Project Finance

Background Material
Seminar
On
Bank Finance
&
Non Banking Finance Companies
May 30, 2009

Hotel Le Meridien, Janpath,
New Delhi
Organised by
Northern India Regional Council of
The Institute of Chartered Accountants of India
Message
Dear colleagues,
Namaskaram!
I am very pleased to present the Background Material on Bank Finance and NBFC.
Businesses and enterprises being revenue driven require immaculate resource
mobilization and optimum deployment. When it comes to finance, it has to be cost
effective, aligned to the requirements of the objectives. With the dawn of
liberalization, privatization and globalization in the early part of last decade, the realm
of finance as a subject has undergone sea change.
There has been paradigm shift in the field of business finance and has tremendously
realigned the role and relationships amongst the resource seekers, resource providers
and the intermediaries. The role of the government, the exchequer and the
regulators, have become all the more pervasive in the dominion of finance and
financial markets the world over. The environment becomes even more arduous in
the times of turbulence.
The Dynamic Scenario and the Chartered Accountant

The dynamic scenario essentially demands that the professionals at the helm of
finance function of the corporations and other segments of the economy bring
themselves inline with the need of the hour by upgrading knowledge and skills to
match the societal expectations. The background of a Chartered Accountant is the
most ripe to unlearn the past and learn the contemporary with ease and speed. Deep
knowledge of business, its operational jugglery and implication of minutest of the
managerial decisions came natural to a Chartered Accountant.
Keeping the same in view, the need for organization Seminar on resource mobilization
in current scenario and the role of the Chartered Accountants in the preparation of
Project Report so as to meet the appraisal criteria of the bankers was felt by us,
similarly the audit seasons being on and seeing the regulatory specific reporting
requirements. In case of audit of Non Banking Financial Companies particularly the
requirement of exception Audit reporting requirements and the Seminar on legal
framework and regulatory means in case of NBFC was felt.
I personally offer my heartiest gratitude to CA. Rajeev Kumar and CA. Walter D’Souza.
I am also thankful to Shri Anil Girotra, Executive Director, Andhra Bank for his valuable
time he has kindly agreed to spare. The contributors have spent their precious time to
compile the data. I appreciate and compliment them for their brilliant effort. I believe
that this Background Material will surely find a suitable place in the library which
would be used as a guide & referencer in cases of any required information, doubts.
I place on records the cooperation of all the office bearers and my colleagues in the
Council for their encouragement and cooperation in bringing this background material
for your use
Warm Regards & Best of Luck.
Chartered Accountant Jayate.
(CA. Bhagwan Das Gupta)

(Mob – 9811152662)
Seminar
On
Bank Finance
Raising Funds in the Current Scenario –

Various Options
Guest Speaker:
CA. Rajeev Kumar
1
Recent Headlines
Raising Funds in the Current
Scenario – Various Options
Tata Steel gets Rs.2000 cr LIC loan
ECB’s register 70% fall in April
L&T plans to raise Rs.1000 cr through NCD
QIP’s become chosen option
30th May 2009 - Delhi
Indiabulls Real Estate raises $600 Mn (through QIP)
Promoters forfeit Rs.1000 cr as Warrants lapse
GMR Infra may take PE route to raise Rs.3k cr
Corporate India clocks PE deals worth 494 mn in April
Private Equity investors may be back
IFC to invest $ 1 bn in next fiscal
Rajeev Kumar IDFC to close infra fund in 2 weeks
Global Financial Issues Impact on Indian GDP
IMF estimates total global losses on account of the Not Classified

Automotive
Power Cement
economic crisis will reach USD 4.1 Trillion 9 Chemicals
Drugs & Pharma
33
US Government stress tests of the 19 largest banks Petroleum
Iron & Steel
24 Metals
reveals that 10 of them require USD 74.6 billion of Infrastructure Somewhat
Highly affected
Sectors Mining
Capital IT/ITES
affected
Sectors
Textiles
Transport
US job losses estimated at 0.5 million per month – Financial Services, Insurance 34 Media
unemployment at around 8.9% currently and Not affected

Sectors
Real Estate
Trade
expected to peak at 10.3%
GDP declines in Jan-March 2009 in USA @1.6%,
Source: Mckinsey & Co. report on
Implications of the Global Crisis
FMCG Govt. Services for India - January 2009
Eurozone @ 2.5% and Japan @ 4% Telecom
Agriculture
Health Services
2
Direct Financial Impact Debt Funding Options
Macro Products
Term Loans
Currency volatility with max Rupee Financial products which have Working Capital Loans
depreciation against USD at around dramatically reduced: NCD’s – secured or unsecured
28% LBO Funding Fixed Deposit’s – Sec 58A compliant
Foreign currency line of credits have CCD’s Forex loans
significantly reduced FCCB’s - Long term : ECB’s / FCNR(B) loans
LIBOR at margin’s have gone-up PTC’s - Short term : Suppliers Credit / Buyers Credit / Export Factoring
considerably Funding - AIM Exchange, London SME lending
Rupee interest rates are broadly still Securitizing Contingent Receivables - Mortgage Finance
- Equipment Finance (Printing / Healthcare / Construction, etc)
in double digits, inspite of huge Exotic Derivatives - Parameterised
Repo / Reverse Repo rate-cuts REIT’s (Offshore) - Credit Guarantee Scheme(CGS)
- SBI Schemes
Structured Finance
Infrastructure Funding
It back to basic’s in the financial world !!!!! Promoter Funding
Risk perceptions have permanently changed !!!!
All products with a far stricter Risk assessment than was prevalent just 1 year back !!
ECB’s Parameterised SME Lending
ECB’s raised in 2008-09 USD18.36 bn (PY USD 30.96 bn) Different definitions in individual banks
All-in cost ceilings for ECB funds suspended by RBI upto December 2009
– hence, currently no cap on LIBOR+ margins Quick turnaround time for sanction
Max $ 500 mn per financial year under the Automatic route. Beyond that,
RBI Approval required Integrating both Qualitative and Quantitative Risk
Average maturity period: Factors
- < $ 20 mn - 3 years
- $20 - $500 mn - 5 years
Rule Based Model (No Subjectivity)
Permitted for foreign currency and rupee capital expenditure for Sectoral Based Scores
permissible end use i.e. import of capital goods, new projects,
modernization, overseas direct investment, infrastructure sector. Market Intelligence
End use for working capital, general corporate purpose, repayment of
existing rupee loan not permitted. Also, not allowed in real estate and
investment in capital market
Estimated MTM losses upto March 2009 is around USD 6 billion
3
Credit Guarantee Scheme (CGS) SBI Products for SME’s
Applicable to Micro and Small Enterprises (MSE) SME Care SME Help
¾
Guarantees provided through Credit Guarantee Trust for Micro 20% incremental WC ¾ Term Loan product
and Small Enterprises (CGTMSE) setup by GOI & SIDBI ¾ Max 2 crores ¾ No cap on amount to be availed
Cover available through Member Lending Institutions i.e, All ¾ Interest 8% ¾ Interest 8% for 2 years
scheduled commercial banks and specified RRB’s which have ¾ Stock Margin reduced by 5% ¾ Max tenure is 60 months
entered into an agreement with CGTMSE. ¾ Debtors funded upto 180 days
Objective is to fund on project viability and secure the credit ¾ Valid upto 30.9.09, with 1 yr validity
facility purely on the primary security of the assets financed
Any facility provided on the basis of collateral security or third
party guarantee shall not covered under the scheme. Open Term Loans
Maximum risk covered is upto 75% (85% in select category of ¾ Pre-sanctioned Term Loan
borrowers), with a max cap of Rs.62.50 / Rs.65 lakhs. ¾ Max Rs.2.5 crores
Guarantee Fees (1% - 1.5%) & Annual Service Fees (0.5%- ¾ Funded on the basis on DSCR of 2
0.75%) payable ¾ Can be drawn multiple times over a year
Structured Finance Infrastructure Funding
Loan made under conditions that are structured so as to free Sectors – Telecom / Power / Roads / Ports / Airports
the lender from concern over the credit-worthiness of the Instruments – Equity / Mezannine / Debt
borrower Loan Tenures in excess of 10 years
Securitisation – process of converting existing assets or future Higher Debt:Equity ratio
cash flows into marketable securities Specialist lenders – IDFC, IIFCL, Power Finance Corpn.,
Factoring – with or without recourse ILFS
Buyers Credit – interest arbitrage opportunities Public Private Partnership (PPP) model being encouraged by
Channel Financing – with or without recourse Government in infrastructure development
Credit Insurance Viability Gap Funding
- In the form of Capital Grants at the stage of project
- Domestic sales & Exports construction
- Indemnity upto 85% on the insured loss - Shall not exceed 20% of total project cost. Additional Grants
- Premium rate : % of the annual insured credit sales of another 20% out of Budget allocation
- Funding through Lead Financial Institution
4
Promoter Funding Restructuring Bank Loans
Helps promoters increase stake / invest in other RBI Circular of 8th December 2008 :
business with equity upside - Exceptional treatment extended to commercial real
Funding by NBFC’s & HNI’s - both for listed and estate exposure if restructured for the first time upto
unlisted companies 30th June 2009
Mezzanine Funding structure - Second restructuring upto 30th June 2009 eligible
for exceptional treatment, except for :
(a) Consumer and Personal Advances
(b) Capital market exposure
(c) Commercial Real Estate exposure
Equity Funding Options Equity Funding Statistics
IPO’s / Right’s Issues 2008-09 2007-08
Preferential Issues No of Amount No of Amount

