Handbook On Project Financing
Handbook On Project Financing
Edition
February, 2015
Committee/ Department
Committee
for
Capacity
Building
of
CA Firms and Small & Medium Practitioners
(CCBCAF&SMP), ICAI
Website
www.icai.org, www.icai.org.in
ISBN
978-81- 8441-782-1
Price
` 150/-
Published by
Printed by
Foreword
Project Financing discipline includes understanding the rationale for project
financing, how to prepare the financial plan, assess the risks, design the
financing mix, and raise the funds. In addition, one must understand the
cogent analyses of why some project financing plans have succeeded while
others have failed. A knowledge-base is required regarding the design of
contractual arrangements to support project financing; issues for the host
government legislative provisions, public/private infrastructure partnerships,
public/private financing structures; credit requirements of lenders, and how to
determine the project's 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 project's
feasibility.
In the appropriate circumstances, project finance has two important
advantages over traditional corporate finance: it can increase the availability
of finance, and reduce the overall risk for major project participants, bringing
it down to an acceptable level. For a sponsor, a compelling reason to
consider using project finance is that the risks of the new project will remain
separate from its existing business. Then if the project, large or small, were
to fail, this would not jeopardize the financial integrity of the corporate
sponsor's core businesses. Proper structuring will also protect the sponsor's
capital base and debt capacity and usually allow the new project to be
financed without requiring as much sponsor equity as in traditional corporate
finance.
Project finance has enjoyed explosive growth in the past five years. Its
emergence has resulted from a number of favorable trends, e.g.,
privatization, deregulation of industries, new attitudes towards the role of the
private sector in developing countries and at the multilateral agencies, etc.
CAs generally carries out high quality industry research and analysis
because of their strong foundation in Commerce and economics. This helps
CAs in rationally evaluating the risks associated with any project financing
deal being evaluated. I am glad to know that the Committee for Capacity
Building of CA Firms and Small & Medium Practitioners (CCBCAF & SMP) of
our Institute has brought out the book on Handbook on Project Financing
as an area of practice for Small and Medium Practitioners.
I appreciate the efforts put in by the contributors for preparing the Basic Draft
of this Book and complement CA. Anuj Goyal, Chairman, CCBCAF&SMP,
ICAI and other Members of the Committee for publishing the aforesaid book.
January 21, 2015
New Delhi
CA. K. Raghu
President, ICAI
iv
Preface
Project finance is a long-term method of financing large infrastructure and
industrial projects based on the projected cash flow of the finished project
rather than the investors' own finances. Project finance structures usually
involve a number of equity investors as well as a syndicate of banks who will
provide loans to the project. They are most commonly non-recourse loans,
which are secured by the project assets and paid entirely from project cash
flow, rather than from the general assets or creditworthiness of the project
sponsors, a decision in part supported by financial modeling. The financing is
typically secured by all of the project assets, including the revenue-producing
contracts. Project lenders are given a lien on all of these assets and are able
to assume control of a project if the project company has difficulties
complying with the loan terms.
Each project financing is different. Each project gives rise to its own unique
risks and hence poses its own unique challenges. In every case, the parties and those advising them - need to act creatively to meet those challenges
and to effectively and efficiently minimize the risks embodied in the project in
order to ensure that the project financing will be a success. As CAs, our deep
understanding of financial statements is very handy in preparing financial
models to project revenues and cash flows. Business/project evaluation is a
technique which you will easily pick up once you start working in project
financing. This is a skill which bankers develop with experience as they work
on more and more transactions.
The Committee has prepared this Book on Handbook on Project
Financing as an area of practice for Small and Medium Practitioners. I
am confident that this publication would surely help the members in
discharging their responsibilities to the profession as well as to the Nation in
a very effective manner.
I feel great pleasure in acknowledging the efforts and the contribution made
by CA. Subhash Nathuramka in preparation of this book on Handbook on
Project Financing as an area of practice for Small and Medium
Practitioners. I appreciate the efforts put in by the members of CCBCAF &
SMP and Dr. Sambit Kumar Mishra & other officials of CCBCAF & SMP
Secretariat, who have provided necessary support for publishing the
aforesaid book.
January 21, 2015
vi
Contents
Chapter
Page No.
Foreword
iii
Preface
Introductory
Professional Opportunities
Making preparation
practitioner
10
13
21
34
45
46
Important Terminology
48
57
65
71
87
88
90
viii
Chapter 1
Introductory
1.1. Traditional areas of practice like Accounts, Audit, Direct tax, Company
law have been the forte of the profession of Chartered Accountancy since its
inception. However with the acceptance of globalisation and economic
liberalisation as tools for boosting economic growth since early nineties a
number of new/non-traditional areas of practice have come to the forefront.
These include excise duty, service tax, VAT, FEMA, WTO, arbitration, SEBI
and stock exchange, special economic zone related matters etc. Another
emerging area of practice which has caught the attention of one and all has
been the area of project financing.
1.2. Project Finance is a vast area encompassing law, accounting,
management, finance, taxation, engineering and many other related subjects.
While it may be difficult to discuss all aspects in the form of one book an
attempt is here made to introduce the subject of project finance as an area of
practice particularly to new upcoming members. While briefly touching upon
the professional opportunities in the field guidance is also provided to
encourage further study on the subject.
1.3. There is no universally accepted definition of project financing.
Sometimes it is identified with firming up various sources of finance for a
given project which may be setting up a manufacturing unit or an
infrastructure project or a trading unit. Sometimes it is identified only with
arrangement of funds through banks and financial institutions for a given
project. In common parlance it also includes arrangement of working capital
funds for a given project. However with the increasing complexities of the
business it would be more appropriate if the term project financing is given
a wider and more comprehensive meaning to include all finance related
activities and decisions starting from identification and conception of the
project to the implementation and running of a project. A finance professional
has to act as a linchpin amongst all the stakeholders viz. investor, lender,
borrower, government agencies, suppliers, project manager, insurer etc.
Chapter 2
Professional Opportunities
2.1 Since finance is considered the lifeline of a project the role of finance
professional is considered to be of critical importance. Because of their
background of integrated knowledge and training cutting across areas of
accounts, finance, law and management the members of CA profession are
in a unique position in playing a key role in the field of project financing. Due
to high ethical standards and professional integrity the members enjoy high
credibility in the eyes of all stakeholders be it the investor or promoter or
borrower or banker or the government agency which helps in smooth
implementation and running of a project.
2.2 In the initial years tying up of finance with the lending institutions was
considered to be synonymous with any project finance related assignment.
However with the advent of globalisation and liberalisation identification,
conception, implementation and running of a venture have become too
complex and too demanding. Therefore in the changed scenario tying up of
finance is considered to be only one of the aspects of project financing.
Because of the highly competitive business environment with fast changing
technology it has become imperative for all the stakeholders to ensure that
the project being taken up for implementation has a suitable team which
can take all the right and timely steps for conceptualising, implementing and
running of the project. While promoter or his nominee acts as the head of the
project he or she has to be properly guided by able professional advisors to
ensure smooth sailing at every step. In view of the present day complexities
of the business the role of finance professionals has become critical to the
survival and growth of business ventures.
