feasibility.

COMPARISON BETWEEN CORPORATE FINANCE AND PROJECT FINANCE

Traditional finance is corporate finance, where the primary source of repayment for investor

and creditors is the sponsoring company, backed by its entire balance sheet, not the project

alone. Although creditors will usually still seek to assure themselves of economic viability of

the project being financed so that it is not a drain on the corporate sponsors existing pool of

assets, an important influence on their credit decision is the overall strength of the sponsors

balance sheet, as well as their business reputation. If the project fails, lenders do not

necessarily suffer, as long as the company owning the project remains financially viable.

Corporate finance is often used for shorter, less capital-intensive projects that do not warrant

outside financing. The company borrows funds to construct a new facility and guarantees to

repay the lenders from its available operating income and its base of assets. However private

companies avoid this option, as it strains their balance sheets and capacity, and limits their

potential participation in future projects. Project financing is different from traditional forms

of finance because the financier principally looks to the assets and revenue of the project in

order to secure and service the loan.

In project finance a team or consortium of private firms establishes a new project company to

build own and operate a separate infrastructure project. The new project company to build

own and operate a separate infrastructure project. The new project company is capitalized

with equity contributions from each of the sponsors. In contrast to an ordinary borrowing

situation, in a project financing the financier usually has little or no recourse to the non-

project assets of the borrower or the sponsors of the project. The project is not reflected in the

sponsors’ balance sheets.

EXTENT OF RECOURSE

Recourse refers to the right to claim a refund from another party, which has handled a bill at

an earlier stage. The extent of recourse refers to the range of reliance on sponsors and other

project participants for enhancement to protect against certain projects risks. In project

financing there is limited or no recourse. Non-recourse project finance is an arrangement

under which investors and credit financing the project does not have any direct recourse to

the sponsors.

In other words, the lender is not permitted to request repayment from the parent company if

borrower fails to meet its payment obligation. Although creditors security will include the

assets being financed, lenders rely on the operating cash flow generated from those assets for

repayment.

When the project has assured cash flows in the form of a reliable off taker and well-allocated

construction and operating risks, the lenders are comfortable with non-recourse financing.

Lenders prefer limited recourse when the project has significantly higher risks. Limited

recourse project finance permits creditors and investors some recourse to the sponsors.

This frequently takes the form of a pre completion guarantee during a projects construction

period, or other assurance of some form of support for the project. In most developing market

projects and in other projects with significant construction risk, project finance is generally of

the limited recourse type.

CHARACTERSTICS OF PROJECT FINANCING

A separate project entity is created that receives loans from lenders and equity from sponsors.

Component of debt is very high in project financing. Debt services and repayments entirely depend on the projects cash flows. Project assets used as collateral for loan repayments. Project financing most appropriate for projects involving large amount of capital

expenditure and involving high risk.

Financial assistance is granted to the project based on the total project cost. A project in a small scale sector would be financed by banks and / or state financial corporations and state Industrial Development Corporation. The project could be financed any one of the institutions or in consortium with each others. This is determined by total requirement of loan funds for the project.

FEASIBILTY STUDIES

To implement any project, the entrepreneur needs to carry out different types of feasibility studies. This feasibility study evaluates all the risks and returns and tries to balance them and help the entrepreneur to finalise his plans. It enables the company to anticipate problems that are likely to be encountered in the execution of the project and places it in better position to respond to all the queries that may be raised by financial institutions and others concerned with the project.

Different feasibility studies include:

MANAGERIAL FEASIBILITY

Every business has different requirements from the management. Businesses, which are complex, require significant experiences on part of top management to run it. Management expertise is not only technical know – how but also in understanding market dynamics, ability to distribute product effectively, manage manpower and environment.

In cases, where MNC, which has a long track record and significant experience, is implementing a project, it would be an added comfort about management feasibility. In businesses, which are technologically driven based on intellectual capital, technocrats would be preferred.

The ultimate success of even a very well conceives project lies upon how competently it is managed. Besides project implementation, other important function required to be controlled can be broadly classified.

ECONOMIC FEASIBILITY

The project has to generate an acceptable rate of return, which adequately covers your cost of capital. The expected rate of return depends on the risk profile of the project. In a rational economic world, nobody implements a project to make losses. In other words net present value has to be positive if you discount the cash flow by the desired rate of return.

COMMERCIAL FEASIBLITY (AVAILABILITY OF KEY FACTORS)

We would like to distinguish between commercial feasibility and economic feasibility. Commercial feasibility refers to availability of raw material, skilled labour, infrastructure and other factors of production. A number of projects have run into rough weather due to poor commercial viability. One of the classic examples of this is a cycle factory which was set up in Baroda, Gujrat. The management was good, market survey showed existence of a good market and the government was giving fiscal incentives. What was overlooked was availability of skilled labour. Bicycle assembly is a hard work and labour in Gujrat is used to process industries. Therefore project failed. The centre of the bicycle industry is Ludhiana where native are sturdy people and used to hard work and have requisite skills in assembly of bicycles.

FINANCIAL FEASIBILITY

The ability to raise money to implement the project is of paramount importance. The promoter should be capable of raising funds either from his own sources or from banks and institutions. One area that often gets overlooked is contingency planning. In most cases, the first generation entrepreneur has problems in raising funds to implement his project, and even if he does so, he lacks staying power and is not able to withstand unforseen problems like delays and overruns.

TECHNICAL FEASIBILITY

An entrepreneur should have the requisite number of technically capable people as well as technology required to set up and run the plant. The technology should be such that is could adapt to local conditions. Technology transfer from overseas often fails in this regard. The conditions in US are quite different from India. Most parts of India are hot and dusty. Sophisticated process controls have known to fail. Therefore, knowledge and suitability to local conditions is very important.

SOCIAL FEASIBILITY

Many a time plants may be viable economically and financially but would be socially undesirable. An example would be dye units, which have mushroomed around Ahmedabad. These are polluting and generate effluents not acceptable to the society and environment. In last 5 years, India is slowly becoming environment conscious and friendly. So using hazardous chemicals or polluting industries may not get the necessary clearance. For instance, the state government has ordered closure of all dyes units in Gujrat unless suitable effluent treatment is implemented.

MARKET FEASIBILTY

This is a critical analysis because the output of any factory has to sell in the market place for the promoter to earn revenues. Very often demand analysis and projections are optimistic leading to problems in the future. Another observation has been that products that sell abroad many not have a market in India. India in general is a cost conscious market and the promoter has to keep this in the back of his mind.

ENVIORNMENTAL ASPECTS:

The project should be sensitive to the demand of the environment. Environmental concerns are highly significant today.

Key questions raised in the ecological analysis:

What is likely damage caused to the environment? What is the cost of the restoration measures?

Environmental planning evaluates the likely impact of a project on the environment and suggests remedial action to minimize damage.

MANAGEMENT BY SOUND PROMOTERS

The promoters form the backbone of every project. While a bad promoter can make a mess of a good project, a good promoter can make a success of a weak project.

Following are the qualities of sound promoters:

Willingness to make sacrifices Leadership skills Decisiveness Confidence in the project Marketing orientation Strong ego.

While new promoters and technocrats are being encouraged, care is taken to ensure that all the aspects of managing an industrial enterprise have been carefully considered. The promoters are appraised by the institutions to ensure that they have the requisite resourcefulness, undertaking, commitment and ability to manage the unit.

The resourcefulness of the promoters is gauged from their business experience, organization of offices, know-how, approvals and sanctions required for the project and the ability to organize and present the project to the institution with the understanding and credibility.

The understanding of the promoters is gauged by the details submitted to the institutions and the manner in which the additional information sought by the institution is furnished.

The commitment of the promoter is determined from the desire to plan the long term objectives or be satisfied with short term gains. In addition to these provisions for recruitment and training requisite personnel in the field of production, administration and management are assessed. This is shown by he time schedule indicate for implementation of project and package for the retention of the personnel.

Criteria for Promoters Appraisal:

A. Managerial attributes: Ability to plan Clarity of goals and objectives Ability to organize Ability to select right kind of people Ability to procure right kind of equipment and spares. Ability to direct Ability to control Knowledge of finance or technology. Production ability Marketing and sales ability Problem solving capability Readiness to delegate Communication skills Human relation skills Forecasting skills Leadership style Ability to co-ordinate ConsistencyB. Entrepreneurial attributes Ability to take calculates risk. Commitment to project. Perception of market opportunity. Willingness to take new challenges. Readiness to co-operate. Positive self confidence Ability to create a following Creativity and innovation Initiative and drive Resourcefulness Achievement motivation Perseverance and persistence Quality consciousness. Inquisitiveness. Desire to change. Absence of dissatisfaction Independence in thinking Flexibility and adaptability Attitude to ambiguity Learning from failure CohesivenessC. Personal Attributes

Appearance Level of education Business experience Experience relevant to project being financed. Technical capacity Maturity Ability to get along with others Financial support and stability Supportive family background Ability to get along with others Financial support and stability Supportive family background Ability to raise finance from outside resources. Social, economic and industrial awareness. Resourcefulness Intelligence Patience Honesty and noble mindness

PROJECT APPRAISAL BY FI`S

A project report is essential before decision for setting up of any project is taken. We have seen that an entrepreneur must study all the aspect of the project including the product to be manufactured. An assessment of the total cost of the project and proposed means of financing with emphasis on overall profitability of the project is necessary. Project report must therefore include all these information and cover entire aspects of a project to stand scrutiny by financial institutions who shall appraise the project from the following angles before taking any decision to grant term loans. The feasibility of a project can be ascertained in terms of technical factors, economic factors or both. A feasibility study is documented with a report showing all the ramifications of the project. In project finance, the pre financing work (sometimes referred to as due diligence) is to make sure there is no “dry rot” in the project and to identify project risks ensuring they can be mitigated and managed in addition to ascertaining “debt service” capability.

TECHNICAL FEASIBILITY

Technical feasibility refers to the ability of the process to take advantage of the current state of the technology in pursuing further improvement. The technical capability of the personnel as well as the capability of the available technology should be considered. Technology transfer between geographical areas and culture needs to be analysed to understand productivity loss due to differences (see cultural feasibility).

The

Product mix Location Land and building Capacity Process of manufacture- technology employed Plant and equipments Collaboration Manpower requirements and break even point Power and water supply Effluent disposal Implementation schedule

MANAGERIAL FEASIBILITY

Managerial feasibility involves the capability of the infrastructure of a process to achieve and sustain process improvement. Management support, employee involvement, and commitment are key elements required to ascertain managerial feasibility.

Focus on larger social point of view Methodology adopted is referred to as the social cost benefit analysis Assessing understanding of the promoters. Quality of the management

Assessment of the entrepreneur, board of directors, chief Executive and departmental heads.

ECONOMIC FEASIBILITY

This involves the feasibility of the proposed project to generate economic benefits. A benefit- cost analysis and a break even analysis are important aspects of evaluating the economic feasibility of new industrial projects. The tangible and intangible aspects of a project should be translated into economic terms to facilities a consistent basis for evaluation.

FINANCIAL FEASIBILITY

Financial feasibility should be distinguished from economic feasibility. Financial feasibility involves the capability of the project organization to raise the appropriate funds needed to implement the proposed project. Project financing can be a major obstacle in large multi- party projects because of the level of capital required. Loan availability, credit worthiness, equity and loan schedule are important aspects of financial feasibility analysis.

Assessing reasonableness of the estimate of capital cost. Assessing reasonableness of the estimate of working results Assessing adequacy of rate of return: (general norms :- IRR – 15%, ROI – 20-25%

after tax and DSCR – 1.5 to 2 ) Assessing appropriateness of the financing pattern : (general debt – equity ration norm

of 1.5:1, promoter’s contribution – 12.5% to 22.5% of project cost etc.)

CULTURAL FEASIBILITY

Cultural feasibility deals with the compatibility of the proposed project with the cultural setup of the project environment. In labour intensive projects, planned functions must be integrated with the local cultural practices and beliefs. For example, religious beliefs may influence what an individual is willing to do or not do.

SOCIAL FEASIBILITY

Social feasibility addressed the influences that a proposed project may have on the social system in the project environment. The ambient social structure may be such that certain categories of workers may be in short supply or non existent. The effect of the project on the social status of the project participants must be assessed to ensure compatibility. It should be recognized that workers in certain industries may have certain status symbols within the society.

SAFETY FEASIBILTY

Safety feasibility is another important aspect that should be considered in project planning. Safety feasibility refers to an analysis of whether the project is capable of being implemented and operated safely with minimal adverse effects on the environment. Unfortunately , environmental impact assessment is often not adequately addressed in complex projects.

POLITICAL FEASIBILTY

A politically feasible project may be referred to as a “politically correct project”. Political considerations often dictate directions for a proposed project. This is particularly true for large projects with national visibility that may have significant government inputs and political implications. For example, political necessity may be a source of support for a project regardless of the projects merits. On the other hand, worthy projects may face insurmountable opposition simply because of political factors. Political feasibility analysis requires an evaluation of the compatibility of project goals with the prevailing goals of the political system.

ENVIORNMENTAL FEASIBILITY

Often a killer of projects through long, drawn out approval processes and outright active opposition by those claiming environmental concerns. This is an aspect worthy of real attention in the very early stages of a project. Concern must be shown and action must be taken to address any and all environmental concerns raised or anticipated. A perfect example was the recent attempt by Disney to build theme park in Virgina. After a lot of funds and efforts, Disney could not overcome the local opposition to the environment impact that the Disney project would have on the historic Manassa battleground area.

MARKET FEASIBILITY

Another concern is market variability and impact on the project. This area should not be confused with the Economic Feasibility. The market needs analysis to view the potential impacts of market demand, competitive activities etc. and “divertible” market share available. Price war activities by competitors, whether local, regional, national or international, must also be analysed for early contingency funding and debt service negotiations during the start up, ramp up and commercial start up phases of the project.

