Vous êtes sur la page 1sur 71

A PROJECT REPORT ON “CREDIT APPRAISAL”

OF CREDIT PROPOSALS
AT J&K BANK, CORPORATE HEADQUARTERS (SRINAGAR)
IN THE FULFILMENT OF THE REQUIREMENT FOR THE MASTERS
DEGREE IN Business Administration

Guided and supervised by Faculty


Guide
Mohammad Shahid Drabu Ms.
Aprajita Das Gupta
Manager Foreign Exchange
J&K Bank
.

Department, Foreign Exchange, J&K Bank

Submitted by
WASEEM RAJA
MBA – 2009-11
A3010909106

1
AMITY GLOBAL BUSINESS SCHOOL
NOIDA SECTOR # 44, 201301

CERTIFICATE

It is Certified that the project report entitled “Credit


Appraisal” is authentic work carried out by Waseem Raja in
partial fulfilment of the award of Masters Degree in Masters
in Business Administration

He has completed this project report within the stipulated time


period as prescribed by the University.

The data mentioned in the report was obtained during the


unfeigned work done and was collected by me. Any other data
or information in this report, which has been collected or
borrowed from outside agency, has been duly acknowledged.

2
CONTENTS
SECTION A: TERM LOANS AND ADVANCES & STATUTORY
PROHIBITIONS:
a. Introduction: Term Loans
b. Maturity profile
c. Standards of margin
d. Statutory And Other Restrictions
SECTION B: TERMS USED IN CREDIT GRANTING DECISIONS
a. Securities
b. Banking facilities
c. Capital Structure
d. Banking arrangements
e. Ratio analysis
f. Financial statements
g. Credit risk rating framework
h. Subjective parameters configuration
SECTION C: LIVE PROJECT APPRAISAL OF ARYAN POWER PROJECT
LTD
a. General Information about the proposal
b. Borrower Information
c. Capital Structure & Shareholding Pattern
d. Board of Directors
e. Financials of APPL
f. Brief about the promoter company
g. Present Proposal of the Company
h. Means of Finance & cost of Project
i. Internal Rating
j. Industry & Swot Analysis
k. Risk Analysis & Mitigation
l. Sensitivity analysis
m.Recommendation

SECTION D: ANNEXURE

BIBLIOGRAPHY

3
ACKNOWLEDGEMENT

First of all I must thank Almighty Allah who is behind my every success in
life and without his blessings this project would not have been completed.
I passionately give my sincere thanks to the organization of J & K Bank for
providing me this grateful opportunity for doing this project.

I would like to express my profound gratitude to my supervisors


Mohammad
Shahid Drabu ( Manager Foreign Exchange J&K Bank) for
their precious assistance, guidance, untiring advice and encouragement.

I sincerely thank all the members of the Foreign Exchange department for
their generous help in my project. I am also thankful to all staff members
for making me feel part of the organization and made me to work with all
my sincerity and potential.

I am grateful and gratified to the respected AMITY GLOBAL BUSINESS


SCHOOL branch of Amity University, for grooming me into a true line of
work.
Before concluding i doubt if we could have completed this project work,
but with the grace of Allah.

4
INTERNSHIP PROGRAMME

The internship programme is part of the mandatory course


completion required for the Masters programme in Business
Administration at Amity Global Business School branch of AMITY
UNIVERSITY. Students are required to undertake Summer
(practical) training of 8 weeks in any company at the end of the
second semester. This provides students with the opportunities
to apply financial concepts and techniques, which they learn in
the classroom and the remaining semesters becomes more
goals oriented and meaningful.

As part of the internship programme I have had the opportunity


and pleasure to intern at J&K BANK Corporate headquarters, M
A Road, Srinagar and study the live project appraisal of Aryan
Power Project Ltd.

5
EXECUTIVE SUMMARY

The economic development of any country depends on the extent to


which its financial system efficiently and effectively mobilizes and
allocates resources. There are a number of banks and financial institutions
that perform this function. Financial institutions provide medium- and
long-term financial assistance and act as catalytic agents in promoting
balanced development of the country. They are engaged in promotion and
development of industry, agriculture, and other key sectors. They also
provide development services that can help in the accelerated growth of
an economy. The industrial growth intern depends upon the success of
new projects. The success of the new projects depends largely upon the
quality of the project appraisal.

The main objective of the study is to understand the actual procedures


and steps involved in project appraisal. The report carriers in depths study
of financing appraisal with relevance to project financing.

The whole part of this study discusses what project appraisal is, various
steps involved in project appraisal, the procedure adopt by banks /
financial institutions in project appraisal.

6
COMPANY PROFILE

Jammu & Kashmir Bank


History:

Traditional moneylenders till 1920-30 performed entire banking in the state of


Jammu & Kashmir at exorbitant interest rates. At the same time some banks
functioned but at a very limited scale, such as Punjab National Bank, Grindlays
Bank and Imperial bank of India. The role of these banks was reduced to the
acceptance of deposits, as they could not grant loans and advances to the
people of the state owing to the statutory limitations. Under this scenario banks
could not ameliorate the financial and social position of people of the State. To
overcome this critical situation the then Maharaja of State conceived an idea of
setting up of a State Bank in the state. After prolonged exercises and
deliberations the assignment for establishment of “The Jammu & Kashmir Bank
Limited” was given to the late Sir Sorabji N Pochkhanwala, the then Managing
Director of the Central Bank of India. Mr. S. N.Pochkhanwala formulated a
scheme on 24.09.1930, suggesting establishment of a Semi State Bank with
participation in capital by State and public under the control of State
Government. Thus the Bank was formally incorporated on 1st of October 1938
and commenced business from 4th of July 1939 at its Registered Office,
Residency Road, Srinagar, Kashmir

In its formative years, the bank had to encounter several serious problems, particularly around the
time of independence, when out of its total of 10 branches two branches of Muzafarabad and Mirpur
fell to the other side of line of control (Now Pak Administered Kashmir) along with cash and other
assets in 1947. However, State Govt. came to its rescue with the assistance of Rs. 6.00 lacks to meet
the claims. The Bank steadfastly overcame its difficulties and kept growing. Following the extension
of Central Laws to the State of Jammu & Kashmir, the Bank was defined as a Govt. Company as per
the provisions of Indian Companies Act 1956. The Bank had its first full time Chairman in 1971,
following the social control measures in banks. The year 1971 was a turning point for the Bank on
conferment of scheduled bank status and witnessed remarkable progress in all the vital fields of
operations. Reserve Bank of India declared the Bank as “A” class bank in 1976. In recognition of
dominant role and exalted performance, RBI entrusted the Bank as its agent for performing the
general banking business of the Central Government, especially in maintaining currency chest and
collection of taxes

7
The Bank has been forerunner in responding to the need for technology up gradation in meeting its
commitment to the customer to offer the best of service and wide range of products. From a small
Beginning the Bank has grown to become a giant with a wide network of 577 branches/offices spread
over the length and breadth of India. A significant contributing factor for this fast growth is the solid
founding principles, which are dedicated to the cause of transforming the bank not only as a financial
heart but also as a social heart of the community. The Bank is investing in a big way in information
technology. Nearly 510 branches have been either partly or fully computerized covering 98% of the
total business of the bank. The bank has already installed around 175 ATMs at vital locations of the
country. The ATMs are interconnected and thus provide the customer convenient and 24-hour
banking facilities. Bank has also commissioned anywhere banking facilities at more than 103
branches throughout the country. The bank has already made available E-mail facilities at all of its
computerized branches and also Tele-banking facilities at most of these branches. The bank has also
launched Internet, SMS and mobile banking facilities.

Presently the bank is the fastest growing bank in the India offering world class banking
products/services to the masses. Today bank has a status of value driven Organization and is always
working towards building trust with Shareholders, Employees, Customers, Borrowers, Regulators and
other diverse Stakeholders, for which it has adopted a strategy directed to developing a sound
foundation of relationship and trust aimed at achieving excellence, which of course, comes from the
womb of good Corporate Governance. Good Governance is a source of competitive advantage and a
critical input for achieving excellence in all pursuits. It also ensures that bank is managed by an
independent and highly qualified Board following best globally accepted practices, transparent
disclosures and empowerment of shareholders, besides also ensuring that shareholders aspirations and
societal expectations are met.

J&K Bank is going from strength to strength as it sees tremendous revenue growth opportunities in all
businesses. The Bank will continue to invest to increase revenue, and Enhance shareholder value
through whichever means is most appropriate, including organic development, acquisitions, joint
ventures and partnerships. The Bank has a powerful set of brands that people trust and has proven
products and services, an integrated distribution network that delivers, and financial strength.
In recognition of its excellent customer service, fair business practices, overall operational efficiency,
overall performance, etc the bank has been felicitated by the following awards during the last few
years:
- Asian Banking Awards – 2004
- Excellence Award – Institute of Economic Studies
Jamnalal Baja Uchit Vyavahar Puraskar 2002– Council for Fair Business Practices dated 26 th
March 2003.
- Ranked 87th among India’s Top 500 Companies by world’s renowned rating agency – “ DUN
& BRADSTREET”
- Asian Banking Award 2004 for the Customer Convenience programme.

8
New Identity

The new identity for J&K Bank is a visual representation of the Bank’s philosophy and business
strategy. The three coloured squares represent the regions of Jammu, Kashmir and Ladakh. The
counter-form created by the interaction of the squares is a falcon with outstretched wings – a symbol
of power and empowerment. The synergy between the three regions propels the bank towards new
horizons. Green signifies growth and renewal, blue conveys stability and unity, and red represents
energy and power.

Unique Characteristics of the Bank

• Sole banker and lender of last resort to the Government of J & K.


• Plan and non -plan funds, taxes and non-tax revenues routed through the bank.
• Salaries of Government officials disbursed by the Bank.
• Only private sector bank designated as agent of RBI for banking.
• Carries out banking business of the Central Government.
• Collects taxes pertaining to Central Board of Direct Taxes in J & K.

Infrastructure: Global Standards


 The fastest growing bank with 577 branches across the country
 98% of the business computerized
 Anywhere Banking, Tele-Banking and SWIFT facilities available
 Internet Banking, SMS and Mobile Banking provided
 ATMs connected globally to all MasterCard networked ATMs
 Mobile ATM Service available – first of its kind in Northern India
 J&K Bank Global Access Debit Cards: Cirrus and Maestro enabled
 Electronic Fund Transfer (EFT) System

Corporate Headquarter:

The Corporate Headquarter, registered office of the Bank is located at Srinagar and is headed by
Chairman and Chief Executive officer (CEO), who is appointed by the J&K Government for a period
of 3 to 5 years. Generally, the Chairman is selected among reputed Economists, Bankers or/and the
Administrators of the State. The Chairman is guided by the Board of Directors of the Bank.

Future Trends

J&K Bank has traversed a long way from the day one with the solitary aim of ‘social benefit’ and
substantial progress has already been made towards this end.
Computerization and up gradation of technologies, rationalization of area wise branch structure,
staffing, development of human resources and strengthening of corporate management studies are
issues which Bank will address and implement in the coming years. At the same time the emphasis
will shift to greater self-regulation through adherence to prudential norms, corporate governance and

9
strengthening of internal supervision and audit system as per guidelines of RBI. Further shift will be
on re-orientation and retraining of staff in tune with the changes in the operating environment; the
need to widen the scope and range of products and services and above all an improvement in the
delivery system and customer service levels. However, it will remain Bank’s endeavour to reduce the
non-performing loans both in percentage as well as in absolute terms

VISION

“To catalyse economic transformation and capitalise on growth.”

Our vision is to engender and catalyse economic transformation of Jammu and


Kashmir and capitalise from the growth induced financial prosperity thus
engineered. The Bank aspires to make Jammu and Kashmir the most prosperous
state in the country, by helping create a new financial architecture for the J&K
economy, at the center of which will be the J&K Bank.
MISSION

Our mission is two-fold: To provide the people of J&K international quality


financial service and solutions and to be a super-specialist bank in the rest of
the country. The two together will make us the most profitable Bank in the
country.

The Jammu and Kashmir Bank Limited


Type PUBLIC LIMITED

Founded 1938
Headquarters M.A.ROAD SRINAGAR, J&K,
No. Of locations 577 branches/offices
Industry Banking

Employees 7267
Website http://www.jkbank.net

10
Components of Project “Credit Appraisal”
PROCESS
CREDIT:

Credit a contractual agreement in which a borrower receives something of value now and agrees to
repay the lender at some later date.

Credit in Finance

A credit is a legal contract where one party receives resource or wealth from another party and
promises to repay him on a future date along with interest. In simple terms, a credit is an
agreement of postponed payments of goods bought or loan. With the issuance of a credit, a debt
is formed

Definition of Credit in Accountancy

• As per accounting theories, credit refers to the subtraction of a payment given by a borrower
or debtor from an outstanding amount. .
• A single entry or the aggregate of all the entries on the right hand side of the ledger account.
• The amount, which is left over in the account of an individual.

Definition of Credit in Trade and Commerce

In trade and commerce, credit is defined as the sanctioning of detained payments for products that
have been bought. Credit depends on the creditworthiness of the debtor or receiver of credit.

Credit Analysis

It is the method by which one calculates the creditworthiness of a business or organization. The
audited financial statements of a large company might be analyzed when it issues or has issued bonds.
Or, a bank may analyze the financial statements of a small business before making or renewing a
commercial loan. The term refers to either case, whether the business is large or small. Credit analysis
involves a wide variety of financial analysis techniques, including ratio and trend analysis as well as
the creation of projections and a detailed analysis of cash flows. Credit analysis also includes an
examination of collateral and other sources of repayment as well as credit history and management
ability. Before approving a commercial loan, a bank will look at all of these factors with the primary
emphasis being the cash flow of the borrower. A typical measurement of repayment ability is the debt
service coverage ratio. A credit analyst at a bank will measure the cash generated by a business
(before interest expense and excluding depreciation and any other non-cash or extraordinary
expenses). The debt service coverage ratio divides this cash flow amount by the debt service (both
principal and interest payments on all loans) that will be required to be met. Bankers like to see debt
service coverage of at least 120 percent. In other words, the debt service coverage ratio should be 1.2
or higher to show that an extra cushion exists and that the business can afford its debt requirements.

11
12
TERM LOANS:
A term loan is usually a single loan for a stated period of time or a series of loans on specified dates.
They are used for specific purposes such as acquiring machinery, renovating a building, refinancing a
debt and so on and so forth. Term loan is not usually extended for finding day to day operations.

Maturity of term loans Term loans range from one year to 20 years. Term loans can be classified into
short term loans, medium term loans and long term loans, depending upon the maturity. From the
lenders point of view the maturity of loan should not exceed the economic life of the asset being
financed. The difference between the values of the asset and the amount being financed is the
borrower’s equity. The borrower’s equity represents the borrower’s investment in the asset being
financed. It also provides the bank with the cushion in the event of default.

Term loans typically carry floating interest rates and repayable in monthly and quarterly intervals.
Term loans are for a set maturity and on the basis of maturity, term loans are classified as under:

Intermedial Term loans: Intermedial term loans usually run less than three years. These loans are
generally repaid in monthly instalments from business cash flow.