2.3 While being in the shoes of a project finance consultant one should try
to emulate the role of the famous character of Vidur from great epic of
Mahabharata. Vidur always advised his King without fear or favour keeping
the interest of the kingdom as uppermost. In the same manner a consultant
has to advise keeping the interest of the project as uppermost irrespective of
by whom he is appointed. It should be invariably remembered that what is in
the interest of the project is also in the interest of its stakeholders and
ultimate aim should be that all stakeholders should get their fair share and
remain satisfied which is also in line with the concept of good governance.
Professional Opportunities
2.4 A member of the profession can play a vital role in the area of project
financing in the capacity of
(i)
(ii)
(iii)
(iv)
Independent consultant;
(v)
2.5 Even while taking up attest functions like audit and certification a
member plays a key role in the overall system of project financing. The
certificate of expenditure incurred during implementation acts as a foundation
for release of loan. Such a certificate has to be issued not only based on the
books of account and supporting but also with reference to the terms of
sanction/approved means of finance.
2.6 Banks and Financial Institutions, PE investors have already
recognised the role of Chartered Accountants in fields like Stock and
Receivables Audit of borrowers, Concurrent Audit of bank branches,
Monitoring of projects on behalf of lending institutions, preparation of Techno
Economic viability study reports, forensic audits in cases of restructuring of
loans, valuation of assets etc. These being specialised areas members have
to develop the right kind of experience and background to be selected on the
panels of the institutions to undertake specific assignments. In addition to
above fields there are a large number of activities from the identification to
the implementation of project in which a practitioner can be part of. These
include process of tendering for civil contracts, acquisition of plant and
machinery, coordination with equipment supplier, engagement of key
personnel, coordination with various departments of the government,
coordination with banks and financial institutions, PE investors, rating
agencies etc.
2.7 A practitioner can play a key role in the process of post disbursement
as follows(a)
(b)
(c)
(d)
(b)
Directors Report should deal with important events occurring after the
date of Balance Sheet as those are very much of interest to the
stakeholders;
(c)
(d)
(e)
(f)
2.9 During the phase of project monitoring and while renewing, enhancing
credit facilities banks and financial institutions lay a lot of emphasis on
preparation and analysis of Credit monitoring arrangement (CMA) data. A
practitioner plays an important part in preparation and validation of CMA data
as follows(a)
(b)
(c)
(d)
(e)
Professional Opportunities
(b)
(c)
(d)
2.12 Project financing is an area requiring high skill and experience. At the
same time practitioner has to have the trust of stakeholders in the project.
Since the stakes are high the practitioners are selected after a lot of
deliberation.A practitioner should therefore look project financing as an area
of specialisation. Within the area further specialisation can be done in the
following manner(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(b) By getting empanelment with banks and financial institutions for the
purpose of acting as lenders financial advisor, valuer of securities
mortgaged ;
(c) By floating LLP or private limited companywith suitable website
providing details about the services proposed to be rendered
Chapter 3
policy, export import policy, SEZ policy, industry specific policies and
schemes etc. At the same time he has to be conversant with incentives
schemes for specific industries like interest subsidy for textile units under
TUFS, incentives to sugar industry, incentives to ship building industry etc.
3.5 In addition to banks/FIs a practitioner has to be conversant with the
framework of private equity investors, venture capital investors and high net
worth individuals (HNIs) which are critical to raising of promoters
contribution/equity contribution for the project. Institutions like IDFC are
having their venture capital arm to fund equity capital in suitable projects. At
the same time knowledge of the policies being pursued by these investors go
a long way in selection of the suitable investor.
3.6 Continuous updating of knowledge and latest developments in the field
is key to the success of a practitioner. Brushing up of knowledge in the field
of business finance could be undertaken by reading reputed journals,
magazines, daily newspapers, websites of government departments, RBI,
banks, financial institutions, rating agencies, research institutions, business
and trade organisations etc. A practitioner can also undertake certification
courses undertaken by ICAI particularly on the subject of business finance.
In recent years a number of programmes are organised at ICAI on various
topics related with project financing. A practitioner should participate in such
programmes as delegate or faculty member to keep himself abreast of the
latest developments.
3.7 Practising on the banking side (including stock and receivables audit,
concurrent/statutory audit of banks etc.) can help a practitioner prepare for
bigger assignments in the field of project financing.
3.8 For a practitioner it would be advisable to be proficient in computer
applications including knowledge of software like Microsoft word, excel,
power point etc. For specific assignments knowledge of the software being
used by the client can help in getting the requisite data more efficiently.
3.9 A practitioner should gradually develop a suitable infrastructure
including automated office space with modern communication and computer
facilities and specialised staff.
3.10 Validation of data is one of the most important aspects in the field of
project financing. A practitioner should learn to corroborate the data from
more than one source to ensure that the decisions taken are not biased. At
the same time provision should be kept for unsuspected errors in data.
3.11
Before taking up an assignment, a practitioner has to make
preliminary scrutiny of the proposal. It should be seen whether project
logistics are basically on right lines. While project logistics are important,the
one of the most important factors to beseen has to be the promoter behind
the project. A practitioner has to ensure that theantecedents and credentials
of the promoter are satisfactory. The estimates, projections never work out in
the manner they are perceived and ultimately the confidence, skill and
entrepreneurship, adaptability of the promoter only drives the project
through the turbulent periods. Age, the physical and mental health condition,
qualification, experience, background of the promoters is important. There
are other important guiding factors also like the ability to withstand an
adverse situation, tendency to adhere to the laws of the land, adherence to
norms of corporate governance, policy towards personnel, track record of
implementation of project etc. The appraisal of the promoter is critical as the
ability to raise need based funds, corporate image and ability to attract
quality customers, suitable personnel largely depend upon the image and
track record of the promoter.
3.12
A practitioner should be aware that his own reputation becomes
attached with that particular project. So before embarking on the assignment
he has to ensure that the promoters and their team are suitable for the
project. At the same time the promoter should be in a position to raise the
requisite minimum contribution for the project.
3.13
A practitioner has to balance the expectations of all stakeholders to
ensure win win situation for all. This is also necessary to ensure long term
relationships amongst stakeholders. In a way the interest on investor/lender
is intimately connected with the interest of investee/borrower. Both the
stakeholders want reasonable return on their investment which in turn is
dependent on smooth implementation and running of the project. A
practitioner has to keep this perspective in mind even if he is representing a
particular stakeholder.
Chapter 4
(b)
(c)
(e)
(f)
(g)
11
12
Chapter 5
(b)
(c)
Steady flow of funds is more important than the security cover. Many
borrowers wrongly believe that adequate security should be enough to
satisfy the lender. However, the basic approach to lending is to
recover money out of inflows in the activity of the project. The security
is kept only as a matter of last resort and is not meant to be disposed
of in normal course.