Issue (Rs. in Issue (Rs. in
QIP’s Crores) Crores)
Public Issue 21 2,082 91 53,219
Private Equity Funding Rights Issue 25 12,637 30 32,519
- Angel Funding QIP 2 189 38 25,770
Preferential Issue 402 43,776 398 61,589
- Venture Funding : Unlisted Companies
- PIPE deals
Mezzanine Funding
Stressed Assets Funding
5
Valuation Jargon Preferential Issues
Pre-money / Post money valuation

Guidelines issued by SEBI for Preferential Issue covers issue of Shares, Warrants,
Primary or Secondary sale Fully Convertible Debenture, Partly Convertible Debenture and other financial
instruments made on a preferential basis to a select group of persons.
EV / EBITDA Preferential Issue to be made at a price not less than higher of the following
TTM PE prices:-
The average of weekly high and low of the closing prices of the related shares quoted on
Peer Comparatives the stock exchange during the six months preceding the relevant date.
Or
DCF Valuation The average of the weekly high or low of the closing prices of the related shares quoted
on the stock exchange during the two weeks preceding the relevant date
Trading Multiple In case of warrants – 25% of price fixed (SEBI Circular of 24th February 2009) as
Transaction Multiple per the formula above would become payable on the date of allotment
Lock-in period of 1 year from the date of allotment for Non Promoters and 3 years
for Promoters (for upto 20% of expanded capital)
QIP’s Private Equity Funding
Only listed companies can do Qualified Institutional Dramatically reduced in FY 2008-09 to $6.6 bn (PY $21.4 bn)
Placements (QIP’s) Number of transactions also reduced to 232 (PY 453)
QIP is currently the preferred route since it is cost effective As per Grant Thornton Deal Tracker, in March / April 2009, 25 deals were
and quicker announced for a total value of USD772 mn, with the sectoral break-up as
Restricted to 5 times the Net Worth as per the last audited follow:
accounts
No lock-in requirement as compared to Preferential Allotment
Minimum 2 Investors for issue size < Rs.250 crores and 5
investors for > Rs.250 crores
Only FII’s, Venture Capital Funds, Mutual Funds, Insurance
companies and other such Institutions can invest
At least 10% to be allotted to Mutual Funds
Recent Issue’s – Unitech / PTC / IndiaBulls
Minimum IRR expectation being plugged into a deals currently
6
Mezzanine Funding Stressed Asset Funding
India is supposed to be the third largest NPA market after

Generally includes Subordinated Debt or Preference Shares, Japan and China – Gross NPA estimated at between USD 20
with Warrants or Options to 30 bn
Investor looks for fixed return with equity upside ARCIL Model - Purchase of portfolios or single assets against
Interest rate greater than normal debt by 3% to 8% issue of Security Receipts. Limited outright cash payouts and
revenue sharing model
Funding provided by VC companies / NBFC’s / HNI’s
Other Players – Kotak / HDFC Bank / Standard Chartered /
Hybrid of Debt and Equity financing and hence generally not Deutsche Bank / JP Morgan / Barclay’s, etc.
collateralized Restructuring possible if future Enterprise Value well in
Company must have proven track record and good profitability excess of current Distressed Value of Assets
projections – ideal for financing acquisition's With or without management participation
Debt + Equity Funding for OTS / Working Capital / Capex
Time-frame for exit of 3 to 5 years
Equity or Debt ?
Existing Schedule VI Balance Sheet
Recast Balance Sheet !!!!
Rupees in Crores Rupees in Crores

Particulars Amount Particulars Amount Particulars Amount Particulars Amount
Sources Application Sources Application

Share Capital 29 Net Fixed Assets 90
Share Capital 29 Net Fixed Assets 90
Reserves & Surplus 319 Investments 20
Reserves & Surplus 319 Investments 495
348 Current Assets, Loans & Adv
Net Worth 348 Current Assets, Loans & Adv Less: -Inventory 43
Secured Loans 208 -Inventory 43 Investment in subsidiary -475 -Debtors 26
Unsecured Loans 49 -Debtors 26 Loans & Adv to subsidiary -33 -Cash & bank 3
Debt 257 -Cash & bank 3 Adjusted Net Worth -160 -Loans & Advances 26
-Loans & Advances 59 Secured Loans 208 98
131 Less: Bank Finance 58 Current Liabilities
Current Liabilities Term Finance 150 -Current Liabilities 97
-Current Liabilities 97 -Provisions 14
- Unsecured Loans 49
-Provisions 14
-Bank Finance 58
111
218
Net Current Assets 20 Net Current Assets -120
Total 605 Total 605 Total -10 Total -10
7
Seminar
On
Bank Finance
Preparation of Project Report for Bank Finance:

Meeting the Credit Appraisal Criteria of Bankers
Guest Speaker:
CA. Walter D’ Souza
8
PREPARATION
OF
INDEX
DETAILED PROJECT REPORT
Presentation by
Walter D’
D’Souza
PROJECT REPORT PROJECT/COMPANY SNAPSHOT
9
IMPLEMENTATION SCHEDULE
ACTIVITY COMMENCEMENT LATEST
DATE COMPLETION
DATE
LAND ACQUISITION
FACTORY BUILDING
CONSTRUCTION
PLANT & MACHINERY
EXECUTIVE SUMMARY/ ACQUISITION
PLACEMENT OF ORDER
PROJECT AT A GLANCE
¾
¾ DELIVERY
ARRANGEMENT OF POWER
ARRANGEMENT OF WATER
STATUTORY APPROVALS
ERECTION OF MACHINERY
TRIALS RUNS
COMMERCIAL PRODUCTION
INTRODUCTION MANAGEMENT EVALUATION

• PROMOTERS AND THEIR BACKGROUND
• FORMATION OF THE COMPANY
• OBJECTS OF THE COMPANY • DETAILS OF MANAGERIAL/ KEY PERSONNEL
• DETAILS OF THE PROJECT PROPOSED TO BE • DETAILS OF THE GROUP CONCERNS