Long Term loans: These loans are commonly set for more than three years. Most of them are
between three and ten years and some are as long as 20 years. Long term loans are collateralized by
business assets and typically require quarterly or monthly payments derived from profits or cash
flows. While making decisions about term loans 5 C,s continue to be of utmost importance, these are

Character: character means how the company has managed other loans (business as well as personal)
and what is the company’s business experience.

Credit capacity: This refers to the success of the borrowers business as reflected in its financial
condition and ability to meet financial obligation via cash flow and earnings. Banks generally require
prospective borrowers to submit their financial statement in order to determine their credit worthiness.
Collateral: Collateral refers to the assets that are pledged for security in a credit transaction. The fact
that borrowers may lose their collateral if they default on their loans serves as an incentive for them to
perform in accordance with the loan contract.

Capital: Capital represents the amount of equity that a firm has, that can be liquidated for payment if
all other means of collection of the debt fail.

Comfort/ Confidence: This is related with the business plan i,e how accurate are the revenues and
expense projections or what is the condition of the economy and the industry.

13
Loans and Advances – Statutory and Other Restrictions

Banks should implement these instructions and adopt adequate safeguards in order to ensure that the
banking activities undertaken by them are run on sound, prudent and profitable lines.

Proposals Prohibited:

A) Granting of loans and advances against the security of shares of the Bank and against partly
paid shares of other companies.
B) Granting of loans and advances to partnership/proprietorship concerns against the primary
security of shares and debentures.
C) Granting of loans and advances against term deposits of other banks and against Certificate of
Deposits.
D) Granting of loans and advances against the security of bullion / primary gold and to silver
bullion dealers which are likely to be utilized for speculative purposes.
E) Entering into commitment for granting of loans and advances to or on behalf of any of its
directors, or any firm in which any of its directors is interested as partner, manager, employee
or director or any company of which any of its directors of the Bank is a director, managing
agent, manager, employee or guarantor or in which he holds substantial interest or any
individual in respect of whom any of its directors is a partner or guarantor. However the
restriction is not applicable in case of exemptions permitted under Section 20(i) of Banking
Regulation Act, 1949
F) Except with the prior approval of Reserve Bank of India, remit in whole or in part any debt
due to it by any of its directors, or an individual any firm or any company in which any of its
directors, or an individual, any firm or any company in which any of its directors is interested
as director, partner, managing agent or guarantor.
G) Holding shares whether as pledgee or mortgagee or absolute owner in any company for an
amount exceeding 30% of the paid up share capital of that company or 30% of its own paid
up share capital and reserves, whichever is less.
H) Holding shares whether as pledgee or mortgagee or absolute owner, in any company in the
management of which any managing director or manager of the Bank is in any manner
concerned or interested.
I) Granting of loans and advances to companies for buy back of their own shares or other
specified securities
J) Unless sanctioned by BOD/MCB loans and advances aggregating Rs 25 lacs and above shall
not be granted to directors of other Banks, any firm in which any of its director of other Banks
is interested as a partner or a guarantor and any company in which any of the directors of
other bank holds substantial interest or is interested as a director or as a guarantor
K) No officer of the Bank or any committee comprising inter alia, an officer of the Bank as the
member shall, while exercising powers for sanction of any credit facility, sanction any credit
facility to his/her relative. The next higher sanctioning authority shall sanction such a facility.
L) Granting of loans and advances for the purpose of setting up of new units consuming/
producing Ozone Depleting Substances as specified by the RBI.

14
Restrictions on Holding Shares in Companies

In terms of Section 19(2) of the Banking Regulation Act, 1949, banks should not hold shares in any
company except as provided in sub-section (1) whether as pledgee, mortgagee or absolute owner, of
an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own
paid-up share capital and reserves, whichever is less.

Further, in terms of Section 19(3) of the Banking Regulation Act, 1949, the banks should not hold
shares whether as pledgee, mortgagee or absolute owner, in any company in the management of
which any managing director or manager of the bank is in any manner concerned or interested.

Restrictions on Credit to Companies for Buy-back of their Securities

In terms of Section 77A (1) of the Companies Act, 1956, companies are permitted to purchase their
own shares or other specified securities out of their

• free reserves, or
• securities premium account, or
• the proceeds of any shares or other specified securities,

Subject to compliance of various conditions specified in the Companies (Amendment) Act, 1999.
Therefore, banks should not provide loans to companies for buy-back of shares/securities.

Regulatory Restrictions

Without prior approval of the Board or without the knowledge of the Board, no loans and advances
should be granted to relatives of the bank's Chairman/Managing Director or other Directors, Directors
(including Chairman/Managing Director) of other banks and their relatives, Directors of Scheduled
Co-operative Banks and their relatives, Directors of Subsidiaries/Trustees of Mutual Funds/Venture
Capital Funds set up by the financing banks or other banks, as per details given below.

Lending to directors and their relatives on reciprocal basis

There have been instances where certain banks have developed an informal understanding or
mutual/reciprocal arrangement among themselves for extending credit facilities to each other’s
directors, their relatives, etc. By and large, they did not follow the usual procedures and norms in
sanctioning credit limits to the borrowers, particularly those belonging to certain groups or directors,
their relatives, etc. Facilities far in excess of the sanctioned limits and concessions were allowed in the
course of operation of individual accounts of the parties. Although, there is no legal prohibition on a
bank from giving credit facilities to a director of some other banks or his relatives, serious concern
was expressed in Parliament that such quid pro quo arrangements are not considered to be ethical. The
banks should, therefore, follow the guidelines indicated below in regard to grant of loans and
advances and award of contracts to the relatives of their directors and directors of other banks and
their, relatives:
Unless sanctioned by the Board of Directors/Management Committee, banks should not grant loans
and advances aggregating Rs. 25 lakhs and above to -

15
(a) directors (including the Chairman/Managing Director) of other banks;
(b) any firm in which any of the directors of other banks is interested as a partner or guarantor; and
(c) any company in which any of the directors of other banks holds substantial interest or is interested
as a director or as a guarantor.
Unless sanctioned by the Board of Directors/Management Committee, banks should also not grant
loans and advances aggregating Rs.25.00 lakhs and above to -
a) any relatives of their own Chairmen/Managing Directors or other Directors;
(b) any relatives of the Chairman/Managing Director or other directors of other banks .
(c) any firm in which any of the relatives as mentioned in (a) & (b) above is interested as a partner or
guarantor; and
(d) any company in which any of the relatives as mentioned in (a) & (b) above hold substantial
interest or is interested as a director or as a guarantor.

The proposals for credit facilities of an amount less than Rs.25.00 lakh to these borrowers may be
sanctioned by the appropriate authority in the financing bank under powers vested in such authority,
but the matter should be reported to the Board. The Chairman/Managing Director or other director
who is directly or indirectly concerned or interested in any proposal should disclose the nature of his
interest to the Board when any such proposal is discussed. He should not be present in the meeting
unless his presence is required by the other directors for the purpose of eliciting information and the
director so required to be present shall not vote on any such proposal.

The above norms relating to grant of loans and advances will equally apply to awarding of contracts.
The scope of the term ‘relative’ will be as under:

• Spouse Father
• Mother (including step-mother)
• Son (including step-son)
• Son's Wife
• Daughter (including step-daughter)
• Daughter's Husband
• Brother (including step-brother)
• Brother’s wife
• Sister (including step-sister)
• Sister’s husband
• Brother (including step-brother) of the spouse

Restrictions on Grant of Loans & Advances to Officers and Relatives of Senior Officers of Banks:
The statutory regulations and/or the rules and conditions of service applicable to officers or
employees of public sector banks indicate, to a certain extent, the precautions to be observed while
sanctioning credit facilities to such officers and employees and their relatives. In addition, the
following guidelines should be followed by all the banks with reference to the extension of credit
facilities to officers and the relatives of senior officers:

(i) Loans & advances to officers of the bank


No officer or any Committee comprising, inter alia, an officer as member, shall, while exercising
powers of sanction of any credit facility, sanction any credit facility to his/her relative. Such a facility
shall ordinarily be sanctioned only by the next higher sanctioning authority. Credit facilities

16
sanctioned to senior officers of the financing bank should be reported to the Board.

Guidelines for Financing of Infrastructure Projects

In view of the critical importance of the infrastructure sector and high priority being accorded for
development of various infrastructure services, the matter has been reviewed in consultation with
Government of India and the revised guidelines on financing of infrastructure projects are set out as
under.

Definition of ‘infrastructure lending’

Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an
infrastructure facility as specified below falls within the definition of "infrastructure lending". In other
words, a credit facility provided to a borrower company engaged in

• developing or
• operating and maintaining, or
• developing, operating and maintaining any infrastructure facility that is a project in any of the
following sectors, or any infrastructure facility of a similar nature :

i. A road, including toll road, a bridge or a rail system;


ii. A highway project including other activities being an integral part of the highway project;
iii . A port, airport, inland waterway or inland port;
iv .A water supply project, irrigation project, water treatment system, sanitation and sewerage system
or solid waste management system;
v. Telecommunication services whether basic or cellular, including radio paging, domestic satellite
service (i.e., a satellite owned and operated by an Indian company for providing telecommunication
service), network of trunking, broadband network and internet services;
vi. An industrial park or special economic zone;
vii. Generation or generation and distribution of power;
viii. Transmission or distribution of power by laying a network of new transmission or distribution
lines;
ix. Construction relating to projects involving agro-processing and supply of inputs to agriculture;
x. Construction for preservation and storage of processed agro-products, perishable goods such as
fruits, vegetables and flowers including testing facilities for quality;
xi. Construction of educational institutions and hospitals;
xii. Laying down and/or maintenance of gas, crude oil and petroleum pipelines
xiii. Any other infrastructure facility of similar nature

Appraisal

(i) In respect of financing of infrastructure projects undertaken by Government owned entities,


banks/Financial Institutions should undertake due diligence on the viability of the projects. Banks
should ensure that the individual components of financing and returns on the project are well defined
and assessed. State Government guarantees may not be taken as a substitute for satisfactory credit
appraisal and such appraisal requirements should not be diluted on the basis of any reported

17
arrangement with the Reserve Bank of India or any bank for regular standing instructions/periodic
payment instructions for servicing the loans/bonds.

(ii) Infrastructure projects are often financed through Special Purpose Vehicles. Financing of these
projects would, therefore, call for special appraisal skills on the part of lending agencies.
Identification of various project risks, evaluation of risk mitigation through appraisal of project
contracts and evaluation of creditworthiness of the contracting entities and their abilities to fullfill
contractual obligations will be an integral part of the appraisal exercise. In this connection, banks/FIs
may consider constituting appropriate screening committees/special cells for appraisal of credit
proposals and monitoring the progress/performance of the projects. Often, the size of the funding
requirement would necessitate joint financing by banks/FIs or financing by more than one bank under
consortium or syndication arrangements. In such cases, participating banks/ FIs may, for the purpose
of their own assessment, refer to the appraisal report prepared by the lead bank/FI or have the project
appraised jointly.

Loans and advances to Real Estate Sector

While appraising loan proposals involving real estate, banks should ensure that the borrowers have
obtained prior permission from government / local governments / other statutory authorities for the
project, wherever required. In order that the loan approval process is not hampered on account of this,
while the proposals could be sanctioned in normal course, the disbursements should be made only
after the borrower has obtained requisite clearances from the government authorities.

Loans and advances to Small Scale Industries

SSI units having working capital limits of up to Rs. 5 crore from the banking system are to be
provided working capital finance computed on the basis of 20 percent of their projected annual
turnover. The banks should adopt the simplified procedure in respect of all SSI units (new as well as
existing).

Project Finance Portfolio of Banks

At the time of financing projects banks generally adopt one of the following methodologies as far as
determining the level of promoters’ equity is concerned.

1) Promoters bring their entire contribution upfront before the bank starts disbursing its commitment.
2) Promoters bring certain percentage of their equity (40% – 50%) upfront and balance is brought in
stages.
3) Promoters agree, ab initio, that they will bring in equity funds proportionately as the banks finance
the debt portion.

While it is appreciated that such decisions are to be taken by the boards of the respective banks, it has
been observed that the last method has greater equity funding risk. In order to contain this risk, banks
are advised in their own interest to have a clear policy regarding the Debt Equity Ratio (DER) and to
ensure that the infusion of equity/fund by promoters should be such that the stipulated level of DER is
maintained at all times. Further they may adopt funding sequences so that possibility of equity
funding by banks is obviated.

18
Guidelines

(i) Applications for loans and their processing

(a) Loan application forms in respect of all categories of loans irrespective of the amount of loan
sought by the borrower should be comprehensive. It should include information about the fees/
charges, if any, payable for processing, the amount of such fees refundable in the case of non
acceptance of application, pre-payment options and any other matter which affects the interest of the
borrower, so that a meaningful comparison with that of other banks can be made and informed
decision can be taken by the borrower.
Banks/FIs should ensure that all information relating to charges/fees for processing are invariably
disclosed in the loan application forms. Further, the banks must inform ‘all-in-cost’ to the customer to
enable him to compare the rates charges with other sources of finance.

(b) Banks and financial institutions should devise a system of giving acknowledgement for receipt of
all loan applications. Time frame within which loan applications up to Rs.2 lakhs will be disposed of
should also be indicated in acknowledgement of such applications.

(c) Banks / financial institutions should verify the loan applications within a reasonable period of
time. If additional details / documents are required, they should intimate the borrowers immediately.

(ii) Loan appraisal and terms/conditions

a) Lenders should ensure that there is proper assessment of credit application by borrowers. They
should not use margin and security stipulation as a substitute for due diligence on credit worthiness of
the borrower.

b) The lender should convey to the borrower the credit limit along with the terms and conditions
thereof and keep the borrower's acceptance of these terms and conditions given with his full
knowledge on record.

c) As far as possible, the loan agreement should clearly stipulate credit facilities that are solely at the
discretion of lenders. These may include approval or disallowance of facilities, such as, drawings
beyond the sanctioned limits, honouring cheques issued for the purpose other than specifically agreed
to in the credit sanction, and disallowing drawing on a borrowal account on its classification as a non-
performing asset or on account of non-compliance with the terms of sanction. It may also be
specifically stated that the lender does not have an obligation to meet further requirements of the
borrowers on account of growth in business etc. without proper review of credit limits.

d) In the case of lending under consortium arrangement, the participating lenders should evolve
procedures to complete appraisal of proposals in the time bound manner to the extent feasible, and
communicate their decisions on financing or otherwise within a reasonable time.

(iv) Post disbursement supervision

a) Post disbursement supervision by lenders, particularly in respect of loans up to Rs. 2 lakh, should
be constructive with a view to taking care of any" lender-related" genuine difficulty that the borrower
may face.

19
b)Before taking a decision to recall / accelerate payment or performance under the agreement or
seeking additional securities, lenders should give notice to borrowers, as specified in the loan
agreement or a reasonable period, if no such condition exits in the loan agreement.

c) Lenders should release all securities on receiving payment of loan or realisation of loan subject to
any legitimate right or lien for any other claim lenders may have against borrowers. If such right of
set off is to be exercised, borrowers shall be given notice about the same with full particulars about
the remaining claims and the documents under which lenders are entitled to retain the securities till
the relevant claim is settled/paid

(v) General

a) Lenders should restrain from interference in the affairs of the borrowers except for what is provided
in the terms and conditions of the loan sanction documents (unless new information, not earlier
disclosed by the borrower, has come to the notice of the lender).

b) Lenders must not discriminate on grounds of sex, caste and religion in the matter of lending.
However, this does not preclude lenders from participating in credit-linked schemes framed for
weaker sections of the society.

c) In the matter of recovery of loans, the lenders should not resort to undue harassment viz.
persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc.

d) In case of receipt of request for transfer of borrowal account, either from the borrower or from a
bank/financial institution, which proposes to take- over the account, the consent or otherwise i.e,
objection of the lender, if any, should be conveyed within 21 days from the date of receipt of request.