Any project can be commercially viable only if it is able to sell its production at a profit. For this purpose it would be necessary to study demand and supply pattern of that particular product to determine its marketability. Various methods such as regression method for estimation of the demand are employed which is then to be matched with the available supply of that particular product. The prospect of exporting that product may also be examined while assessing the demand. If the selling of the product is already been tie up with the foreign collaboration or some of the other users the fact needs to be highlighted. This factor shall definitely have a positive influence on the commercial viability of the project. Necessary factors that may influence the supply position such as licensing of new products, introduction of the new products, changes in the import policy etc. shall be taken into cognizance while estimating the market potential of any project. This exercise shall be conducted for sufficiently longer period say 5 to 10 years to determine the continued demand for the product during the currency of the loan granted by financial institutions. These factors are not only important from the financial institutions point of view but also help the promoter to take aright decision in selecting the size of the plant and determining the capacity utilization.

The financial institutions look into following considerations in considering the marketing appraisal of the project;

Product, scope of the market, competition. Special features, quality and price Examining reasonableness of demand projections (existing and future) Export facilities Assessing adequacy of marketing infrastructure and principal customers Judging competence of key marketing personnel Selling arrangements Trends in price.

SCOPE OF FEASIBILTY ANALYSIS

In general terms, the elements of a feasibility analysis for a project should cover the following:

Need Analysis

This indicates recognition of a need for a project. The need may affect the organization itself, another organization, the public or the government. A preliminary study is then conducted to confirm and evaluate the need. A proposal of how the need may be satisfied is then made. Pertinent questions that should be asked include:

Is the need significant enough to justify the proposed project? Will the need still exist by the time the project is completed? What are the alternate means of satisfying the need? What are the economic, social, environmental and political impacts of the need?

Process Work

This is the preliminary analysis done to determine what will be required to satisfy the need. The work may be performed by a consultant who is an expert in the project field. The preliminary study often involves system models or prototypes. For technology oriented projects, artists conception and scaled down models may be used for illustrating the general characteristics of a process. A simulation of the proposed system can be carried out to predict the outcome before the actual project starts.

Engineering & Design

This involves a detailed technical study of the proposed project. Written quotations are obtained from suppliers and subcontractors as needed. Technology capabilities are evaluated as needed. Product design, if needed, should be done at this time.

Cost Estimate

This involves estimating project cost to an acceptable level of accuracy. Levels of around -5% to +15% are common at this level of project plan. Both the initial and operating costs are included in the cost estimation. Estimates of capital investment and of recurring and nonrecurring costs should also be contained in the cost estimate document.

Sensitivity Analysis

It can be carried out on the estimated cost values to see how sensitive the project plan is to the estimated cost values

Financial Analysis

This involves an analysis of the cash flow profile of the project. The analysis should consider rates of return, inflation, sources of capital, payback periods, breakeven points, residual values and sensitivity. This is critical analysis since it determines whether or not and when

funds will be available to the project. The project cash flow profile helps to support the economic and financial feasibility of the project.

Project Impacts

This portion of the feasibility study provides an assessment of the impact of the proposed project. Environmental, social , cultural , political and economic impacts may be some of the factors that will determine how a project is perceived by the public. The value added potential of the project should also be assessed. A value added tax may be assessed based on the price of a product and the cost of the raw material used in making the product. The tax so collected may be viewed as a contribution to government coffers.

Conclusions and Recommendations

The feasibility study should end with the overall outcome of the project analysis. This may indicate an endorsement or disapproval of the project. Recommendations on what should be done should be included in this section of feasibility report.

COST OF THE PROJECT

It is very important to estimate each constituent of the project cost with utmost care. As far as possible, the estimate should be based on the supporting data. Care should be taken to ensure sufficient cushion for the unforeseen factors as well as for the as well the inflationary trends. The cost of the project is estimated after assessing the critical process parameters and the suitability of the technology for manufacturing the proposed product under Indian Scenario.

CRTICAL FACTORS AFFECTING THE COST OF THE PROJECT:

PRODUCTION TECHNOLOGY

Suitability of the technology needs to be evaluated in terms of the soundness, raw material capital investment involved, cost of production and absorption capacity of the promoters, during the appraisal the institution may insist on visiting the site using same or similar technology to evaluate its feasibility and longevity.

RAW MATERIAL AND INPUTS

Raw material used for manufacturing should be easily available preferably under OGL (Open General License)

CAPITAL AND PRODUCT MIX

The capacity of the unit should be so planned that the cost of the production of the product is optimal. The plant capacity should be so installed to ensure maximum profitability. The installed capacity should also have the flexibility for the future expansion and diversification at the minimal additional capital expenditure.

Broad Heads of the Cost of the Project:

Land, location and site development Building and civil work Plant and machinery Technical know how and engineering fees/ royalty. Miscellaneous fixed assets Utilities Preliminary and pre- operative expenses Provision for contingencies Margin money for working capital

NORMS AND POLICIES OF FINANCIAL INSTITUTION

ELIGIBILITY

Till recently, long term loans were provided to concern in certain industries only and denied to concerns in industries placed on the negative list.

Gradual shift in policy. Currently, inclination of FI’s to finance almost every kind of industry.

DEBT- EQUITY RATIO

One of the important factors which determine the components for the financing of a project is the debt – equity ratio. These are certain guide lines prescribed by IDBI for debt equity ration for different category of industries. They are;

General debt – equity norm for medium and large scale proportion is 2:1 General debt – equity norm for small scale projects is 3:1

However it has been learnt that financial institution these days require debt equity ration of 1.5:1 for medium to large scale industries.

PROMOTERS CONTRIBUTION

FI’s require promoters to contribute 25 to 30% of the project cost. This is lowered selectively in certain cases like capital intensive projects, high priority projects etc.

The GOVT. of India has classified the location in three categories:

‘A’ category : No industry districts ‘B’ category: Where Industrial activities have already started. ‘C’ category: Where Industrial activity has gained sufficient ground.

The promoter’s contribution may reduce as we move from ‘C’ to ‘A’ in order to promote industrial growth in backward areas. The promoters contribution is also reduce for the non MRTP companies.

FOREIGN CURRENCY LOANS

In case of large projects involving heavy capital equipments, foreign currency loans are emerging as an important source of project finance. The department of Economic Affairs Govt. of India specifically permits borrowing in foreign currency loans in respect of specific projects.

Apart from rupee term loans, FI’s also provide foreign currency loans. This assistance is now provided only for the import of capital equipment.

There are two types of foreign currency borrowings:

Fixed rate borrowing; funds that can be borrowed on fixed interest rates. Floating rate borrowings; funds that can be raised on floating rates of interest.

Fixed rate of borrowings insulate the borrower against the movements in the interest rates.

KEY FINANCIAL INDICATORS USED BY FI’S

INTERNAL RATE OF RETURN (IRR)

Internal rate of return is defined as the discount rate which equates the present value of the investment in the project to the present value of the future returns over the life of the project. This is an indicator of the earning capacity of the project and higher IRR indicates better prospects for the project. The project investment in cash outflow which is assumed to be negative cash flow and returns are assumed to be positive cash flow. The sum total of the discounted cash flows shall be zero as above is the IRR.

Cash outflows and cash inflows of the project taken into the consideration Ideally IRR should be 15% or more.

DEBT SERVICE COVERAGE RATIO (DSCR)

Debt service coverage ratio is calculated to find out the capacity of the project servicing its debt i.e. in repayment of the term borrowing and interest. The Debt service coverage ratio is worked out in the following manner.

DSCR= Net PAT + Depn. + Interest on Long term borrowing

(Repayment of term borrowing during the year + Interest on

Long term borrowing)

The higher DSCR would impart intrinsic strength to the project to repay its term borrowing and interest as per the schedule even if some of the projections are not full realized. Normally a min. DSCR of 2:1 is insisted upon by the term lending institution and repayment is fixed on that basis.

BREAK EVEN POINT

Estimation of working results pre supposes a definite level of production and sales and all calculations are based on that level. It may, however, not to possible to realise those level at all times. The minimum level of production and sale at which the unit will run on ‘no profit no loss’ is known as break – even point can be expressed in terms of volume of production or as percentage of plant capacity utilisation.

The cost of production may be divided in two parts as under:

Fixed Costs: These costs are not related to the volume of production and remain constant over a period of time. Examples of such costs include rent of building, depreciation, interest on term loans etc, salaries of permanent employees etc.

Variable Costs: These costs have direct relationship with the column of production. The cost will increase with any increase in the level of production. Examples of such costs include raw material, fuel and power, wages, packaging etc.

SENSITIVITY ANALYSIS

It may also be sometimes necessary to carry out sensitivity analysis which helps in identifying elements affecting the viability of project taking into account the different sets of

assumptions. While evaluating profitability projections, the sensitivity analysis may be carried in relation to changes in the sale price and raw material costs, i.e. sale price may be reduced by 5% to 10% and raw material costs may be increased by 5% yo 10% and the impact of these changed on DSCR. If the new DSCR, so calculated after changes, still proves that the project is viable, the financial institution may go ahead in funding the projects.

NET PRESENT VALUE

The Discounted Cash Flow (DCF) Technique which is more commonly known as Net Present Value method (NPV) takes into account the time value of money for evaluating the cost and benefits of a project. It recognises that streams of cash inflows at different points of time differ in value. A sound comparison among such inflows and outflows can be made only when they are expressed in terms of common denominator i.e. present values. For determining present values, an appropriate rate of discount is selected and the cash flow streams then are converted into present values with the help of rate of discount so selected. If NPV is positive (i.e. difference between present values of inflows and outflows) the project is taken to be viable and as such proceeded with otherwise not.

Other indicators ( Debt equity Ratio, Current ratio, Profit margin on sales, Return on owners equity, ROI after taxes, ROI before taxes)

OTHER INDICATORS

Profit margin on sales = Net profit after tax / sales Return on owners equity= Net profit after tax / promoters cont. + S / L Debt – equity ratio = Long term Debt / equity Current Ratio = Current assets / current liabilities ROI before taxes = PBT + Depn. + Interest / project cost ROI after taxes = PAT + Depn. + Interest / project cost

MEANS OF FINANCE

Capital & reserves (Net worth)

Net worth is a measure of financial stake of the promoters/owners in, the business is also referred to as ‘owned funds’. This is an important indicator of intrinsic financial strength of the concern and is generally compared to the total outside liabilities of the concern which is discussed in details in subsequent paragraphs.

The following items on the net worth:

Ordinary share capital. Preference share capital (redeemable after 12 years). General reserve. Share premium. Development rebate reserve. Investment allowance reserve. Other reserve (excluding provisions). Surplus in profit and loss account.

However, if there is any deficit (carried forward) in profit and loss a/c on the assets side of the balance sheet, the same should be deducted to find out the net worth of the concern. The value of any intangible asset is also deducted to arrive at the tangible net worth.

The revaluation reserve, if any, is generally not counted for the purpose of determining the net worth. Capital investment in subsidiary/ other group companies any also be sometimes deducted from the net worth/net owned founds to arrive at the correct status of the stake of owners in the business.

In case of partners/proprietor shall also be deducted from partners’ capital while computing the net worth.

TERM LOANS:

Term loans represent secured borrowings and at present are the most important source of finance for new projects. They generally carry a rate of interest varying from 17.5% to 22.5%, inclusive of interest tax, depending on the credit rating of the borrower, the perceived risk of lending and the cost of funds. The interest rates applicable for different types of financial assistance are indicated in Annexure 7th. These loans quarterly installment.

Term loans are provided by banks, state financial/development institutional and all India term lending financial institutions corporations normally provide term loans to projects in small scale sector while for the medium and large industries term loans are provided by state development institutions alone or in participation with banks and state financial corporations. For large scale projects or in consortium with other all India financial institutions, state level institutions and /or banks.

DEFFERRED PAYMENT GUARNTE:

Many a time the suppliers of machinery provide deferred credit facility under which payment for the purchase of machinery can be made over a period of time. Generally the entire cost of machinery is financed and the company is not required to contribute any amount initially towards acquisition of the machinery. However, in some cases the financing is done to the extent of 90% of the cost of the machinery. Such facility doses not have a moratorium period for repayment. Hence, it may be advisable only for an existing profit making company. Normally, the supplier of machinery insists that bank guarantee should be furnished by the buyer.

UNSECURED LOANS FROM PROMOTERS:

Unsecured loans are typically provided by the promoters to fill the gap between the promoter‘s contribution required by financial institutions and the equity capital subscribed to by the promoter or to meet the promoter’s contribution norm. These loans are subordinate to the institutional loans and do not carry the interest till the company declares dividend. The rate of interest chargeable on these loans should be less then or equal to the rate of interest on the loads or the rate of dividend which is lower and interest can be paid only of there is no default in the payment of institutional dues. These loans cannot be repaid without the prior approval of the financial institutions.

INTERNAL CASH ACCRUALS:

Existing profit making companies which undertake an expansion /diversification program may be permitted to invest a part of their accumulated reserves or cash profits for creation of capital assets in such cases the past performance of the company permits the capital the expenditure from within the company by way of disinvestments of working/ invested funds, in other words the surplus generated from the operations after meeting all the contractual ,statutory and working requirements of the funds is available for further capital expenditure

Government subsidies

Subsidies extended by the central as well as state government from a very important type of funds available in the nature of outright cash grant or long -term interest- free loan. Infact, while finalizing the means of finance, government subsidy forms and important source having a vital bearing on the implementation of many a project.

FINANCIAL ASSISTENCE

Direct financial assistance Foreign currency loans Subscription to equity shares Seed capital finance indirect financial assistance deferred payment guarantee guarantee foreign currency loan

underwriting SPECIAL SCHMES Bill discounting scheme Supplier ‘s line of credit Equipment finance schemes

FOREIGN CURRENCY LOANS

Foreign currency loans are also arranged by all-India financial institutions out of various lines of credit, some of which are:

1. Euro dollar loans.2. Export credit from U.K.3. Japanese Ye n loans.4. Deutsche Mark Revolving Funds.5. KFW(Kreditanstalt-Fur-Wiederaufbau),Federal Republic f Germany6. International Bank for Reconstruction and Development.7. Asian Development Bank.8. Commonwealth Development Corporation.

The loan amount normally available is the C.I.F. value of the capital goods/ equipment to be imported and the know-how fees payable. The interest rates depend upon the interest rate applicable to the foreign currency funds utilized by funding institution.