UNDERTAKEN
• RATIONALE BEHIND THE PROJECT
• IMPLEMENTATION SCHEDULE
10
TECHNICAL EVALUATION FUNDING EVALUATION
• PRODUCTS
• PROCESS KNOW-HOW AND TECHNICAL SERVICES

1. FUNDING SOUGHT
• COLLABORATIONS /TECHNICAL CONSULTANTS
2. SECURITY OFFERRED
• SUPPLIERS DETAILS WITH THEIR EXPERIENCE
• PRODUCTION CAPACITY
• RAW MATERIALS REQUIREMENTS
• UTILITIES AND ARRANGEMENTS MADE
• TECHNICAL PERSONNEL
• LOCATION OF THE PLANT
COMMERCIAL EVALUATION SWOT ANALYSIS

1. STRENGTH
1. INTRODUCTION OF THE INDUSTRY
2. WEAKNESS
2. DEMAND/SUPPLY SCENARIO
3. OPPORTUNITIES
3. MARKETING ARRANGEMENTS
4. THREATS
11
SENSITIVITY ANALYSIS VIABILITY EVALUATION
1. REDUCTION IN SELLING PRICE

1. Cost of Project
2. INCREASE IN RAW MATERIAL COST
2. Means of Finance
3. REDUCTION IN CAPACITY UTILIZATION
3. Projections of Profitability and Performance
4. ESCALATION IN PROJECT
4. Projected Fund Flow Statement
5. Projected Balance Sheet
6. Details of Working Capital and Margin Money
7. Calculation of Production Capacity
8. Calculation of Raw Material Mix and Value
VIABILITY EVALUATION
9. Year-
Year-wise Raw Material Consumption
10. Sales Realisation at 100%
11. Year-
Year-wise Sales Realisation
ASSUMPTIONS 12. Power Cost
13. Calculation of Factory Wages
14. Calculation of Factory Overheads
15. Calculation of Consumables & Stores
16. Administrative Salary
17. Calculation of Administrative Expenses
12
LAND
18. Calculation Of Financial Expenses
19. Calculation of Depreciation for Project Working Particulars Amount

(Rs. In lacs.)
20. Calculation of Depreciation for Tax Calculation
Area of Land (Sq. mtrs)
mtrs) 5000
21. Calculation of Debt-Service Coverage Ratio
Cost of per sq.mtrs (Rs.) 450
22. Computation of Income Tax
Cost of Land 22.50
23. Break Even Analysis
24. Internal Rate of Return Stamp Duty 2.00
25. Cost of Capital Registration Charges 0.25
26. Pay Back Period Brokerage paid 0.25
27. Ratio Analysis Total Cost 25.00
SITE DEVELOPMENT
1. Cost of Project
Particulars Amount
(Rs. In lacs.) Particulars Amount
(Rs. In lacs)
Land 25
Site development 25 Cost of leveling the land 12.50
Building & Civil works 100

Boundary walls & gate 5.00
Plant & Machinery 400
Technical know-
know-how fees 25 Cost of laying internal roads 2.50
Expenses on Foreign Technicians 25

Cost of water drainage system 1.50
Utilities 50
Electricals 50 Watchman cabin & other 1.50
Misc. Fixed Assets 25
Cost of digging tube-
tube-wells and bore wells 2.00
Preliminary & Pre-
Pre-operative expenses 50
Provision for Contingencies 75 Total Cost 25.00
Working Capital Margin 150
Total Cost 1000
13
BUILDING & CIVIL WORKS UTILITIES
Particulars Amount
(Rs. In Lacs) Particulars Amount
(Rs. In Lacs)
Cost of factory building for main plant and machinery 60.00
Crane 15.00
Cost of factory building for auxiliary services like steam 10.00
supply, water supply, laboratory, workshop etc. Air Compressor 5.00
Administrative building 10.00 Cooling Tower 5.00
Godowns,
Godowns, warehouses and open yard facilities 10.00 Boiler 15.00
Building canteen, guest houses, time office, excise 5.00 D.G. Set 10.00
house and quarter for staff
Building garages, sewers and drainage system 2.50 Total Cost 50.00
Architects’
Architects’ fees 2.50
Total Cost 100.00
PLANT AND MACHINERY

Particulars Amount
ELECTRICALS
(Rs. In Lacs)
IMPORTED
FOB value 150.00 Particulars Amount
Shipping freight 20.00
(Rs. In Lacs)
Custom duty 50.00
Insurances 5.00
Cost of clearing, loading, unloading and transport charges to the
the 10.00 Transformer 10.00
factory site.
Cabling 25.00
Total 235.00
INDIGENOUS Control Panel 5.00
FOR cost 100.00
Excise 15.00 Others 10.00
VAT 5.00
Octroi and other taxes 2.00
Railway freight and transport charges to site 3.00
Total Cost 50.00
Total 125.00
Machinery stores and spares 20.00
Foundation and installation charges on imported and indigenous 20.00
machinery
Total Cost 400.00
14
MISCELLANEOUS FIXED ASSETS PRE-
PRE-OPERATIVE EXPENSES
Particulars Amount
(Rs. In Lacs)
Particulars Amount
(Rs. In Lacs) Establishment expenses 2.50
Rent, rates and taxes 2.50
Cost of furniture 5.00
Trial Run Expenses 2.50
Office machinery and equipment 5.00 Insurances 2.50
Erection tools 2.00 Consultancy fees 4.00
Cars, trucks etc 3.00 Interest on Loans 5.00
Laboratory equipment 2.50 Bank charges / LC commission 2.50
Workshop equipment 2.50 Electricity deposits 5.00
Fire fighting equipment 2.00 Loan processing fees 2.50

Mortgage expenses 5.00
Effluent collection, treatment and 3.00
disposal arrangement Training and education 2.50
Total cost 25.00 Courier and Postage 1.00

Total Cost 37.50
PRELIMINARY EXPENSES PROVISION FOR CONTINGENCIES

Particulars Amount
(Rs. In Lacs)
Particulars Amount Land & Site Development 2.50
(Rs. In Lacs)
Building 10.00
Company Formation Expenses 5.00
Plant & Machinery 40.00
Expenses related to capital issue 5.00 Technical know-
know-how fees 2.50
Other expenses 2.50 Expenses on foreign technicians and 2.50

training of Indian technicians abroad
Total cost 12.50 Utilities 5.00
Electricals 5.00
Miscellaneous fixed assets 2.50
Preliminary & Pre-
Pre-operative expenses 5.00
Total Cost 75.00
15
WORKING CAPITAL MARGIN VIABILITY EVALUTION
Particulars Period Amount 2. Means of Finance
(No. Of Days) (Rs. In Lacs) Particulars Amount
(Rs. In Lacs)
Indigenous raw materials 15 100.00 Promoters Contribution 250.00
-Equity Share Capital
Imported raw materials 15 100.00
-Preference Share Capital
Consumable stores 90 25.00 -Quasi Capital (Unsecured loans from promoters)
-Others
Finished goods 10 100.00 Term Loans 600.00
Work-
Work-in-
in-process 21 50.00 -Rupee Term Loan
-Foreign Currency Term Loan
Debtors 45 225.00 -External Commercial Borrowings (ECB)
-Others
Total 600.00
Unsecured Loans / Deposits 150.00
Less : Creditors 7 50.00
Deferred Payment Arrangement including 0.00
Total 550.00 supplier’
supplier’s credit/ Buyers credit
Add : Expenses 30 25.00 Internal Cash Accruals 0.00
Other Sources 0.00
Total Working Capital Required 575.00
-Lease Financing/ Hire Purchase
Working Capital Facility 425.00 -Debentures
-Subsidy
Working Capital Margin 150.00
Total 1000.00
1. Cost of Project IMPORTANT RATIOS / PARAMETERS
Particulars Amount • DEBT EQUITY
(Rs. In lacs.)
Land 25
• CAPITAL GEARING RATIO
Site development 25
• TOL/TNW
Building & Civil works 100
Plant & Machinery 400 • DEBIT SERVICE COVERAGE RATIO (DSCR)
Technical know-
know-how fees 25
• PAY BACK PERIOD
Expenses on Foreign Technicians 25
Utilities 50 • BREAK EVEN POINT
Electricals 50
Misc. Fixed Assets 25 • RETURN ON CAPITAL EMPLOYED
Preliminary & Pre-
Pre-operative expenses 50
• CURRENT RATIO
Provision for Contingencies 75
Working Capital Margin 150
Total Cost 1000
16
BASE II NORMS
Basel II is a New Capital Adequacy Framework (NCAF) applicable to scheduled SOURCES OF FINANCE
commercial Banks in India. As mandated by Reserve Bank of India (RBI).’ Basel
Capital Accord’ is in respect of Capital Measurement and Capital Standards,
which align regulatory capital requirements more closely with underlying risks.
The accord has been accepted by over 100 countries including India.
A basic principle is that short-
short-term financial needs
should be met from short-
short-term sources, medium
Capital Adequacy Ratio (CAR) = Capital Funds (Own funds or net worth) term financial needs from medium term sources &
Risk Weighted Assets (RWA)
long term financial needs from long-
long-term sources.
The minimum CAR in India is placed at 9%, one percentage point above the Basel Moreover a proper balance between loan funds &
II requirement. own funds has to be maintained.
The Basel II guidelines aim to align the bank’s capital to risks and works on
arriving at the regulatory capital for banks based on:-
Credit Risk
Market Risk
Operational Risk
CREDIT RATING FOR RISK CLASSIFICATION OF SOURCES OF