(e)
(f)
5.2
Particulars
Basis and
Documents to
be referred
Sale Deed, land
records like 7/12
Extract
Search report of
lawyer
Comments
Critical factors
Suitability
of
location from the
point of view of
workers,custome
rs,suppliers,cust
omers
Availability
of
Suitability
14
and
adequacy of land
to be seen
Approved
Building Plan
Estimates
by
Architect
Work orders
Plant
Machinery
Competitive
Quotations
Purchase Orders
Invoices
supporting
for
govt. taxes
and
Built up area,
height of building
to be specified.
Credentials
of
Architect,
structural
engineer,
contractor to be
established
Credentials
of
critical and major
equipment
suppliers to be
established
Machine layout,
Machine
balancing to be
examined
Utility
of
equipment
for
project to be
ascertained
Besides
basic
cost
taxes,
duties, freight,
insurance,
handling
charges,
electrical,
foundation
charges to be
included
DG
sets,
15
infrastructure
facilities
like
power,
manpower,
transport
facilities etc.
Satisfactory past
record of similar
machinery and
supplier to be
ascertained
Pre-operative
Expenses
Contingency
Margin money
for
working capital
5.3
transformers,
testing
equipment to be
included
Cal. of interest Need to be
during
aligned
with
implementation,
implementation
cost of stamp schedule
duty, upfront fee,
legal
and
professional fee
Segregation of
2 to 3% of nonfirm costs is
firm and
usually taken
non-firm costs
25% of ( stock, Need to be
debtors,
other aligned
with
current assets) working capital
less S. Creditors assessment
( for first year)
Working Capital
should be tied up
with the term
loan
Promoters
Capital
Share
Basis and
Documents to be
referred
Shareholding
Pattern, IT returns,
Personal Balance
Sheets
Interest
free
unsecured
Loans
from promoter group
IT returns, Personal
Balance Sheets
Private Equity
Letters of consent,
buyback
agreements,
Credential of parties
16
Comments
Internal Accruals
Suppliers Credit
5.4
Audited Accounts,
ready/
liquid
availability
of
surplus
after
servicing of existing
loans
Agreement
Payment schedule to be
suitably incorporated in the
projections
Govt.
schemes, There should be alternative
their terms
arrangement of funds till
sanction/ release of such
loans, subsidies is made.
In case of more than one
bank tie up with all banks is
a must before release will
start.
Financial Risk
Parameter
Current Ratio (Current Assets/
Current Liabilities)
Promoters Contribution (as % of
cost of project)
TOL/TNW
(Total
outside
liabilities/Tangible Net Worth)
Debt/Equity Ratio
Acceptable level/considerations
1.33
17
managerial
competence/commitment, expertise,
organization structure and system,
experience in industry, credibility,
compliance with statutes, strategic
initiatives, length of relationship etc.
are considered.
Qualitative Factors
Factors like contingent liabilities,
auditors qualifications, accounting
policies as to depreciation; inventory,
adherence to accounting standards
etc. are considered.
Comparison
Borrowers financial ratios are
compared with the standard industry
norms and with the ratios achieved
by peers
Loan Rating by External Credit
Agencies (CRISIL, ICRA, CARE,
FITCH, BRICKWORK etc.) under
Basel II norms
5.5
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
20
Chapter 6
b)
c)
The expenditure has been incurred on a head other than the head
envisaged in the approved plan e.g. more civil works, higher
preoperative expenses, higher soft costs, less expenditure on
equipment and machinery.
6.5 For taking an integrated and fair view the project has to be viewed
from all angles viz. technical, commercial, financial and managerial. A
Chartered Accountant as a professional can play a key role in ensuring
compliance of the stipulations with regard to increasing authorized capital,
raising of promoters equity, unsecured loans, Private Equity, Govt.
subsidies, soft loans etc. A Chartered Accountant is also in a position to
take a view on the fairness of the expenditure incurred under various heads,
engagement of suitable key personnel, outside professionals like architect,
technical consultant etc. for the smooth implementation of the project,
compliance of the terms and conditions of the suppliers of the key
equipment, statutory approvals from various departments of the Govt.,
adherence to the time schedule of implementation etc.
6.6 In an ever-changing business environment, a number of developments
having a significant bearing on the outcome of the project can take place
during the implementation of the project. A fair and integrated assessment
during an inspection goes a long way in factoring in the impact of such
developments and taking necessary corrective steps. Some of the
illustrations are given below(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Particulars
Documents to be
referred
(In
addition
to
Approved Project
Report, Appraisal
Memorandum,
letter of sanction
by Bank, FI)
Check Points
Suggested
Corrective
Action
Land
and
Site
Development
Adequacy of land
for the project
Suitability
of
In
case
of
agricultural land
action
to
23
report
Building and
civil works
Approved Building
Plan
Estimates
by
Architect
Work orders
Built up area,
height of building
to be specified.
Credentials
of
Architect, structural
engineer,
contractor to be
established
Whether Quality of
construction is upto
the standard
Plant
and
Machinery
Competitive
Quotations
Purchase Orders
Invoices
supporting for govt.
taxes
L/C Documents
Correspondence
with the suppliers
Whether
critical
and
major
equipment
suppliers
are
approved
by
Bank/FI at the time
of appraisal
Machine
layout,
Machine balancing
to be examined
Whether additional
equipment
have
been
purchased
and the reasons
thereof
24
convert it for
industrial use
should
be
initiated.
In
case
of
change
in
supplier
of
major
equipment
approval
of
lender should
be taken
Whether
the
capacity,
make,
specifications
of
the
equipment
match with the
approved list
Preoperative
Expenses
Cal. of interest
during
implementation,
cost of stamp duty,
upfront fee, legal
and
professional
fee
Whether there is
any
material
upward deviation
under any head,
reasons to be
analyzed
Contingency
Cost overrun, if
any, should be
within the amount
provided
under
Contingency
Margin
money
working
capital
6.9
for
Description
Promoters Share
Capital
Interest
free
Documents
to
be
referred (In addition to
Approved
Project
Report,
Appraisal
Memorandum, letter of
sanction by Bank, FI)
Shareholding Pattern, IT
returns,
Personal
Balance Sheets
IT
returns,
Personal
25
Check Points
unsecured Loans
from
promoter
group
Private Equity
Internal Accruals
Suppliers Credit
Soft
Loans,
Subsidies
from
Govt.
Balance Sheets
Letters of consent,
buyback agreements,
Credential of parties
Audited/Provisional
Accounts
Agreement
Govt. schemes,
terms
their
It is generally raised
before the release of bank
loan
Only
internal
accruals
readily available in liquid
form
after servicing of
existing loans should be
considered
There should be alternative
arrangement of funds till
sanction/ release of such
loans, subsidies is made.
In case of more than one
bank tie up with all banks is
a must before release will
start.
(b)
(c)
(d)
(e)
26
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Whether the assets of the project have been got adequately insured
against various risks like fire, flood, earthquake etc.
(m)
(n)
(o)
6.11 Format of Financial Inflow and Outflow upto Dec. 31, 2014
Financial Inflow Till Dec.31, 2014
S.
No.
1
2
3
Heads
Equity
Internal Accruals
Unsecured Loans
(Rs. Cr.)