Foreign currency loans carry a commitment charge of 1% per annum on the undrawn amount from the date of the letter of interest issues by the financial institution.

The repayment period is normally synchronized with the relative repayment commitments of the funding institution.

Foreign currency loans can be availed from foreign banks under suppliers credit scheme or any other foreign bank or institution approved by the government of the India.

EQUITY SHARE CAPITAL:

This is the contribution made by the owners of the company, i.e., the equity shareholder, who enjoy the rewards and bear the risks of ownership. However, their liability is limited to their capital contribution. This is most important source of ling term funds. It has the following advantages:

It represents permanent capital. Hence, there is no liability for payment. It does not involve any fixed obligation for payment of dividends.

It enhances the credit worthiness of the company. Larger the equity base, higher the ability of the company to obtain credit.

The disadvantages of equity share capital are:

The cost of equity share capital is high, usually the highest. Equity dividends are not deductible for tax purpose. The cost of issuing equity share capital is generally higher than the cost of

issuing other types of securities.Sale of equity shares to outsiders may result in dilution of control of existing shareholders.

If the size of the issue for share capital is small, it may be advised for the company to approach mutual funds, venture capital organization or opt for private placement of such shares.

The minimum issued capital should be at least Rs. 30 Lacs for a company, of which at least 60% should be offered to the public as prescribed in the listing requirements of the stock exchanges.

With the abolition of controller of capital issues (cci)

And the introduction of the concept of “free pricing” by SEBI, more and companies ay raise equity share capital at a comparatively higher premium.

Seed capital

In consonance with the government policy which encourages a new class of entepreneurs and also intends wider dispersal of ownership and control of manufacturing units, a special scheme to supplement the resources of an entrepreneur has been introduced by the government. Assistance under this scheme is available in the nature of seed capital which is normally given up by way of long term interest free loan. Seed capital assistance is provided to small as well as medium scale units promoted by eligible entrepreneurs.

Special Seed capital Assistance Scheme.

This scheme is exclusively administered by state level financial institution out of funds provided by IDBI. Sometimes concerned state governments also provide contribution to the seed capital. The maximum assistance under this scheme is restricted to 20% of the Rs.2 lacs whichever is lower and thus basically meets the requirements of comparatively smaller projects.

Issue of deferred payment guarantees (DPGs) by banks exclusively for Financing of project

Where all India financial institutions are not involved in providing financial assistance, the banks may meet the entire financial requirement by way of deferred payment guarantee to projects for modernisation/diversification /expansion of existing units. In such cases, however , the concerned bank or the lead bank should make a detailed appraisal of the project and assess the risks involved before sanctioning the deferred payment guarantees.

Salient Features of the Bill Rediscounting Scheme

The bills rediscounting scheme was introduced in April, 1965, in terms of the powers vested in the industrial development bank of India under section9(I)b of its statute , which authorizes it to accept, discount or rediscount bills of exchange and promissory notes of industrial concerns subject to such conditions as may be prescribed. The objective of the scheme is two –fold. The manufacture of indigenous machinery/capital equipment can push up the sales of their products by offering deferred payment facilities to the prospective purchase user. The purchaser user of the machinery, on the other hand, is enabled to utilize the machinery acquired and repay its cost over a number of years. The manufacturer , of the machinery by discounting with his banker, the bills of exchange /promissory notes arising out of sale of the machinery. The scheme thus helps the indigenous machinery manufacturing industry to increase their turnover, which in turn, helps expansion/modernization of existing industrial units, there units, there by contributing to the industrial progress of the country.

Suppliers’ credit scheme envisages providing a non- revolving line of credit to machinery, equipment and computer manufacturing concerns for sale of their equipment and computer manufacturing concerns for sale of their equipment to actual –user purchaser concern on deferred payment basis.

The basic objective of the scheme is to provide facility to the manufacturing concerns to sell their equipment, and the needy industrial concerns to acquire the same for their actual use on deferred payment basis.

EQUIPMENT CREDIT SCHEME

Based on eligibility, credit worthiness and repaying capacity of the actual user- industrial concern, the scheme envisages that IFCI finances the entire cost of equipment purchased /fabricated by such actual user against the security of the equipment to be purchased/fabricated.

The facility under the equipment credit scheme is a available only to those existing industrial concerns:

1. Which are in the corporate or co operative sector, i.e., those which are incorporated as limited companies and/or are registered as a co-operative society, under the relative enactments?

2. Which fall within the purview of section 2(c) of the IFC act, 1948 as “eligible industrial concerns” and

3. Which have a satisfactory record in terms of operating results, financial position and credit worthiness?

AN EXAMLPE OF PROJECT FINANCING

Name of a company-reliance petroleum limited. Type of project –fuel refinery project. Estimate capacity -9 million metric tones per annum.

Project cost: (Land and development , building and township , P/M Technical

know how, misslaneous fixed assets, preliminary and pre-operative expenses, contingency provision and margin money for working capital).

Means of finance. (Privately placed PCDs, ECB, leasing, unsecured loans FII’s

public issue of TOCDs).

PROECT COST DETAILS

Type of cost Rs. In million

Land and Site development 920Building and township 880Plant and machinery 28870Technical know how 1090Miscellaneous fixed assets 2620Preliminary and pre-operative expenses 5030

Contingency provision 9850

Margin money for workingCapital 2160

Total 51420

Means of finance details

Types of finance Rs. In million

Privately placed PCDs 10000 Overseas sppliers credit/ECB 6000 Reliance industries Ltd. And associates

-TOCDs 5770

leasing /unsecured loans 1430

Euro issue/ FIIs/NRIs/OCBs 3000 Public issue of TOCDs 21720

TOTAL 51420

Eg2: (Project: MANUFACTURING OF MOTORS)

SALE PROECTIONS : Rs. 900lacs for 1st yr

And Rs.1200lacs

2nd yr. onwards

Capacity utilization :75% in 1st

yr&100%frm 2nd yr.

Economic life of the project :10 years

Total project cost : Rs.1619 lacs

Promoters contribution :20.94% of the project

ROI (before tax) :27.94%

ROI(after tax) :23.27%

IRR : 19.77%

AVERAGE DSCR :2.164

Debt equity raito :About 1:1

Solution to eg 2:

The project should be financed, on account of the following reasons:

IRR is more than 15% and therefore the project is worthwhile Average DSCR is satisfactory

Promoter’s contribution is fairly good ROI (before tax) and ROI (after tax) are good. Profitability ratios show that the project would earn sufficient

returns on the capital employed over its estimated life

MERITS AND DEMERITS OF PROJECT FINANCING

Project financing is continuously used as a financing method in capital-intensive industries

for projects requiring large investments of funds, such as the construction of power plants,

pipelines, transportation systems, mining facilities, industrial facilities and heavy

manufacturing plants. The sponsors of such projects frequently are not sufficiently

creditworthy to obtain traditional financing or unwilling to take the risk and assume the debt

obligation associated with traditional financing. Project financing permits the risk associated

with such projects to be allocated among number of parties at levels acceptable to each party.

The advantages of project financing are as follows:

Non recourse: the typical project financing involves a loan to enable the sponsor to

construct a project where the loan is completely “Non-recourse” to these [sponsor i.e. the

sponsor has no obligation to make payments on the project loan if revenues generated by

the project are insufficient to cover the principle and interest payable on the loan. This

safeguards the assets of sponsors. The risks of new projects remain separate from the

existing business.

Maximizes leverage: in project financing. The sponsors typically seek to finance the cost

of development and construction of project on highly leverage basis. Frequently such

costs are financed using 80 to 100 percent debt. High leverage in an non recourse

financing permits a sponsor to put less in funds at risk, permits a sponsor to finance a

project without diluting its equity investment in the project and in certain circumstances,

also may permit reduction in cost of capital by substituting lower cost, tax deductible

interest for higher cost, tax able return on equity.

Off balance sheet treatment: depending upon the structure of project financing the

project sponsors may not be required to report any of the project debt on its balance

sheet because such debt is non recourse or of limited recourse to the sponsor. Off

balance sheet treatment can have the added practical benefit of helping the sponsor

comply with convenient and restrictions related to the board. Borrowings funds contain

in other indentures and credit agreements to which the sponsor is a party.

Maximizes tax benefits: project finance is generally structured to maximize tax benefit

and to assure that all available tax benefit are used by the sponsors or transferred to the

extent possible to another party through a partnership, lease or vehicle.

Diversifies risk: by allocating the risk and financing need of the projects among a group

of interested parties or sponsors, project financing makes it possible to undertake project

that would be too large or would pose too great a risk for one party ion its own.

DEMERITS

Complexity of risk allocation: project financing is complex transaction involving many

participants with diverse interest. If a project is to be successful risk must be allocated

among the participants in an economically efficient way. However, there is necessary

tension between the participants. For e.g. between the lender and the sponsor regarding

the degree of recourse, between the sponsor and contractor regarding the nature of

guarantees. Etc which may slow down the realization of the project.

Increase transaction cost: it involves higher transaction costs compared too there types of

transactions, because it requires an expensive and time-consuming due diligence conducted

by the lenders lawyer, the independent engineers etc., since the documentation is usually

complex and lengthy.

Higher interest rates and fees: the interest rates and fees charged in project financing are

higher than on direct loan made to the project sponsor since the lender takes on more risk.

Lender supervision: in accordance with a higher risk taken in project financing the lender

imposes a greater supervisor on the management and operation of the project to make sure

that the project success is not impaired. The degree of lender supervision will usually

result into higher costs which will typically have to be borne by the sponsor.

IMPORTANCE OF PROJECT FINANCE

Whether expanding manufacturing facilities, implementing new processing capabilities, or

leveraging existing assets in new markets, innovative financing is often at the core of long-

term projects to transform a company’s operations. Akin to the underlying corporate

transformation, the challenge with innovative financial structures such as project finance is

that the investment is made upfront while the anticipated benefits of the initiative are realized

years later.

There has been a rise in number of companies that need innovative financing to satisfy their

capital needs, in a significant number of instances they have viable goals but find that

traditional lenders are unable to understand their initiatives. And so the need merged for

project finance.

Project financing is a specialized form of financing that may offer some cost advantages

when very large amounts of capital are involved It can be tricky to structure, and is usually

limited to projects where a good cash flow is anticipated. Project finance can be defined as:

financing of an industrial (or infrastructure) project with myriad capital needs, usually based

on non-recourse or limited recourse structures, where project debt and equity (and potentially

leases) used to finance the project are paid back from the cash flow generated by the project,

with the project's assets, rights and interests held as collateral. In other words, it’s an

incredibly flexible and comprehensive financing solution that demands a long-term lending

approach not typical in today’s market place.

Whether expanding manufacturing facilities, implementing new processing capabilities, or

leveraging existing assets in new markets, innovative financing is often at the core of long-

term projects to transform a company’s operations. Akin to the underlying corporate

transformation, the challenge with innovative financial structures such as project finance is

that the investment is made upfront while the anticipated benefits of the initiative are realized

years later.

Infrastructure is the backbone of any economy and the key to achieving rapid sustainable rate

of economic development and competitive advantage. Realizing its importance governments

commit substantial portions of their resources for development of the infrastructure sector. As

more projects emerge getting them financed will continue to require a balance between equity

and debt. With infrastructure stocks and bonds being traded in the markets around the world,

the traditionalist face change. A country on the crest of change is India. Unlike many

developing countries India has developed judicial framework of trust laws, company laws

and contract laws necessary for project finance to flourish.

TYPES OF PROJECT FINANCE

Build operate transfer (BOT)

Build own operate transfer (BOOT)

Build own operate (BOO)

BUILD OPERATE TRANSFER (BOT)

Build operate transfer is a project financing and operating approach that has found an

application in recent years primarily in the area of infrastructure privatization in the

developing countries. It enables direct private sector investment in large scale infrastructure

projects.

In BOT the private contractor constructs and operates the facility for a specified period. The

public agency pays the contractor a fee, which may be a fixed sum, linked to output or, more

likely, a combination of the two. The fee will cover the operators fixed and variable costs,

including recovery of the capital invested by the contractor. In this case, ownership of the

facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a public

infrastructure project. The company then secures their own financing to construct the project.

OPERATE – The private developer then operates, maintains, and manages the facility for an

agreed concession period and recoups their investment through charges or tolls.

TRANSFER- After the concessionary period the company transfers ownership and operation

of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and operates and maintains it over a period, often as long as 20 or 30 years. This period is referred to as the “concession” period. In short, under a BOT structure, a government typically grants a concession to a project company under which the project company has the right to build and operate a facility. The project company borrows from the lending institutions in order to finance the construction of the facility. The loans are repaid from “tariffs” paid by the government under the off take agreement during the life of the concession. At the end of the concession period the facility is usually transferred back to the government.

ADVANTAGES

The Government gets the benefit of the private sector to mobilize finance and to use

the best management skills in the construction, operation and maintenance of the

project.

The private participation also ensures efficiency and quality by using the best

equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency

through performance-based contracts and output-oriented targets.

The projects are conducted in a fully competitive bidding situation and are thus

completed at the lowest possible cost.

The risks of the project are shared by the private sector.

DISADVANTAGES

There is a profit element in the equity portion of the financing, which is higher than

the debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a

BOT financing deal as it involves multiple entities and requires a relatively

complicated legal and institutional framework. There the BOT may not be suitable for

small projects

It may take time to develop the necessary institutional capacity to ensure that the full

benefits of BOT are realized, such as development and enforcement of transparent

and fair bidding and evaluation procedures and the resolution of potential disputes

during implementation.

BUILD OWN OPERATE TRANSFER

A BOOT funding model involves a single organization, or consortium (BOOT provider) who

designs, builds, funds, owns and operates the scheme for a defined period of time and then

transfers this ownership across to a agreed party. BOOT projects are a way for governments

to bundle together the design and construction, finance, operations and maintenance and

potentially marketing and customer interface aspects of a project and let these as a package to

a single private sector service provider. The asset is transferred back to the government after

the concession period at little or no cost.

