667bank Finance
667bank Finance
667bank Finance
PROJECT FINANCE: Loan arrangement in which the repayment is derived primarily from the
project's cash flow on completion, and where the project's assets, rights, and interests are held as
collateral/Security.The financing of long-term infrastructure, industrial projects, etc. based upon
a non-recourse or limited recourse financial structure where project debt and equity used to
finance the project are paid back from the cashflow generated by the project. Project finance is
especially attractive to the private sector because they can fund major projects off balance sheet.
A Greenfield project is one which is not constrained by prior work. It is constructing on unused
land where there is no need to remodel or demolish an existing structure. Some examples of
Greenfield projects are new factories, power plants or projects which are built from scratch.
Those facilities which are modified/ upgraded are called Brownfield projects.
Term Loan- This type of loan is normally given to the borrowers for acquiring long term assets
i.e. assets which will benefit the borrower over a long period (exceeding at least one year).
COD:(Commercial operation Date) It is the date on which the concern start its commercial
operation.
Moratorium date: The period between the last disbursements till date of first installment
payment.
Door to door tenure: The period from date of first disbursement till the last date of repayment.
IDC: Interest during construction is the Interest on term loan charged during the construction
period of a particular project.
Upfront Fees: It is the fees paid chargedby banksfor sanctioning of loan. It is normally
considered at 1% on the term loan.
Cost & Means -
Lease Deed – Mortgage clause – in case of any loan, the leasehold property may be mortgaged to
bank from which loan is taken.
Land documents include Sale deed, Jamabandi, mutation, patta, Trace map, Non encumbrance
certificate, land revenue receipt, etc.
Land – Title Investigation Report (TIR) – from banks empanelled lawyer.- Report about creation
of charge on the property.
Land development cost – cost of land filling, land cutting, boundary wall, internal roads, factory
gate, etc.
Civil – Civil cost of the project, which includes factory shed, office buildings, staff quarters
The civil cost estimate must normally be from an architect,approved valuer or engineer and as
per PWD cost estimate.
Plant & machinery- depending on product & capacity, we get the list of machineries and then
get the quotations& proforma invoices.We calculate the cost in a format where we first take
Basic rate then taxes, freight inward, Packing charges, Insurance charge after totaling we include
the cost of installation.
Misc. Fixed assets-which are notdirectly used for manufacture but will be required by the
concern. It may include furnitures and fixtures, computers, vehicles, DG sets, fire
fightingequipments, etc. Quotations or estimates are taken from clients.
Pre-operative expenses includes such expenses such as IDC, upfront fees, preliminary expenses,
trial run expenses, etc. incurred before commercial operation.
Contingency: contingency is generally calculated as a percentage of civil, P&M, MFA cost and is
taken in order to account for increase in cost of project due to contingent events like inflation.
Margin money of working capital. The promoter’s margin on initial period’sworking capitalis
included in the project cost and is funded by bank under TL.
Means of Finance:
Term Loan
Promoters Contribution
TYPES OF LOAN
TERM LOAN
Banks lend money in this mode when the repayment is sought to be made in fixed, pre-
determined installments. This type of loan is normally given to the borrowers for acquiring long
term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one
year). Purchases of plant and machinery, constructing building for factory, setting up new
projects fall in this category. Financing for purchase of automobiles, consumer durables, real
estate and creation of infra structure also falls in this category. Term Loans are the counter parts
of Fixed Deposits in the Bank.
This account is the primary method in which Banks lend money against the security of
commodities and debt. It runs like a current account except that the money that can be
withdrawn from this account is not restricted to the amount deposited in the account. Instead,
the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in
excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand.
These are, therefore, counterpart of demand deposits of the Bank.
Book debts of accounts receivables arise out of sale of goods or service on credit. Because of
credit sales, the seller’s available working funds become inadequate to support the scale of
operation necessitating Bank finance. The system of financing credit sales or receivables by bill
finance that is purchases or discount of bills is quite common.
But another mode of financing credit sales is by way of cash credit against the book debts.
Under this system the bank allows the borrower to draw to the extent of the limit sanctioned to
him, provided the drawings are backed by adequate receivables.
Advance against book debts is made by way of cash Credit or Overdraft. The margin for
advances is normally in the range of 30-40% of book debts accepted security. The borrowers
should submit the monthly statement showing the outstanding book debts party wise. The
statement should be scrutinized with reference to the age of book debts and drawing power.
Ad-hoc limit is a limit fixed by the bankers to its existing client in the following cases:
OVERDRAFT
The word overdraft means the act of overdrawing from a Bank account. In other words, the
account holder withdraws more money from a Bank Account than has been deposited in it. The
difference between OD & CC is very subtle and relates to the operation of the account. In the
case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the
value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the
other hand, is allowed against a host of other securities including financial instruments like
shares, units of mutual funds, surrender value of LIC policy and debentures etc. Some
overdrafts are even granted against the perceived "worth" of an individual. Such overdrafts are
called clean overdrafts.