Approve
d Means
of
Finance
5.00
22.83
15.00
27
Amount
raised
till
Oct.31,
2014
5.00
7.00
10.00
Amount
raised
during
Nov.Dec. 14
0.00
0.00
0.00
Cumulati
ve upto
Dec. 31,
2014
5.00
7.00
10.00
4
5
35.00
100.00
177.83
0.00
22.00
0.00
6.75
6.75
0.00
6.75
28.75
1
2
3
4
5
6
7
8
Heads
Site development
Building and civil
works
Purchase
of
corporate office
including
furniture/fixtures
Plant
and
Machinery
Misc.
Fixed
Assets
Preliminary and
Preop. Exp. / IDC
Contingency
Total
(Rs. Cr.)
Exp.
incurred
Nov.Dec. 14
Cumulative
upto Dec.
31, 2014
2.77
16.39
Amount
incurred
till
Oct.31,
2014
2.77
1.79
0.00
2.21
2.77
4.00
15.23
8.70
8.70
120.31
7.42
4.38
11.80
2.50
17.57
1.32
0.16
1.48
3.06
177.83
22.00
6.75
28.75
Approved
Cost of
Project
1 Construction Submit
Permission construction
plan,
machinery
layout to
Associate
Town Planner
(ATP)
Applied to
Associate
Town
Planner
(ATP)
28
ATP
Remarks
Status
Appraised
by Factory
Inspector,
Fire
Department
Const.
Permission
recd.
Construction
plan
approved on
---
State
Pollution
Board
Compliance
with
conditions
prescribed in
the Consent
Order
Consent to
establish is
available
Applied
Approval
recd. On ---
Ministry of Applied
Environment
and Forests
Approval
recd. On --
3 Environment Compliance
Protection with emission
Act
standards (if
applicable) as
prescribed by
the Act
Compliance
with
conditions
prescribed in
the Consent
Order
4 Hazardous Maintenance
Wastes
of Valid
Handling and authorization
Management for
Rules
transporting
and treating
Hazardous
wastes. To
seek
membership
of M/s. GEIPL
Membership PCC
to be
renewed
every 5 yrs.
Waste
disposal
once in a yr.
Applied. In
process.
5 NOC for
construction
of storage
facility for
To be
CCOE
renewed
annually or
three yearly.
Received on
--
Maintenance
of valid
license for
storage and
29
transport of
petroleum
(Furnace Oil)
6 Atomic
Energy
Regulatory
Board
License for
importing
radioactive
source
Once off
Nucleonic Received on
Level
-Gauges for
Reactors
7 Usage of
Electricity
Approval for
availability
and use of
Electricity
supply from
State
Electricity
Board
Once off
Executive
Engineer Electricity
Department
While
Done
actual
usage
necessary
clearance
to be done
Arranged Being
by Boiler, obtained
pipe and
fitting
supplier for
initial
supply
Estimated
Completion
CP
30%
Tank Farm
25%
Underground Water
Tank
10%
30
Time
For % of Physical
Progress
HTM
0%
Utility
0%
Cooling Tower
0%
Water Treatment
Plant
0%
Weigh Bridge
0%
10
ETP
0%
11
Pipe Rack
0%
1
2
Name of
Equipment
Chip Pneumation
Conveyor
PTA Chain-Style
Conveyor
Ordered on
1
2
3
4
5
6
Description
Locatio
n
Plot
Area(
Sq.
Mtrs)
Land
Main building
incl
Mezzanine
Floor
DG Room
Toilet Block
Security
Cabin
Others
31
Built
Up
(Sq.
Ft.)
When
constructe
d
Cost
incurre
d (Rs.)
(b)
(c)
(d)
33
Chapter7
(b)
(c)
By discussing with the rating agency so that the conclusions drawn are
correct;
(d)
undergone a change under the Basel II approach. The guidelines for the
implementation of a new capital adequacy framework issued by Reserve
Bank of India (RBI) in April 2007 allow commercial banks to allocate capital
in relation to the credit risk embedded in their exposures. Such embedded
credit risks are measured through ratings assigned by RBI approved
domestic rating agencies (External Credit Assessment Institutions or ECAIs)
like CRISIL, ICRA, CARE, BRICKWORK and FITCH. Thus under the revised
framework banks can lower their capital allocation to as much as one fifth of
the earlier requirement for rated exposures depending upon the level of
external credit rating.
7.4 Capital Adequacy is the ratio of capital funds (own funds or net worth)
to risk weighted assets. Under the Basel I framework all assets were given a
uniform risk weightage of 100% while the stipulated minimum capital
adequacy ratio (CAR) for a bank was 9%. Under Basel II while the minimum
CAR is unchanged at 9% the risk weights assigned to assets would be
proportionate to the credit risk of these assets.
7.5 As capital is the most expensive source of funding any increase or
decrease in such capital allocation could translate into substantial
savings/additional costs for banks. For instance for exposures to investment
grade (Triple B and above) borrowers a bank could save on cost depending
on the cost of capital for the bank and the underlying credit rating. If however
the borrowers do not opt to get themselves rated the bank concerned would
be required to maintain 50% additional capital; hence its cost could go up.
The banks may at their discretion decide to share the savings achieved
through lower capital allocation with investment grade borrowers; at the
same time given the pressures on profitability banks may be forced to pass
on the additional costs for unrated exposures to their borrowers.
7.6 The revised framework for capital adequacy became effective from
March 31, 2008 for all foreign banks operating in India and Indian banks
having operational presence outside India (12 public sector banks and 5
private sector banks). It have become applicable to all other commercial
banks (except local area banks and regional rural banks) from March 31,
2009.
7.7 External rating can be sought for all types of loans, working capital
facilities, project loans, corporate loans, general purpose loans, working
capital demand loans, cash credit facilities and non-fund based facilities like
letters of credit, bank guarantees. Under RBI guidelines credit rating is not
mandatory. However in order to achieve saving in capital requirement banks
35
(b)
(c)
(d)
Product wise sales (value and volume), showing domestic and export
sales separately.
(e)
(f)
(g)
(h)
36
(i)
List of major clients (top 10) for each product, sales (volume and
value) made to each of them. Companys credit terms offered to
clients.
(j)
(k)
Finance related
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
37
7.11
The assigned rating along with rating rationale is communicated to
the management of the entity for acceptance. The process of rating takes
three to four weeks. If the entity does not find the rating acceptable it has a
right to appeal for a review. Such reviews are generally made only if fresh
inputs are provided. During a review the response from the borrower is
presented to the Rating Committee. If the inputs and/or fresh clarifications so
warrant the committee would revise the initial rating.Non-accepted ratings
are not disclosed by the rating agency.
The ratings once accepted are subject to regular periodic reviews. The
assigned rating may be retained or revised (that is upgraded or downgraded)
following review. The criteria for assigning bank loan ratings incorporate all
the features of the criteria applied for rating bonds and debentures. However
the criteria factor in features such as technical defaults and minor differences
in defining due dates that are specific to bank facilities.