The Components of BOOT:-

B for build

The concession grants the promoter the right to design, construct, and finance the project. A

construction contract will be required between the promoter and a contractor. The contract is

often among the most difficult to negotiate in a BOOT project because of the conflict that

increasingly arises between the promoter, the contractor responsible for building the facility

and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the

construction contract are reasonable and that the construction risk is placed as far as possible

on the contractors. The contractor undertakes responsibility for constructing the asset and is

expected to build the project on time, within budget and according to a clear specification and

to warrant that the asset will perform its design function. Typically this is done by way of a

lump-sum turnkey contract.

O for Own

The concession from the state provides concessionaire to own, or at least possess, the assets

that are to be built and to operate them for a period of time: the life of the concession. The

concession agreement between the state and the concessionaire will define the extent to

which ownership, and its associated attributes of possession and control, of the assets lies

with the concessionaire.

O for Operate

An operator assumes the responsibility for maintaining the facility’s assets and the operating

them on the basis that maximizes the profit or minimizes the cost on behalf of the

concessionaire and, like the contractor undertaking construction and be a shareholder in the

project company. The operator is s often an independent through the promoter company.

T for Transfer

This relates to a change in ownership of the assets that occurs at the end of the concession

period, when the concession assets revert to the government grantor. The transfer may be at

book value or no value and may occur earlier in the event of failure of concessionaire.

STAGES OF BOOT PROJECT

BUILD

Design

Manage project implementation

Carry out procurement

Finance

Construct

OWN

Hold in interest under concession

OPERATES

Mange and operate facility

Carry out maintenance

Deliver products/services

Receive payment for product/ service

TRANSFER

Hand over project in operating condition at the end of concession period

ADVANTAGES

The majority of construction and long term risk can be transferred onto the BOOT

provider.

The BOOT operator can claim depreciation on the facility constructed and

depreciation being a tax-deductible expense shareholder returns are maximized.

Using an output based purchasing model, the tender process will encourage maximum

innovations allowing the most efficient designs to be explored for the scheme. This

process may also be built into more traditional tendering processes.

Accountability for the asset design, construction and service delivery is very high

given that if the performance targets are not met, the operator stands to lose a portion

of capital expenditure, capital profit, operating expenditure and operating profit.

Boot operators are experienced with management and operation of infrastructure

assets and bring these skills to scheme.

Corporate structuring issues and costs are minimal within a BOOT model, as project

funding, ownership and operation are the responsibility of the BOOT operator. These

costs will however be built into the BOOT project pricing.

DISADVANTAGE

Boot is likely to result in higher cost of the product/ service for the end user. This is a

result of the BOOT provider incurring the risks associated with 100percnet financing

of the scheme and the acceptance of the ongoing maintenance liabilities.

Users may have a negative reaction to private sector involvement in the scheme,

particularly if the private sector is an overseas owned company.

Management and monitoring of the service level agreement with the BOOT operators

can be time consuming and resource hungry. Procedures need to be in place to allow

users to assess service performance and penalize the BOOT operator where necessary.

A rigorous selection process is required when selecting a boot partner. Users need to

be confident that the BOOT operator is financially secure and sufficiently committed

to the market prior to considering their bid.

BUILD OWN OPERATE

In BOO, the concessionaire constructs the facility and then operates it on behalf of the public

agency. The initial operating period {over which the capital cost will be recovered} is

defined. Legal title to the facility remains in the private sector, and there is no obligation for

the public sector to purchase the facility or take title. The private sector partner owns the

project outright and retains the operating revenue risk and all of the surplus operating revenue

in perpetuity. As an alternative to transfer, a further operating contract {at a lower cost} may

be negotiated.

DESIGN BUILD FINANCE OPERATE (DBFO):

Under this approach, the responsibilities fro designing, building, financing and operating are

bundled together and transferred to private sector partners. They are also often supplemented

by public sector grants in the from of money or contributions in kind, such as right of way. In

certain cases, private partners may be required to make equity investments as well. DBFO

shifts a great deal of the responsibility for developing and operating to private sector partners,

the public agency sponsoring a project would retain full ownership over the project.

Others:

BUILD TRANSFER OPERATE (BTO)

The BTO model is similar to BOT model except that the transfer to the public owner takes

place at the time that construction is completed, rather than at the end of the franchise period.

The concessionary builds and transfers a facility to the owner but exclusively operates the

facility on behalf of the owner by means of management contract.

BUY BUILD OPERATE (BBO)

A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing

facility. The government sells the asset to the private sector entity, which then makes the

improvements necessary to operate the facility in a profitable manner.

LEASE OWN OPERATE (LOO)

This approach is similar to a BOO project but an existing asset is leased from the government

for a specified time. The asset may require refurbishment or expansion.

BUILD LEASE TRANSFER (BLT)

The concessionaire builds a facility, lease out the operating portion of the contract, and on

completion of the contract, returns the facility to the owner.

BUILD OWN LEASE TRANSFER (BOLT)

BOLT is a financing scheme in which the asset is owned by the asset provider and is then

leased to the public agency, during which the owner receives lease rentals. On completion of

the contract the asset is transferred to the public agency.

BUILD LEASE OPERATE TRANSFER (BLOT)

The private sector designs finance and construct a new facility on public land under a long

term lease and operate the facility during the term of the lease. The private owner transfers

the new facility to the public sector at the end of the lease term.

DESIGN BUILD (DB)

A DB is when the private partner provides both design and construction of a project to the

public agency. This type of partnership can reduce time, save money, provide stronger

guarantees and allocate additional project risk to the private sector. It also reduces conflict by

having a single entity responsible to the public owner for the design and construction. The

public sector partner owns the assets and has the responsibility for the operation and

maintenance.

DESIGN BID BUILD (DBB)

Design bid build is the traditional project delivery approach, which segregates design and

construction responsibilities by awarding them to an independent private engineer and a

separate private contractor. By doing so, design bid build separates the delivery process in to

the three liner phases: Design, Bid and Construction. The public sector retains responsibility

for financing, operating and maintaining infrastructure procured using the traditional design

bid build approach.

DESIGN BUILD MAINTAIN (DBM)

A DBM is similar to a DB except the maintenance of the facility for the some period of time

becomes the responsibility of the private sector partner. The benefits are similar to the DB

with maintenance risk being allocated to the private sector partner and the guarantee

expanded to include maintenance. The public sector partner owns and operates the assets.

DESIGN BUILD OPERATE (DBO)

A single contract is awarded for the design, construction and operation of a capital

improvement. Title to the facility remains with the public sector unless the project is a design\

build\operate\transfer or design\build\own\operate project. The DBO method of contracting is

contrary to the separated and sequential approach ordinarily used in the United States by both

the public and private sectors. This method involves one contract for design with an architect

or engineer, followed by a different contract with a builder for project construction, followed

by the owner's taking over the project and operating it.

A simple design build approach credits a single point of responsibility for design and

construction and can speed project completion by facilitating the overlap of the design and

construction phases of the project. On a public project, the operations phase is normally

handled by the public sector under a separate operations and maintenance agreement.

Combining all three phases in to a DBO approach maintains the continuity of private sector

involvement and can facilitate private sector financing of public projects supported by user

fees generated during the operations phase.

LEASE DEVELOP OPERATE (LDO) or BUILD DEVELOP OPERATE (BDO)

Under these partnerships arrangements, the private party leases or buys an existing facility

from a public agency invests its own capital to renovate modernize, and expand the facility,

and then operates it under a contract with the public agency. A number of different types of

municipal transit facilities have been leased and developed under LDO and BDO

arrangements.

PROJECT FINANCE STRATEGIC BUSINESS UNIT

A one-stop-shop of financial services for new projects as well as expansion, diversification

and modernization of existing projects in infrastructure and non-infrastructure sectors

Since its inception in 1995 the Project Finance SBU has built-up a strong reputation for it's

in-depth understanding of the infrastructure sector as well as non-infrastructure sector in

India and they have the ability to provide tailor made financial solutions to meet the growing

& diversified requirement for different levels of the project. The recent transactions

undertaken by PF-SBU include a wide range of projects under taken by the Indian Corporate.

Wide branch network ensuring ease of disbursement.

EXPERTISE

Being India's largest bank and with the rich experience gained over generation, SBI

brings considerable expertise in engineering financial packages that address complex

financial requirements.

Project Finance SBU is well equipped to provide a bouquet of structured financial

solutions with the support of the largest Treasury in India (i.e. SBI's), International

Division of SBI and SBI Capital Markets Limited.

The global presence as also the well spread domestic branch network of SB ensures

that the delivery of your project specific financial needs are totally taken care of.

Lead role in many projects

Allied roles such as security agent, monitoring/TRA agent etc.

Synergy with SBI caps (exchange of leads, joint attempt in bidding for projects, joint

syndication etc.). In a way, the two institutions are complimentary to each other.

We have in house expertise (in appraising projects) in infrastructure sector as well as

non-infrastructure sector. Some of the areas are as follows :

Infrastructure sector:

Road & urban infrastructure

Power and utilities

Oil & gas, other natural resources

Ports and airports

Telecommunications

Non-infrastructure sector:

Manufacturing: Cement, steel, mining, engineering, auto components, textiles, Pulp &

papers, chemical & pharmaceuticals.

Services: Tourism & hospitality, educational Institutions, health industry …

Expertise

Rupee term loan

Foreign currency term loan/convertible bonds/GDR/ADR

Debt advisory service

Loan syndication

Loan underwriting

Deferred payment guarantee

Other customized products i.e. receivables securitization, etc.

Services offered

Single window solution

Appetite for large value loans.

Proven ability to arrange/syndicate loans.

Competitive pricing.

Professional team

Dedicated group with sector expertise

Panel of legal and technical experts.

Procedural ease

Standardized information requirements

Credit appraisal/ delivery time period is minimized

Eligibility

The infrastructure wing of PF SBU deals with projects wherein the project cost is more than

Rs 100 Crores. The proposed share of SBI in the term loan is more thanRs.50 crores. In case

of projects in Road sector alone, the cut off will be project cost of Rs.50 crores and SBI Term

Loan Rs. 25 Crores, respectively.

The commercial wing of PF SBU deals with projects wherein the minimum project

cost is Rs. 200 crores (Rs. 100 crores in respect of Services sector).

The minimum proposed term commitment is of Rs. 50 crores from SBI.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$96

billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months

ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the

Indian stock exchanges in terms of free float market capitalization.

The Bank has a network of about 955 branches and 3,687 ATMs in India and presence in 17

countries. ICICI Bank offers a wide range of banking products and financial services to

corporate and retail customers through a variety of delivery channels and through its

specialized subsidiaries and affiliates in the areas of investment banking, life and non-life

insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in

Unites States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International

Finance Centre and representative offices in United Arab Emirates, China, South Africa,

Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch

in Belgium.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National

Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on

the New York Stock Exchange (NYSE).

At ICICI Bank, they offer corporate a wide range of products and services, the technologies

to leverage them anytime, anywhere and the expertise to customize them to client-specific

requirements.

From cash management to corporate finance, from for ex to acquisition financing, we provide

you with end-to-end services for all your banking needs. The result is an overall financial

solution for your company that helps you accomplish your objectives.

CORPORATE SERVICES

ICICI Bank can guide one through the universe of strategic alternatives – from identifying

potential merger or acquisition targets to realigning your business' capital structure.

ICICI Bank has been the foremost arrangers of acquisition finance for cross border

transactions and is the preferred financer for acquisitions by Indian companies in overseas

markets.

The Bank has also developed For ex risk hedging products for clients after comprehensive

research of the risks a corporate body is exposed to, e.g., Interest Rate, For ex, Commodity,

Credit Risk, etc.

They offer you global services through our correspondent banking relationship with950

foreign banks and maintain a NOSTRO account in 19 currencies to service you better and

have strong ties with our neighbouring countries

ICICI Bank is the leading collecting bankers to Public & Private Placement/ Mutual Funds/

Capital Gains Bonds issues. Besides, we have products specially designed for the

They support international business by meeting working capital requirements of export and

import financing. They also have a host of non-funded services for our clients •whatever the

industry, size or financial requirements, ICICI Bank has the expertise and the solutions to

partner all the way.

TRANSACTION BANKING

The Bank delivers world class banking services to financial sector clients. Their current

roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed for

customers convenience.

Our comprehensive collection and payment services span India's largest CMS network of

over 4,500 branches. They provide correspondent banking tie-ups with foreign banks to assist

them in their India-related businesses.

LOAN SYNDICATION

The FISG is responsible for syndication of loans to corporate clients. They ensure the

participation of banks and financial institution for the syndication of loans. Some of the

products syndicated are

•ProjectFinance

•CorporateTermLoans

•WorkingCapitalLoans

• Acquisition Finance, etc

SELL DOWN

ICICI Bank is a market leader in the securitization and asset sell-down market. From its

portfolio, the FISG offers different products to its clients in this segment. The products are:

Asset-Backed Securities (ABS).

Mortgage-Backed Securities (MBS).

Corporate Loan Sell-down.

Direct Loan Assignment.

BUYOUTS

As a part of a risk-diversification and portfolio-churning strategy, ICICI Bank offers

Buyouts of the assets of its financial sector clients.

RESOURCES

The Bank also raises resources, from clients, for internal use by issuing a gamut of products,

which run from Certificates of Deposit (CDs) to Term deposits to Term Loans.

IDBI was set up under an Act of Parliament as a wholly-owned subsidiary of Reserve Bank

of India in July 1964. In February 1976, the ownership of IDBI was transferred to

Government of India.

In January 1992, IDBI accessed domestic retail debt market for the first time with innovative

Deep Discount Bonds and registered path-breaking success. In December1993, IDBI set up

IDBI Capital Market Services Ltd. as a wholly-owned subsidiary to offer a broad range of

financial services, including Bond Trading, Equity Broking, Client Asset Management and

Depository Services.

In September 1994, in response to RBI's policy of opening up domestic banking sector to

private participation, IDBI in association with SIDBI set up IDBI Bank Ltd. Today, IDBI

Bank has a network of 161 branches, 369 ATMs, and 8 Extension Counters spread over 95

cities.