20
21
FINANCIAL TERMS
The appraising officer come across following Financial terms and jargons that are used for credit
appraising and decision making as follows:-

SECURITIES:
Sound Banking practices in respect of credit portfolio require loans & advances backed by adequate
security. If the borrower defaults on a loan, bank’s fall on the security for realisation of the defaulted
amount. Therefore, it is frequently referred as secondary source of repayment. Securities reduce the
Banks risk when it makes a loan.
There are two types of securities available to Banks to secure a loan. They are Primary security and
Collateral security.

PRIMARY SECURITY:
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.

COLLATERAL SECURITY:
Collateral security is any other security offered for the said credit facility. For example, hypothecation
of jewellery, mortgage of house, etc. Collateral Security refers to certain additional security obtained
by the Bank to secure the loan. For example, say, a Bank has financed the purchase of machinery by
a Pharmaceutical manufacturing company. This machinery would be the primary security for this
loan. In addition, the Bank may obtain collateral security in the form of the factory building owned by
the company, as additional security. This will guard Bank's interests in the event of the primary
security not having sufficient value to liquidate the loan. Sometimes, on account of adverse market
conditions, the value of the primary security gets eroded, exposing the Bank to a higher risk than it
had originally bargained for.

FORMS OF SECURITY
The forms of security either by way of primary security or collateral security is given here under:-

1. Hypothecation:
Under hypothecation, the borrower is provided with working capital finance by the bank against the
security of movable property, generally inventories. The borrower does not transfer the property to the
bank; it remains in the possession of the borrower, however, title of property is transferred in the
name of Bank or lending institution. Thus hypothecation is a charge against property for an amount of
debt where neither ownership nor possession is passed to the creditor. Banks generally grant credit
under hypothecation only to first class customers with highest integrity. Banks do not usually grant
hypothecation facility to new customers.

2. Pledge:
Under this agreement, the borrower is required to transfer the physical possession of the property
offered as security to the bank to obtain credit. The bank has a right of lien and can retain possession
of the goods pledged unless payment of the principle, interest and any other expenses is obtained from

22
the borrower. In case of default, the bank may either a) sue the borrower for the amount due, or b)
sue for the sale of goods pledged, or c) after giving due notice to s

3. Mortgage:
Mortgage is the transfer of the legal or equitable interest in a specific immovable property for security
against the debt. In case of mortgage, the possession of the property may remain with the borrower,
however, the lender get the full legal title. The transferor of interest (borrower) is called mortgagor,
the transferee is called mortgagee and the instrument of transfer is called the mortgage deed.

Banking Facilities

Financing is the act of providing funds for business activities, making purchases or investing.
Financial institutions and banks are in the business of financing as they provide capital to businesses,
consumers and investors to help them achieve their respective goals.
There are two ways of providing funds i.e. financing to the borrowers used by Banks or financial
institutions as given below:-

A. Fund Based Financing:


The fund based financing provided by banks involve immediate outlay of funds, which must be
provided by before hands. This facility includes Term Loan facilities, Cash Credit limit, over draft
etc.

1. Term Loans:
A term loan is usually a single loan for a stated period of time or a series of loans on specified dates.
They are used for specific purposes such as acquiring machinery, renovating a building, refinancing
debt, entering into new business and so on and so forth. Term loans are of maturity of 1 year and
above and are re paid on an amortized basis.
The term loans are mostly given to the borrowers who propose to set up a unit (project) for example a
manufacturing unit, or it may be to set up of power plant or construction of complexes, buildings,
roads etc.

The maturity of term loan called tenor of the loan comprises of following components:

a. Construction Period: Time taken for completion of construction activity by the unit holder.
b. Moratorium Period: Holiday period given to repay the term loan.
c. Repayment Period: Period in which the term loan is repaid.

2. Cash Credit:
Cash credit facility is the most popular method of bank finance to the borrowers adopted by the
lenders. Under cash credit facility, a borrower is allowed to withdraw funds from the bank upto the
sanctioned credit limit. He is not required to borrow the entire credit sanctioned once, rather he can
withdraw periodically to the extent of his requirements and repay by depositing surplus funds in his
cash credit account

3. Over draft:

23
Under the over draft facility, the borrower is allowed to withdraw funds in excess of balance in his
current account upto a certain specified limit during a stipulated period. Overdrawn amount is repaid
on demand. Over draft generally continue for a long period by annual renewals of the limits.

B. Non-Fund Based Financing:


Non-fund based financing are essentially in nature of promises made by banks in favour of a third
party to provide monetary compensation on behalf of their clients if certain situations emerge. These
non-fund based facilities may be in the nature of bank guarantee or letters of credit.

Letter of credit:
Suppliers particularly the foreign suppliers insist that the buyer should ensure that his bank will make
the payment if he fails to honour its obligations. This is ensured through a letter of credit (L/C)
arrangement. A bank opens an L/C in favour of a customer to facilitate his purchase of goods. If the
customer does not pay the supplier within the credit period, the bank makes the payment under the
L/C arrangement. Bank charges the customers for opening the L/C. Banks extend such facility to
financially sound customers.

Line of credit:
The line of credit is the maximum amount that can be borrowed under the terms of the loan. The loans
are made for the periods of one year or less; and they should be used to finance the seasonal increase
in inventory and accounts receivables. When the inventory is sold, receivables are collected and the
funds are used to reduce the loan. The loans are usually payable on demand by the bank or within
ninety days.

Bank Guarantee:
Bank guarantee is a commitment to a foreign buyer that the bank will pay an exporter for goods
shipped if the buyer defaults or it is an undertaking by a bank to be answerable for payment of a sum
of money in the event of non performance by the party on whose behalf the guarantee is issued.

CAPITAL STRUCTURE

In order to run and manage a company, funds are needed. Right from the promotional stage upto end,
finances play an important role in a company’s life. If funds are in adequate the business suffers and if
the funds are not properly managed the entire organisation suffers. It is therefore necessary that there
should be an optimal capital structure which will help the organisation to run its work smoothly. The
capital structure is made-up of debt and equity securities and refers to permanent financing of a firm.
It is composed of long term debt, preference share capital and share holders’ funds.

Equity Capital:
Equity capital represents the remaining interest in assets of a company, spread among individual
shareholder of common or preferred stock. At the start of a business owners put some funding into the
business to finance assets this creates liability on the business in the shape of capital as the business is
a separate entity from its owners.

Debt:

24
Debt is the capital that a business raises by taking a loan. Actually it is a loan made to a company that
is normally repaid at some future date. Debt capital differs from the equity or share capital because
subscribers to debt capital do not become the part owners of the business but are merely creditors.

Types of debt:-

Senior Debt: Debt which has a priority claim on the assets of a company. This refers to debt secured
by collateral on which the lender has put in place a first lien. Usually this covers all the assets of a
corporation and is often used for revolving credit lines.

Sub- ordinate Debt:


It is the debt whose holders have a claim on the firm’s assets only after senior debt holder’s claims
have been satisfied. Subordinate debt is referred as subordinate because the debt provides have
subordinate status in relationship to the normal debt. This debt has a lower priority than other bonds
of the issuer in case of liquidation during bankruptcy below the liquidator, government tax authorities
and senior debt holders in the hierarchy of creditors.

Banking Arrangements

The lenders arrange fund (debt) to the borrowers by way of following methods:-

SOLE BANKING ARRANGEMENT:


Under this arrangement credit facilities in favour of the single borrower are sanctioned by a single
bank. However, in case of larger credit exposure, say Rs 25.00 crores and above, sole banking should
not be encouraged as it exposes the Bank to concentration risk

MULTIPLE BANKING ARRANGEMENT:


Multiple Banking is a banking arrangement where a borrower avails of finance independently from
more than one bank. Thus, there is no contractual relationship between various bankers of such
borrower. Also in such arrangement each banker is free to do his own credit assessment and old
security independent of other bankers. In multiple banking, different banks provide finance and
different banking facilities to a single borrower without having a common arrangement and
understanding between the lenders. Under multiple banking arrangements, each bank is free to
negotiate terms and conditions, including margin, rate of interest etc. As such, where the borrower
enjoys working capital limits from more than one bank, details about borrowings should be obtained
from other banks and regular exchange of information amongst financing banks should be ensured.

CONSORTIUM BANKING ARRANGEMENT:


Under consortium financing, several banks (or financial institutions) finance a single borrower with
common appraisal, common documentation, joint supervision and follow-up exercises. In consortium
arrangement, wherein the bank is a member of the consortium, the appraisal method followed by the
lead bank may be adopted provided it does not result in any major deviation of credit assessment. In
case of lending under consortium arrangement, in addition to the appraisal made by the leader bank,
bank should also make an independent appraisal regarding the viability of the project and the
recommendations of the bank should be based on such appraisal.

25
Banks may consider opting out from the consortium, where it is not satisfied with the
performance/financials/operation of the borrower.

Syndicate Banking:
It is a group of investment banks which jointly underwrite and distribute a new security offering or
jointly lend money to a specific borrower. A bank syndicate is not a permanent entity but forms
specifically to handle a deal that might be too difficult or too risky for a single underwriter

Sector: Lending involves extending of credit facilities to different activities viz trade,
manufacturing, construction etc. On the basis of these activities loan book of a bank is divided into
different sectors. Main aim of these sectors is to mitigate the concentration risk. Sectors can be
broadly classified in to Priority and Non Priority sectors

Priority Sector: Some areas or fields in a country depending on its economic condition or
government interest are prioritised and are called Priority sectors. Banks are directed by the Reserve
bank of country that loans must be given on reduced interest rates with discounts to promote these
fields. Such lending is called priority sector lending:
SECTOR Percentage of adjusted net Bank credit under
the category
Total Priority sector out of which under 40%
Agriculture 18%
Weaker sections 10%
DRI 1%

ANALYSIS

The banks analyse the borrowers thoroughly to check their credit worthiness before financing the
borrowers. One such analysis includes financial analysis. Financial analysis includes analysing the
balance sheet, profit & loss account and cash flow of the applicant company. Financial analysis is
supported by ratio analysis.

FINANCIAL ANALYSIS

Financial analysis includes through analysis by the banks or financial institution of the financial
statements of the applicant borrower.

Financial Statements
Financial statements are required in investment and financing decision making. This financial
information of an enterprise is contained in the financial statements and the three basic financial
statements of great significance to investors are Balance Sheet, Profit and Loss account and cash flow
statement

A. Balance Sheet:
Balance sheet is the most significant financial statement. It indicates the financial condition of a
business at a particular moment of time. Most specifically Balance sheet contains information about
resources and obligations of a business entity and about its owners or in other language Balance sheet
gives clear information about Assets , liabilities and owners equity of a business firm. Balance sheet

26
includes items like share capital, reserves and surplus , secured loans, unsecured loans and current
liabilities on the liabilities side and fixed assets, investments, current assets, loans and advances on the
asset side.

Format of Balance Sheet

Liabilities Amount Assets Amount


Current liabilities: Current assets:

Income received in advance Cash in hand


Outstanding expenses Cash at bank
Provisions Short term investments
Bank overdraft Bills receivable
Bills payable Book debts
Sundry creditors Closing stocks:
Finished goods
Fixed liabilities: Goods sent on consignment
Long term loans Work-in progress
Raw materials
Share capital Prepaid expenses
Reserve and surplus Long-term investments

Fixed assets:
Loose tools stores
Live stock furniture
Plant & machinery
Patents
Goodwill
Fictitious assets:
Losses & expenses not written
off

Elements of balance sheet:

a. Assets Side:

The term “Asses” denotes the resource acquired by the business from the funds made available either
by owners of the business or by others. Asset is any item of economic value owned by an individual
or corporation, especially that which could be converted to cash. Assets are subdivided into current
and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is
considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less
likely to sell overnight or have the capability of being quickly converted into a current asset such as
cash.

Current assets:

27
Current assets are any assets that can be easily converted into cash within one calendar year and
comprise of debtors, inventories (Raw material, stock in process and finished goods). Examples of
current assets would be checking or money market accounts, accounts receivable, and notes
receivable that are due within one year’s time.

Main components of current assets are:

Fixed assets: Fixed assets include land, buildings, machinery, and vehicles that are used in
connection with the business.

• Land - Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because
land is considered an asset that never wears out.
• Buildings - Buildings are categorized as fixed assets and are depreciated over time.
• Office equipment - This includes office equipment such as copiers, fax machines, printers, and
computers used in your business.
• Machinery - This figure represents machines and equipment used in your plant to produce your
product. Examples of machinery might include lathes, conveyor belts, or a printing press.
• Vehicles - This would include any vehicles used in the business.

INVESTMENTS: This includes investment of the company in shares of other companies, investment
in mutual funds etc. (both short and long term)

B. LIABILITY SIDE:

Share capital:
This is divided into two types: equity capital and preference capital. The first represents the
contributions of equity shareholders, who are theoretically the owners of the firm. Equity capital
being risk capital carries no fixed rate of dividend. Preference capital carries a fixed rate of dividend.

Reserve and surplus:


Reserves may be classified into two broad types: revenue reserves and capital reserves. Revenue
reserves represent accumulated retained earnings from the profits of normal business operations.
These may be divided into general reserve, investment allowance reserve, capital redemption reserve,
dividend equalisation reserve, etc. capital reserves arise out of gains which are not related to normal
business operations. Examples of such gains are the premium on issue of shares and the appreciation
recognised on revaluation of assets.

Secured loans: borrowings of the firm against which tangible security is provided are referred to as
secured loans. The important components of secured loans are: loans from financial institutions,
debentures, and loans from commercial banks.

Unsecured loans: borrowings of the firm against which no tangible security is provided are referred
to as unsecured loans. The major components of unsecured loans are: fixed deposits, loans and
advances from promoters, inter corporate borrowings, and unsecured loans from banks.

Current liabilities and provisions:


This category includes liabilities that are to be paid within 1 year and provision for taxes dividends,

28
etc.

Profit and Loss account:


Profit and loss account is a score board of the firm’s performance during a period of time. It gives the
summary of revenues, expenses and net income of a firm. It serves as a measure of the firm’s
profitability. Creditors particularly bankers and financial analysts have recently started paying more
attention to the firms earning capacity as a measure of its financial strength.

Format of Profit & Loss Account;

Particulars (Credit side) Amount (Rs.) Particulars (Debit side) Amount (Rs.)

To Gross loss b/d: ……….. By Gross profit b/d ………

Office & Management Expenses; ……….. By Interest received ………


Selling & Distribution Expanses ………… By Discount received ………
Financial Expanses; ………… By Commission received ………

Repairs & Depreciation ………… By Sundry receipts ………

Losses & Miscellaneous ………… By Net loss ………


Expenses; ……….
To Net profit. ……….