FINANCE
For operational convenience the banks have cut-cut-off of Rs. 5.00 crs & above LONG TERM
for the Fund Based and Non-
Non-Fund Based credit facilities.
Mandatory external rating for the account exposure above cut- cut-off level Share Capital
from CRISIL/ ICRA/ CARE/ FITCH. Reserves and Surplus including retained earnings
The rating of the account assigns risk weights to loan exposure and Long Term loans from FI’
FI’s and Banks (Rupee and Forex)
subsequently the capital adequacy of the Bank’
Bank’s. Deferred payments
The credit rating criteria adopted by the rating agencies are summarized
summarized Unsecured loans from promoters and sister concerns
as follows: Public deposits
Asset Securitization
¾History of payments made
Lease financing
¾ Amount outstanding
Venture Capital Financing
¾ Duration of credit history
International Financing including GDR, ADR, FCCB etc.
¾ Types of credit used
Buyers Credit.
¾ Credit account inquiries
Long Term Bank Guarantees.
¾ Industry Scenario
¾Concentration of customers
17
CLASSIFICATION OF SOURCES OF
FINANCE
SHORT TERM
Bank Overdrafts
Trade Credit
Short Term Loans
Bridge loans
Factoring
Bills of Exchange
Hire purchase
Letters of Credit
Short Term Bank Guarantees
CREDIT MONETORY ASSESSMENT

CMA
COMPONENTS OF CMA DATA
Analysis of Profit & Loss Statement
Analysis of Balance Sheet
Working Capital/Bank Borrowings Assessments
Calculations of Maximum Permissible Bank Finance (MPBF)
Fund Flow Analysis
Financial Indicators
18
Seminar
On
Non Banking Finance

Companies
Regulatory & legal Framework of NBFC
Guest Speaker:
Sh. Subhash Agarwal
19
NBFCs Regulatory & Legal Framework
Supervision
wOn-site Inspection
wMeeting and discussion with Company’s top management
wOff-site surveillance through Returns, SILA
wAuditors’ Exception Report
wMarket Intelligence
wCo-ordination with State Govt.
Corporate Governance
o CC 94 dt. May 08, 2007

oApplicable to NBFC-D (PD> Rs 20 cr) & all NDSI
Constitution of Audit Committee
–i) NBFC having assets of Rs. 50 crore and above required to constitute an Audit
Committee, consisting of not less than three members of its Board of Directors
–ii) In addition, NBFC-D with deposit size of Rs 20 crore may also consider constituting
an Audit Committee on similar lines.
o Constitution of Nomination Committee

o NBFC-D with deposit size of Rs 20 crore and above and NBFC-ND-SI may form a
Nomination Committee to ensure ‘fit and proper’ status of proposed/existing Directors.
oConstitution of Risk Management Committee

oTo manage the integrated risk, a risk management committee may be formed, in
addition to the ALCO in case of the above category of NBFCs.
wDisclosure and transparency

–Following information to be put up by the NBFC to the Board of Directors at regular
intervals
–progress made in putting in place a progressive risk management system, and risk
management policy and strategy followed
20
–conformity with corporate governance standards viz. in composition of various
committees, their role and functions, periodicity of the meetings and compliance with
coverage and review functions, etc.
AS – 22
wBank’s Circular CC No. dated July 31, 2008

wThe tax effects of timing differences are included in the tax expense in the statement of
profit and loss and as deferred tax assets (DTA) (subject to the consideration of prudence)
or as deferred tax liabilities (DTL) in the balance sheet.
wTheir treatment was reviewed in the light of International Best Practices
wDTL will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy
purpose
wDTA will be treated as an intangible asset and should be deducted from Tier I Capital
Types of non-banking companies under RBI
wEquipment Leasing companies

wHire purchase finance companies
(No longer valid – last date for applying for AFC 31 December 2008 – CC 128 dated 15
Sep 2008)
wLoan companies
wInvestment Companies
wThose EL/HP with. Asset Fin> 60% & Income from Asset Fin. >60% classified as
Assets Finance company.
NBFCs – Classifications
wOn basis of PDs

–Category A (NBFC – D)– Public deposit holding /accepting
–Category B (NBFC – ND)– – Non- PD holding/accepting
–NBFC – NDSI (Assets > Rs 100 cr)
–NBFC – ND (Assets > Rs 50 cr & < Rs 100 cr)
–NBFC – ND (Assets < Rs 50 cr)
PN - The ultimate aim
wSecuring safety of funds exposed

wOr in other words a prudent management (through compliance with international
standards and best practices) with the aim of minimizing risk (as risk can never be
eliminated)
Prudential norms mean?
21
wCapital adequacy ratio
wMethod of recognizing income
wAsset classification
wMaking provision for non-performing assets, and
wExposure norms
wDisclosure norms-bring in more transparency in the disclosed financial statements
Capital Adequacy (Para 16)
NBFCs-D- (for AFCs) Min CRAR (Tier I and Tier II) 12 % of aggregate Risk Weighted
Assets (RWA) and Risk Adjusted Value of off-balance sheet items
Other than AFCs – Min. 15%
NDSI – 10%
(Let us see the calculation)
Discount rate for Subordinated debt instruments