It provides an array of services like:

PERSONAL BANKING

Deposits

Loans

Payments

Insurance

Cards

24hours banking

Institutional banking

Other products

Preferred banking

NRI Services

CORPORATE BANKING

Project Finance

Infrastructure finance

Advisory

Carbon credits Business

Working Capital

Cash Management Service

Trade Finance

Tax Payments

Derivates

SME FINANCE

IDBI has been actively engaged in providing a major thrust to financing of SMEs. With

a view to improving the credit delivery mechanism and shorten the Turn around Time

(TAT), IDBI has set up Centralized Loan Processing Cells (CLPCs) at major centres

across the country. To strengthen the credit delivery process, the CART (Credit

Appraisal & Rating Tool) Module developed by Small Industries Development Bank of

India (SIDBI), which combines both rating and appraisal mechanism for loan proposals,

was adopted by IDBI for faster processing of loan proposals. Recently, a number of

products have been rolled out for the SME sector, which considerably expanded IDBI’s

offerings to its customers. Also, the German Technical Co-operation and IDBI entered

into an understanding for strengthening the growth and competitiveness of SMEs by

providing better access to demand-oriented business development and financial services.

AGRI BUSSINESS

Agriculture continues to be the largest and the most dominant sector in India, contributing 22

% to the country’s GDP. It provides a source of employment and livelihood to over 60 % of

the population. Its linkages with industry are growing with increasing stress on food and agri

processing industry on account of changing demand patterns for processed food by

consumers. With this background Corporate India has started finding new opportunities in

Agriculture.

The emergence of modern economic system has institutionalized agriculture sector on

business models. Agribusiness is a broad term that encompasses a number of businesses in

agriculture including food production, farming, agrochemicals, farm machinery,

warehousing, wholesale and distribution, and processing, marketing and sale of food

products.

The bank has launched several products catering to the rural and agri community

PROJECT FINANCE SCHEME

Under the Project Finance scheme IDBI provides finance to the corporate for projects. The

Bank provides project finance in both rupee and foreign currencies for Greenfield projects as

also for expansion, diversification and modernization. IDBI follows the Global Best Practices

in project appraisal and monitoring and has a well-diversified industry portfolio. IDBI has

signed a Memorandum of Understanding (MoU) with LIC in December 2006 for undertaking

joint and take-out financing of long-gestation projects, including infrastructure projects.

It has been a long and eventful journey of almost a century across 24 countries. Starting in

1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre

in Mumbai is a saga of vision, enterprise, financial prudence and corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in private

capital, princely patronage and state ownership. It is a story of ordinary bankers and their

extraordinary contribution in the ascent of Bank of Baroda to the formidable heights of

corporate glory. It is a story that needs to be shared with all those millions of people -

customers, stakeholders, employees & the public at large - who in ample measure, have

contributed to the making of an institution.

PERSONAL BANKING SERVICES

Bank of Baroda believes in the strength and integrity of relationships built with its customers

like you. With over 90 years of experience in the banking industry and a wide network of

over 2700 branches all over the country, we have always been active in extending financial

support and adapting to your changing needs.

Their Deposit Products, Retail Loans, Credit Cards and Debit Cards help you with your

growing financial needs. With facilities like Lockers we ensure that your valuables are safe

with us.

Their countrywide branches offer you convenience and ease in operating your account

wherever you are. Their 24-hour ATMs enable you to withdraw cash, check your account

balance and request for a new chequebook even after banking hours.

Baroda Internet Banking / Baroda Mobile Banking, their latest Internet and Mobile banking

initiatives enable you to operate your account just as you would in any of our branches. You

can through the Internet check your balance, request for cheque books and print account

details.

Choose from other various products and services, that they sincerely feel will put a smile on

your face; an investment we would like to bank on forever.

BUSINESS OPERATIONS

The small and medium business enterprise is one of the fastest growing sectors in the

country. Bank of Baroda offers various products and services that meet the specific

requirements of such enterprises and help them grow.

In addition to tailor-made products, you can depend on the strength of other nation-wide

network and facilities that will enable you to conduct your business smoothly ,without

geographical constraints.

Be it Deposits, Loans & Advances, Collection Services, Working Capital Finance, Term

Finance, Non-Fund based Facilities, Trade Finance, Merchant Banking or other such aspects of

banking, they have a solution to help your business run smoothly and efficiently.

CORPATE BANKING SERVICES

As corporations grow they feel the need to expand and invest in new infrastructure.

External finance is one of the most important sources for funding expansion plans.

With services ranging from Working Capital Finance, Short Term Corporate Loans, Project

Finance to Cash Management and Merchant Banking, Bank of Baroda Corporate Banking

offers various options that help fund and enable corporations in their investment and

expansion plans. These products also offer merchant banking and cash management

solutions.

Their global presence, large-scale operability, highly networked systems and local

market penetration allow our customers to reap financial benefits to the maximum.

LOANS & ADVANCESFor immediate financial need in times, Bank of Baroda has a host of loan options for a

corporate to choose from. These enable smooth functioning without monitory hassles.

PROJECT FINANCE

Bank of Baroda provides its customers with the option of a loan to take care of the needs of

an ongoing project, whether it is in Indian or foreign currency. This facility is available for

project finance and also for project exports.

INTERNATIONAL OPERATIONS

Bank of Baroda started its overseas journey by opening its first branch way back in1953 in

Mombassa, Kenya. Since then the Bank has come a long way in expanding its international

network to serve NRIs / PIOs and locals. Today it has transformed into India’s International

Bank.

It has significant international presence with a network of 70 offices in 24 countries including

45 branches of the Bank, 21 branches of its eight Subsidiaries and four Representative

Offices in Malaysia, China, Thailand, & Australia. The Bank also has one Joint Venture in

Zambia with 9 branches.

The Bank has presence in world’s major financial centres i.e. New York, London,

Dubai, Hong Kong, Brussels and Singapore.

The” round the clock around the globe", Bank of Baroda is further in the process of

identifying/opening more overseas centres for increasing its global presence to serve its29

million global customers in still better way.

The Bank has recently upgraded its operations in Hong Kong on 2nd April 2007 and now

offers full banking service through its two branches at Central and Tsim Sha Tsui.It would

also be upgrading its operations to full banking service in China and through JV in Malaysia

shortly.

It is also in process of establishing offices in Canada, New Zealand, Qatar, Bahrain, Saudi

Arabia, Mozambique, Russia etc. Besides this, it has plans to extend its reach in existing

countries of operations in US and UAE.

TREASURY OPERATIONS

In the changing economic environment of the country in particular and the globe in general,

Bank of Baroda was the premier public sector bank in India to set up a Specialized Integrated

Treasury Branch (SITB) in Mumbai and the integrated approach initiated by the Bank in its

treasury operations is now being emulated by other peer banks.

Bank of Baroda has consciously adopted a focused approach towards improving

efficiency and profitability by successfully integrating the operations of different financial

markets, viz. Domestic Money, Investments, Foreign Exchange and Derivatives and has

made its mark as an important player in the market-place. The SITB at Mumbai, equipped

with the State-of-the-art technology, with modern communication facilities, handles all types

of financial transactions, both for managing its resources and deployments and effective

compliance of regulatory requirements.

RURAL OPERATIONS

Rural India contributes a major chunk to the economy every year. To give this sector a strong

hold on finance and to enable economic independence, Bank of Baroda has special offerings

that extend credit facilities to small and marginal farmers, agricultural labourers and cottage

industry entrepreneurs.

With the objective of developing rural economy through promotion of agriculture, trade,

commerce, industry and extending credit facilities particularly to small and marginal farmers,

agricultural labourers and small entrepreneurs, Bank of Baroda, over the years, has reached

out to larger part of rural India. They extend loans for agricultural activities and a host of

services for farmers well tuned to the rural market, and aim to make a Self Reliant Rural

India.

Axis Bank was the first of the new private banks to have begun operations in 1994, after the

Government of India allowed new private banks to be established. The Bank was promoted

jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),

Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. and other

four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance

Company, The Oriental Insurance Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 357.48 crore with the public holding

(other than promoters) at 57.03%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.

Presently, the Bank has a very wide network of more than 608 branch offices and Extension

Counters. The Bank has a network of over 2595 ATMs providing 24 hrs a day banking

convenience to its customers. This is one of the largest ATM networks in the country.

The Bank has strengths in both retail and corporate banking and is committed to adopting the

best industry practices internationally in order to achieve excellence. It provides an array of

services like Personal Banking, Corporate Services, NRI services and Priority Banking.

In personal Banking it offers different accounts like Easy Access Account Senior Citizen's

Account Prime Savings Account Women's Account Salary Power etc. It also offers deposits

services like Fixed Deposit, Recurring Deposit, and Tax Saving Fixed Deposits. It provides

an array of loan services like Home Loan, Car Loan, Personal Loan, Study Loan, Mortgage

etc.

In Corporate Services it offers the option of different accounts like Normal Current Account

Business Advantage Account Current Account for Govt. Organizations Business Classic

Account Current Account for Banks Business Privilege Account Trust/NGO Savings

Account, further it also offers Credit Facility like Structured Finance, Microfinance

Commodity Power, Microfinance project Finance. It also offers Capital Market Services in

the form of Debt Solutions Advisory Services Private Equity, Mergers & Acquisitions

Capital Market Funding Trusteeship Services Depository Services

It also provides Cash Management Services as in today's competitive market place,

effectively managing cash flow can make the difference between success and failure. Axis

Bank offers a wide range of collection and payment services to meet your complex cash

management needs. Payments received from your buyers and made to your suppliers are

efficiently processed to optimize your cash flow position and to ensure the effective

management of your business' operating funds.

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from

Mumbai. The Bank was under private ownership and control till July 1969 when it was

nationalized along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and

50employees, the Bank has made a rapid growth over the years and blossomed into a mighty

institution with a strong national presence and sizable international operations. In business

volume, the Bank occupies a premier position among the nationalized banks.

The Bank has 2644 branches in India spread over all states/ union territories including93

specialized branches. These branches are controlled through 48 Zonal Offices .There are 24

branches/ offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997. Total number of shareholders

as on 30/09/2006 is 2, 25,704.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront

of introducing various innovative services and systems. Business has been conducted with the

successful blend of traditional values and ethics and the most modern infrastructure. The

Bank has been the first among the nationalized banks to establish a fully computerized branch

and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989.

The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the

Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an

agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is

an association that has blossomed into a joint venture with BSE, called the BOI Shareholding

Ltd. to extend depository services to the stock broking community. Bank of India was the

first Indian Bank to open a branch outside the country, at London, in 1946, and also the first

to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a

network of 23 branches (including three representative office) at key banking and financial

centres viz. London, New York, Paris, Tokyo, Hong-Kong and Singapore. The international

business accounts for around 20.10% of Bank's total business.

Apart from personal banking services it offers different products like Insurance

Products:

Tie-up for Life Insurance: ICICI Prudential Life Insurance Co Ltd.

Tie-up for General Insurance (Non-life) National Insurance Co Ltd.

(NICL)

Mutual Funds Products.

It also offers credit facility like Personal Loan, Bullion Banking, Kisan Credit Card,

Agriculture Loan, Bill Finance, Bank Guarantee, export Finance, Interest Rates, Channel

Credit etc. It also offers deposit services like Safe Deposit Vaults, fixed Deposits, Term

Deposits, Tax Saving Deposits etc. It also offers corporate services like Bonds, Loans, and

Project Finance Etc.

NBFC – The Future

OVER the last decade or so, the Reserve Bank of India has been blowing hot and cold about

non-banking finance companies (NBFCs). The RBI reacted to a series of defaults and

misdemeanours by a few NBFCs, restricting their ability to take public deposits.

This unfortunately led to a collapse of many NBFCs which depended on a continuous inflow

of deposits to meet redemption obligations. Subsequently, there seems to have been a better

realization of the role of NBFCs in financing the small-scale industry, particularly the

transport sector.

The RBI in its latest monetary policy statement has cautioned that NBFCs should been

courage to exit from public deposits, in essence saying NBFCs should not take public

deposits. This is, indeed, extraordinary. The reasons given are that nowhere in the world are

private financial institutions allowed to accept public deposits.

The fact is that non-bank finance institutions are active in other economies. They accept

deposits in developed countries as well as in some developing countries, like Malaysia. The

existence of thrift societies in the US and housing societies in the UK is well- known.

Thrift and savings associations are almost omnipresent in the US. Credit unions of employees

are, in effect, self-help groups, present in every organization. So are housing societies in the

UK. They perform a useful role in garnering public savings and extending credit to those in

need. The same is the situation with non-bank finance companies in Malaysia.

The position in the US is that as against deposits of $4,391 billion held by commercial banks,

thrift institutions and finance companies hold $1,247 billion. These non-banks as a whole

hold 28.4 per cent of the deposits of banks. In India, however, public deposits of NBFCs are

only 0.003 per cent of banks in India.

Non-bank finance institutions in the US are even covered by deposit insurance even as they

are subject to supervision by a special office of thrift supervision. These institutions handle a

substantial channel of local savings and transfer them as loans to deserving borrowers,

besides small and medium-scale industries, as well as housing needs. These institutions are

also liberally allowed to access the capital market, where banks subscribe to bonds issued by

them.

The situation in UK is broadly similar. Building Societies in the UK have a big share of

business compared to their analogues in India, which hold deposits amounting to 18 percent

of total retail deposit balances.

They also are entitled to receive compensation from the Financial Services Compensation

Scheme in the event of failure in the business of deposit-taking, among others. In Malaysia,

non-bank finance companies' deposits as a percentage of bank deposits amount to 21 per cent.

It is, therefore, wrong to argue that non-bank finance companies cannot access public

deposits in other countries.

Again, the new-fangled notion of Grameen banks and self-help groups is nothing but thrift

societies in another form. Traditionally in India, chit funds have performed the role of

collecting deposits from savers and lending money to those who are in need. Constrained as

they are by numerous restrictions, they still perform a signal service in funding small and

medium business, trade and transport.

The fact is that NBFCs in India have played a useful role in financing various sectors of the

economy, particularly those that have been underserved by the banks. No business flourishes

unless there is a need for it and it fulfils the need efficiently.

The success of NBFCs bears testimony to its role. Anywhere in India, the small entrepreneur

goes first to an NBFC for funds even before he approaches banks in view of the former's easy

access, freedom from red-tape and quick response. The large expansion of the consumer

durable business in India in the last few years would not have taken place if NBFCs had not

entered the trade.