(I.e. ALL EXPENSES & (I.e. AII INCOMES & GAINS)


LOSSES)

Components of Income statement:

Revenue: Revenue reflects Cash inflows or other enhancements of assets of an entity during a period
from delivering or producing goods, rendering services, or other activities that constitute the entity's
ongoing major operations. Usually presented as sales minus sales discounts, returns, and allowances

Expenses: Expenses reflects Cash outflows or other using-up of assets or incurrence of liabilities
during a period from delivering or producing goods, rendering services, or carrying out other
activities that constitute the entity's ongoing major operations.

o General and administrative expenses (G & A) - represent expenses to manage the business
(officer salaries, legal and professional fees, utilities, insurance, depreciation of office building
and equipment, office rents, office supplies)
o Selling expenses - represent expenses needed to sell products (e.g., sales salaries, commissions
and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and
equipment)

29
o R & D expenses - represent expenses included in research and development
o Depreciation - is the charge for a specific period (i.e. year, accounting period) with respect to
fixed assets that have been capitalized on the balance sheet.
o Other expenses or losses - expenses or losses not related to primary business operations.

Cash flow statement:

This statement describes the inflows and outflows of cash and cash equivalent in an enterprise during
a specified period of time. Such a statement enumerates net effects of various business transactions on
cash and its equivalent and takes into account receipts and disbursements of cash.

FORMAT OF CASH FLOW STATEMENT;

Rs. Rs.
CASH FLOWS FROM OPERATING ACTIVITIES:
• Cash receipts from customers.
• Cash paid to suppliers & employees.
• Cash generated from operations
• Extraordinary items
• Net cash from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:


• Individual items of cash inflows and outflows from financing
activities( purchase/sale of fixed assets, interest received)
• Net cash from investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:


• Individual items of cash inflows and outflows from financing
activities(long term borrowings, repayment of long term borrowings)
• Net cash from financing activities
Net increase (Decrease) in cash
Cash at the beginning of period.
Cash at the end of period

30
RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making certain decisions.

Bench mark of key Financial Ratios in J&K Bank:


Financial ratios are only tools and not an end in credit appraisal process. They are means to an end
and only pass guiding signals. Analysis of a combination of critical financial ratios can help in proper
decision making. They are also practical constraints in evolving industry wise benchmarks for key
financial indicators.

However following minimum levels of key financial indicators are proposed to be accepted;
Key ratios Minimum Remarks
Current ratio 1.33:1 May be relaxed:
1. upto 1.25:1 in case of SME sector and
2. upto 12.10:1 in case of export credit
DER 2:1 May be relaxed
1. upto 3:1 in case of SME and large industries sector
and
2. upto 4:1 in case of infrastructure projects
3. in other sectors may be accepted at a level higher
than 2:1 as in case of units having stable income
and faster generation of operating profits after
commencement of proposed activity DSCR under
various scenarios is minimum of 1.75:1
DSCR 1.30:1(Minimum) The acceptable level in base case scenario is prescribed as
and 1.30:1(minimum) and 1.60:1(average). However under the
12.60::1(Average) scenarios of decrease in sales price by 5% increase in
critical inputs by 5%, increase in project cost by 5% and
increase in operational expenditure by 5% < DSCR at
minimum of 1.15:1 and average of 4.40:1 is prescribed to
be accepted
interest 1.25:1 The ratio is an indicator of ability of the unit to pay interest
coverage ratio and is arrived at by dividing PBIT by interest and has to be
analysed in combination with other financial indicators

Some important ratios used during analysis of the financial statements by the Banks to ascertain the
credit worthiness of the borrowers is described as under:

Liquidity Ratio:
These ratios are also called as Working Capital Ratio or Short Term Solvency Ratio. An enterprise
must have an adequate WC to run its day-to-day operations. The important liquidity ratios are:

31
Current Ratio:
It is defined as a relationship between current assets and current liabilities. This ratio is a measure of
general liquidity and is most widely used to make the analysis of short term financial position or
liquidity of a firm. It is calculated by dividing the total of current assets by total of current liabilities.
CR = CA/ CL
Accepted benchmark for determining satisfactory current ratio is 1.331. It may be relaxed upto 1.25:1
in case of SME sector and upto 1.10:1 in case of export credit. An ideal CR is 2. The ratio of 2 is
considered as safe margin of solvency due to the fact if the CA are reduced to half, i.e., 1 instead of 2,
then also the creditor will be able to get their payments full.

Quick Ratio: This ratio is also termed as Acid Test Ratio or Liquidity Ratio. This ratio is ascertained
by comparing the liquid assets (i.e. assets which are immediately convertible into cash without much
loss) to CL. It is expressed as:
QR = Liquid Assets / Current Liabilities
The ideal QR is 1. The ratio is also an indicator of short-term solvency of the company.

Net working capital (NWC):


The NWC is a measure of owner’s stake or long term liquid fund in the firm. It has a close
relationship with current ratio. When current ratio equals 1 NWC is zero. When current ratio is more
than 1 NWC is positive and vice versa. Negative NWC implies that lending bank is running a more
than normal financial risk in respect of borrower.
NWC = Current assets - Current liabilities
NWC is sometimes used as a measure of firm’s liquidity. It is considered that between two firms, the
one having the larger NWC has the greater ability to meet its current obligations.

Leverage Ratios:
A firm should have both strong short term as well as long term financial position. To judge the long
term financial position of the firm Financial Leverage ratios are calculated. Following ratios are
commonly used to analyze financial leverage.

Debt Equity Ratio:


Debt Equity ratio is calculated to measure the relative claims of outsiders and the owners (i.e.
shareholders) against the firm’s assets. This ratio indicates the relationship between the external
equities or the outsider’s funds and the internal equities or the shareholders funds. It is calculated as
Debt Equity ratio= Debt/Equity
It is relaxed upto 3:1 in case of SME and large industries sector and upto 4:1 in case of infrastructure
projects.

TOL/TNW:
This is also called gearing ratio. This ratio indicates leverage to the owned funds of the firm. Higher
gearing ratio indicated that the firm is more leveraged to the external sources of funds and in turn will
expose it to high debt cost.

Interest Coverage Ratio:


It is used to test the firm’s debt servicing capacity. A high interest coverage ratio means that the firm
can easily meet its interest even if earnings before interest and taxes suffer a considerable decline. It is
calculated as

32
Interest Coverage=Earnings before interest and tax/interest

Debt service coverage ratio (DSCR):


DSCR is the ratio of cash available for debt servicing to interest, principle loan payments. It is a
popular benchmark used in the measurement of an entity’s ability to produce enough cash to cover its
debt payments. The higher the ratio, the easier is to repay a loan.

DSCR = EBIT + Depreciation+ principal repayment on existing & proposed loans


Principal repayments +interest payments

Typically most commercial banks require the ratio of 1.15-1.35 times (net operating income /Annual
debt service) to ensure cash flows is sufficient to cover loan payments on an ongoing basis. In J&k
Bank the acceptable levels in base case scenario are prescribed as 1.30:1(Minimum) and
1.60:1(Average). However under the scenarios of decrease in sales price by 5%, increase in critical
inputs by 5%, increase in project cost by 5% and increase in operational expenditure by 5%, DSCR at
minimum of 1.15:1 and average of 1.40:1 is prescribed to be accepted.

Profitability Ratios:
Profitability is the indication of the efficiency with which the operations of the business are carried
on. Bankers, financial institutions and other creditors look at profitability ratios as an indicator
whether or not the firm earn sustainability more than it pays interest for the use of borrowed found
&whether the ultimate repayment of their debt appears reasonably certain. Owners are interested to
know the profitability as it indicates the return, which they can get on their investment. The following
are important profitability ratios:

Gross Profit Margin:


Gross profit margin reflects the efficiency with which the management produces each unit of product.
It shows the percentage of gross profit to sales

Gross Profit margin=Gross Profit/Sales


More the gross profit margin more is the efficient production and better is the operating performance.

Net Profit Margin:


Net profit is obtained when operating expenses, interest and taxes are subtracted from gross profit. It
is calculated as:
Net profit margin= Profit after tax/ sales

Net profit margin shows the percentage of net profit to sales. This ratio reflects the efficiency of
manufacturing, administration, and selling the products

Overall profitability ratio:


It is also called “Return on Investment” (ROI) or Return on Capital Employed (ROCE). It indicates
the percentage of the total capital employed in the business. It is calculated as
ROI = Operating Profit / Capital Employee * 100

33
The ROI invested is a concept that measures the profit, which a firm earns on investing a unit of
capital. The return on capital employ also shows whether the company’s borrowing policy was
economically & whether the capital had been employed fruitfully.

Earnings per share (E.P.S.):


In order to avoid confusion on account of the varied meaning of the term capital employed, the
overall profitability can also be judged by calculating earnings per share with the help of the
following formula:
E.P.S= PAT & Preference dividend / No. Of Equity Shares
The E.P.S. helps in determining the market price of the equity shares of the company. It also helps in
estimating the company’s capacity to its equity shareholder.

Price earnings ratio (P.E.R.):


This ratio indicates the no. of times the earning per share is covered by its market price. This is
calculated according to the following formula:
P.E.R =Market price per equity share / Earning per share
It helps the investor in deciding whether to buy or not to buy the shares of a co. at a particular market
price.

RISK ANALYSIS

Analysis of financial statements including ratio analysis is followed by the risk analysis of the said
borrower by the banks to ascertain the risk involvement in granting loan to the borrower. Under Risk
analysis promoter’s experience, ability of the promoters to infuse the required equity, marketing
arrangements and future financials are taken into consideration.

RISK
Risk may be defined as uncertainties resulting in adverse outcome, adverse in relation to planned
objective or expectations. Uncertainties associated with risk elements impact the net cash flow of any
business or investment. Under the impact of uncertainties, variations in net cash flow take place. This
could be favourable as well as unfavourable. The possible unfavourable impact is the RISK of the
business.

Banking risks:
The major banking risks are as under:

1. Default / Credit Risk: Credit risk is defined as the probability of losses associated with reduction
of credit quality of borrower. In banks losses arise due to inability or unwillingness of a customer to
meet commitments in relation to lending.

2. Market Risk
It is the risks that involves the possibility of losses associated in, on balance sheet and off balance
sheet items due to movements in the market prices

Types of Market Risk includes:-

34
a. Interest rate risk:
It is the exposure of banks financial condition to adverse movements in interest rates. IRR refers to
potential impact on Net Interest Income or Net Interest Margin or Market value of Equity caused by
unexpected changes in the market.

b. Liquidity Risk:
The liquidity risk arises from funding of long-term assets by short-term liabilities.

c. Gap or Mismatch Risk:


A gap or mismatch risk arises from holding assets and liabilities and off balance sheet items with
different principal amounts, maturity.

d. Basis risk:
The risk that the interest rate of different assets, liabilities and off balance sheet items may change in
different magnitude is termed as basis risk.

3. Operational risk:
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes,
people, systems or external events.

Types of operational Risk:

a. Transaction Risk:
It is the risk arising from fraud, both Internal and external, failed business processes and the inability
to maintain business continuity.

b. Compliance risk:
Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation loss that a bank
may suffer as a result of its failure to comply.

4. Concentration Risk:
If the loan portfolio is not diversified fully that is to say that it has higher weight in respect of a
borrower or geography or industry etc. the portfolio gets concentration risk.

5. Systematic or Intrinsic Risk:


If a portfolio is diversified fully i.e., diversified across geography, industry, borrowers, etc then the
portfolio risk is reduced to a minimum level. This minimum level corresponds to the risks in the
economy in which it is operating. This is called intrinsic or systematic risk.

6. Country risk:
This is also a type of credit risk and is related to non-performance of borrower or counter party arises
due to constraints or restrictions imposed by a country. Here non-performance is external factors on
which the borrower has no control.

35
Risk mitigation:
Since risk arises from uncertainties associated with the risk element, risk reduction is achieved by
adopting strategies that eliminate or reduce the uncertainties associated with the risk element. This is
called risk mitigation.

Deployment of Risk Scorer Application and


Credit Risk Rating Framework in J&K Bank:

An appraising officer at A&AP department, J & K bank use IMACS software tool to ascertain the
credit risk involved in the credit financing and also ascertain to price the borrower based
on the risk involved.

BRIEF ABOUT IMACS SOFTWARE

Bank has been working on several initiatives to streamline and upgrade the existing Risk Management
Systems to bring them in tune with the current Regulatory guidelines (enunciated in the
RBI and Basel-II guidance notes) and prevailing International Best Practices in the
rapidly evolving domain of Integrated Risk Management.
Internal Rating of Borrower accounts is one of the processes for effective Credit Risk identification
and in this context J&K bank has developed a tool to rate the account on an ongoing basis.
Risk Scorer Application:
In order to bring about a qualitative change in the existing credit processes in the bank, the Risk
Scorer Application has been designed to help the bank in automating the entire credit process right
from Loan origination to its final sanction including Borrower Selection, Credit Proposal Creation and
Analysis. Each proposal follows a workflow system with predefined business rules for its analysis,
rating and final sanction. The system help the bank in selecting right kind of borrowers and managing
the portfolio both at micro (branch) level and macro (Bank) level.

Risk Scorer Application as the Business Process Transformation tool:


Risk Scorer application has been designed to act as the automated credit processing system and
replace the existing manual system of credit processes in the bank. The Risk Scorer application
performs following functions:
 Standardize the borrower selection, credit processing and approval system across the bank
 Provide a real time and effective decision support system in the form of ratings and
accompanied likely probability of default.
 Centralize the entire borrower database of the bank.