Income Recognition
wAs per recognised accounting principles
wOn NPA income to be recognized only on actual realization
wAny unrealized income to be reversed
wIncome on investments on cash basis, except,
–Where dividend has been declared + right to receive payment established
–Income from bonds and debentures of corporate bodies and from government
securities/bonds if interest is predetermined and has so far been serviced regularly
What is a NPA?
–Interest overdue for 6 months or more;
–Installment overdue for 6 months or more;
–Bills overdue for 6 months or more;
–Any dues on account of sale of assets or services rendered or reimbursement of
expenses incurred- overdue for 6 months or more;
–Lease rental or HP installments overdue for 12 months or more
Asset Classification
wClassification of credit assets into

wStandard assets
22
w Sub-standard assets
wDoubtful assets, and
w Loss assets
wThese not be upgraded merely as a result of rescheduling.
wHowever, many auditors are classifying the assets as per disclosure requirements as
prescribed in part 1 of schedule VI of the Companies Act, 1956
Asset Classification Standard asset
wNo default in repayment is perceived

wCarry normal risk attached to the business
(Cont.)
wDoubtful assets Sub-standard for more than 18 months
wCredit weakness inherent
wRecovery of dues is doubtful
(Cont.)
Hire purchase and lease assets
wSub-standard assets - 24 months
wDoubtful assets - 24 – 48 months
wLoss assets - more than 48 months
Provisioning
Provisioning (para 8)
Disclosure in the balance sheet

wProvisions to be separately declared without netting
wDistinctly indicated under separate heads
–Provisions for bad and doubtful debts
–Provisions for depreciation in investments.
wNot be appropriated from the general provisions and loss reserves
wProvisions for each year to be debited to the profit and loss account.
Additional Disclosure - NDSI

wAdditional disclosures in their Balance Sheet March 31, 2009 relating to:
•Capital to Risk Assets Ratio (CRAR)
•Exposure to real estate sector; and
•Maturity pattern of assets and liabilities
23
Real Estate exposure = Mortgage on residential property + Mortgage on commercial real
estate (including non-fund based limits) + investment in MBS + fund / non-fund exposure
to NHB / HFCs
Investments
Accounting for Investments

wClear investment policy by BOD
wClear criteria for classification into current and long term investments
–No ad-hoc inter-class transfer
–Half year
–Transfer only scrip wise at book value or market value, whichever is lower
–Depreciation to be provided for appreciation to be ignored.
–Depreciation in one scrip not to be set off against appreciation in another scrip
Valuation
wCURRENT INVESTMENTS (readily realizable, intended to be held for not more than
1 year)
–Quoted - lower of cost or market value
–Unquoted equity shares -lower of cost or break up value (or fair value)
wBreak up value = [(equity + reserves)- (intangible assets + revaluation
reserves)]/number of equity shares
wEarning value = [(avg PAT) –( pref. Div)+ (extraordinary items)]/number of equity
shares and capitalized
wFair value = (BUV+EV)/2
wCarrying cost = book value + interest accrued
Valuation (cont..)
wIf the balance sheet of the investee company not available for 2 years-value at one
rupee only.
wUnquoted current investment (preference shares) – lower of cost or face value
wLong term investment - AS 13
wUnquoted government securities or government guaranteed bonds - carrying cost.
wUnquoted current investment (mutual funds) - net asset value declared by the mutual
fund.
wCommercial paper – carrying cost
Concentration & Exposure
CREDIT/INVESTMENT CONCENTRATION NORMS
24
EXPOSURE – NBFC-ND-SI
Off-site Surveillance
All NBFCs
Under para 13 of the NBFC (Reserve Bank) PN Directions, 1998 every non-banking
financial company shall append to its balance sheet prescribed under the Companies Act,
1956, the particulars in the schedule as set out in Annex 1
(It is to be furnished by all NBFCs. However It is observed that many companies are not
preparing the said schedule. NBFCs / Auditors need to ensure compliance)
All NBFCs
Under para 8(4) of NBFC APD Directions, 1998 and para 19 of the NBFC (Non-deposit
accepting) PN Directions, 2007
wWithin one month from the occurrence of any change in the following matters, shall
intimate to the Reserve Bank of India:
(i) the complete postal address, telephone number/s and fax number/s of the
registered/corporate office;
All NBFCs
(ii) the names and addresses of the directors of the company;

(iii) the names and the official designations of its principal officers;
(iv) the specimen signatures of the officers authorised to sign on behalf of the company;
and
(v) the names and office address of the auditors of the company.
All NBFCs
Under para 15 of the NBFC (Reserve Bank) PN Directions, 1998 every NBFC shall
submit a Certificate from its Statutory Auditor that it is engaged in the business of non-
banking financial institution requiring it to hold a Certificate of Registration under
Section 45-IA of the RBI Act. latest by June 30, every year. Such certificate shall also
indicate the asset / income pattern of the NBFC for making it eligible for classification as
Asset Finance Company, Investment Company or Loan Company.
(To be furnished by all NBFCs)
25
SA Certificate
Press Release : 1998-99/1269

The company will be treated as an NBFC if its financial assets are more than 50 per cent
of its total assets (netted off by intangible assets) and income from financial assets should
be more than 50 per cent of the gross income. Both these tests are required to be satisfied
as the determinant factor for principal business of a company
SA Certificate
DNBS.PD. CC No. 85 / 03.02.089 /2006-07 December 06, 2006

wAFC would be defined as any company which is a financial institution carrying on as
its principal business the financing of physical assets supporting productive / economic
activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and
material handling equipments, moving on own power and general purpose industrial
machines. Principal business for this purpose is defined as aggregate of financing
real/physical assets supporting economic activity and income arising therefrom is not less
than 60% of its total assets and total income respectively.
NBFI Activity
wDefined u/s 45I ( c ) of RBI Act, 1934
wFollowing activities are covered:
Financing whether by loans or advances or otherwise, of any activity other than its own
Acquisition of shares, stock, bonds, debentures or securities issued by Government/local
authority or other marketable securities
Letting or delivering of goods to the hirer
Carrying insurance business, conducting of chits etc, receiving monies under a scheme
& awarding prizes/gifts (not under RBI’s purview)
All NBFCs having foreign investment

wA Statutory Auditor’s Certificate on half-yearly basis as on March 31 and as on
September 30, every year to the effect :
In Case of Automatic Route :

wThat the company as on March/September has duly complied with the Minimum
Capitalization Norms on an ongoing basis as prescribed vide FEMA notification
No.94/2003-RB.dated June 18,2003 and the activities of the company are confined to 18
permissible activities as prescribed vide the said FEMA Notification as amended vide
Press note 1 dated.(2008).dated March 12,2008.
26
In Case of FIPB Route
wThat the company as on March/September has duly ,complied with all the terms &
conditions on an ongoing basis as prescribed vide FIPB approval letter..............dated
................
All NBFCs-D
wNBS 1 – Annual return (Deposits) in terms of para 8(3) of NBFC APD Directions,
1998 by September 30 (CC No.115 dated July 1, 2008)
wNBS 2 – Half- yearly return (Capital and Risk weighted assets) within three months of
the expiry of the relative half-year in terms of para 21 of NBFC (Deposit accepting) PN
Directions, 2007 (CC No 116 dated July 1, 2008)
wNBS 3 – Quarterly return (liquid assets) within 15 days of the close of quarter in terms
of Notification No.108 dated April 30, 1997 (CC No 119 dated July 1, 2008)
NBFCs-D
wNBS 4 – Only by rejected companies having PD

wNBS 5 – Quarterly (Monetary and Supervisory Return) by large NBFCs-D with PD >
Rs 20 cr within 10 days of the close of quarter (CC 19 dated April 22, 2009)
wNBS 6 – Monthly return (Capital Market exposure) within a period of 7 days of the
expiry of the month by NBFCs-D with asset size >Rs 100 cr in terms of para 22 of
NBFC (Deposit accepting) PN Directions, 2007 (CC No 116 dated July 1, 2008)
wCopy of audited financial statements with a copy of the report of the Board of
Directors in terms of Paragraph 8(1) of the NBFC APD Directions, 1998
NBFCs-D
wMonthly statement on status of liquid assets within 10 days from the close of the
month
wHalf-yearly ALM return containing all the 3 parts i.e. ALM I, II & III within one
month of the relevant half-year in terms of CC No. 15 dated June 27, 2001 by NBFCs-D
with PD > Rs 20 cr or Assets > Rs 100 cr
All NBFCs-D
Under para 8(2) of the NBFC (Reserve Bank) APD Directions, 1998 every NBFC
holding/accepting public deposits shall furnish to the Reserve Bank a copy of the
Auditor’s report to the Board of Directors and a certificate from its auditor, to the effect
that the full amount of liabilities to the depositors of the company, including interest
payable thereon, are properly reflected in the balance sheet, and that the company is in a
position to meet the amount of such liabilities to the depositors.
All NBFCs-ND
27
wBoard resolution within 30 days of the commencement of the financial year to the
effect that it would not accept any public deposits during the current financial year in
terms of notification no. .DFC 118/DG(SPT)-98 dated January 31,1998. (To be furnished
by all NBFCs - ND)
With Assets > Rs 50 cr but less than Rs 100 cr