BILLS DISCOUNTING
Bill discounting is a major activity with some of the smaller Banks. Under this type of lending,
Bank takes the bill drawn by borrower on his (borrower's) customer and pay him immediately
deducting some amount as discount/commission. The Bank then presents the Bill to the
borrower's customer on the due date of the Bill and collect the total amount. If the bill is
delayed, the borrower or his customer pays the Bank a pre-determined interest depending upon
the terms of transaction.
FACTORING:
The selling of a company account receivables, at a discount to a factor that then assumes the
credit risk of the account debtors and receives the cash as the debtors settles their account. There
is no need to open the LC. There is a specialize Financial Institutions, such as SBI Factors, Global
Credit Finance, IFCI Factors which gives us services of Factoring.(Domestic as well as
International)
LINE OF CREDIT:
Arrangement between a Financial Institutions and the customer that establishes a maximum
loan balance that the bank will permit the borrower to maintain. The borrower can draw down
on the Line of Credit at any time as long as he/she does not exceed the maximum set in the
agreement.
PACKING CREDIT:
This is basically a loan or advance extended to the exporter by the bank on the basis of :
A standard commercial letter of Credit is a document issued by a buyers Bank. The bank gives
guarantee on behalf of its client to supplier for supplying of material or good subject to that
invoices, bills of lading, shipment documents will come directly to the bank. Bank will make lien
on the goods and will stand as lender/creditor in the books of the client (buyer).
In BG the bank guarantees a sum of money to a beneficiary. The sum is only paid if the
opposing party does not fulfill the stipulated obligations under the contract. This can be used to
essentially insure a buyer or seller from loss or damage due to non performance by the other
party in a contract.
Another way to classify the loans is through the activity being financed. Viewed from this
angle, bank loans are bifurcated into:
The Government of India through the instrument of Reserve Bank of India (RBI) mandates
certain type of lending on the Banks operating in India irrespective of their origin. RBI sets
targets in terms of percentage (of total money lent by the Banks) to be lent to certain sectors,
which in RBI's perception would not have had access to organised lending market or could not
afford to pay the interest at the commercial rate. This type of lending is called Priority Sector
Lending. Financing of Small Scale Industry, Small business, Agricultural Activities and Export
activities fall under this category. This is also called directed credit in Indian Banking system.
• Financing Priority Sector in the economy is not strictly on commercial basis as not only the
general approach is liberal but also the rate of interest charged on such loans is less. Export
finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian
corporates. Part of the cost of this concession is borne by RBI by means of refinancing such loans
at concessional rate. Indian Banks, therefore, contribute towards economic development of the
country by subsidizing the business activities undertaken by entrepreneurs in the areas which
are consider "priority sector" by RBI.
Commercial Lending
It is the mainstay of Indian Banking - its bread and butter activity. Although historically, this
activity had been relegated to a secondary position as banks were driven by the desire to excel
themselves in what is known as "priority sector banking" yet it is this part of their loan portfolio
which has kept them afloat and help meet the costs. This activity survived despite a number of
restrictions imposed on it in the past. With financial sector reforms, the focus has shifted from
"priority sector banking" to commercial lending. Today many banks focus on this activity for
improving their bottom lines. Fresh and innovative products are being launched to facilitate the
corporate customer who forms the core of this business. There is big competition among banks
to secure bigger share of this business. At present, commercial loans are available for practically
any kind of activity and also for both long and short tenures. Based on customer profile, these
loans are of two types :
• Corporate Loans
• Retail Loans
Corporate Loans
These loans are meant for corporate bodies (and bigger ones among other entities like
proprietorships, partnerships and HUFs) engaged in any legal activity with the object of making
profit. Banks lend to such entities on the strength of their balance sheet, the length of cash cycle
and depending upon the products available with individual banks.
Banks analyze the audited balance sheets of the prospective borrowers to appraise their needs as
also the capacity to absorb credit. Prospective borrowers are required to furnish their financial
details in the form of CMA data to the bankers and file an application for the loan. This
application is processed and a line of credit (limit) allowed to the borrower. The overall limit
(line of credit) is structured into various type of facilities or accounts - each with its own limit
within the overall line of credit - depending upon the needs of the customer. The borrower is
then asked to execute Bank's standard documents, surrender the security or title to the security
to the Bank and open suitable accounts (mostly Cash Credit accounts with different underlying
securities) with the Bank. Thereafter the borrower can operate these accounts within the limit
(line of credit). are many type of loan products available for corporate clients in India. The loans
are structured depending upon the need of the client and the product available with the lending
Bank.