Risk Rating Models:

Risk Rating Models are the tools to score a borrower on significant quantitative (Financial data) and
qualitative (Non-Financial data) parameters to assess its likelihood of loss (Probability of Default).
J&K Bank has devised Risk-Rating Models for five broad lending segments of:
1. Large Corporate
2. SME

36
3. SBS
4. Housing
5. Personal
In addition, there are three additional rating models for Infrastructure, NBFC and Project Finance.
Infact, Project Finance module is the sub module of Large Corporate and SME Rating Model.
Definition of Lending Segments and applicability of suitable Rating Model:

Large Corporate:
Large corporate exposures would be those where aggregate exposure of the bank to a borrower is
more than Rs. 5.00 Crores (Aggregate exposure means Fund and Non-fund based limits or
Outstanding balances whichever is higher) and / or where average annual turnover of the company /
concern for preceding three years is Rs. 50.00 Crores and more. In case of companies / concerns with
no financial history three years projected turnover shall be taken and in case of companies which are
yet to complete three years, both actual and projected turnover shall be considered. Large Corporate
rating model would be used for borrower rating for the Fund / Non Fund based working capital and /
or other short term lending to large Corporate Segment
SME (Small and Medium Enterprises):
These are manufacturing concerns / companies where aggregate exposure of the bank to a borrower is
less than Rs. 5.00 Crores (Aggregate exposure means Fund and Non-fund based limits or Outstanding
balances whichever is higher) and / or where average annual turnover of the company / concern for
preceding three years is less than Rs. 50.00 Crores. SME rating model would be used for borrower
rating for the Fund and Non-Fund based working capital and / or Short term exposure to SME lending
segment.
SBS (Small Business in Trade and Services):
These are concerns / companies in the trade and services business segment where aggregate exposure
of the bank is less than Rs. 5.00 Crores (Aggregate exposure means Fund and Non-fund based limits
or Outstanding balances whichever is higher) and / or where average annual turnover of the
company / concern for preceding three years is less than Rs. 50.00 Crores. SBS rating model would be
used for borrower rating in case of Fund and Non-Fund based working capital and Term lending
exposure to SBS lending segment.
Project Finance:
Project Finance sub-module sits on top of the Large Corporate and SME rating models to help the
bank in rating the borrower where they want to finance some project or give advance in the form of
medium and long term loans for creation of specific tangible assets. Thus, Project Finance Module
shall be used in case of Large Corporate and SME borrowers who undertake projects of any sort, any
size. The Project Risk rating Module generates a separate Project Risk Score, which shall modify the
basic borrower Risk Score for Project activities and give a final risk grade.
Infrastructure:
All infrastructure exposures like Highways, Airports, Bridges, and Telecom etc. executed by way of a
SPV (Special Purpose Vehicle) or a newly created company (with no recourse to the Balance sheet of
the Promoter companies) shall be rated with the help of Infrastructure Model. In case of projects

37
executed by existing companies with previous financial history, LC Model with Project Risk Score
Sub module shall be used.
Range of Risk Grades:
The J&K bank has used a range of 10 risk grades starting from risk grade 1 denoted as JKB 1(plus the
lending model acronym like LC for Large Corporate, SME for Small and Medium Enterprises, EC
(Emerging Corporate) for Infrastructure and likewise) to JKB 10. Thus large corporate Model will
generate rating grades of JKBLC1, LC2 …….,. LC10. Similarly SME Model shall generate output in
the form of JKBSME 1………SME10 and so on. Risk grade 1 denotes the borrowers having highest
safety and credit quality (Consequently lowest PD) whereas JKB 10 represents the borrowers who are
most likely to default over one year horizon. The PD of such borrowers shall be highest.
RISK SCORING PARAMETERS
Financial Risk Scoring Parameters:
 Growth (Sales growth over the preceding two years, Sales growth recorded in the latest year
shall have more weightage)
 Profitability calculated as ROCE (Return on Capital Employed)
 Coverage (This is the Operating Cash Flows over total Interest. Operating Cash Flows is the
Net Profit plus Depreciation adjusted for change in Net Working Capital)
Industry Risk Scoring Parameters:
 Cyclicality of the industry
 Technology dependence
 Environmental impact
 Demand-supply situation
Business Risk Scoring Parameters:
 Customer quality and concentration
 Supplier reliability and concentration
 Competition impact on GP margin
 Industrial/employee relations
Management Risk Scoring Parameters:
 Integrity
 Business Commitment
 Credit track record
 General reputation
 Competence
 Business Experience
 Ability to raise funds
 Financial strength/burden - due to group
 Internal Control
 Succession Planning
 Intra-group conflicts
Project Risk Score Parameters: (Both for LC and SME Models)
 Status of Project clearances
 Infrastructure availability

38
 Legal/regulatory environment
 Market for project output
 Ability to handle projects in hand
 Force majeure risk
 Project Debt-Equity
 Debt repayment period
 Sensitivity analysis

The appraising officer put audited financial data and non financial date in IMACS software. The
financial data includes balance sheet, profit and loss account of the borrower. After putting audited
financial data, the appraising officer, put non financial data called subjective parameters. Subjective
parameters are different for Different models i.e. SME, SBS, LC or INFRA has to put different
subjective parameters. The details of subjective parameters for the infra model is given briefly as
below:-
SUBJECTIVE PARAMETERS CONFIGURATION FOR INFRASTRUCTURE/
PROJECT FINANCE MODEL

REGULATORY, POLITICAL AND LEGAL RISK ASSESSMENT:


 Regulatory Environment

 Demerits and licences

 Tax and fiscal incentives

 Political stability

 Environmental impact

PROJECT STATUS:

 Project structure

 Term of agreement

 Detailed project feasibility report

 Status of project clearances

SPONSOR RISK ASSESSMENT:

 Financial strength of promoters

 Competence of senior management in the sector

 Competence of senior management in project execution

 Competence of the project management team in the sector

 Competence of the project management team in the project execution

39
 Banking history

CONCESSION AGREEMENT RISK ASSESSMENT

 Toll pricing

 Regulatory approvals

 Toll risks

TECHNOLOGY RISK ASSESSMENT

 Contemporariness of technology

 Technology _ Regional relevance

 Technology – Appropriateness of scale

 Performance guarantees offered by the technology supplier

CONSTRUCTION RISK ASSESSMENT:

 Selection procedure of contractors

 Contractors Ability_ sector

 Contractors Ability_ technology

 Land& labour availability

 Transportation infrastructures

 Contingencies

MARKET RISK ASSESSMENT

 Traffic Assessment

 Alternate source of revenue

 Demand supply Situation

 Credit worthiness of the consumer

 Competition Analysis

SUPPLY RISK ASSESSMENT

 Identification of supplier

 Quantity of supply

 Input price of supply

40
 Supplier track record

PROJECT COST AND VIABILITY

 Financial structure of loan

 Projected debt service coverage ratio

 Price of equipment

 Debt equity ratio

An example how remarks are attributed to Subjective Parameters

Please select
PARAMETER ATTRIBUTE appropriate REMARKS
option
The regulatory regime is progressive and sensitive
Excellent to the needs of the sector
The regulatory regime is reasonably favourable to
Regulatory the sector, although the changes/ reforms needed
Environment Good have been slow in coming
The regulatory regime is somewhat unfavourable
from a financier's standpoint, as changes are
unpredictable, & not necessarily making projects
Marginal viable in a predictable manner
NA NA

After putting the required data by the appraising officer, the IMACS software automatically generates
its report indicating the final risk grade as per the detail given here under:-

Final Rating Grade

Construction Risk Assessment ******


Market Risk Assessment ******
Supply Risk Assessment ******
Project Cost And Viability *****
Basic Borrower Risk Score *****
Borrower Risk Score (with Project Status Cap) *****
Final Risk Grade *****
Probability of Default *****

The final risk grade provides the appraising office information that in which category of risk the
borrower falls. More the risk more is the probability of the default and therefore higher the
borrower will be priced.

41
42
M/S ARYAN POWER PRIVATE LTD
B/O XXX
GENERAL INFORMATION ON THE PROPOSAL

Date of receipt of 12.03.2010


the proposal.
Nature of Fresh connection
proposal
Existing banking Nil
arrangement
Proposed banking Consortium banking arrangement
arrangement
Activity Power generation
Sector Power sector
Priority Non–priority sector
classification
Particulars of the Fresh connection
existing facilities
sanctioned by our
Bank.
Recommendation (amount in crores of Rs)
s of the Branch Type Limit Rate of Moratori Total tenor of
Interest um TL
Including
moratorium
Sr. 175 Floating
debt interest
rate of
11.50% 180 months i.e.,
linked to moratorium
PLR of period including
respective construction
bank, with period of 60
5 years
annual months and
resets. repayment period
Sub 25 2% above of 10 years. (40
debt the interest quarterly
rate instalments)
applicable
to senior
debt
In addition, branch has also recommended for LC/ BG/
Letter of comfort limit of Rs.85.00 crores as sub limit of
term loan.

43
Security:
The Facility, Interest, fees thereon and all other amounts
in respect thereof shall be secured inter alia by a first
ranking:
(a) mortgage / hypothecation and charge on all the
Company’s movable and immovable assets (including
all revenues, receipts, receivables and intangible
properties) both present and future in favour of Lenders
/ security trustee;
(b) assignment of all rights, titles, permits, approvals and
interests of the Company in, to and in respect of all its
assets, agreements (including but not limited to the
power purchase agreement(s), fuel supply / fuel off-take
agreement(s)), clearances, permits, approvals,
consents in favour of Lenders / security trustee;
(c) assignment of contractor guarantees, performance
bonds and any letter(s) of credit that may be provided
by any party for the Project in favour of Lenders /
security trustee;
(d) assignment in favour of Lenders / security trustees of all
insurance policies taken in respect of the Project;
(e) charge on the Company’s bank account(s), including
but not limited to the trust and retention account(s)
created in relation to the Project;
(f) pledge over 30% of the total issued share capital of the
Company held by Promoters and/or Coal block allottee;
and

DER 4:1
DSCR Min DSCR 1.30
Max DSCR 2.91
Average 1.59
Expected date of 48 months from NTP
COD
Moratorium 12 months from the COD
Repayment period Repayable in 40 structured quarterly instalments such that
the door-to-door maturity shall not exceed the Tenor.
Repayment schedule for the Facility is proposed as
follows:

Year of repayment % of Facility


1st year 8.0%
2nd year 8.0%
3rd year 8.0%
4th year 8.0%
5th year 8.0%
6th year 10.8%
7th year 11.4%
8th year 12.0%
9th year 12.8%
10th year 13.0%

44
BORROWER INFORMATION:

Name Aryan Power Pvt. Ltd.

Date of Incorporation 30th May, 2007

Corporate Office Aryan Power Pvt. Ltd., Plot No.397, Udyog Vihar,
Phase III, Bihar 12310056
Registered Office Aryan House, Plot No.4, Software Units Layout,
Hitec City Mirpur, Aliabad 500081.
Constitution Public Limited Company
Project Site Village Kurunti, Kishan nagar Bihar

Sector Power
Project 1320 MW (2 x 660 MW) Coal Based Power Project
using super critical technology being set up in
Kishan nagar Bihar
The Project includes power evacuation
arrangements, water arrangement and coal
transportation / infrastructure arrangement in
relation to the power plant.

CAPITAL STRUCTURE OF THE COMPANY:


(Amount in lacs of Rs)
Share Capital Amount
Authorised Share Capital 100000.00
(10,000 Equity Shares of Rs.10/- each)
Issued, subscribed Paid up capital 100000.00
(10000 equity shares of Rs.10/- each)

SHARE HOLDING PATTERN OF APPL:

Name of Shareholder Stake


Aryan Group 51%
Aryan Infratech Ltd. 26%
Charon Trading Pvt Ltd. 23%
Total 100%

OTHER RELATED INFORMATION

Whether name of the applicant company/its directors are No


appearing in the caution/defaulter list of RBI/CIBIL/ECGC.

Whether directors of the applicant company are a director or No


specified near relation of a director of a banking company.
Whether directors of the applicant company is a near No
specified relation of any Bank’s senior officer of the rank of
scale-IV and above.

BOARD OF DIRECTORS
Mr. Ali Hyder is one of the founder members of the Aryan Group. He is
currently the Executive Vice-Chairman of Aryan Infratech Ltd and heads the

45
Construction Division of AITL. Mr.Hyder holds a Bachelor’s degree in engineering
with Production as specialisation. He also holds an M.E degree in Machine Design
from the Indian Institute of Science, Bangalore. Mr.Hyder is respected for his
expertise and achievements in the Construction industry. His experience in
project planning and execution continues to give a firm direction to Aryan’s
strategic growth, especially in the Construction and Infrastructure segments.
Mr. L. Sridhar: is Director with Aryan Kondapalli Power Pvt. Ltd., Aban Power
Company Ltd., Aryan Amarkantak Power Pvt. Ltd. and Aryan Green Power Pvt.
Ltd. He had worked as Joint Managing Director of AITL from 1997 to 2003. He
has joined Aryan Group after working with Acon Building Constructions in
Sanjose, USA. He has done B.E. (Civil Engineering) from Siddaganga Institute of
Engineering in Tumkur, Karnataka and MS (Construction Management in Civil
Engineering) from University of Eastern Michigan in the United States.
Mr. Vinay Kumar: is Managing Director of Aryan Infratech Ltd. He has varied
experience in Commercial Banking, Corporate Advisory, Mergers and
Acquisitions, Project Finance and Equity Capital Markets. He currently looks after
Aryan Infratech's Finance functions and is a member of the Aryan's strategy
team. He focuses on Aryan's strategic partnerships and growth initiatives. He is
extensively involved in financing of AITL’s projects and overseeing the resources
function of all the group companies. He is respected as a strategist who can
foresee opportunities, new horizons and give a rapidly growing organization an
impetus to achieve desired goals. He is a Bachelor of Commerce from Madras
Christian College and also a Chartered Accountant and Cost Accountant.
Mr. Pradeep Kumar is the Chief Executive Officer – Thermal, of Aryan Infratech
Ltd. In addition to this, he also plays a key role in strategic planning and
technology. Mr. Kumar is a Mechanical Engineer with Finance Management
Certification course from IIM, Bangalore. He has more than 30 years of
experience in power projects as Original Equipment Manufacturer and also as
Independent Power Project Developer. He has led the implementation of over 15
power projects based on coal, oil and gas in public and private sectors.
BRIEF FINANCIALS OF APPL:
(Amount in Rs)

46
Particulars 31.03.09 31.03.08

I Sources of Funds
1. Shareholders’ Funds
Share Capital 100000 100000
Share Application Money Pending Allotment 770100000 140100000
Total 770200000 140200000
II Application of Funds
1. Fixed Assets
a) Gross Block 16551526 7882727
b) Less: Deprecation 1234051 278380

c) Net Block 15317476 7604347


Capital Work in progress (incl. Capital 71281678 36551830
Advances)
Pre operative expenses – pending allocation 142826198 44927629

2. Investments - 55111406
3. Current Assets, Loans & Advances
a) Loans and advances 537974785 2131847
b) Other current assets 17472 17502
c) Cash and Bank Balances 11714078 4872659
549706335 7022008
Less: Current Liabilities and Provisions 8931687 11017220
Net Current Assets 540774648 (3995212)

770200000 140200000

BRIEF ABOUT THE PROMOTER COMPANY

Aryan group, established in FY 1989, has diversified businesses covering power


generation and trading, civil engineering, construction, infrastructure and real
estate. The group was founded by Mr. L. Rajasingh, a second generation
entrepreneur, who started civil construction business and later ventured into
manufacturing of pig iron/steel. Mr. L. Madhusudan singh his younger brother
joined the Aryan group in 1992 after completing his studies from USA. In 2000,
the group ventured into power business by setting up a 368 MW gas based
power plant in Kondapalli, Andhra Pradesh. During FY 2002 the group, exited
from the steel business in order to become a focused player in the infrastructure
segment, Besides this, in 2003, Mr. L. Rajasingh moved into active politics by
becoming a member of Parliament, representing Vijaywada constituency in the
State of Andhra Pradesh. Mr. L. Madhusudan singh is the Chairman of the Aryan
group.
The group has experienced significant growth in recent years through various
projects undertaken in power sector, road and civil construction. The group also
has entered into real estate sector by undertaking property development of 20
million square feet (msf) of built-up area in Hyderabad. In power sector, the
group has 7 operational projects aggregating 1,044 MW capacity based on gas,
coal, hydro and wind sources. In addition, the group has undertaken
development of 11 power projects and the total generation capacity post the
implementation of all these projects by FY 2014 would aggregate to about 7,250
MW out of which about 3,565 MW capacity is presently in advanced stage of
construction. In power trading business, the group traded about 2,900 million

47
units (MUs) of power for FY 2009 and emerged as the largest private sector
power trading participant (market share of about 15%).
In order to increase the power generation portfolio and capitalize on the
increasing opportunities in the fast growing power sector, the group has
promoted APPL to construct, operate and maintain a 1,320 MW (2x660 MW)
domestic coal based power project in kishan nagar Bihar

Promoter:

Aryan Infratech Ltd. (AITL) is the main operating cum holding company of the
group. AITL is a listed company with market capitalisation of about Rs. 142.75
billion. In November 2006, AITL made an Initial Public Offer (IPO) of Rs. 10.67
billion by issuing 44.5 million equity shares of Rs.10 each at a premium of Rs.
230 per share. The IPO was oversubscribed by around 11 times and well received
by the investors. The proceeds from the IPO have been utilized primarily towards
development of infrastructure projects in power and real estate sectors.