Quarterly return within one month from the close of the relevant quarter in terms of
Bank’s Circular CC No. 130 dated September 24, 2008
NBFCs - NDSI
With Assets > Rs 100 cr
Yearly-Returns/Documents
wForm NBS-7: a statement of capital funds, Risk asset ratio etc in terms of Banks
Circular No.93 dated April 27,2007 as at the end of March every year within three
month from the end of the respective financial year.
wHalf-Yearly returns/documents
wStatement of Structural Liquidity (ALM-2) in terms of Circular. No. 125 dated August
1,2008 within 20 days from the end of the half-year period to which it pertains
NBFCs - NDSI
Monthly Returns / documents

wReturns on important financial parameters, in terms of C.C. No.67dated April 05, 2006
read with C.C.No. 69/ dated June 02, 2006 within 7 days following the month to which it
pertains
wStatement of short-term Dynamic Liquidity (ALM-1) in terms of C.C. No. 125 dated
August 1,2008 within 10 days of the close of the month
wNBFCs-ND-SI that have availed short term Foreign Currency loans - to furnish a
monthly return in terms of CC No.132 dated December 23,2008 within 10 days from the
end of the month
Power to issue directions

45 MA(1-A) of The Reserve Bank of India Act, 1934 – Bank may issue directions to
NBFCs or auditors of such NBFCs relating to balance sheet, P&L a/c, disclosure of
liabilities or any matter relating thereto.
(Directions vide CC 129 dated September 18, 2008)
Powers & duties of auditors

w45 MA(1) – It shall be the duty of an auditor of an NBFC to inquire whether or not the
company has furnished to the Bank all the statements/information under Chapter IIIB of
the Act & make a report to the Bank giving the aggregate amount of deposits held by the
company. The contents of such report shall be included in his report u/s 227(2) of the
Companies Act, 1956.
28
Powers & duties of auditors
w45 MA(3) – If needed, the Bank may direct a special audit of the accounts of an NBFC
and may appoint an auditor/auditors for the purpose.
w45 MA(4) – The remuneration as fixed by the Bank shall be borne by the NBFC so
audited.
Penalties u/s 58 B(4-AA)

wIf an auditor fails to comply with any directions made by the Bank u/s 45 MA, he shall
be punishable with fine which may extend to five thousand rupees.
Auditor’s Report (Reserve Bank) Directions, 1998”

wIn addition to report under Section 227 of the Companies Act, 1956 the auditor of an
NBFC shall also make a separate report to the Board of Directors of the Company on
the matters specified in paragraphs 3 and 4 of these Directions
Matters to be included in the auditor’s report

wIn case of all NBFCs (Para 3-A)
wWhether the company is engaged in the business of non-banking financial institution
and whether it has obtained a Certificate of Registration (CoR) from the Bank
wIn the case of a company holding CoR issued by the Bank, whether that company is
entitled to continue to hold such CoR in terms of its asset/income pattern as on March 31
of the applicable year.
wwhether the non-banking financial company has been correctly classified as AFC
Matters to be included in the auditor’s report

wIn case of NBFC-PD (Para 3-B)
whether the public deposits accepted by the company together with other borrowings
which has not been excluded from the definition of ‘public deposit’ are within the limits
admissible to the company as per the provisions of the Non-Banking Financial
Companies APD (Reserve Bank) Directions, 1998;\
whether the excess public deposit are regularised
Whether AFC with CRAR < 15% or an Investment / Loan Company without minimum
investment grade credit is accepting "public deposit”
Matters to be….
NBFC-PD
wwhether the credit rating is from a listed Agency and is in force and whether the
aggregate amount of deposits outstanding as at any point during the year has exceeded
the limit specified by the Rating Agency;
29
wNBFCs NOF >Rs 25 lakh and <Rs 200 lakhs, whether PD is in excess of the revised
ceiling in terms of Notification dated June 17, 2008 and whether such company :
whas frozen its level of deposits orhas brought down its level of deposits to the level of
revised ceiling of deposits.
Matters to be….
NBFC-PD
wwhether the company has defaulted in paying to its depositors

wwhether the company has complied with the prudential norms on income recognition,
accounting standards, asset classification, provisioning for bad and doubtful debts, and
concentration of credit/investments as specified in the directions issued by the Reserve
Bank of India
wwhether CRAR as disclosed in the return submitted to the Reserve Bank has been
correctly determined and whether such ratio is in compliance with the minimum Capital
to Risk Asset Ratio prescribed by Reserve Bank of India;
Matters to be….
NBFC-PD
wWhether the company has complied with the prescribed liquidity requirement and
kept the approved securities with a designated bank.
wwhether the company has furnished to the Reserve Bank of India within the stipulated
period the annual return NBS-1 and half-yearly return on prudential norms – NBS-2
wIn case of opening of new branches or offices to collect deposits or closure thereof
whether the company has complied with the requirements contained in the NBFC
(Reserve Bank) Directions, 1998
Matters to be….
NBFC-Non-deposit taking (Para 3-C)
wwhether the Board of Directors has passed a resolution for the non- acceptance of any
public deposits.
wwhether the company has accepted any public deposits during the relevant period/year;
and
wwhether the company has complied with the prudential norms relating to income
recognition, accounting standards, asset classification and provisioning for bad and
doubtful debts as applicable to it.
Matters to be….
NBFC-NDSI Para 3-C)
wwhether the capital adequacy ratio as disclosed in the return submitted to the Bank in
form NBS- 7, has been correctly arrived at and whether such ratio is in compliance with
the minimum CRAR prescribed by the Bank;
wwhether the company has furnished to the Bank the annual statement of capital funds,
risk assets/exposures and risk asset ratio (NBS-7) within the stipulated period
30
Matters to be….
wIn the case of a company engaged in the business of non-banking financial
institution not required to hold CoR subject to certain conditions (3-D)
wWhere a Company has obtained a specific advice from the Bank that it is not required
to hold CoR from the Bank
wwhether the company is complying with the conditions stipulated as advised by the
Bank.
Matters to be….
Reasons to be stated for unfavourable or qualified statements (Para 4)
wWhere, in the auditor’s report, the statement regarding any of the items referred to
above is unfavourable or qualified, the auditor’s report shall also state the reasons there-
for.
wWhere the auditor is unable to express any opinion on any of the items referred to
above his report shall indicate such fact together with reasons there-for.
Obligation to report to RBI (p 5)

Where, in the case of an NBFC, the statement regarding any of the items referred above
is unfavourable or qualified, or in the opinion of the auditor the company has not
complied with the provisions of the NBFC APD (Reserve Bank) Directions, 1998 or
NBFC PN (Reserve Bank) Directions, 1998 or the provisions of the Chapter IIIB of the
RBI Act, 1934, it shall be the obligation of the auditor to make a report containing the
details of such unfavourable or qualified statements and/or about the non-compliance, as
the case may be, to the Regional Office of the Department of Non-Banking Supervision
of the Reserve Bank of India under whose jurisdiction the registered office of the
company is located
Some instances…..
wNOF falling below regulatory requirement
wCRAR falling below regulatory requirement
wF/A or F/I falling below 50% of gross assets & gross income respectively
wNot registered with RBI & doing NBFI activity
wAccepting PD without a valid registration from RBI as Cat ‘A’ company
w…..and so on and so forth
Appointment letter of Statutory Auditors
The certificate of registration is issued subject to the company complying with certain
terms and conditions’ & one of the conditions is that
‘In the appointment letter to be issued to the Statutory Auditors, the company may insert
a Clause inviting the attention of the Statutory Auditors about the provisions contained in
Para 5 of the NBFCs Auditor’s Report (Reserve Bank) Directions 1998, in terms of
which the Statutory Auditors are required to send an exception report to Reserve Bank of
India for violations of the Directions as stated therein.’
______________________________________________________________________
31
Seminar
On
Non Banking Finance