Similarly, housing activity has also been encouraged by NBFCs. The role of NBFCs in

funding transport activities is well-known. Latterly, some NBFCs have been active in funding

infrastructure quite successfully using the securitization of obligations.

NBFCs in India have played a useful role in financing various sectors of the economy,

particularly those that have been underserved by the banks. The tendency of regulators to

deny access to these institutions to public deposit is a confession of inability to seethe

economic reality, which calls for a flexible and customer-friendly financial intermediary,

which is what NBFCs and chit funds are.

The tendency of regulators to deny access to these institutions to public deposit is a

confession of inability to see the economic reality, which calls for a flexible and customer-

friendly financial intermediary, which is what NBFCs and chit funds are.

In fact, many banks are forming NBFCs to take advantage of their greater flexibility in

dealing with customers. The fact that some NBFCs were found abusing their position in the

1990s seems to have scared the regulator out of its wits. The answer lay in better regulation,

supervision and prudential norms.

The RBI has now strengthened its machinery of registration and supervision and extended

prudential norms to NBFCs. Denying access to deposits would seem a case of throwing the

baby out with the bathwater. On the contrary, the RBI should apply its mind to strengthening

the functioning of NBFCs, if necessary, facilitating better access to the capital market.

It is, however, interesting to note that the RBI is thinking of using in some form an

instrumentality like the NBFC to extend its credit reach. Observations in recent RBI reports

show that the central bank would prefer to use microfinance credit agencies dedicated to

serving SME clusters.

The RBI's Report on Trend and Progress of Banking in India 2004 mentions that "banks

should extend wholesale financial assistance to non-governmental

organizations/microfinance intermediaries and work as innovative models for securitisation

of MFIs' receivable portfolios. Such micro-credit institutions can take the form of NBFCs

funded by individuals or a group of banks, but not permitted to take public deposits".

A strange requirement, indeed, of exclusion from public deposits! The recommendation of

setting up an institution in the form of NBFC is significant, although excluding such

institutions from deposit-taking is not correct.

NBFCs have, indeed, served a useful purpose as instruments for extending outreach of credit

in the Indian countryside. To ignore them but recreate them in the form of microfinance

institutions or NGOs of the same kind is being ritualistic.

After all, let us recognise that NBFCs have a set of characteristics that have made the man

effective form of financial intermediation. It is these characteristics that the RBI wants to

incorporate in its version of microfinance groups. The path of wisdom is to incorporate

NBFCs as such into India's financial structure rather than reinventing the min another form.

There are, of course, some persistent problems for NBFCs, apart from deposit-taking. These

relate to flexible handling of their capital issues. Both SEBI and the RBI need to revisit their

case for relaxations with sympathy, especially since they are rated and supervised. These

specific relaxations are more a matter of confidence-building. The requests made by NBFCs

deserve sympathetic treatment by both the securities market regulator and the central bank.

In short, NBFCs are vitally needed to give the Indian economy a much-needed boost by

enabling easier access to credit. As it is, public and private sector banks are finding it difficult

to extend their reach for various reasons. It be hooves the RBI and the Government to look at

the problems faced by NBFCs with sympathy rather than with are collection of the past

follies of a few institutions.

The time has come for the RBI to "make" peace with NBFCs as a class. They are proven

instruments of efficient and customer-friendly outreach in the credit space —not only for

consumer durables, but also housing and transport, besides infrastructure.

These are also critical areas in which the Government is vitally interested as part of boosting

economic growth. I hope the regulators will not forget that their role is not only to regulate

but to spur the growth of the economy. The NBFCs' request to be allowed to continue to

accept public deposits deserves to be nurtured, not restricted.

Over the years, in its developmental role, the RBI has been attempting to expand credit by

exhortation. But public sector banks have proved that even with their best efforts they are

able to reach only a limited extent of credit expansion.

The experiment of Regional Rural Banks, Urban Cooperative Banks and Kisan Credit Cards

has also been a mixture of success and failure. It is in this background that the proven

successful record of credit growth, exemplified by the NBFCs, deserves to be replicated at

least in respect of their better features by the banking system.

Commercial banks by their very nature cannot take on all the features of NBFCs, but they can

collaborate with NBFCs by extending credit and participation in the securitisation.

While the flow of bank finance will help, it will be more important to remember that NBFCs

started by accessing public deposits. These can be an additional window for savings. All this

would of course require a change of mindset on the part of both our regulators and policy-

makers.

The government is planning to treat mortgage guarantee Companies as non-banking finance

Companies (NBFCs). This would enable foreign firms to set up wholly owned subsidiaries in

India as there is no foreign direct investment (FDI) cap for NBFCs. The rules governing this

are expected to be unveiled soon, according to sources.

The finance ministry favoured the inclusion of mortgage guarantee Companies in the

relatively relaxed NBFC norms rather than the stricter insurance sector guidelines.

The move would help overseas Companies like Genworth Financial, PMI Group, Mortgage

Guaranty Insurance Corporation and Radian set up wholly owned mortgage guarantee

subsidiaries in India. It will also allow joint ventures such as India Mortgage Guarantee

Company Ltd and ICICI Lombard General Insurance start local operations.

Though mortgage guarantee Companies usually fall under the non-life insurance sector

overseas, in India they want to be governed by rules similar to NBFCs, an industry insider

said requesting anonymity. This is because only 26% FDI is allowed in the insurance sector.

Commercial Banks and non-banking finance companies are not subject to uniform

regulation although for both the principal regulator is the Reserve Bank of India.

The dichotomy has many practical implications. While the two undertake many common

functions, there are also certain spheres in which they do not compete. For instance, certain

typical NBFC activities such as hire purchase and leasing, IPO funding, small ticket loans

and venture capital are financial services that mainline banks in India have traditionally kept

away from or placed much less emphasis.

On their part, banks alone provide working capital by way of cash credits and mobilize

demand deposits (savings bank and current accounts).

As a category, NBFCs are heterogeneous in their ownership patterns (such as foreign or

domestic) and in the nature of activities undertaken. Hence regulation impacts unevenly even

within this broad category. Hence there is no level playing field not only between banks and

NBFCs but among NBFCs themselves.

Banks, by definition, are the most regulated, being subject to prudential norms, capital

adequacy stipulations, CRR/SLR requirements, priority sector lending limits and so on.

While deposit taking NBFCs have been brought under regulation, non-deposit taking

companies (NBFC- NDs) are, for all practical purposes, still out of it. "Even in the former

case, regulation is less rigorous than for banks. This gives NBFCs as a category and the

minimally regulated non-deposit taking ones among them in particular an opportunity to

exploit the "regulatory arbitrage.''

An outstanding example is the enormous capacity of NBFC-NDs to leverage their balance

sheets to raise funds. There is practically no regulation to constrain them. As pointed out,

only deposit taking NBFCs have been brought under regulation and even they have fewer

norms than banks.

Banks and NBFCs complement as well as compete with one another. This should on the

whole lead to a widening of the financial sector and benefit the customer. For instance,

ownership of an NBFC by a bank gives the former a status and an assurance that its well-

regulated owner will ensure its solvency.

At the same time the relatively easy regulatory norms have made it easier to set up NBFCs.

(Many foreign banks have used the NBFC route to expand or even enter India). Naturally the

cost of conducting similar businesses should be lower with NBFCs.

In 2006 the RBI laid down a number of guidelines to fine-tune the existing financial linkages

between banks and NBFCs, the objective being to protect the interests of bank depositors.

In the normal course, NBFCs are more advantageously placed than banks. Like wise there are

norms covering the structural linkages between the two. However, there are still several grey

areas. The RBI identified the following key principles that should guide a revised framework

for NBFCs.

While as a rule any financial service provider should be regulated, as a first step all"

systemically relevant entities'' should be covered. What is systemically relevant will

be covered from time to time.

To avoid regulatory arbitrage, regulation and supervision should be centred on

activities and not be institution centric, as it is now.

New norms should be made applicable to NBFCs that are less regulated now, the

objective being to enhance their governance.

Ownership of an NBFC should not be the criterion for deciding on the products it

offers.

Foreign entities now gain a foothold in the Indian financial sector by investing in an

NBFC through the automatic route available for FDI. Certain checks and balances

must be prescribed to monitor their movements into other fields without undergoing

an authorisation process.

 Banks should not use an NBFC as a vehicle for creating arbitrage opportunities.

Under no circumstances should the NBFC route be used for undermining existing

regulations.

Some of these have been put into practice already. For now, all NBFC- NDs with an asset

size of Rs. 100 crore and more will be considered systemically important.

They cannot raise borrowings more than ten times their net owned funds. These will have to

follow new capital adequacy norms. Other restrictions such as those laid down under group

exposure limits will have to be complied with.

Among the other new guidelines, the one that has received wide publicity relates to

ownership and governance of NBFCs.

The RBI has laid down that banks including foreign banks operating in India shall not hold

more than 10 per cent of the paid up capital of a deposit taking NBFC. Housing finance

companies have been excluded from this stipulation.

Some of these new regulatory norms have had a far-reaching impact on the NBFCs.

PROCEDURAL ASPECTS OF PROJECT FINANCING IN BANKS AS WELL AS

NBFC’S

Development operations financed by follow a procedure cycle, which is almost identical for

all kinds of projects whose technical, economic, and financial feasibility has been established.

These projects must have a reasonable economic rate of return and should be intended to

promote development in the beneficiary country. The procedure consists of the following

IDENTIFICATION OF THE PROJECT

The project’s idea is introduced to providers by various sources: a request from the

government concerned or financials identification missions may identify a proposal from

other financiers, or it. Applications for financing are then sorted out and classified: projects to

be financed are selected from amongst projects which have top priority in the development

plans of the beneficiary countries and which meet the requirements established by the rules

for financing set out by the providers and agreed upon by the government concerned. In all

cases, an official request from the government should be submitted to financials before it

decides to participate in the financing.

DESK REVIEW AND DETERMINATION OF THE PROJECT’S SCOPE

Experts, each in his field of specialization, study all the documents available on the project

and examine its components, its estimated local and foreign costs, the preliminary financing

plan, the position of the other sources of financing, the current economic situation and the

development policy of the beneficiary country and, generally, review all elements which may

help in making the project a success.

PRELIMINARY APPROVAL

The findings of the project’s review are set out in a report prepared by financials experts and

submitted to Board of Directors for preliminary approval for undertaking further studies on

the said project with the intention of considering the possibility of organization’s

participation in its financing.

PROJECT APPRAISAL AND SUBMISSION TO THE BOARD

After the project has been granted preliminary approval, organizations usually dispatches an

appraisal mission to the project’s site. The appraisal stage is considered to be one of the key

stages of the procedure in this stage the project’s objectives, components, cost, financing

plan, justification and all its economic, technical and legal aspects are determined. The

project’s implementation schedule, the methods of procurement of goods and services, the

economic and financial analysis and the implementing and operating agencies are also

examined at this stage. Based on the results of the appraisal mission, an appraisal report is

prepared, as well as a Director General’s report which is submitted to the Board of Directors

for final approval.

CONSULTATIONS WITH OTHER CO FINANCIERS

Consultations are considered to be one of the important stages in the procedure. It is during

this stage that agreement is reached regarding the financing plan, the type of financing, and

distribution of the components of the project so as to ensure the smooth flow of

disbursements during execution of the various components of the project. This coordination

should continue throughout the project implementation period to ensure the fulfilment of its

objectives.

NEGOTIATIONS AND SIGNATURE OF THE LOAN AGREEMENT

After the beneficiary government is informed of the Board of Directors’ decision to extend

the loan according to the terms agreed upon during the appraisal of the project, the loan

agreement is prepared and negotiated, and eventually signed with the government concerned.

DECLARATION OF EFFECTIVENESS OF THE LOAN AGREEMENT

A loan agreement is declared effective after continuous contacts with the government

concerned and the other co-financiers and after fulfilment of all conditions precedent to

effectiveness stipulated in the loan agreement.

PROJECT IMPLEMENTATION AND DISBURSEMENT FROM THE LOAN

After the declaration of effectiveness of the loan agreement, the project’s implementation

and, consequently, the disbursements from the loan funds start according to the plan agreed

upon during the appraisal process and in line with the rules and provisions of the loan

agreement signed between the two parties.

SUPERVISION AND FOLLOW UP

Financials undertakes the follow-up of the project’s implementation through its field missions

sent to the project’s site or through the periodic reports which it requires the beneficiary

country to provide on a quarterly basis. These reports enable them to advise the government

concerned on the best ways to implement the project.

CURRENT STATUS REPORTS

Whenever necessary, experts prepare status reports which include the most recent

information and developments on the project’s implementation. These reports are submitted

to the Board of Directors for information and approval of any possible amendments, which

may be required for implementation. This is done in coordination and agreement with the

government concerned and the other co-financiers.

PROJECT COMPLETION REPORT

This report is prepared at the project’s site and in the office as well, after completion of the

project. This report enables organizations to make use of the experience gained from the

completed project, when implementing similar projects in future. In addition, it may help in

identifying a new project in the same sector.

RISK INVOLVED IN PROJECT FINANCING

Each of these risks, along with their possible mitigates, is discussed in the following sections.

COMPLETION RISK

Completion risk refers to the inability of a project to commence commercial operations on

time and within the stated cost. Given that project financiers are often reluctant to underwrite

the completion risk associated with a project, project structures usually incorporate recourse

to the sponsors during the construction stage. However, this link gets severed once the project

starts generating its own cash flows. Hence, during the construction period, risk perception is

significantly influenced by the credit worthiness and track record of the sponsors and their

ability and willingness to support the project via contingent equity/subordinated debt for

funding cost and time over-runs, if any.

The risks are also dependent on the complexity of construction, as greater the complexity (for

instance, in the case of a petrochemical facility), higher the risks arising on this count. In

addition, for projects with strong vertical linkages, the non- availability of upstream and

downstream infrastructure is an important source of completion risk.

Typical examples of such projects would be liquefied natural gas (LNG), natural gas, and

toll road projects. In certain types of projects, such as ports and roads, project completion is

also a function of the permitting risks associated with obtaining the necessary Rights of Way

(ROW), environmental clearances and Government approvals.