Particulars Detail
Corporate Office Aryan Power Pvt. Ltd., Plot No.397, Udyog Vihar, Phase
III, Bihar 12310056
Registered Office Aryan House, Plot No.4, Software Units Layout, Hitec City
Mirpur, Aliabad 500081.
Constitution Public Limited Company
Date of March 26, 1993
incorporation
External credit BBB+ by CRISIL
rating
Ownership pattern Promoters – 67.95%
Institutions/FIIs – 23.12%
Non-institutions/Public – 8.93%
External Credit BBB+ by CRISIL
Rating

Board of Directors of the promoter company( AITL) :

The composition of Board of Directors of Aryan Infratech Limited is as follows:


Name of Director Designation
Mr. L. Madhusudhan Singh Executive Chairman
Mr. Alihyder Executive Vice Chairman
Mr. L. Sridhar Vice Chairman
Mr. G. Vinay Kumar Managing Director
Dr. B. Vasanthan Director
Dr. P. Kotaiah Director
Mr. O. Abraham Director
Dr. Uddesh Kumar Kohli Director
Mr. P Narasimharamulu Director

Shareholding Pattern of AITL:


Shareholding pattern of AITL as on September 30, 2009

48
Category of No. of shares % of shareholding
shareholder (Rs. 10/- per share fully paid
up)
Promoters 163,605, 400 67.95%
Institutions / FIIs 55, 664,020 23.12%
Non-Institutions / 21,511,072 8.93%
Public
Total 240,780,492 100.00%

various sectors of AITL :

Brief detail of presence of AITL in various sectors is as follows:

1. Power sector

Presently, the subsidiaries of AITL are operating 7 power plants with total
operational capacity of 1,044 MW. With power projects in operations, under
construction and development, the aggregate power generation capacity of
Aryan group shall be close to 7,250 MW by FY 2014.

List of power plant Operational Under Under Actual/Expected


(MW) constructio developmen completion date
n (MW) t (MW)
Kondapalli,Andhra 368 - - October, 2000
Pradesh
Chitraguda,wind 3 - - March, 2002
project, Karnataka
Aban-Power,Tamil 120 - - August, 2005
Nadu
Tirunnelveli-wind 10 - - September, 2006
project, Tamil Nadu
Amarkantak– 300 - - May, 2009
Chhattisgarh
Vamsi Hydro Energy, 10 - - June, 2009
Kangra, HP
Kondapalli 233 - - October, 2009
expansion, AP
Vamshi Industrial - 10 - December, 09
power, (HP)
Amarkantak II- - 300 March, 2010
Chhattisgarh
Kondapalli - 133 - April, 2010
expansion, AP
Udupi Power, - 1,200 - June, 2010
Karnataka
Aryan Green, HP - 70 - October, 2010
Anpara “C”, Uttar - 1,200 - March, 2011
Pradesh
Aryan-Hydro,
Uttranchal - 76 - March, 2012
- Phata Byung - 76 - March, 2013
project

49
- Rambara project
Aryan Teesta, Sikkim - 500 - November, 12
Amarkantak III & IV, - - 1,320 November, 13
Chattisgarh
Babandh project, - - 1,320 March, 2014
Bihar
Total 1,044 3,565 2,640

On completion of above power projects, the group would become one of the
leading power generating company in India with a well diversified power portfolio
based on all types of fuel, as tabulated below:

Type of Fuel Capacity (in MW) % of total capacity

Coal 5,640 77.80%


Gas 854 11.80%
Hydro 742 10.22%
Wind 13 0.18%
Total 7,249 100.00%

Key Financial Indicators of the promoter company:


(Amount in crores of Rs)

50
For the period ended, Mar 2007 Mar 2008 Mar 2009
Audited Audited Audited
No of months 12 12 12
Total operating income (TOI) 16057.7 32,412.6 60,719.6
EBIDTA 4,198.0 6,994.5 8,873.6
EBIDTA/TOI (%) 26.14% 21.58% 14.61%
Interest 828.6 921.4 2,184.9
Depreciation 655.6 775.7 1,073.4
Operating Profit (OP) 2,713.8 5,297.4 5,615.3
Non-operating Income 415.8 952.9 562.4
PBT 3,129.6 6,250.3 6,177.7
PAT 2,657.7 4,845.6 4,487.3
PAT/TOI (%) 16.55% 14.95% 7.39%
Net Cash Accruals (NCA) 3,375.4 5,702.7 5,562.4
Net fixed assets 24,390.0 38,029.4
Tangible Net worth (TNW) 15,104.8 18,333.4 20,976.2
Long term debt (LTD) (A) 16,411.2 30,308.0 49,439.0
Short term debt (STD) (B) 0.0 0.0 0.0
Working Capital Bank Finance
(C) 687.5 1,341.7 6,530.8
Guarantee (D) 0.0 0.0 0.0
Total Debt (A+B+C+D) 17,098.8 31,649.7 55,969.7
Total Debt /TNW 1.1 1.7 2.7
LTD/ TNW 1.1 1.7 2.4
Total Current Assets 17,173.9 38,768.8 49,342.4
Total Current Liabilities 11,533.7 27,038.8 31,331.3
Net working capital 5,640.2 11,730.0 18,011.2
Current ratio 1.5 1.4 1.6
ROCE (%) 11.80% 12.50% 10.50%
Interest cover 5.0 7.1 3.5
Total debt/ EBIDTA 4.1 4.5 6.3
Total debt/ NCA 5.1 5.5 10.1

Comments:
Total Operating Income:

The total operating income (TOI) during FY 2009 has increased to Rs. 60719.6
crores from Rs. 32412.6 crores in FY 2008. The increase in TOI was primarily on
account of increased revenue income from various construction and EPC
contracts and power business.

Profitability:

Despite increase in operating income, Profit before Tax (PBT) has remained
stagnant at Rs. 6177.7 crores during FY 2009 against Rs. 6250.3 crores during
FY 2008. The EBIDTA margin has reduced on account of increase in cost of
construction material and higher administrative/development expenses and
finance charges due to increased leverage.

Leverage:

51
Total debt increased to Rs. 55969.7 crores in FY 2009 from Rs. 31649.7 crores in
FY 2008. Of the total debt about 6% of the total debt is unsecured in nature. The
total debt to net cash accruals is at 10.1 times.

PRESENT PROPOSAL OF THE APPLICANT COMPANY

Aryan group, established in FY 1989, has diversified businesses covering power


generation and trading, civil engineering, construction, infrastructure and real
estate. The group was founded by Mr. L. Rajasingh, a second generation
entrepreneur, who started civil construction business and later ventured into
manufacturing of pig iron/steel. Mr. L. Madhusudan singh, his younger brother
joined the Aryan group in 1992 after completing his studies from USA. In 2000,
the group ventured into power business by setting up a 368 MW gas based
power plant in Kondapalli, Andhra Pradesh. During FY 2002 the group, exited
from the steel business in order to become a focused player in the infrastructure
segment, Besides this, in 2003, Mr. L. Rajasingh moved into active politics by
becoming a member of Parliament, representing Vijaywada constituency in the
State of Andhra Pradesh. Mr. L. Madhusudan Rao is the Chairman of the Aryan
group.
In order to increase the power generation portfolio and capitalize on the
increasing opportunities in the fast growing power sector, the group has
promoted APPL to construct, operate and maintain a 1,320 MW (2x660 MW)
domestic coal based power project in Dhenkanal district, Bihar. The estimated
project cost of Rs. 69.30 billion is proposed to be financed in the ratio of 75:5:20
comprising senior debt (Rs. 51.97 billion), subordinated debt (Rs. 3.47 billion)
and equity (Rs. 13.86 billion) respectively. The entire equity requirement of the
project of Rs. 13.86 billion shall be brought in by Aryan group and AITL, the
flagship company of the Aryan group, proposes to provide sponsor support for
the same. The subordinated debt of Rs. 3.47 billion (5% of project cost) is
proposed to be availed by the company after successful commercial operation of
each of the two units of 660 MW. The project is being implemented on super
critical technology by way of a turnkey Engineering, Procurement & Construction
(EPC) contract. The project is expected to achieve commercial operation within
48 months of financial closure.

The total coal requirement of the project at 85% plant load factor (PLF) is
estimated at 6.09 million tonnes per annum and is proposed to be sourced
through allocated coal linkages/captive mine. The company has received long
term coal linkage for 660 MW capacities in December 2008 from Mahanadi
Coalfields Ltd (MCL) which is located at a distance of about 26 kms from the
project site. Further, Ministry of Coal has allotted Rampia and dip side of Rampia
captive coal blocks to APPL along with 5 other independent power producers
(IPPs) and the same is expected to be operational in FY 2017. APPL has also
applied for tapering coal linkage for the balance capacity of 660 MW till the
allotted captive mine is operationalised.

APPL has entered into long term power purchase agreement (PPA) for sale of
25% of total capacity at Central Electricity Regulatory Commission (CERC) tariff
to Grid Corporation of Bihar (GRIDCB). The company proposes to enter into long
term PPA with state utilities/industrial bulk consumers based on competitive
bidding for additional 25% of capacity (at a price not less than or equivalent to
the tariff calculated as per CERC regulations) and the balance 50% of the
capacity (660 MW) is proposed to be tied up by way of short term/bilateral sale.

52
GRIDCB would be procuring the power from the power station bus bar and the
balance power shall be evacuated through Power Grid Corporation of India
Limited (PGCIL) pooling station at Angul which is located at a distance of about
25 kms from the project site. Further, the company has initialled a bulk power
transmission agreement (BPTA) with PGCIL in this regard.

COST OF PROJECT:

The 1320 MW project is proposed to be set up by way of a turnkey fixed price


fixed time EPC contract using super critical technology at an estimated cost of
Rs. 69.30 billion comprising expenditure towards land & site development, EPC
cost, transmission line, railway line, ash pond, water line, captive coal block
development contribution, township, preliminary & preoperative expenditure,
contingencies, interest during construction and margin money for working
capital.
A summary of the components of project cost is presented below:
Rs. billion)
Particulars Amount
Land & site development 0.60
EPC cost including civil works 55.86
Pre-operative expenditure 1.76
Interest during construction 8.36
Contingencies 1.51
Margin money for working capital 1.21
Total cost 69.30

ITEMWISE DESCRIPTION OF PROJECT COST

Land & site development:

Total land requirement of the project is 497 acres including 105 acres for green
belt and 100 acres for ash pond. The company proposes to acquire land in
tranches. In first tranche, the company proposes to acquire land for main plant,
water reservoir, transmission system etc. and land for ash pond and green belt
will be acquired subsequently. The land requirement for main plant, water
reservoir, transmission system etc. is of 292 acres.

The total land required for the project is estimated to be acquired at a cost of Rs.
0.30 billion (497 acres @0.6 million per acre). Till date, the company has
acquired around 130 acres of land. Out of the total land acquired, 23 acres is
Government land, 91 acres is private land and 16 acres is forest land. The
company has so far paid Rs. 50.9 million towards compensation for the land.

Further, an amount of Rs. 0.30 billion has been earmarked towards site
development consisting of levelling and boundary wall, R&R cost and
contingency in land acquisition cost.

EPC cost:

The complete plant and machinery for the project would be procured through a
turnkey EPC contract. The total EPC cost is estimated at Rs. 55.86 billion

53
(including USD 500.0 million) which represents EPC cost of Rs. 51.59 billion for
supply of BTG package, balance of plants & related civil works and Non EPC cost
of Rs. 4.27 billion.

The civil works and infrastructure includes expenditure on development of


independent systems such as main plant building, cooling water system, RCC
chimney, various pump house buildings, storage tanks, coal handling plant, ash
handling plant etc.

Pre-operative expenses:

Pre-operative expenses are estimated to cost Rs. 1.76 billion and include fees to
be paid towards technical studies conducted by owner’s engineer and lenders’
independent engineer, legal expenses for fees payable to the lenders’ and
owner’s legal counsel, insurance advisor’s fees, start up fuel, employees
recruitment, training and salaries, establishment and other expenses etc.
Expenses towards start up fuel are estimated at Rs. 0.45 billion. Other pre-
operative expenses of Rs. 1.31 billion includes salaries, establishment & admin
overheads cost – Rs. 0.60 billion, consultancy charges – Rs. 0.21 billion etc.

Interest during construction and Financing charges (including


Insurance):

The total interest during construction (IDC), financing and insurance charges is
estimated at Rs. 8.36 billion. The cost includes interest on rupee term loan
during construction, processing fees, insurance cost, bank guarantee
commission, hedging cost, facility agent fees etc. The IDC has been calculated
assuming an implementation period of 44 months for Unit 1 with subsequent
completion of second unit with a gap of 4 months from Notice to Proceed (NTP)
to EPC contractor. The debt drawdown schedule has been made with provision of
25% upfront equity and balance by way of equity and debt drawdown on a pro-
rata basis. Subordinated debt is proposed to be availed for payment of retention
money to EPC contractor and will be availed proportionately after COD of each of
the two units of 660 MW i.e. 50% of Rs. 3.47 billion to be availed after COD of
unit 1 and balance 50% after COD of unit 2.

Contingency:

The company proposes to implement the project by way of a turnkey EPC


contract which will be a fixed price and fixed time contract. However, considering
the wide fluctuation in the forex conversion rate for USD (@ Rs. 49.00 /USD),
concessional duty payments and mega power benefits, a contingency provision
has been considered at 2.25% of the total project cost (excluding working capital
margin), equivalent to Rs. 1.51 billion.

Margin money:

The provision for margin money for working capital has been made at Rs. 1.21
billion. The margin money has been estimated at the rate of 25% of projected
net working capital requirement of APPL. For the purpose of estimates, the
current assets comprising of receivables of 16 days, primary fuel stock of 1
month, secondary fuel stock of 2 months and O&M cost for 1 month and spares
requirement equal to 5% of the O&M cost has been assumed.

54
MEANS OF FINANCE:

The cost of the 1,320 MW project, estimated at Rs. 69.30 billion, is proposed to
be financed with senior debt, subordinated debt and equity in ratio of 75:5:20.
The proposed components of financing are as under:
(Rs. in billions) (Amount in crores of Rs)
Source Percentage (%) Amount
Equity 20%
13.86
Senior debt 75% 51.97
Subordinated debt (Sub debt) 5%
3.47
Total 100% 69.30

Equity

The equity contribution aggregating to Rs. 13.86 billion is proposed to be


brought in as equity investment by AITL and its associates. 25% of the total
equity requirement would be brought in prior to first drawdown of debt and
balance 75% shall be brought in over 48 months period. AITL will provide
undertaking for balance equity requirement of the project. Aryan Group has
satisfactory visibility of earning and access to capital markets for meeting equity
infusion requirements. In July 2009, AITL completed Qualified Institutional
Placement (QIP) issue of USD 150.0 million. The group has cash and cash
equivalents of Rs. 10,666.0 million as on September 30, 2009.