Companies
Issues & Prospects of NBFC
Guest Speaker:
Sh. Raman Aggarwal
32
9 Approx. 13000 players registered under RBI : A & B categories
¾ Approx. 350 NBFCs authorized to accept public deposits (Catg. A)

¾ Total deposits held are Rs.2000 Crores approx.
Presented by :
¾ Total asset size Rs.3,25,000 Crores approx.
RAMAN AGGARWAL
Director, Bansal Credits Ltd., New Delhi & 9 Asset financing
Co-Chairman, Finance Industry Development Council (FIDC) ¾ Commercial vehicles
(Self Regulatory Organization for Asset Financing NBFCs)
¾ Passenger cars
Email : bansal@sify.com ¾ Multi-utility & multi-purpose vehicles
Mobile: 98100 16667
¾ Two-wheelers & Three-wheelers
¾ Construction equipments
¾ Consumer durables
NIRC 30.05.2009 1 NIRC 30.05.2009 2
¾ Prevent concentration of credit risk in banks only 9 As recognized by RBI & Expert Committees / Taskforce
¾ Financial Inclusion – providing finance to unorganized and under banked ¾ Development of sectors like Transport & Infrastructure
segment of the society ¾ Substantial employment generation
¾ Help & increase wealth creation
¾ Product innovation gives NBFCs a competitive edge ¾ Broad base economic development
- used vehicles financing ¾ Irreplaceable supplement to bank credit in rural segments
- small ticket personal loans ¾ major thrust on semi-urban, rural areas & first time buyers / users
- three wheeler financing ¾ To finance economically weaker sections
- IPO financing ¾ Huge contribution to the State exchequer
- finance for tyres & fuel
¾ Robust asset quality is major strength of NBFCs
NIRC 30.05.2009 3 NIRC 30.05.2009 4
33
9 The key factor for our survival & growth ¾ Weak and Fly by Night operators have been weeded out by RBI
¾ Deposit mobilization at the doorstep of the depositors with

¾ Prompt, tailor made service with least hassles - Compensates for the personalized approach, interest warrants are delivered in advance
higher lending rates of NBFCs as compared to Banks & FIs
¾ NBFCs provide financial assistance to their borrowers in case of
¾ Personal Touch – guidance in insurance matters and help in their hour of emergency needs
need
¾ NBFCs provide assistance and guidance to their customers in
matters relating to insurance
¾ NBFCs cater to a class of borrowers who are unbankable and who:-
¾ Provide credit to “unbankable” borrowers and mature them to
- do not necessarily have a high income become bankable
- but have adequate net worth
- are honest and sincere (gauged by the personal touch maintained
with them)
NIRC 30.05.2009 5 NIRC 30.05.2009 6
¾ Lack of level playing field with Banks & FIs
¾ Regulator needs to play a “developer’s” role
¾ Dependence on banks for resources
¾ Competition with banks on originating assets
¾ Limited options for capital enhancing as compared to banks
¾ No insurance for public deposits held by NBFCs
¾ Some state govts treating NBFCs as Money Lenders under the

Money Lenders’ Act
NIRC 30.05.2009 7 NIRC 30.05.2009 8
34
¾ Bank Funding
¾ Income Tax Benefits U/s. 36(1) & 43D of the I. T. Act where Deduction is
- Need for liberal Bank Funding at competitive rates allowed for Provisions made against NPAs – available to banks, FIs and
HFCs
- “Wholesaler - Retailer” relationship between banks and NBFCs needed
¾ Exemption from TDS requirements U/s. 194A(3) of the I. T. Act –
¾ Deposit acceptance limits have not been changed since 1998 available to banks and FIs
¾ ECBs – the only source for Low Cost Long Term finance for NBFCs
engaged in Infrastructure funding restricted
¾ Securitization Guidelines issued by RBI have restricted securitization of ¾ TDS on Lease Rentals U/s. 194I as per Taxation Laws (Amendment) Act,
receivables 2006 where TDS is deducted from the principal also
¾ Urgent need for Refinance window for NBFCs
¾ Service Tax on the 10% of the interest component in a Lease & Hire
Purchase Transaction – makes lease & H.P unviable as compared to a
9 Stimulus Package announced by the Govt on Jan 02, 2009 loan transaction
¾ Special Line of credit from public sector banks for financing of ¾ Multiple Taxes Levied on Lease/ Hire Purchase Transactions
commercial vehicles – IBA yet to issue the circular
¾ SPV created to provide liquidity support to NBFCs-ND-SI – Rs. 25000 cr - Treated as “Sale” & Subject to VAT
for meeting existing liabilities only
- Treated as “Service” & Subject to Service Tax
- Treated as “Finance” & Subject to Interest Tax
- TDS on Lease Rentals
NIRC 30.05.2009 9 NIRC 30.05.2009 10
¾ Filing civil suits : takes ages and thus defeats the purpose
¾ There is no laid out Recovery Mechanism to facilitates recoveries by
NBFCs
¾ Referring the matter for arbitration : the borrowers/ hirers do not
¾ Timely Recovery of our dues shall ensure timely payment of our participate
liabilities including deposits
¾ Filing criminal complaints against the borrower/hirer u/s.138 of The
¾ SARFAESI Act & DRTs not available to NBFCs Negotiable Instruments Act for Cheque Bouncing
- huge back log of pending cases all over the country
¾ Supreme Court order dt. February, 2007 and subsequent orders passed
by Consumer Courts have been wrongly interpreted to ban - special courts setup for the purpose are simply few drops in the ocean
repossession - recent Supreme Court order has created unnecessary confusion
relating to the jurisdiction
- some courts have even commented that they cannot act as collection
agents for Banks/ NBFCs
Hire Purchase & Hypothecation are on equal footing in these
procedures
NIRC 30.05.2009 11 NIRC 30.05.2009 12
35
9 Do you know?
¾ NBFC-AFCs have been repossessing since decades without facing much 9 False criminal complaints : harassment & threats
problems
¾ FIRs lodged due to ignorance and misguidance
¾ Problems of unethical behavior of recovery agents is quite recent
¾ Issue is CIVIL (not criminal)
¾ Problems of Abusing, harassment and threatening by recovery agents is
more in case of unsecured lending where the borrower himself is the ¾ FIRs lodged at police stations other than the police station under whose
only security jurisdiction the place of repossession lies and where the intimation by
the recovery agents has been given
¾ Only 1 to 2% of the cases lead to repossession – blown up by the media
9 Typical allegations
¾ Repossession is more a deterrent to default and is the major tool for
recovery for NBFC-AFCs
¾ Thefts & act of dacoity
¾ Discouraging Repossession is having a cascading effect and even
regularly paying borrowers are defaulting ¾ Loss of cash & valuables
¾ The borrower is an “Informed Defaulter” who has been sent reminders ¾ Physical abuse and unethical behavior of “goons” (recovery agents)
and notices
NIRC 30.05.2009 13 NIRC 30.05.2009 14
9 The Right to Repossess
9 Who Should Repossess? ¾ Has never been challenged both in case of hire purchase and
hypothecation agreements
9 How to Repossess?
¾ Supreme Court order dt. February, 2007 also upholds this right
9 Post Repossession Sale & Transfer of the Asset ¾ Misinterpreted by the police authorities
¾ Blown out of proportion by the negative media publicity
¾ Resulted in a situation where repossession is practically not happenning
NIRC 30.05.2009 15 NIRC 30.05.2009 16
36
9 Need for distinction between Recovery & Repossession Agents
9 Need for Recognition and Regulation of Repossession Agents
Sno. Recovery Agents Repossession Agents
¾ In this era of heavy retail lending there is a undisputable need for
Repossession Agents
1 Engaged to “recover” unsecured Engaged to “repossess” assets financed in case
loans like personal loans, credit cards of default
¾ The society needs to recognize the need and role of Repossession etc.
Agents and stop blatantly coining them as “goons”
2 Adopt pressure tactics on the Focused on taking possession of the asset
customer since there is no underlying which is the prime security
¾ Repossession agencies provide employment opportunities to young and security
bold men including ex-servicemen and retd. Police personal
3 Often cause harassment to the May not contact the borrower and simply take
borrower by calling at odd hours and back the asset as soon as it is traced, as per the
¾ The need of the hour is to regulate repossession agencies – licensing use of unethical methods terms of the agreement
and training and thus bring credibility to this profession
4 Start approaching the borrower at the Repossession is the last recourse resorted to
first instance of default only after other options fail
5 The borrower may not be aware/ The borrower is an “informed defaulter” to whom
informed of the default reminders, notices etc. have been sent
NIRC 30.05.2009 17 NIRC 30.05.2009 18
¾ Need of the hour is to regulate repossession and not ban it