Rating Methodology
Business Risk Analysis
Industry Risk- Macroeconomic factors, Industry Structure, Industry demand
supply, Industry growth prospects , Industry profitability, Market size, Extent
of competition, Extent of cyclical nature, Regulatory Environment
Market Position-Key competitive advantages, Brand Strength, Product
profile, Pricing power, Distribution Network
Operational Efficiency- Cost structure, Technological factors, Access to
resources, Labour Relations, Capacity Utilization, Integration (Forward and
Backward), Flexible production capacities, R & D capabilities
Accounting Quality- Accounting Policies, Reporting and Disclosure,
Integrity of data
Existing and Future Financial Position- Capital Structure, Profitability
Analysis, Debt protection ratios, Off Balance Sheet Obligations,
Liquidity/short term factors, Working Capital Management
Cash Flow Adequacy-Sources and Uses of funds, Cash accruals in relation
to debt payments, Capital expenditure plans, Funding profile, Working
Capital needs
Financial Flexibility -Bank limits Utilization, Cash and marketable securities,
Access to capital markets, Relationship with bankers, Contingency Plan
Ability to defer cap. Exp.
38
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
Low gearing
(p)
(q)
(r)
(s)
(b)
(c)
(d)
(e)
High gearing
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
Low on adherence to norms of corporate governance (nontransparency in accounts, noncompliance with accounting standards,
noncompliance with environment regulations, noncompliance with
various statutes, unsatisfactory dealings with employees, suppliers,
customers, govt., banks etc.)
(n)
(o)
(p)
Outdated technology
(q)
(r)
(s)
AAA
AA
BBB
BB
P1+
P1+
P1+
P1+
P1
P1
P2+
P2
P2
P3+/P3
P4
+ ( plus) and - ( minus) signs are applied from AA to C on the long term
scale and from P1 to P3 on the short term scale to reflect comparative
standing within the category.
The borrowers may get pricing benefits, faster loan approval, better
terms flowing from the capital relief for the bank
Internal
rating/assessment by
banks
Rating by external
rating agency under
Basel II
Security
Transactions
account
All
overdawings,
irregularities in the
in
43
operation
of
the
account are viewed
seriously.
Quality of
management
Leadership position in
the market /Size of
operations
Strong
Leadership
position in the market is
seen as a strong
positive
feature.
Otherwise small size of
operations constraint
the rating.
Weightage is given
keeping in view other
criteria which may at
times outweigh this
aspect.
44
www.rbi.org
www.sebi.gov.in
www.sbicaps.com
www.crisil.com
www.icraindia.com
www.careratings.com
www.fitchindia.com
www.brickworkratings.com
www.smera.in
www.mitconconsultancy.org
www.mottmac.com
www.mca.gov.in
www.cibil.com
www.arcil.co.in
www.txcindia.com
www.ecgcindia.in
www.sidbi.com
www.sbiglobal.in
2.
3.
4.
5.
6.
7.
8.
9.
The recovery of debts due to banks and financial institutions Act 1993
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
47
Important Terminology
(Some of the terms used in the field are briefly explained here, readers
are encouraged to learn more and more such terms)
Base Rate is the minimum rate of interest charged by a bank or financial
institution which is determined keeping in view its cost of funds, net interest
margin and other relevant factors. Depending upon the risk profile of the
borrower, income level in the account, conditions prevailing in the market the
lenders make suitable additions to the base rate to arrive at the rate of
interest to be levied in a particular account.
Average DSCR (Debt service coverage ratio) Profit before interest and
depr. (After tax) during the tenure of loan /interest on term loan plus
repayment obligations.DSCR is calculated to ascertain the capacity of the
project to honour its debt (interest and instalments of loan) obligations.
Average DSCR should be in the range of 1.50 to 2 and should also been
seen on year to year basis during the tenure of loan.
Average security coverage ratio indicates the proportion of fixed assets to
quantum of loans The standard norm for fixed assets of the project is 1.25
times (or more) of the quantum of term loan.
Current Ratio is the ratio of current assets (assets generally convertible into
cash/cash equivalent within one year (like inventories, receivables, advances
etc.) to current liabilities(liabilities payable within one year)(like creditors,
expenses payable, instalments of bank loans etc.). The standard norm for
current ratio is 1.33 which varies from industry to industry. Current ratio
analysis is important part of CMA data submitted to banks and financial
institutions.
TOL/TNW Ratio is the ratio of total outside liabilities (long term liabilities and
current liabilities) to total net worth (share capital,reserves and surplus,
accumulated profits). It should generally not exceed 3.
Credit monitoring arrangement (CMA) involves submission of information
and data ( with assumptions) in prescribed format (which include Profit and
Loss Account, Balance Sheet, Cash Flow, financial ratios) by borrower to the
lender for the purpose of analysis and decision making like sanction of
new/additional credit facility, renewal of existing facility etc. CMA data
provides the basis for the future plans and direction of the company. These
are thoroughly discussed amongst borrower, lender and the practitioner
before finalisation.
Important Terminology
Important Terminology
(b)
(c)
Assets financed either not been purchased or been sold and proceeds
have misutilised;
(d)
(e)
(f)
52
Important Terminology
2.
The account remains out of order for a period of more than 90 days,
in respect of an Overdraft/Cash Credit (OD/CC),
3.
The bill remains overdue for a period of more than 90 days in the case
of bills purchased and discounted,
4.
5.
6.
7.
(Cash
Credit/Over
2.
Doubtful Asset: a doubtful asset is one which has remained NPA for a
period exceeding 12 months.
3.
Loss assets: where loss has been identified by the bank, internal or
external auditor or central bank inspectors. But the amount has not
been written off, wholly or partly.
Capital Adequacy is the ratio of capital funds (own funds or net worth) to
risk weighted assets. Under the Basel I framework all assets were given a
uniform risk weightage of 100% while the stipulated minimum capital
adequacy ratio (CAR) for a bank was 9%. Under Basel II while the minimum
53
(ii)
(iii)
(ii)
(iii)
Important Terminology
obligations between parties are met with and transactions are operated in
terms of the underlying agreement. An Escrow account is typically used for
lending arrangements, project financing, securitisations, mergers and
acquisitions, buy-back of shares, take-overs, litigations, purchase and sale of
land etc.
Mezzanine financing is basically debt capital that gives the lender the rights
to convert it to an ownership or equity interest in the company if the loan is
not paid back in time and in full. It is generally subordinated to debt provided
by senior lenders such as banks
Bridge loan is a type of gap financing arrangement wherein the borrower
can get access to short-term loans for meeting short-term liquidity
requirements. It helps in bridging the gap between short-term cash
requirements and long-term loans. These loans are normally extended for a
period of 12 months. These loans are generally provided at relatively higher
rate of interest and are normally backed by a collateral security like equity,
debentures etc.
Adhoc credit facility is the facility extended for meeting temporary
exigencies like seasonal spurt in business activity, special order etc. to
existing borrowers. Such facilities are extended for a short period of time.
Revolving letter of credit is a single letter of credit that covers multipleshipments over a long period. Instead of arranging a new letter of credit for
each separate shipment, the buyer establishes a letter of credit thatrevolves
invalue (a fixed amount is available which is replenished when exhausted).