Senior debt

Senior debt requirement of the project of Rs. 51.97 billion is proposed to be


sourced by way of Rupee term loans (RTL) from various banks/financial
institutions.

Subordinate debt

Total sub debt requirement of project of Rs. 3.47 billion is proposed to be


sourced by way of Rupee term loan from various banks/financial institutions. The
disbursement of sub debt is proposed to be availed after successful
implementation of each of the two units of 660 MW. Further, sub debt will be
additionally secured by corporate guarantee of AITL. The corporate guarantee
shall fall off if the average DSCR for the first 2 years of operations or at anytime
thereafter is at least 1.40 times and subject to the average DSCR for the balance
tenor being maintained at 1.30 times.

PROJECT IMPLEMENTATION SCHEDULE:

The company is negotiating the EPC contract with AITL and is expected to
finalize it before financial closure of the project. The project will be implemented
as per the following implementation schedule.

Particulars Completion time


Notice to proceed (NTP) to EPC contractor Day 0
Start of trial run – unit I Day 0 + 39 months
Start of trial run – unit II Day 0 + 43 months
Commercial operation date - unit I Day 0 + 44 months

55
Commercial operation date - unit II Day 0 + 48 months

OTHER INFORMATION WITH RELATED TO THE PROJECT

Location and site

The proposed power plant would be located at village Kurunti in Kishan nagar
Bihar state. Total land requirement for main plant, power house, transformer
yard, switchyard, water system, coal & ash handling system, ash disposal area
and green belt is estimated at 497 acres.

The site location has been selected considering the proximity of site to coal
mines and availability of water from Brahmani River. Further, the project land is
above the highest flood level of the area. The site is 1 km from NH 42 (Angul –
Kishan nagar), 6 kms from Budhapank railway station on the East Coast Railway,
120 kms from Bhubaneswar airport and 220 kms from Paradip port.

INTERNAL RATING:
Construction Risk Assessment 1.00
Market Risk Assessment 1.00
Supply Risk Assessment 1.00
Project Cost And Viability 2.00
Basic Borrower Risk Score 1.09
Borrower Risk Score (with Project Status Cap) 1.09
Final Risk Grade JKB-INFRA-1
Probability of Default 3.16%

INDUSTRY ANALYSIS

The Indian electricity sector has grown manifold since 1947 and India today is
the third largest producer of power in Asia. The power generating capacity has
increased from 1,362 MW in 1947 to about 152,360 MW as on September 30,
2009. Out of the total installed generation capacity, 50.3% is owned by the state
sector, 32.7% is owned by the central sector and the balance 17.0% by the
private sector. The break-up of installed capacity as on September 30, 2009 is as
follows:
(In MW)
Source/ownership State Central Private Total
Coal/lignite 42,950 30,455 6,991 80,396
Gas/liquid fuel 3,672 6,702 6,075 16,449
Diesel 603 - 597 1,200
Hydro 27,087 8,565 1,233 36,885
Nuclear - 4,120 - 4,120
Renewable Energy Resources 2,315 - 10,995 13,310
Total 76627 49843 25891 152360
Source: Ministry of Power

As may be observed from the above, thermal power based power plants account
for about 64.4% of the country's installed capacity for power generation, with

56
coal/lignite constituting about 52.8% and gas/liquid fuel constituting about 10.8%
of the total installed capacity. The annual per capita consumption of electricity in
India is one of the lowest in the world and is estimated at about 704 units. India’s
per capita consumption for electricity is about one fourth of the world’s average.
The per capita consumption for China, USA and UK is 2,400 units, 13,640 units
and 6,250 units respectively.

Demand – supply position

The electricity demand and supply position in Bihar over the eight-year period
ended FY 2009 is given below:

Demand Supply Surplus/deficit


Energy Peak Energy Peak
demand Demand Supply Supply Energy
Year (MU) (MW) (MU) (MW) (MU) Peak(MW)

2001-02 12,328 2,132 12,318 1,977 (10) (155)


2002-03 13,393 2,125 13,087 1,988 (306) (137)
2003-04 13,610 2,125 13,375 1,987 (235) (138)
2004-05 13,980 2,220 13,875 2,220 (105) -
2005-06 15,208 2,437 15,010 2,396 (198) (41)
2006-07 17,101 2,695 16,796 2,608 (305) (87)
2007-08 18,846 3,142 18,500 2,905 (346) (237)
2008-09 20,481 3,067 20,173 3,040 (308) (27)
Source: Ministry of Power/Infraline

The electricity demand-supply gap in Bihar and the corresponding position in the
Eastern and on an all India basis is as follows:

Energy deficit (%) Peak deficit (%)


Year Eastern Eastern
Bihar All India Bihar All India
region Region
2001-02 (11.
(0.1) (7.5) (7.3)
(1.0) (3.7) 8)
2002-03 (12.
(2.3) (8.8) (6.4)
(2.7) (5.0) 2)
2003-04 (11.
(1.7) (7.1) (6.5)
(4.9) (10.3) 2)
2004-05 (11.
(0.8) (7.3) -
(2.4) (3.2) 7)
2005-06 (12.
(1.3) (8.4) (1.7)
(2.6) (4.8) 3)
2006-07 (13.
(1.8) (9.6) (3.2)
(3.0) (4.1) 8)
(16.
(1.8) (9.9) (7.5)
2007-08 (4.9) (11.1) 6)
(12.
(1.5) (11.0) (0.9)
2008-09 (4.6) (9.4) 0)

57
It may be observed that Bihar is better-off in terms of energy deficiency in
Comparison to other states in India, and is expected that in the near future,
there will be marginal or no deficit of power in the state of Bihar considering the
fact that a number of power projects are being developed in the state. On a
comparative basis, while the demand-supply gap in Bihar is much in line with the
average for the eastern region, it is significantly lower than the corresponding
national average. Bihar was the first state in the country to go in for a
comprehensive restructuring of the electricity sector starting with the enactment
of the Bihar Electricity Reform Act, 1995 and the unbundling of Bihar State
Electricity Board (BSEB) into generation, transmission and distribution entities.
This was followed by the corporatisation, commercialization and privatization of
the distribution entities and the creation of a statutory authority namely Bihar
Electricity Regulatory Commission (BERC).

SWOT Analysis

Strength

• Aryan Group has considerable experience in setting up and operating power


projects successfully and APPL will be leveraging the same in effective
execution and operation of the proposed project.
• The equity in APPL will be infused by Aryan Group, which has satisfactory
visibility of earning and access to capital markets for meeting equity infusion
requirements. In July 2009, AITL completed Qualified Institutional Placement
(QIP) issue of USD 150.0 million. The group has cash and cash equivalents of
Rs. 10,666.0 million as on September 30, 2009.
• The company has already started land acquisition process and acquired 130
acres of land (26% of total land requirement). Further, MOU has been signed
with State Government of Bihar, which interalia would facilitate land
acquisition, captive mine/ coal linkage, environmental clearance, water
allocation and power required during construction period.
• The company has received long term coal linkage for 660 MW capacity from
Mahanadi Coalfields Ltd (MCL). Further, Ministry of Coal has allotted Rampia
and dip side of Rampia captive coal blocks to APPL for 1000 MW capacity.
APPL has also applied for tapering coal linkage for the balance capacity of
660 MW till the allotted captive mine is operationalised.

Weaknesses

• PPA for 330 MW is yet to be tied up, which exposes the company to off take
risk.
APPL has undertaken to execute long term PPA with state utilities/industrial
bulk consumers for the above mentioned 25% capacity based on competitive
bidding (at a price not less than or equivalent to the tariff calculated as per
CERC regulations) within 18 months of first drawdown of debt. Additionally,
AITL would be providing sponsor support in the form corporate guarantee to
the lenders to secure the Lenders debt obligation.

• Fuel supply for 660 MW of capacity for initial year of operation is yet to be
tied up, which exposes the company to fuel supply risk.
The company has received long term coal linkage for 660 MW capacity from
MCL. Further, Ministry of Coal has allotted Rampia and dip side of Rampia
captive coal blocks to APPL for 1000 MW capacity. Since development of the

58
captive coal block is expected to be completed by FY 2017, which is beyond
the scheduled commercial operation date of the project, therefore, APPL has
also applied for tapering coal linkage for balance 660 MW capacities till the
allotted captive mine is operationalised.
To mitigate coal supply risk for balance 660 MW capacity, the company has
undertaken to procure the tapering coal linkage within 18 months of first
drawdown of debt. Additionally, AITL would be providing sponsor support in
the form of corporate guarantee to the lenders to secure the Lenders debt
obligation.

Opportunities

• With several reforms implemented in past by Government like The Electricity


Act 2003, National Tariff Policy 2006, APDRP etc. and further strengthening
and opening of the sector, it is expected that more and more opportunities
would emerge for private sector parties in the energy sector in India.
• On production of the coal from the captive coal blocks, the cost of power
generation is expected to reduce further.

Threats

The other power plants coming up in the surrounding region may provide
competition to APPL with regard to tie-up of plant capacity with other State
utilities/ Industrial bulk consumers
The company has already tied up 25% of its total plant capacity with GRIDCB and
has undertaken to enter into long term PPA with State utilities/ Industrial bulk
consumers for additional 25% of capacity based on competitive bidding (at a
price not less than or equivalent to the tariff calculated as per CERC regulations)
within 18 months from the date of first drawdown of debt. Additionally, AITL
would be providing sponsor support in the form of corporate guarantee to the
lenders to secure the Lenders debt obligation

RISK ANALYSIS AND MITIGATION MECHANISM:

The key risks of the project and mitigation measures are analyzed below:

Increase in project cost and delays in construction:

The company proposes to implement the project by way of a fixed time, fixed
price EPC contract. The EPC contract is expected to be finalized prior to financial
closure in a form and manner acceptable to the lenders. The sponsor, AITL, is an
experienced player in power sector and so far implemented 7 power projects
aggregating to 1,044 MW, with 3,565 MW capacity under advanced stage of
construction. Further, APPL has already obtained key clearances for
implementation of the project. The Lender’s Engineer (LE) would monitor
progress of construction of the project on quarterly basis.

AITL, the promoter of APPL, would be providing an undertaking to arrange for an


acceptable credit support for meeting any cost overrun in respect of the project.

59
Off-take risk

APPL has executed long term PPA for about 25% (330 MW) of its power
generation capacity. The power will be sold to GRIDCB at SERC/CERC tariff. In
case GRIDCB is unable to honour the terms of the PPA, APPL shall have a right to
sell the power to any third party. Further, APPL proposes to sell additional 25%
capacity on long term basis for which it proposes to enter into PPA with state
utilities/industrial bulk consumers based on competitive bidding (at a price not
less than or equivalent to the tariff calculated as per CERC regulations) and the
residual 50% capacity on short term/bilateral sale basis. APPL has undertaken to
execute long term PPA for additional 25% capacity within 18 months of first
drawdown of debt.

A comprehensive analysis of other identified risks and measures for mitigation of


the same is given below:-

Allocated
Risk Remarks
to
Pre construction risks
Finalization APPL The project is proposed to be implemented by
of-key way of a fixed price fixed time turnkey
contracts Engineering, Procurement and Construction
(EPC) contract. The EPC contract is expected
to finalise before financial closure in a form
and manner acceptable to the lenders.

For sale of power, APPL has executed long


term PPA for 25% of its total capacity and shall
execute long term PPA for additional 25%
capacity within 18 months of first drawdown of
debt.

APPL is also entering into BPTA with PGCIL for


ensuring evacuation of power from the plant.
Regulatory APPL APPL has received all major clearances
Approvals including Chimney height clearance and
and permits pollution clearance from State Pollution
Control Board. The list of major
approvals/clearances and status thereof is
detailed out earlier in the note.
Land APPL Out of total land requirement of 497 acres,
297 acres is sufficient for main power plant,
water reservoir, transmission system etc.
proposed to be acquired prior to first
disbursement. The company has so far
acquired 130 acres of land.

In addition, AITL would be providing sponsor


support in the form of corporate guarantee to
the lenders for acquisition of balance 200
acres of land by APPL within 18 months from
first drawdown of debt.
Financing risks

60
Allocated
Risk Remarks
to
Equity AITL Of the total equity requirement of Rs. 13.86
billion, Rs. 3.47 billion (25%) shall be deployed
prior to first disbursement. Balance equity
requirement of Rs. 10.39 billion shall be
brought in over a period of 4 years. Aryan
Group has satisfactory visibility of earning and
access to capital markets for meeting equity
infusion requirements.
Debt AITL The total debt of Rs. 55.44 billion is proposed
to be syndicated with various banks/financial
institutions.
ICICI Bank has been mandated to raise the
balance debt and tying up of entire debt is a
condition precedent to first disbursement.
Operational risks
Equipment Equipment The EPC/BTG contracts would include
under- supplier provisions for guaranteed performance
performance parameters, completion schedule, liquidated
damages for failure in meeting completion,
and liquidated damages for failure in meeting
performance guarantees and warranty period.
These contracts will be finalised prior to
financial closure of the project in a form and
manner acceptable to the lenders and will be
reviewed by the Lender’s Engineer. Further,
the Lenders Engineer would also review the
construction and operations of the Project.

Approvals & clearances:

⇒ Pollution clearance - Consent to Establish received from Bihar State


Pollution Control Board (BSPCB) on May 20, 2009.

⇒ Environmental clearance - MoEF clearance has been recommended by


the Expert Appraisal Committee (EAC) on environmental impact
assessment of thermal power and coal mine projects during its 54 th
meeting held on September 10-12, 2009. Letter for environment clearance
is awaited.

⇒ Chimney Height clearance – No objection for construction of chimney


received from Airport Authority of India on September 03, 2008.

⇒ Clearance for private railway siding (6 kms) - Clearance received from


East Coast Railway on August 28, 2008.

⇒ Forest Clearance: The forest clearance for 16 acres of land has been
submitted to the nodal agency for approval on October 30, 2009 and
clearance is awaited.