Completion risks are usually mitigated through strong fixed price; date certain, turnkey

contracts with credit-worthy contractors, along with the provision of adequate liquidated

damages for delays in construction, which need to be seen in relation to debt service

commitments.

While assessing completion risk, adequate attention is also paid to the experience of the

engineering, procurement & construction (EPC) contractor and its track record in

constructing similar projects, on time and within the cost budgets. Further, it looks at the

reasonableness of the time available for project completion, and an aggressive schedule for

project completion, which does not provide for adequate contingency provisions, is often

viewed negatively.

FUNDING AND FINANCING RISKS

A project company’s financial structure and its ability to tie up the requisite finances are the

focus of analysis here. The financing structure is usually reviewed for the capital structure of a

project, which is evaluated to assess whether the debt-equity ratio is inline with the underlying

business risks and that of other projects of similar size and complexity.

The protections provided to bondholders such as minimum coverage ratios that must be met

before shareholder distributions are made, and the availability of substantial debt reserves to

meet unforeseen circumstances. The matching of project cash flows (under various sensitivity

scenarios) with the debt service payouts and the potential for cash flow mismatches.

The pricing structure adopted for debt and the exposure of the debt to interest rate and

currency risks. Such risks are particularly significant where the project raises variable rate

debt or liabilities in a currency other than the one in which its revenues would be

denominated. The presence of an experienced trustee to control cash flows and monitor

project performance on behalf of the bondholders.

Limitations on the ability of the project company to take on new debt. The average cost of

debt, given that the cost of financing is increasingly becoming a key determinant of project

viability, in view of the fact that differences in technical and operating abilities have virtually

become indistinguishable among front-runners.

Usually, most projects have a high leverage, and while equity is arranged privately from

sponsors, the project would be dependent on financial institutions and banks for arranging the

debt component. In assessing the funding risk, the extent to which the funding is already in

place and the likelihood of the balance funding being available in time is considered, so that

the project’s progress is not delayed.

OPERATING AND TECHNOLOGY RISKS

Operating and technology risks refer to a project’s inability to function at the desired

production levels and within the design parameters on a sustainable basis. Such risks usually

arise in projects using complex technology (power plants or refinery projects, for instance);

for projects in the roads, ports, and airport sectors, such risks are usually of a lower order.

Technology risk usually arises because of the newness of technology or the possibility of its

obsolescence, most often seen in telecom projects.

Where technology is well established, the focus of analysis is usually on determining its

reliability and the sustainability of the technology platform over the tenure of debt. The

Independent Engineer’s Report (IER) is used to review and assesses whether the engineer’s

findings support the views of the sponsors and the EPC contractor..Technology risks, where

imminent, are usually mitigated through performance guarantees/warranties from the

manufacturer, contractor or operator, and the availability of adequate debt reserves to allow

for operating disruptions.

The sponsors would conduct a due diligence to establish the credit-worthiness of the

technology suppliers/operators and the ability of these participants to compensate the project

for failure of the technology adopted. The risks associated with disruptions in operations due

to mechanical failure of equipment are usually mitigated through Operations and

Maintenance (O&M) contracts.

Here again, sponsors evaluates the quality/experience of the O&M contractor, the familiarity

of the O&M contractor with the technology being used, and the adequacy of the performance

guarantees from the O&M contractor.

MARKET RISKS

Market risks usually arise because of insufficient demand for products/services, changing

industry structures, or pricing volatility (for input and also output). Given the long-term

nature of project financing, a considerable source of market risk is the possibility of dramatic

changes in demand patterns for the product, either because of product obsolescence or sudden

and large capacity creations, which could severely affect the economics of the project under

consideration.

For analytical convenience, one can group projects into two categories: one, which produces

commodities (e.g. LNG projects, refinery projects, and power projects), and two, where

certain natural monopolies exist (e.g. roads, ports, airports, power or gas transmission

projects). While the first category of projects is exposed to most of the risks identified above,

the market risks for the latter type of projects are more demand related, with the pricing

usually being subject to regulatory or political controls.

Until recently, the implementation of some of these “commodity” projects, such as power

and LNG projects, in the international markets was supported by long-term off-take contracts,

which provided considerable comfort to project financiers. However, with the development

of a spot market for these commodities, customers of such projects are not willing to commit

themselves to such long-term contracts; this has considerably increased the market risks

associated with such projects.

Under the circumstances, cost competitiveness and the nature (regional or global) and adequacy

of demand have emerged as critical determinants of a project’s long-term viability.

For instance, even in India, despite power projects being backed by off-take commitments

and adequate payment security mechanisms, there are numerous instances where cost

competitiveness has emerged as the principal mitigant against the rather well documented

market risks associated with India’s power sector. Thus the point of focus, while assessing

market risks for projects producing a commodity, is usually the cost structure of a project,

which is a function of the capital costs incurred to set it up, the input costs and also the costs

required to operate and maintain the asset.

One usually benchmarks the capital cost of a project with those of recently commissioned

facilities across the world to ascertain the global cost competitiveness of the project; this is a

key determinant of the project’s long-term economic viability. On the input side, ICRA looks

at issues related to certainty of supply, ability of the supplier to meet contractual

commitments over the life of the project, the pricing structure of such supplies, and the ability

of the project to pass on variations in input costs.

In situations where the primary input is scarce or is not actively traded, one attempts to

evaluate the cost implications for replenishing shortfalls in supply and the availability of

liquidated damages in the supply contracts for compensating the project for such costs. For

the second category of projects, the primary focus is on evaluating the adequacy of existing

demand, the potential for growth in demand and the possibility of alternative assets being

created, which could undermine demand for the project being financed.

Assessing demand patterns for such projects, particularly road projects, is often a daunting

task since in most cases, the demand is highly price elastic and a function of the pattern of

socioeconomic development in the service area of the road.

One refers to “independently” conducted traffic/demand studies by reputed agencies to

establish the veracity of the demand estimations prepared by the project sponsors

COUNTER – PARTY RISK

As discussed earlier, a project involves a number of counter-parties who are bound to it by

the contractual structure. Therefore, an evaluation of the strength and reliability of such

participants assumes considerable importance in ascertaining the credit strength of the

project. Counter-parties to projects usually include feedstock/raw material suppliers, principal

off takers, and EPC contractors.

Even a sponsor could become a source of counter-party risk, as it needs to provide equity

during the construction stage. Because projects have inherently complex structures, a

counter-party’s failure can put a project’s viability at risk. The counter-party risks are usually

addressed through performance guarantees, letters of credit and payment security

mechanisms (such as escrows), most commonly seen in the case of power projects.

However, it has been observed that such contractual risk mitigants, however strong, may not

be effective in insulating a project from this risk, unless the project is fundamentally cost

competitive and makes commercial sense for all the project participants.

REGULATROY AND POLITICAL RISKS

Political and regulatory risks continue to play an important role in the development of the

project finance business in India. Most project financing transactions carry an element of

political risk by virtue of the fact that they are often related to capital-intensive infrastructure

development and the resultant goods/services are consumed by the masses, directly or

indirectly.

Political and regulatory risks could manifest themselves in various forms, and significantly

impact the economics of the project under evaluation. For instance, such risks may take the

form of: Lack of transparency and predictability in the functioning of the regulatory

commissions which are typically involved in granting licences, specifying the terms and

conditions for use of infrastructure on a “common carrier” basis and fixing tariffs.

For instance, some of the stand-alone LNG projects being set up in the country require a

change in regulatory policy for allowing them to use the available gas evacuation

infrastructure on a common carrier basis. Resistance to increases in user charges for common

utilities such as water charges, toll tax rates, and energy charges, despite such tariff increases

being envisioned in the project documents. Changes in environmental norms, which could

impact power plants and refinery projects by requiring them to invest substantially in meeting

such norms.

Problems in acquisition of land, which are typical in the case of road projects. As is apparent

from the preceding discussion, regulatory and political risks are often difficult to quantify and

also mitigate. While assessing such risks, an attempt is often made to understand the

vulnerability of the project to such risks and also the nature of the relationship between the

local/central Government and the project under review.

FORCE MAJEURE RISKS

Project financed transactions, which are different from corporate or structured finance

because of their dependence on a single asset for generating cash flows, are potentially

vulnerable to force majeure risks. The legal doctrine of force majeure excuses the

performance of parties when they are confronted by unanticipated events beyond their

control. A careful analysis of force majeure events is critical in project financing because

such events, if not properly recompensed, can severely disrupt the careful allocation of risk

on which project financing depends.

Natural disasters, such as floods and earthquakes, civil disturbances, and strikes can

potentially disrupt a project’s operations and hence its cash flow. In addition, catastrophic

mechanical failure, due to either human error or material failure can be a form of force

majeure that may excuse a project from its contractual obligations. Projects are usually not

able to cope with force majeure events as well as large corporations, which have a diversified

portfolio of assets.

It is therefore important that force majeure events be tightly defined, and that such risks be

allocated away from the project through suitable insurance covers taken from financially

strong insurance companies. One usually studies the nature, coverage and appropriateness of

the insurance policies taken and also evaluates the adequacy of debt reserves for meeting debt

service commitments in force majeure circumstances.

SWOT ANALYSIS OF BANKS

STRENGTH

Over the years both private sector and public sector banks have developed to a great extent

and are a major factor for the flow of money in the economy.

Banks are using latest technologies to cater to the needs of the people.

The number of branches that a bank opens, the ATM facility, other services like payment of

bills etc. is proof to the fact that customer satisfaction is the objective of any bank.

Retail Banking, Business Banking, Merchant Establishment Services (EDC Machine),

Personal loans & Car loans, Demat Services with E-Broking, Mutual Fund, Insurance, and

Housing Loans.

Keeping the need of the consumers in mind, banks all over are offering an array of services.

WEAKNESS

The rural market is still waiting to be tapped. There is latent demand for the same, only

awareness is to be created. If the organized urban financial sector can somehow connect to its

rural counterpart, it can accelerate the growth of the rural financial sector. With the help of

latest technologies this feat could be achieved. Banks currently provide overdrafts against

property. While the younger population believes in looking at future cash flows to spend

today, senior citizens often have their investments locked in not-so-liquid securities. This

could lead to a problem in future for the banks. Affluent investors typically overlook banks as

a source for personal financial advice.

Wealthy clients tend to consult financial advisers and accountants for personal financial

advice before they speak with banks.

OPPORTUNITY

The Budget provides for increased medical insurance coverage through more insurance

companies of the GIC group. There is perhaps an opportunity here for banks to look at

bundling insurance with liability products.

Income from rural insurance is around Rs2,700 crore and is estimated to grow to Rs 8,000

crore in three years.

Banks could easily exploit this opportunity.

Even after the Reserve Bank of India having okayed institutional lending to the film industry,

very few banks have even done a study of Financing films.

The film industry could provide banks with good business opportunities, at a time when the

credit off take is poor.

THREATS

With distribution of financial services in the rural areas being touted as the next big wave,

there could be more competition for banks and NBFCs (non-banking financial companies)

operating in the hinterland.

The regional rural banks would be given charge of rural areas hence increasing competition.

Exploiting the impressive growth of e-commerce and the desire of many merchants to

provide their customers with more online payment options at a lower cost, nonblank players

like Pay Pal and BillMe Laterare carving out a niche in the Internet payments business.

At the same time, the e-check is emerging as an attractive payments alternative for merchants

tired of paying high credit card interchange fees.

The e-check is essentially a debit against the customer's checking account that travels over

the Automated Clearing House network.These and other technologies threaten to wrest more payments revenues from banks, which

still rely on the credit card as their primary online payments product.

SWOT ANALYSIS OF NBFC

STRENGTHS

The core strengths of NBFC’S lie in their strong customer relationships, good understanding

of regional dynamics, service orientation, and ability to reach out to customers who would

otherwise have been ignored by banks.

Because of their niche strengths, local knowledge, and presence in remote topographies, these

NBFC’S are able to appraise and service non-bankable customer profiles and ticket sizes.

They are thus able to service segments of the population whose only other source of funding

would be moneylenders, often charging usurious rates of interest.

WEAKNESS

With the onset of retail financing, NBFC’S are loosing ground to banks. Also the profitability

of NBFC’S has also come under pressure due to the competitive dynamics in the Indian

financial system. Under these circumstances, NBFC’S have begun to look at high-yield

segments such as personal loans of small ticket sizes, home equity, loans against shares, and

public issue (IPO) financing, to boost profitability.

To benefit from access to funding at lower costs, among other reasons, some leading NBFC’S

have also metamorphosed into banks: Ashok Leyland Finance Ltd, for instance, merged into

IndusInd Bank Ltd, and Kotak Mahindra Finance Ltd converted into Kotak MahindraBank

Ltd.

OPPORTUNITIES

Virgin business segments are likely to have NBFC’S as innovators. The NBFC’S will

leverage their first mover advantage to make reasonable profits in these segments.

NBFC’S will play the role of innovators, going forward, with some doubling up as partners to

banks. As innovators, they will help identify new businesses, or new ways of doing

traditional businesses; they will build business models that will attain a measure of stability

over time, before the banks step in.

When that happens, it will be difficult for some NBFC’S to hold their own against the

competition, and some will move out; others will enter into partnerships with banks, resulting

in a win-win relationship for both.

Partnerships with banks can take a variety of forms.

Some NBFC’S will become originating agents working for a fee, like DSA’S ,but others are

likely to have more substantial partnerships with banks. Such a partnership could, for

instance, involve the NBFC performing credit appraisals, and sharing credit risk on assets

that it has originated and sold to its partner bank.

The success of this business model will depend critically on the NBFC’S ability to assess the

risks involved in the exposures it originates.

THREATS

Factors such as ability to sustain good asset quality, provide prompt and customized services,

enter into franchises or tie up arrangements with manufacturers and dealers, and build large

networks to reach out to customers, are vital for success on the business front; so are strong

collection and recovery capabilities. NBFC lack such facilities.

On the financial side, competitive cost of funds and the ability to capitalize at regular

intervals, in line with growth requirements, are key requirements for maintaining competitive

positions.