Factoring is a financial transaction and a type of debtor finance in which a
business sells its accounts receivable (i.e., invoices) to a third party (called a
factor). Factor gets charges for the facility extended.
Corporate governance is the framework of rules and practices by which a
board of directors ensures accountability, fairness, and transparency in a
company'srelationship with its all stakeholders viz. financiers, customers,
management, employees, government, and the community with an aim to
balance the interests of its stakeholders.
Risk management is the identification, assessment, and prioritization of
risks followed by coordinated and economical application of resources to
minimize, monitor, and control the probability and/or impact of unfortunate
events or to maximize the realization of opportunities.
55
56
General
(a)
(b)
Last three years complete balance sheets and profit and loss accounts
of the concern and its associate/sister concerns, including Sales and
Production Data (with quantity and value) and Groupings/Annexures
to be submitted along with the application.
(c)
(d)
Copy of Application to the Bank with all the Annexures thereto and
earlier Project Report, if any.
2.
Promoters
(a)
(b)
functional
3.
Product
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
4.
Technical Knowhow
(a)
(b)
(c)
5.
(a)
58
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Production capacity calculation (installed and optimum possible) with stage wise balancing of the capacity - keeping in view proposed
no. of shifts working.
(k)
6.
Locational Aspects
(a)
(b)
Reasons for the site selection along with the specific locational
advantages if any
(c)
(d)
(a)
Land
Important points from the purchase agreement including name of
seller, land tenure, cost ofacquisition.
59
Building
Salient particulars regarding built-up area, suitability to the proposed
activity, type of construction, FSI consumed etc. to be included in the
Project Report
Approved plans for construction to be submitted - approval from
competent authorities like FDA in the case of drugs and from
Explosive Department in the case of explosives etc. and how the
stipulated requirements of these authorities are being complied with.
(c)
II
Power
(a)
Power requirements - for individual machinery and for lighting estimate of connected load, maximum demand, power factor and the
arrangements being made for ensuring continuous supply (viz.
separate feeder line, if any)
(b)
Power Rate per unit (if differential then rates applicable for different
periods in the day), duty, minimum demand charges etc. with
supporting document
(c)
(d)
(e)
(f)
Power situation in the area and the justification for D.G. set if required
to be installed.
(g)
III
Water
(a)
(b)
(c)
(d)
IV
Fuel
(a)
(b)
(c)
Compressed Air
Transportation
Transportation arrangements for raw materials and finished goods with cost
details.
VII
(a)
(b)
(c)
(d)
(e)
Raw Materials
(a)
(b)
(c)
(d)
8.
(a)
(b)
(c)
9.
(a)
Demand and Supply estimates - existing and future - for the area in
which the products are to be marketed - with source of the data.
Justification for the proposed sales levels
(b)
(c)
(d)
(e)
10.
Profitability
(a)
(b)
Unit Costing (costing per unit which may be per piece) of the products
backed by quotations for raw materials (with modvat details),
consumables, packing material and other basic inputs. If products
exported, costing break-up in respect of exports to be given.
(c)
along with detailed assumptions for each item of profit & loss
accounts, and schedules/annexure for depreciation - straight line and
WDV -, income tax computation (based on applicable number of shifts
working), loan repayment and interest, Debt Service Coverage Ratio
(DSCR) and Break-Even Calculations
(d)
11.
(a)
(b)
(c)
(d)
12.
Cost of Project
(a)
(b)
(c)
(d)
(e)
(f)
Calculation of contingencies
(g)
13.
Means of Finance
(a)
(b)
(c)
(d)
14.
64
II.
III.
IV.
V.
VI.
VII.
Scope of Assignment
1.
Experience
6.
Constitution
66
(D)
Consultancy charges
Provide all the information requested in the application form. Enclose all the
supporting papers as listed below under F Attach the pay order/Demand
Draft of applicable charges, favouring Bank with the application. Submit the
same to the respective Regional Office / Field General Managers Office
falling in the area. The Regional Office / Field General Managers Office will
forward the application to Project Appraisal Cell, Corporate Office after
scrutiny of the credentials along with their views and recommendations.
(F)
1.
2.
3.
4.
5.
6.
7.
TEV reports prepared in the past (at least last three along with present
status of these projects).
8.
9.
10.
11.
67
(G)
Validity
This empanelment will be valid for two years. The consultant will be required
to apply for renewal of empanelment along with renewal charges, one month
prior to anniversary date of original empanelment/last renewal to the branch.
Failure to do so will require the consultant to pay charges as applicable for
fresh empanelment.
(H)
AND
INSTRUCTIONS
TO
THE
INTENDING
1.
2.
3.
4.
6.
7.
8.
9.
10.
Bank reserves its right to reject any/or all the applications without
assigning any reasons, whatsoever.
12.
Miscellaneous
1.
2.
3.
4.
70
Existing
Limits
Remarks
Number of Months
Gross Sales
(i) Domestic Sales
(ii) Export Sales
(iii) Other Operating Income
TOTAL
Less Excise Duty
Net Sales (1 - 2)
% age rise (+) or fall (-) in net
sales
as compared to previous year
Cost of Sales
(i) Raw materials (including
stores and other items used in the
process of manufacture)
(Amou
nt Rs.
Lakh)
As per Profit & Loss accounts/
estimates for the year ended/ending
31-Mar- 31-Mar- 31-Mar- 31-Mar2011
2012
2013
2014
Curr. Year Following
Last 2
years
actuals
Audite Audite Estimat
Yeard
d
es
proj
1
2
3
4
12
12
12
12
(a) Imported
(b) Indigenous
(ii) Other Spares
(a) Imported
(b) Indigenous
72
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
73
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Liabilities
1.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Current Liabilities
Short-term borrowings
from Banks (include.
bills
purchased,
74
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
75
13.
14.
15.
16.
17.
17a.
17b.
18.
19.
19a.
20.
21.
22.
23.
24.
25.
year)
Term loans
(exclude.
instalments
payable within one year)
Deferred
Payment
Credits
(exclude.
instalments
due within one year)
Term Deposits
(repayable after one
year)
Other term liabilities
TOTAL
TERM
LIABILITIES
(Total of 11 to 16)
Deferred Tax Liabilities
(Net)
Share Application Money
pending allotment
TOTAL
OUTSIDE
LIABILITIES ( 10 + 17 )
Net Worth
Ordinary Share Capital
Preference
Share
Capital
General Reserve
Revaluation Reserve
Other
Reserves
(excluding provisions)
Surplus (+) or deficit (-)
in
Profit & Loss Account
Net Worth
Total Liabilities (18 + 24)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
(Amount
Rs.
Lakh)
As per balance sheet as at
Assets
26.
27.
28.
29.
30.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Current Assets
Cash and Bank balances
Investments
(other than long term
investments)
(i) Government & other
Trustee Securities
(ii) Fixed deposits with
banks
(i)
Receivables other
than deferred &
exports
(including
bills purchased &
discounted by banks)
(ii) Export Receivables
(incldg. Bills
purchased/discounted by
banks)
Instalments of deferred
receivables
(due within one year)
Inventory
(i)
Raw materials
77
31.