SENSITIVITY ANALYSIS

61
Sensitivity analysis has been carried out to study the impact of the following
critical parameters on the ability of the project to service its debt obligations.
The following key parameters have been considered:

• Plant load factor (PLF)


• Short term/bilateral tariff
• Linkage coal price

PLF sensitivity
The base case PLF has been assumed at 85% PLF. The impact on DSCR in case of
decrease in PLF is as under:

PLR (%) ADSCR MDSCR


Base Case 85% 1.45 1.30
Case I 80% 1.32 1.18
Case II 75% 1.19 1.05

Short term/bilateral tariff sensitivity


The base case short term/bilateral tariff has been assumed at Rs. 3.00/unit. The
impact on DSCR in case of decrease in short term/bilateral tariff is as under:

Short ADSCR MDSCR


term/bilateral
tariff
(Rs./tonne)
Base Case 3.00 1.45 1.30
Case I 2.75 1.34 1.19
Case II 2.50 1.23 1.07

Coal price sensitivity


The company has obtained long term coal linkage for 660 MW from Mahanadi
Coalfields Limited (MCL) and has applied for tapering coal linkage for balance
capacity of 660 MW. The notified price for ‘F ‘grade coal w.e.f October 15, 2009
is Rs. 480/tonne for run-of-mine coal from MCL region. The base case coal price
has been assumed at Rs. 720/tonne (inclusive of taxes, duties, royalty, handling
charges etc) for ‘F’ grade coal with 4.00% escalation p.a. (with average gross
calorific value of 3600 Kcal/Kg). The transportation charges have been assumed
at Rs. 125/tonne with 2.00% escalation p.a. The impact on DSCR in case of
increase in linkage price is as under:

Linkage coal Price for first year ADSCR MDSCR


price of operation (FY
(Rs./tonne) 2014)
(Rs./tonne
Base 845 978 1.45 1.30
Case
Case I 925 1,071 1.42 1.26
Case II 1000 1,159 1.38 1.22

RECOMMENDATION:
Keeping in view the above, the experience of the promoter in the existing field,
profitability position of promoter companies and economic and financial viability

62
of the project, the case is recommended for sanction of Long term loan (Senior
Debt Rs.175.00 Crores and Subordinated Debt Rs.25.00 Crores) aggregating
Rs.200.00 crores (Rupees Two Hundred Crores only) and Sub-Limit as Non-fund
Based facility by way of LC/BG/Letter of Comfort to the extent of Rs.85.00 Crores
(Rupees Eighty Five Crores only) directly or by way of fronting risk –cum-
remuneration basis on any of the part of the Lending Institutions in favour of M/s
Aryan Babandh Power Pvt. Ltd. on the following securities terms and conditions:-

Borrower : Aryan Power Private Limited (“APPL” or the "Borrower" or


the “Company”).
Promoter : Aryan Infratech Limited (AITL), its affiliates and
subsidiaries, jointly and severally.
Project : 1,320 MW (2 x 660 MW) coal based power project using
super critical technology being set up in Kishan nagar,
Bihar (the "Project").

The Project includes power evacuation arrangements,


water arrangement and coal transportation/infrastructure
arrangement in relation to the power plant.
Captive Mines : 12 square kilometres of coal mines in the Rampia and dip
side of the Rampia coal fields (“Captive Mines”) allocated
by Ministry of Coal, India for sole utilization by the Project.
Project Cost : The cost of the project is estimated at Rs. 69.30 billion
("Project Cost").
Project Cost covers direct costs related to the
implementation of the Project, including appropriate
provisions for contingencies, and interest accrued during
the construction period, etc.
Means of finance : The Project Cost is to be funded in the following manner:
Senior debt: Rs. 51.97 billion (Our Shares Rs.175.00 Crores
);
Subordinated debt: Rs. 3.47 billion (Our Share Rs.25.00
Crores); and
Equity: Rs. 13.86 billion.
Arranger : ICICI Bank.
ICICI Bank shall be the sole lead arranger to tie-up the
entire debt required for the Project. The finalization of the
rupee term loan syndicate would be by way of a book
building process and on best efforts basis.
Lenders : ICICI Bank and other banks / financial institutions,
collectively the “Lenders” to be arranged by the Arranger.
Facility Agent : ICICI Bank.
Purpose : The proceeds of the Facility shall be utilized solely for the
purpose of part financing the Project Cost.
Availability Period : Subject to terms and conditions contained in the Financing
Documents and the satisfaction of the conditions
precedent set out therein, the Facility will be available for
drawdown from the Signing Date up to:
(i) the date falling 6 months after Commencement
Date; or
(ii) the date on which Facility is fully disbursed,
cancelled or terminated
Whichever is earlier

63
Amounts remaining undrawn at the end of the Availability
Period shall be automatically cancelled.
Signing Date : The date on which the financing agreements / documents
(the “Financing Documents”) in relation to the Facility are
executed.
Commencement : At the end of 48 months from the Signing Date or actual
Date commercial operation of the last unit of the Project (2 x
660 MW), whichever is later (“COD”).
Interest rate for : The Borrower shall pay to Lenders the interest on the
Senior debt principal amount of the Facility outstanding from time to
time monthly in each year on 15th day of each calendar
month.
The rate of interest for each tranche of the Facility for each
Lender ("the Applicable Rate") shall be a sum of Margin
and the Prime Lending Rate ("PLR") prevailing on the date
of disbursement of such tranche of the Facility for each
Lender, plus applicable interest tax or other statutory levy,
if any.
The Applicable Rate as on date is 11.50% per annum,
payable monthly. The Margin for each Lender is the
difference between the Applicable Rate as on date and the
PLR for the respective Lender as on the Agreement Date.
Provided that the aforesaid interest rate payable to the
Lenders for each tranche shall be reset at the end of every
12 months from the date of first disbursement ("Reset
Date") based on the then prevailing PLR of each bank /
financial institution and the Borrower shall thereafter pay
interest at such reset rate till the following Reset Date.
Interest rate for : Applicable Interest rate for Senior debt plus 2.00% p.a.
Subordinated payable monthly with annual reset
debt
Interest Period / : The Company shall pay to Lenders Interest on the principal
Payment Dates amount of Facility outstanding from time to time monthly
in each year on 15th day of each calendar month.
Interest payments shall be made in arrears at the end of
each Interest Period (“Interest Payment Date”) and
calculated on the basis of the actual number of days
elapsed in a year of 365 days.
Tenor : The final maturity will not exceed 180 months from the
date of first drawdown.
Moratorium : 12 months from the COD.
Liquidated : The Borrower shall pay additional interest at the rate of
damages/ 2.0% p.a. over applicable interest rate, plus interest tax or
additional other statutory levy, if any, on the total outstanding of the
interest on Facility in the event of any defaults in payment of Interest,
defaulted principal, upfront fee or any other monies due to Lenders
payments on their respective dates during the currency of the Facility
for the relevant period.
Security : The Facility, Interest, fees thereon and all other amounts
in respect thereof shall be secured inter alia by a first
ranking:
(g) mortgage / hypothecation and charge on all the
Company’s movable and immovable assets (including

64
all revenues, receipts, receivables and intangible
properties) both present and future in favour of Lenders
/ security trustee;
(h) assignment of all rights, titles, permits, approvals and
interests of the Company in, to and in respect of all its
assets, agreements (including but not limited to the
power purchase agreement(s), fuel supply / fuel off-
take agreement(s)), clearances, permits, approvals,
consents in favour of Lenders / security trustee;
(i) assignment of contractor guarantees, performance
bonds and any letter(s) of credit that may be provided
by any party for the Project in favour of Lenders /
security trustee;
(j) assignment in favour of Lenders / security trustees of
all insurance policies taken in respect of the Project;
(k) charge on the Company’s bank account(s), including
but not limited to the trust and retention account(s)
created in relation to the Project;
(l) pledge over 30% of the total issued share capital of the
Company held by Promoters and/or Coal block allottee;
and
Coal Block : Aryan Group Limited.
Allottee
EPC Contractor : AITL
Guarantor : AITL
Conditions : Before the Facility becomes effective, the Company shall,
precedents to to the satisfaction of Lenders:
effectiveness (a)submit up to date copies of constitutional documents of
the Company (including memorandum, articles of
association);
(b)amend its memorandum and articles of association for
increasing the share capital, borrowing power and
incorporate any other change, as may be deemed
necessary and to reflect the necessary conditions for
the envisaged means of financing;
(c) provide copy of the resolution of the board of directors
of the Company approving the terms of this transaction
and authorizing specified person(s) to execute, sign
and / or dispatch all documents and notices to which it
will be a party;
(d) provide copy of the shareholders resolution under
section 293(1)(a) and 293(1) (d) of the Companies Act,
if applicable; and
(e) Provide certificate from the statutory auditors of the
Company confirming that the borrowing or the availing
of the Facility would not cause any borrowing limit
binding on the Company to be exceeded.

Conditions : Prior to first disbursement the Company shall, to the


precedent to first satisfaction of Lenders:
drawdown
a) demonstrate that the entire debt amounting to Rs.
55.44 billion required for the Project has been tied up and

65
can be drawn;
b) ensure that at least 25% of the total equity
requirement for the Project has been brought in up front;
c) provide an undertaking from AITL for meeting the
balance equity required for the Project, including the
equity requirement to meet any cost overrun (in addition
to cost overrun on account of non-receipt of mega power
status for the Project), liquidated damages as well as to
meet any shortfalls in DSRA to meet the stipulated DSCR,
without any recourse to the Lenders;
d) appoint the Lenders’ Legal Counsel (LLC) mutually
agreed between the Company and Lenders to assist
Lenders including the review of project documents and
finalization of the financing and security documents
required in relation to the Project;
e) appoint the Lenders’ Insurance Advisor (LIA) mutually
agreed between the Company and Lenders to assist
Lenders in the review and finalization of the insurance
package with respect to the Project;
f) have appointed statutory auditor for the Company;
g) execute the engineering, procurement & construction
(EPC) contract for the implementation of the Project and
ensure the effectiveness of the same;
h) ensure that the EPC and BTG contract shall stipulate
liquidated damages as are customary (as reviewed by
LE), for delay in commissioning of power plant/supply of
equipments and shortfall in performance guarantees;
i) agree that Lenders will have a right to appoint an
owner’s engineer in case there is cost / time over-run;
j) shall have procured a firm coal linkage (supported by
Letter of Assurance) from Coal India Limited (CIL) for 660
MW for entire tenor of the Facility;
k) ensure that the Company shall make satisfactory
arrangements for the transportation of coal from the
various coal mines providing coal to the Project and
achieve the requisite milestones (including but not limited
to route survey study, DPR for railway transportation,
railway transport clearance, etc as per the implementation
schedule as certified by the LE);
l) transfer all approvals / clearances / consents /
memorandum of understanding (MoU) in relation to the
Project received by any other party, if any, to the
Company to the satisfaction of Lenders;
m) ensure that all clearances, approvals, consents
required for the Project have been obtained and shall
remain in full force and effect, including but not limited to
ministry of environmental and forest clearance to the
satisfaction of Lenders
Other Conditions : During the currency of the Facility, the Company shall
inter-alia, to the satisfaction of Lenders:
(a) ensure no event of default has occurred and is
continuing;
(b) agree not to change its articles or memorandum of
association in any manner, which would be

66
inconsistent with undertaking the Project, or with any
of the Financing Documents (including security
documents);
(c) ensure that all required statutory / non-statutory
approvals and clearances as may be required under
the existing laws in relation to the Project, are in full
force and effect, to the satisfaction of Lenders;
(d) notify Lenders upon becoming aware that the actual
Project Cost exceeds or is expected to exceed the
Project Cost as per the Base Case Business Plan;
(e) agree to pay dividends only after meeting TRA
mechanism flows as agreed (including no event of
default existing) and with prior approval of Lenders;
(f) enter into fuel supply / fuel off-take agreement (FSA)
within the stipulated time frame in the letter of
assurance (LOA) pertaining to the firm coal linkage
from CIL;
(g) within 18 months from the first drawdown: shall have
acquired, balance land area (at least measuring 200
acres) required for the Project (including right of way
for the railway siding / transmission line/ water
intake), as certified by the LE, free from all
encumbrances and completed the transfer of the
same to the Company;
(h) within 18 months from the first drawdown: shall have
procured for the balance 660 MW a firm tapering long
term coal linkage from Coal India Limited (CIL) for not
less than 4.0 mtpa, such that the entire fuel
requirements for the Project is tied up and execute
the fuel supply agreement for the same within the
stipulated timeframe under the LOA;
(i) within 18 months from the first drawdown: shall enter
into long term Power Purchase Agreement for 330 MW
of the capacity with state utilities / industrial bulk
consumers at a price not less than or equivalent to
the tariff calculated as per CERC regulations;
(j) at least 12 months prior to commercial operations:
make adequate arrangements for the operations &
maintenance (O&M) of the Project, including inter-alia
recruitment of qualified and experienced manpower,
training of personnel and shall be reviewed by the LE;
(k) at least six months prior to commercial operations:
make satisfactory arrangements for meeting its
working capital requirements;
(l) ensure that all the approvals / clearances / consents /
MoUs as stated in clause (y) of “Conditions precedent
to first drawdown” required for the project have been
obtained and shall remain in full force and effect
before COD;
(m) maintain adequate insurance with reputable insurers,
including coverages and risks and periodically provide
Lenders with such policies and premium receipts;
(n) ensure that after COD, the debt service coverage
ratio (DSCR) shall be maintained at atleast 1.30 times

67
during the first 2 years of operation and thereafter at
atleast 1.20 times;
(o) agree to not undertake any additional indebtedness;
(p) agree not to effect any change in its shareholding
pattern without prior written consent of Lenders;
(q) agree that Lenders reserves the right to appoint any
independent/concurrent auditors for the review of the
Project as deemed fit;
(r) agree to broad base the board of directors by
induction of independent professionals and/or
professional nominees, both technical and
professional;
(s) agree that Lenders will be entitled to appoint one
nominee directors on the Board;
(t) ensure that the none of the directors of the Company
appear in RBI willful defaulters’ list;
(u) agree that in the case of any default in the payment
of dues to Lenders, Lenders / the Reserve Bank of
India (RBI)/Credit Information Bureau (India) Limited
(CIBIL) shall have an unqualified right to disclose or
publish the details of the default and the name of the
Company and its directors as defaulters in such
manner and through such medium as Lenders or RBI
in their absolute discretion may think fit;
(v) Maintain adequate books of accounts which should
correctly reflect its financial position and scale of
operations and should not radically change its
accounting.
Documentation : In addition to the terms and conditions contained in this
Term Sheet, the final documentation will contain other
customary/ additional stipulation/ clauses such as, financial
covenants, representation & warranties from the Borrower,
conditions precedent to the effectiveness and condition
precedents to each disbursement, affirmative covenants,
negative covenants, additional covenants, information
covenants, events of defaults by the Borrower and the
consequences of the event of default, cross defaults, RBI
disclosure norms, as applicable, etc.
Governing Law : Shall be governed by laws of India. Any dispute resolution
and Jurisdiction shall be at courts of Mumbai, India.

The Proposal requires the approval of the chairman.

PROJECTED FINANCIALS OF THE APPLICANT COMPANY

1. Projected Profit & Loss account

2. Projected Balance Sheet

3. Projected Cash Flow Statement

68
4. DSCR

Attached as an Annexure

Conclusion:

Banking sector plays the main role in the developing economy of the country. There are
many banks in the state of Jammu & Kashmir helps in fulfilling the needs of customers.
Among these banks J & k Bank is the leading bank in the valley, which is trying to give all
the facilities to their customers. But in the J & K bank Credit & Advanced Department plays

69
the main role in gaining the profits. It is the Credit Department of J & K Bank, which
sanctions the loan facility to both large as well as small industries throughout the India. Thus
Credit Department of the J & K Bank is generally called as the backbone of the bank.

BIBLIOGRAPHY

Financial Management By I M Pandey

Financial & Management Account By Dr. S.N. Maseshwari

70
Management Accounts By R.K. Sharma

Risk Management By Macmillan

Financial Management By Prasana Chandra

WEBSITES VISITED:

o www.jkbank.net
o www.google.com
o www.wikipedia.com
o www.moneycontrol.com

71

Vous aimerez peut-être aussi