Slowly and steadily NBFC is loosing ground to banks and it only way out is go for

partnership with banks.

ANALYSIS

Q.1Have you obtained project financing previously?

First time takers 11

Taken previously 69

Not aware 20

Of the 100 respondents, 11 were first time takers of project financing, 20 had never taken

project financing and most of them had not heard of the same, 69 of the respondents had

taken project financing previously.

Q.2 If yes, how many times?

1 to 3 60

4 to 6 6

7 to 9 1

>10 2

Of the 100 respondents, 20 have never taken project financing, 11 are first time takers, 60 fall

in the category of having taken project financing 1to 3 times previously, 6 who have taken

project finance 4 to 6 times, one respondent falls in the category of having taken project

finance 7 to 9 times and 2 who have taken project financing more than 10times

.

We can see that majority of the respondents have taken project finance 1to3 times and only 2

respondents have taken project finance more than 10 times. This shows that project finance is

not such a favourable option of finance among the borrowers. This is be due to the fact that

documentation process involved in financing a project is very lengthy and also that approval

time for funding is long. Also the borrowers have other options like loan from banks,

deposits, loan from relatives, investment in bonds etc

Q.3 Please name the lenders from whom you have obtained project financing in past.

SBI 29

ICICI 16

DENA 10

Others 22

29% of the respondents had taken project financing from State Bank of India, 22%from

ICICI Bank and 14% from Dena Bank and 35% have taken project finance from other banks.

None of the respondents had taken project finance from NBFC’S, all of them had opted for

Banks as there is more security and also it is backed by strong brand name. Further of all the

banks, nationalized banks have more market share than private banks in terms of popularity.

Majority of the respondents have taken project financing from SBI, followed by ICICI and

Dena Bank.

Q4. Please describe your experience with the lender in terms of the following criteria

(A) Accessibility of officers:

Very satisfied 26

Satisfied 40

Neither satisfied nor

Dissatisfied 14

Dissatisfied 0

Fully Dissatisfied 0

26 respondents were very satisfied in terms of the accessibility of officers, 40 were satisfied

in terms of accessibility of officers, 14 respondents were neutral on this aspect and none were

dissatisfied or dissatisfied.

It can be observed that majority of the respondents are very satisfied or near to satisfied with

regard to accessibility of the officers. The lenders have taken care to see that the borrowers

can easily access the officers. Majority of the respondents had taken project fiancé from SBI

and are very satisfied in terms of accessibility of officers. This is the starting point for any

prospective borrower and lenders should take care to see that their officers are easily

accessible because many a times bad response in terms of accessibility repulses the

prospective lender.

Q4 (b) Speed of dealing: (documentation and formalities)

Particulars No.

Very satisfied 10

Satisfied 42

Neither satisfied nor

Dissatisfied 19

Dissatisfied 7

Fully dissatisfied 2

Only 10 of the respondents were very satisfied with the speed of dealing with regard to

documentation process, 42 were satisfied with the speed of dealing, 19 were neutral on this

aspect, 7 dissatisfied and 2 fully dissatisfied with the speed of dealing.

Those that were very satisfied with the documentation process had taken project finance from

ICICI and also the customers of Dena Bank were satisfied with documentation process. This

shows that ICICI and Dena Bank Have taken due care in finishing the paper work quickly so

that the borrowers can start with the project as soon as possible.

It has been observed that the documentation process in terms of SBI is the lengthiest. Many a

times due to this factor SBI is not preferred by the borrowers as the approval time is more and

the borrowers cannot afford this delay.

Q4 (C) Quality of interaction:

Particulars No.

Very satisfied 15

Satisfied 45

Neither satisfied nor

Dissatisfied 19

Dissatisfied 1

Fully dissatisfied 0

From the above chart we can see that 15% of the respondents were very satisfied with the

quality of interaction, 45% were satisfied with the interaction, and 19% were neutral lon this

aspect, 1% dissatisfied with the quality of interaction.

It can be observed that the above graph more or less depicts the graph of accessibility of

officers. It means that those who felt that officers were easily accessible also felt that quality

of interaction was also good.

All the lenders are taking care to see that the prospective borrowers feel at ease with the

officers and that it results in a project finance deal. This is also an important aspect that the

lenders should consider as the quality of interaction would determine whether the project

would be financed or not.

Q5 What was/were the reason/s for selecting this particular project financing company?

Particulars No.

Reference 54

Time frame 14

Documentation process 10

Others 5

From the above chart we can see that 65% of the respondents choose a particular firm

because of reference, i.e. either they had a bank account there or someone recommended the

firm, for 17% time frame was the deciding factor, 12% of the respondents gave importance to

documentation process and 6% gave importance to other factors like security, brand name

etc.

The lenders should promote project finance facility to all its existing customers as we can see

that 65% of respondents choose a particular firm because of reference. The Enders should

take care to see that the time needed for approval of project should also be shortened as this

one of the factors which gives advantage to the competitor.

The lenders should also try and reduce the number of documents that a borrower is expected

to present. This is also one deciding factor for the borrowers as in the case of SBI there is

stringent checking of documents and the approval of finance takes more than 1 month

usually.

Q6 Which other source of finance would you prefer for financing projects?

Particulars No.

Loan from banks 62

Loan from relatives 17

Deposits 14

Investments in bonds 3

Others 0

From the above chart we can see that 62 respondents would take loans from banks to finance

their projects, 17 would have taken loan from relatives, 14 would use their deposits to finance

their projects and 3 respondents would use their investments in bonds for the same.

Apart from taking project finance to finance their project, there are various other avenues

from where the borrowers can finance their project. The major competitor of project finance

is the loans provided by the banks, we can say this as this is the most favoured option of the

respondents. Better promotional strategies should be adopted by the lenders so as to meet the

competition.

The lenders should try and educate the customers regarding the benefits of taking project

finance over other options like loan, deposits etc. in order to meet competition. Also the

NBFC’S should market themselves as the easiest option available for entrepreneurs and this

is the only way they can sustain the competition.

Q7 What are/were your reasons for obtaining project finance?

Particulars No.

Equipment purchase 24

New unit setup 31

Further investment 26

Ongoing project 6

Other 0

From the above chart we can see that out of the 80 respondents who had taken project

financing 24 had taken it for purchase of equipment, 31 for new unit setup, 26 for further

investment and 6 for ongoing project.

We can observe that project finance is usually preferred for new unit set up. This is because

such project usually requires more capital for initialization and also as the finance is provided

on the merits of the project, approval time is less. Close to new unit setup, the next is further

investment in business for which project finance is taken. As loan is provided on the credit of

the project the borrowers would not have a problem in getting the finance.

Q8 Are you aware of the factors considered by the lender before providing you project

financing?

Particulars No.

Yes 64

No 16

From the above chart we can see that 80% of the respondents were aware

of the factors considered by the lender before financing the project, but most of them are not

aware of all the factors. 20% of the respondents were unaware of the factors considered by

the lender.

Only 16 respondents were unaware about the factors considered by the lender before

providing finance, they not aware about all the factors considered. These respondents were

about some factors like feasibility of the project, credit worthiness, financial soundness and

availability of documents. They were not aware that the lenders also consider the current

government policies, market scenario, macro economic factors and also sole lender ship.

Those who knew about the factors considered were aware of most of the factors considered

by the lender. They were aware regarding what all documents would be expected by them

and would keep them ready before meeting the lenders so that the process is completed

quickly. Also that agriculture related projects got easy clearance.

Q 9 Which of the following do you think are factors that your lender might have considered

before giving you project financing?

Particulars No.

Previous projects 54

Present business 53

Market scenario 38

Government policy 17

Macro economic factors 6

Agriculture related 10

Sole lender 8

54 respondents felt that previous projects was a deciding factor for the lenders before

financing the project, 53 respondents felt that their current business conditions was a deciding

factor, for 38 respondents market scenario was a deciding factor for the lenders, 17 felt

government policy affected the decision of the lenders, 10 respondents thought that

agriculture related project got faster approval and 8 respondents felt sole lender ship was

given importance by the lender.

According to the lenders before giving finance to any project, the feasibility of the project,

credit worthiness of the project and availability of documents are given foremost importance.

They also consider the government policies like which sector has been given subsidies or tax

holiday, also the current market scenario as to which sector is growing or is expected to grow,

macro economic factors. The lender also preferred that it be the only lender to the project and

that no other lender had a claim on the cash flows of the project.

Majority of the respondents were aware of the foremost three factors i.e. feasibility of project,

credit worthiness and availability of documents. So we can say that there is considerable

awareness regarding the same among the borrowers.

Q10 In which of the flowing range does your debt/equity ratio lies?

Particulars No.

0.25-0.5 17

0.50-1.00 7

1.00-1.50 37

1.25-2.00 13

>2.00 0

Out of the 80 respondents who had taken project financing, 4 did not want to disclose their

debt equity ratio, the debt equity ratio of firms of the respondents lied between0.25-0.5, 44

firms had their debt equity ratio between 0.50-1, 10 firms had their debt equity ratio between

1.00-1.50 and 5 firms had their equity ratio between 1.25-2.00

Majority of the respondents hesitated in giving this ratio. It shows that majority of the

respondents have debt equity ratio between 1-1.5 it shows that they have taken loans from the

market.

Q11 Which type of Repayment schedule do you prefer?

Particulars No.

Bullet 7

Instalment 73

91% of the respondents were more comfortable with the instalment repayment system, and

9% with the bullet repayment system.

Q12 Out of these how many project financing providers are you aware of?

Particulars No.

SBI 61

IDBI 52

BOB 37

Other Banks 70

GSFS 27

GLF 27

Sundaram 10

Banks have a majority of mind share among the respondents, it can be clearly seen that SBIis

very well know among the respondents, 52 respondents were aware that IDBI also provides

project finance, 37 respondents were aware about Bank of Baroda giving the same service.

The awareness regarding the NBFC’S in this field is very low. Of all the respondents only 27

were aware about Gujarat State Financial Services and Gujarat Lease Finance Ltd providing

project finance and that is due to the fact that they are state run firms.

NBFC firms need to invest more in marketing their products to stay in competition. The

awareness regarding NBFC’S is very less among all the respondents, they should try and

market themselves as the lender for new entrepreneur as project finance deals with the merits

of the product. Also they should try to inculcate in the minds of the borrowers that NBFC is

as safe as any bank and should try and develop a feeling of security among borrowers with

regard to NBFC.

Q13 How would you prefer risk to be managed?

Particulars No.

Lenders 53

Third party 17

Allocate between two 10

65% of the respondents preferred risk to be managed by the lenders, 21% wanted third party

to absorb the risk and 14% felt that risk should be allocated equally between the lenders and

the respondents.

Q14 For future projects from whom would you prefer to take project financing?

Particulars No.

Banks 100

NBFC’S 0

All the respondents opted for banks rather than NBFC for project financing for their future

projects. The Banks have majority of mind share among the borrowers. Also the lenders feel

that if they borrow from banks they will not face any problem regarding availability of

finance and also that the banks will keep up to their word, in short the will not face a problem

with regard to working capital when it comes to banks. But the same they do not feel

regarding the NBFC.

Further the borrowers are not aware about various NBFC existing within the city, this shows

that the marketing efforts carried on by these firms is not enough. As a result they are loosing

out to the banks. Also they need to improve upon their image regarding the NBFC being not a

safe option.

Q15 Factors responsible for choosing a lender (Bank/NBFC)

Particulars No. Documentation process 29 Security 48 Brand name 39 Rate of involvement 12 Project approval time 8 Others 1

The respondents choose bank over NBFC because they thought banks provided more

security, 47 respondents felt the same, for 39 respondents brand name was a deciding factor,

for 28 respondents documentation process was of importance, for 11 respondents rate of

involvement affected their decision, 7 respondents gave importance to project approval time.

As said earlier the NBFC firms need to make their presence felt among the borrowers. They

need to market themselves to borrowers differently than the banks and improve their image.

The major reason for choosing a bank is the security aspect, NBFC need to prove to the

lenders that they are as secure as any bank and also develop their brand name. This will take

few years but the first and foremost thing that they can do is to market themselves and make

their presence felt in the market.

FINDING AND RECOMMENDATIONS

Project finance is not that popular among the CA’S. They prefer taking bank loans

over project finance. This due to the fact that the lenders have not made much effort

in creating awareness regarding the same.

The documentation process involved in financing a project is very lengthy and also

that approval time for funding is long. Also the borrowers have other options.

None of the respondents had taken project finance from NBFC’S, all of them had

opted for Banks as there is more security and also it is backed by strong brand name.

The lenders have taken care to see that the borrowers can easily access the officers

and also the interaction between the lender and borrowers is pleasant.

Majority of the banks get customers for project finance through reference that is

either they are existing customers are they have been recommended by others.

Also documentation process should be shortened as this affect the decision of

choosing a lender.

The major competitor of project finance is the loans provided by the banks.

Project Finance is usually preferred for new unit set up.

According to the lenders before giving finance to any project, the feasibility of the

project, credit worthiness of the project and availability of documents are given

foremost importance.

Banks have a majority of mind share among the respondents. The awareness

regarding NBFC’S is very less among all the respondents.

All the respondents opted for banks rather than NBFC for project financing for their

future projects.

The major reason for choosing a bank over NBFC is the security aspect and also the

brand name that a bank enjoys.

RECOMMENDATIONS

The lenders should promote project finance facility to all its existing customers.

The lenders should try and educate the customers regarding the benefits of taking

project finance over other options like loan, deposits etc. in order to meet competition.

Also the NBFC’S should market themselves as the easiest option available for

entrepreneurs and this is the only way they can sustain the competition.

The borrowers should be made aware regarding the aspects considered by the lender

before providing project finance.

The awareness regarding the NBFC’S in this field is very low. Hence strong

marketing strategies should be adopted by these firms to stay in competition.

The NBFC’S should make their presence felt in the market by organizing financial

fares, sponsoring financial events and other effective marketing tools.

The NBFC firms should try to inculcate in the minds of the borrowers that NBFC is as

safe as any bank and should try and develop a feeling of security among borrowers

with regard to NBFC.

The NBFC firms need to develop their brand. This will definitely take a few years but

efforts need to made now so as to sustain competition.