32.
33.
34.
35.
36.
37.
37a
.
38.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
78
Current Assets
(i)
(a) Investments in
subsidiary
38.
a
39.
40.
41.
42.
43.
44.
45.
companies/affiliates
(b) Others
(ii)
Advances to
suppliers of Capital
goods & contractors
(iii) Deferred Receivables
(maturity exceeding
one year)
(iv) Debtors more than 6
months
(v) Others
Deferred Tax Assets (Net)
Non-consumable stores &
spares
Other Non-current assets
including dues
from directors
TOTAL OTHER NONCURRENT ASSETS
( Total of 38 to 40 )
Intangible
assets
(patents, goodwill, prelim.
expenses, bad/doubtful
debts not provided
for etc.)
TOTAL ASSETS ( Total of
34, 37, 41 & 42 )
TANGIBLE NET WORTH
(24 - 21- 42)
NET WORKING CAPITAL
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
79
46.
47.
48
(A)
(B)
0.00
80
0.00
0.00
0.00
FORM IV
COMPARATIVE STATEMENT OF CURRENT ASSETS & CURRENT
LIABILITIES
ABC Pvt. Ltd.
Assets
Norms
1
A.
1.
2.
Current
Assets
Raw materials
(incldg. stores
& other items
used in the
process
of
manufacture)
(a) Imported
31-Mar- 31-Mar-13
12
Last
Curr.
year
Year
Actuals Estimates
2
3
31-Mar-14
Following
Year-proj
4
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Months'
consumption
(b)
Indigenous
Months'
consumption
Other
Consumable
spares,
excluding
those included
in 1 above
(a) Imported
0.00
0.00
0.00
0.00
0.00
0.00
Months'
0.00
0.00
0.00
81
Peak
reqt.
As on
5
consumption
3.
4.
5.
6.
7.
(b) Indigenous
0.00
0.00
0.00
Months'
consumption
Stocks-inprocess
Months' cost
of production
Finished
Goods
Months' cost
of sales
Receivables
other
than
deferred
&
exports
(including bills
purchased &
discounted by
bankers)
Months'
domestic
sales
excluding
deferred
payment sales
Export
Receivables
(incldg. bills
purchased/
discounted by
banks)
Months' export
sales
Advances to
suppliers
of
raw materials
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
82
8.
9.
B.
10.
11.
12.
13.
and
stores/
spares,
consumables
Other current
assets
incl.
cash & bank
balances
&
deferred
receivables
due within one
year (specify
major items)
Total Current
Assets
(to
agree
with
item 34 in
Form III )
0.00
0.00
0.00
0.00
0.00
0.00
Current
Liabilities
(other
than
bank
borrowings for working
capital)
Creditors
for
purchase of raw
materials, stores
& consumable
spares Months'
purchases
Advances from
customers
Statutory
liabilities
Other
current
liabilities (specify
major items)
Short
Term
Borrowings,
unsecured loans,
83
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
14.
dividend
payable,
instalments
of
TL, DPG, public
deposits,
debentures etc.
TOTAL
CURRENT
LIABILITIES
(to agree with
subtotal B in
Form III )
ABC Pvt. Ltd.
ASSETS
.
2.
3.
.
5.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
84
6.
0.00
0.00
0.00
7.
0.00
0.00
0.00
8.
Maximum
permissible
bank finance (Item 6 or 7
whichever is lower)
Excess
borrowings
representing short fall in
NWC (4 - 5)
0.00
0.00
0.00
0.00
0.00
0.00
9.
FORM VI
FUNDS FLOW STATEMENT
ABC Pvt. Ltd.
Assets
1.
2.
Sources
(a) Net Profit (after tax )
(b) Depreciation
(c) Increase in capital
(d) Increase in term
liabilities
(includg.
Public
Deposits)
(e) Decrease in
(i) Fixed Assets
(ii) Other non-current
assets
(ii) Intangible assets
(f) Others
(g) Total
Uses
85
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
3.
4.
5.
6.
7.
8.
Break-up of (4)
(i)
Increase/ Decrease
Raw Materials
(ii)
Increase/ Decrease
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
in
0.00
0.00
0.00
in
0.00
0.00
0.00
86
(iii)
(iv)
(v)
(vi)
Stocks-in-process
Increase/ Decrease
Finished Goods
Increase/ Decrease
Receivables
(a) Domestic
(b) Export
Increase/ Decrease
Stores & Spares
Increase/ Decrease
Other Current Assets
Total
in
0.00
0.00
0.00
in
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
in
0.00
0.00
0.00
0.00
0.00
0.00
in
87
Usance
Total
FOR ILC
I
1
2
3
4
5
II
1
2
III
1
2
3
4
IV
Rs. in
Crore
2014-15
Bid Bond Guarantee
Projected sales/contracts for the ensuing
year
Projected bids to be submitted in one year
Average monthly bids
Anticipated period of BG for bids
Quantum of BG limit (03 x 04 x10%)
Bank Guarantee in lieu of Security
Deposit
Projected amount of security deposit
Quantum of BG limit in lieu of Security
Deposit
Bank Guarantee for Mobilisation
Advance
Expected amount of Mobilisation Advance
in one year
Average monthly mobilisation
Period of retention of mobilisation advance
Quantum of BG limit for mobilisation
advance
Bank Guarantee for release of retention
88
Rs. in
Crore
2015-16
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1
2
3
4
V
1
2
3
VI
1
2
3
4
money
Anticipated holding of retention money by
various buyers
Average monthly retention
Period of retention money
Quantum of BG limit for release of retention
money
Performance Guarantees
Projected performance guarantees for one
year
Taken as 15% of Service Income
Service Income treated as 60% of Turnover
Period of performance guarantees
Quantum of Performance Guarantee limit
Bank Guarantee for Duty Exemption
Projected Duty exemptions for one year
Average duty exemption available per
month
Period of duty exemption BG
Quantum of BG limit for duty exemption
Total Bank Guarantee requirement for next
one year
(I + II + III + IV + V + VI)
89
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
*Reference Year:
COL
UMN
C
Good
Cr
os
s
COL
UMN
D
Aver
age
Cr
os
s
COL
UMN
E
Poor
Good
Aver
age
Poor
Abov
e5&
upto
8
years
Abov
e3&
upto
5
years
3
years
&
Belo
w
Good
Aver
age
Poor
Aver
age
xxxx
xxxx
xx
xx
xxxx
2.0 xxxx
xx
xx
xxxx
xxxx
xx
xx
Maximum Marks
Poor
Good
90
1.0
20
xxxx
xx
xxxx
xx
xxxx
xx
Cr
os
s
0.0
91
Cr COLU
oss MN
E
Poor
Cr
oss
Heavy
Comp
etition
Poor
Poor
Poor
xxxxxx
xx
0.5
0
xxxxxx 0
xx
xxxxxx
xx
10
Marks Cross
5
4
3
2
0
Parameter
More than 8%
More than
6.5% to 8%
More than 5%
to 6.5%
More than
3.5% to 5%.