Retail Loans
This type of lending is meant for very small entrepreneurs as well as individuals who are
engaged in gainful commercial activity and have the capacity to repay the loan. Loans are given
on the strength of the means of the borrower with an eye on the repaying capacity. The latter is
judged through the cash streams (income) available with the borrower for repayment of the
loan.
Most banks nowadays have a product for financing the purchase of automobiles and other
consumer durable items. The quantum of loan is generally determined by the repayment
capacity of the prospective borrower. This in turn, depends upon the monthly income. Most
Banks have their own method to calculate the maximum monthly repayment capacity of a
person. Thereafter, a loan for which Equated Monthly Installment (EMI) is within this capacity
is considered the outer limit for a person. The bank will be glad to finance to this extent for the
purchase of an automobile or any other consumer durable item.
Most Banks judge the monthly income with reference to either the latest salary certificate from
the employer ( in case of employees) or the last year's income tax return (in case of self
employed persons). Other methods are also employed to appraise the maximum limit
considered desirable for a person.
Sources of Finance
A basic principle is that short-term financial needs should be met from short-term sources and
long-term financial needs from long-term sources. Moreover a proper balance between loan
funds and own funds has to be maintained.
Long-Term
• Public deposits
• Asset Securitization
• Lease financing
CMA
It is the format used to monitor data and analyse the credit rating of any customer. it is generally
used by Banks and other financial institutions, for the purpose of granting the Cash Credit
Working capital limit.it is a systematic format which reveals the actual position of the customer
in relation to his credit rating based upon study the balance sheet and other financial statements
for actual year, an estimated running year and two projected year.
In other words it is the detailed explanation of the balance sheet and other financial ratios of the
Firm or any other Body corporate. it is a detailed study of the financial position of the customer
and is based on the Tandon committee report for the purpose of grant of working capital.
The CMA format is essentially based on some set views about permissible credit limit for
working capital - such as a certain percentage of current assets should be funded from current
liabilities (other than short term bank finance) and the difference between the two i.e. current
assets - (current liabilities - short term bank finance) was dubbed working capital gap. This gap
needs to be met by a) long term sources of the borrower and b) short term bank finance. Though
RBI has permitted commercial banks to assess the credit requirement of borrowers by any other
method (and many banks do emply cashflow shortfall funding) CMA formal continues to be de
riguere.
Installed capacity:Ask the client about No.of shifts per day , working hours per shift ,No.of
working days in a year (generally 330 days is taken) , installed capacity of machines to produce
a products.Sale value per unit (MT , pc)).The machine whose capacity is minimum are taken as
installed production per day.
Production: In a greenfield project we will have to ask the client when the concern will start its
operation. Utilization capacity per year is estimated in %.and on the basis of their utilization
capacity and installed yearly production, the production of a product every year is ascertained
.On the basis of production we can calculate now raw material consumed , stockof finished
goods ,sales , consumables.
Raw material:To know how much Raw material is consumed. On the basis of production how
much raw is required to produce a product is estimated. Ask the client about Raw Material
cost.How much Raw material is consumed and purchased is ascertained.
Sales: To estimate the Sales stock, of Finished goods shoud be calculated which is calculated on
the basis of production and we have to also estimate Holding period for stock.
Power::To calculate power we have to ask the client Load Sanction Letter and we have to know
whats the current power rate.
Man power::We have to estimate the administrative staff requiredsuch as Accountant , Office
Executives and the workers required in a factory i.e those directly linked to production such as
Machine operators ,Electrician.And their salary/WEages is to be estimated.
Operating profit
Income tax
Security
The securities are of mainly of two Types-
1. Primary
Primary security is the asset created out of the credit facility extended to the borrower and / or
which are directly associated with the business / project of the borrower for which the credit
facility has been extended. In the case of term loan, primary security is Land, factory building,
Plant & machinery, assets.In the case of working capital loan , "stock and book debts" is
considered as primary security.
2. Collateral
Collateral security is any other security offered for the said credit facility. For example,
hypothecation of jewellery, mortgage of house, etc.
Ratios
Current ratio may be defined as the relationship between current assets and current liabilities.
This ratio is also known as "working capital ratio". It is a measure of general liquidity and is
most widely used to make the analysis for short term financial position or liquidity of a firm. It
is calculated by dividing the total of the current assets by total of the current liabilities.
Components:
The two basic components of this ratio are current assets and current liabilities. Current assets
include cash and those assets which can be easily converted into cash within a short period of
time, generally, one year, such as marketable securities or readily realizable investments, bills
receivables, sundry debtors, (excluding bad debts or provisions), inventories, work in progress,
etc. Prepaid expenses should also be included in current assets because they represent payments
made in advance which will not have to be paid in near future.