More than 1%
to 3.5%
1% and below.
92
Marks Cross
Lowest Risk
Score
Low Risk
Score
Medium Risk
High Risk
Score
Highest Risk
score
Caution
Score
7.5
6.0
4.5
3.0
2.0
0
Parameter
Indicator
More than 5%
Lowest Risk
Score
7.5
Net Sales
More than 4%
to 5%
Low Risk
Score
6.0
More than 3%
to 4%
Medium Risk
4.5
Profitability %
(PAT*100)/Net
sales
More than 2%
to 3%.
High Risk
Score
3.0
More than 1%
to 2%
Highest Risk
score
2.0
1% and below
Caution
Score
Reference
Year 31.3.
(c)
Solvency
(TOL/TNW)
All
other
borrowers
Marks
Indicator
2 and below
Tangible Net
Worth (TNW)
Total Outside
Liabilities (TOL)
TOL/TNW
31.3.
Marks Cross
Traders
Marks Cross
10
2
and
below
10
2.01 to 4.00
2.01
4.00
to
4.01 to 5.00
4.01
6.00
to
5.01 to 6.00
6.01
9.00
to
6.01 to 7.00
7.01
above
9.01
&
above
&
Cross
93
Limits
over
Rs.6.0
crores
Marks
Minimum
acceptable
Current ratio (1.15 or
1.33)
1.33
&
above
1.25 to
<1.33
1.20 to
<1.25
1.15 to
<1.20
Less than
1.15
10
Current Ratio
Cross
8
6
3
0
31.03.
Limits
up to
Rs.6.0
crores
1.25
&
above
1.15 to
<1.25
1.13 to
<1.15
1.10 to
<1.13
less than
1.10
Marks
Cross
10
8
6
3
0
Parameter
Marks
7.5
6.0
Cross
4.5
2.0
0
Parameter
Upto 1.50 months
Marks Cross
2.50
above 1.50
upto 2
months
above 2.00
upto 3
months
above 3.00
upto 6
months
above 6.00 months
2.00
94
1.50
1.00
0
Parameter
Marks Cross
2.50
2.00
1.50
1.00
0
Parameter
Marks
Indicator
2.50
Receivables
Collection period
Receivables x 12
Net Sales
2.00
1.50
1.00
Above 6 months
Parameter
Above 2.00
Marks
2.50
2.00
1.50
1.00
0.50
0
Reference
Year
31.3.
95
Cross
Cross
SSI advances
Marks Cross
All other
advances
Marks Cross
(Existing TLs
& where TL
& working
capital limits
co-exists)
<=2.00 Lowest
risk
2.50
<=1.50 Lowest
risk
2.50
2.00
>1.50 to 1.75
low risk
2.00
1.50
>1.75 to 2.00
Medium risk
1.50
1.00
>2.00 to
2.25High risk
1.00
0.50
>2.25 to 2.50
Highest risk
0.50
> 2.50
Caution score
Long Term
Liability
Net worth
*Net worth = Share Capital + Free Reserves intangible assets like patents, good
will preliminary & pre-operative expenses, accumulated losses and bad & doubtful
debts not provided for.
(i) Financial Risks not transparent (Negative Marks)
Parameter
The impact of auditors comments and off balance sheet
on net worth/profitability is more than 30%.
The impact of auditors comments and off balance sheet
on net worth/profitability is more than 15%.
The impact of auditors comments and off balance sheet
on net worth/profitability is more than 5%
The impact of auditors comments and off balance sheet
on net worth/profitability is less than 5%
Marks
items
items
items
items
Cross
(-) 5
(-) 3
(-) 2
0
Marks
total forex
(-) 5
(-) 4
96
Cross
(-) 3
(-) 2
FINANCIAL
FACTORS
RISK MAXIMUM
SCORE
SCORE
SECURED
MAXIMUM SCORE
FOR APPLICABLE
POINTS
50
(D) OPERATIONAL EXPERIENCE:
PARAMETER
COLUMN - A COLUMN - B
Submission of Most
Regular
stock
regular
with delay
statement/QIS/
renewal
proposal
Allotted score
3
2
Repayment of Most
Regular
interest
and regular
with delay
instalment
Allotted score
4
3
PARAMET
ER
Collateral
Security
coverage
(incl.
Govt.
guarantee,
surplus 2nd
charge)
Allotted
score
Personal
guarantee
COLUMN - C
Irregular but
submitted
COLUMN - D
Highly
irregular
and not
submitted
1
Irregular but
paid
0
Over dues
are
persisting
0
COLUMN - A
COLUMN - B
COLUMN - C
COLUMN - D
Above 50%
25%
50%
Below 25%
No
collateral
security
Available
----
------
Not
available
to
97
----
-----
Liability not
exceeded
DP or limit.
Adhoc
/excess
drawals are
adjusted as
per sanction
terms.
Meeting all
commitment
s on time
and
no
BG/LC
devolvement
.
Liability
exceeded
limit
occasionall
y but within
DP.
Adhoc/exce
ss drawals
are mostly
adjusted as
per
sanction
LC/ BG
devolved
but
paid
with-in 15
days from
the date.
Liability
exceedded
frequently
but
regularized.
Adhoc/exce
ss drawals
adjusted
with some
delay.
LC/BG
devolved
but
paid
after
15
days.
Liability
exceeded
without DP
frequently.
Adhoc/exce
ss drawals
adjusted
after long
delay.
LC/BG
Devolveme
nts not paid.
allotted
20
98
Normalized
marks
Col.3
------X
Col.1
Col.2
20
10
50
20
100
Applicable
Spread
Above 95%
A+++
Prime
>90 to 95%
A++
Excellent
>80 to 90%
A+
Very good
>70 to 80%
A
Good
>60 to 70%
B
Satisfactory
>40 to 60%
C
Average
Unacceptable Credit Ratings:
40% & Below D
Poor
NPA
D1
Substandard(SSA)
accounts are D2
Doubtful (DA)
classified
under
this
D3
Loss (LA)
rating
category
99
Spread as
applicable
to
C
rating shall
be applied
Cross
Interest
applicable
Present
Proposed
Date:
CRA
Rating
Rate of
Interest
100
Date:
Feedback Page
This is the first edition of the handbook by the Committee. As such, there is
scope for its improvement. We intend to make it as useful as possible in its
present format. The committee, therefore, hopes to keep updating this
handbook on a regular basis to make it functional.
We solicit comments and suggestions from practitioners and other to improve
the usefulness of the Handbook. In particular, we welcome the views of the
practitioners on enhancement of their knowledge base.
Your valuable inputs may be sent to [email protected].
We are thankful to CA. Subhash Nathuramka for preparing the draft of this
book on Project financing as an area of practice for SMPs.
Secretary,
Committee for Capacity Building of CA Firms and Small & Medium
Practitioners (CCBCAF&SMP)
The Institute of Chartered Accountants of India (ICAI),
ICAI Bhawan, First Floor, Administrative Block, A-29, Sector-62, Noida,
Distt.- Gautam Budh Nagar (U.P), Pincode-201309
E-mail : [email protected]