Current liabilities are those obligations which are payable within a short period of time
generally one year and include outstanding expenses, bills payable, sundry creditors, bank
overdraft, accrued expenses, short term advances, income tax payable, dividend payable, etc.
However, some times a controversy arises that whether overdraft should be regarded as current
liability or not. Often an arrangement with a bank may be regarded as permanent and therefore,
it may be treated as long term liability. At the same time the fact remains that the overdraft
facility may be cancelled at any time. Accordingly, because of this reason and the need for
conversion in interpreting a situation, it seems advisable to include overdrafts in current
liabilities.
TOL/ TNW -
Total net worth is the total of all of the assets (stocks, bonds, bank accounts, home equity, real
estate, personal property, business receivables, notes receivable, etc.) minus the total of the
liabilities (outstanding loans owed, credit card balances, taxes payable, bills payable, etc.)
Total net worth can be a useful tool to measure the financial progress of the business from year
to year.
1. ADJUSTED TNW
As the adjusted net worth represents a measure of value of a company, it is a useful way to
compare the company's relative value to other companies. The word "adjusted" in the phrase is
a clue that it is meant to reflect economic value which can be compared between multiple firms. It
is common to standardize values that are generated from the financial statements to use in
analyzing an industry. Then a particular company's relative value can be compared within that
industry.
The internal rate of return on an investment or project is the "annualized effective compounded
return rate" or discount rate that makes the net present value (NPV) of all cash flows (both
positive and negative) from a particular investment equal to zero.
In more specific terms, the IRR of an investment is the discount rate at which the net present
value of costs (negative cash flows) of the investment equals the net present value of the benefits
(positive cash flows) of the investment.
Internal rates of return are commonly used to evaluate the desirability of investments or
projects. The higher a project's internal rate of return, the more desirable it is to undertake the
project. Assuming all projects require the same amount of up-front investment, the project with
the highest IRR would be considered the best and undertaken first.
Definitions
A calculation of the sales volume (in units) required to just cover costs. A lower sales volume
would be unprofitable and a higher volume would be profitable. Break-even analysis focuses
on the relationship between fixed cost, variable cost (or cost per unit), and selling price (or
selling price per unit).
Fixed Costs
Cost that do not change when production or sales levels do change, such as rent, property tax,
insurance, or interest expense. The fixed costs are summarized for a specific time period
(generally one month).
The price that a unit is sold for. Sales Tax is not included the selling price and sales taxes paid is
not included as a cost. The Selling Price times the number of units sold equals the Total Sales.
The sales volume (express as units sold) at which the company breaks even. Profits are Zero at
the break even point. The break even point is calculated by the following formula: Break Even
Point = Fixed Costs / (selling price-variable costs).
One of major benefit of analysis of break even point, with this, we can calculate exact amount of
profit of business whether they are over or below the sale than break even point.
Without finding break even point, we can not find margin of safety.
4. Debt/Equity Ratio
DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s
Capital (Equity).
5. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which
indicates the ability of an enterprise to meet its liabilities by way of payment of installments of
Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of
the repayment schedule in respect of the Term Loans raised for a project.(The Ideal DSCR Ratio is
considered to be 2 )
Leveraging –
Gearing - Computed as the ratio of the borrowers Total Debt to his Tangible Networth • The
higher the gearing the more leveraged a borrower is and the lesser cushion he has for adverse
circumstances.
Important Coverage ratios- Debt Service Coverage ratio = PAT+ Depn+ Amortisation+ (INTT)
Loan Repayment + (INTT).
DSCR measures ability to service debt of the borrower.DSCR should be calculated for all
borrowers irrespective of Source of Term Loan
Cashflow - Cash is king, Importance of cash flow, Need to measure how much cash flow does a
firm generate internally from operations, Internal cash flow generation turning negative is the
first sign of operating distress, particularly if it recurs.
Internal cash flow is a combination of three parameters - sales growth, operating profitability
and working capital. Internal cash flow measures need to be interpreted in conjunction with
leverage and working capital requirements and measures of financial flexibility of firm.
1 To verify the sanction of terms, issue of the sanction letter to the borrower.
2 To start the documentation for the loan sanctioned as per the documents mentioned in the
sanctioned note.
4 Filing of charges ( form 8 & 13 ) in the case of a company ( Hypothecation of Vehicle, Current
assets etc)
5 Recital of documents in the document execution register ( entering & witnessing the execution)
10 Processing Fee, valuation charges advocate fee to be collected for loans other than cash credit,
TL Particularly Housing Loans, Vehicle, loans, and Consumer loans, Personal loans.
b] Cheque of facility (Employer to giver an under taking for deducting installments from the
salary & payment to the bank
c] Standing instructions