¾ Any activity if left unregulated is vulnerable to misuse
¾ FIDC has been strongly advocating the need for separate guidelines on
repossession only
¾ Valuation of the asset is the key issue
9 Key Points to be kept in mind
¾ Quotation from registered dealers should be obtained
¾ A clear clause on repossession in the agreements signed with the
borrower/ hirer is a must ¾ Public auction of the asset
¾ Reminders/ notices of default should be sent to defaulting borrower/
hirer ¾ Getting the vehicle transferred often takes lot of effort and time at the
¾ Notice stating the “Intent” to repossess must also be sent RTOs
¾ Intimation to the concerned police station in writing and/or by dialing
the centralized control room at the telephone no.100 immediately after
repossession ¾ Huge tax arrears/ RTOs dues often become a stumbling block
¾ Notice to the defaulting borrower/ hirer informing him of repossession
and giving him a final opportunity to repay and take back the asset ¾ Corruption and malpractices at the RTOs
¾ There is also an equally important need to fix up borrowers/hirers
responsibilities:
- should surrender the asset in case of default

- should ensure that the asset is in an up kept condition
NIRC 30.05.2009 19 NIRC 30.05.2009 20
37
9 Favorable Supreme Court Rulings ¾ Right to Repossess is widely recognized by the judiciary and the
regulators
¾ The procedure used and the people deployed have been the focus of all
¾ Orix Auto Fin. Ind. Ltd. V/s. Jagmander Singh, 2006 the adverse court rulings and negative media publicity
¾ Charanjit S. Chadha V/s. Sudhir Mehra, 2001 ¾ The suggestion is to use “legal means” to repossess
¾ K.A.Mathai & Others V/s. Kora Bibbi Kutty, 1996 ¾ What are the legal means to undertake repossession :
¾ Manipal Finance V/s T Bangarappa, 1993 - Obtaining court orders for the same OR
¾ Trilok Singh and Others V/s Satyadeo Tripathi, 1979 - Repossession of assets by engaging people who are recognized by
the law and by following an acceptable procedure for the same
¾ Enormity of the back log of pending cases all over the country make it
9 Supreme Court Ruling which stopped Repossession impractical to obtain court orders
¾ Repossession by engaging licensed and trained agents and by using an
¾ Manager, ICICI Bank Ltd. V/s Prakash Kaur & Others, 2007 acceptable procedure as laid out under separate Repossession
guidelines is the most practical and achievable solution
9 Supreme Court Case where FIDC has Intervened ¾ Complaints of use of force and abusive behavior of agents shall also be
resolved once these agents are recognized by the law and are licensed
¾ Citicorp Maruti Finance Ltd. V/s S. Vijayalaxmi (Pending) – the bench to repossess
had expressed their intent to lay down guidelines
NIRC 30.05.2009 21 NIRC 30.05.2009 22
9 Self Regulatory Organization (SRO)

9 Need for a SRO
¾ For RBI Registered NBFC-AFCs
¾ It is human nature to accept self imposed rules more readily than rules
imposed by outsiders ¾ Registered as a Section 25 Company
¾ SRO enables regulators to leverage their limited public resources ¾ Head Office in Mumbai with Regional Chapters started at Delhi, Kolkata,
through their expertise and oversight and Chennai
¾ Code of Conduct & Fair Business Practices has been formulated and
¾ SRO enables regulators to focus their resources where the risks are enforced
greatest
¾ Full recognition from MOF & RBI – Invited for Pre-Budget & Credit Policy
discussions
¾ Equal representation to small & big NBFC-AFCs in the – Managing

Committee
NIRC 30.05.2009 23 NIRC 30.05.2009 24
38
¾ Code of Conduct
9 FIDC has been formed with a very clear focus
¾ Standardization of Practice
¾ System Manual
¾ To protect the interest of its members ¾ Risk Management
¾ Defaulters List
¾ To promote Asset Finance Business ¾ Compilation of Data / Statistics
¾ Pool of Funding / Contingency Fund
¾ To represent to Govt., RBI & various statutory & Trade Bodies ¾ Recovery Agents
¾ Trainings / Seminars / Workshops
¾ Web – Site
¾ To promote brotherhood amongst members
¾ Members Directory
¾ Journal
¾ To ensure fair and ethical practices among its members ¾ Grievance Forum
¾ To bring NBFCs on the mainstream of the financial sector of the country
NIRC 30.05.2009 25 NIRC 30.05.2009 26
¾ Leasing as a tool for lending to low capital SMEs needs to be promoted

¾ Micro Financing in rural & semi urban areas – huge untapped market
¾ Clarity on definition and taxation on leasing
¾ Leverage their strengths in sourcing business and recovery
¾ Providing collection services for banks’ portfolios ¾ Supportive laws governing accounting rules, property rights and
contract enforcement will be of prime importance
¾ Acting as distribution backbone for Insurance Companies
¾ Fast track recovery mechanism like Repossession of Assets using
¾ Distribution of Mutual Fund Products – RBI Circular Dt. December 04, “private” means within the legal framework
2006
¾ A new regulatory approach
¾ Issue of Co-branded Credit Cards without risk sharing – RBI Circular Dt.
December 04, 2006 - development of NBFCs to ensure co-existence with Banks & FIs
- removing inequitable restrictions vis-à-vis banks
¾ Acting as Business Facilitator & Correspondents to banks for extension - a long term policy framework enabling the players to evolve long term
of Banking Services - RBI permission withdrawn
strategies
¾ Buyout and servicing of retail NPAs - closer consultation with representative bodies
- play the dual role of growth enabler and the regulator
NIRC 30.05.2009 27 NIRC 30.05.2009 28
39

Project Finance

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Project Finance

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Background Material

May 30, 2009

The Dynamic Scenario and the Chartered Accountant

Warm Regards & Best of Luck.

Chartered Accountant Jayate.

(CA. Bhagwan Das Gupta)

Raising Funds in the Current Scenario –

CA. Rajeev Kumar

Global Financial Issues Impact on Indian GDP

IMF estimates total global losses on account of the Not Classified

unemployment at around 8.9% currently and Not affected

ECB’s Parameterised SME Lending

Structured Finance Infrastructure Funding

Equity Funding Options Equity Funding Statistics

IPO’s / Right’s Issues 2008-09 2007-08

Preferential Issues No of Amount No of Amount

 Pre-money / Post money valuation

QIP’s Private Equity Funding

 India is supposed to be the third largest NPA market after

Rupees in Crores Rupees in Crores

Sources Application Sources Application

Preparation of Project Report for Bank Finance:

CA. Walter D’ Souza

PROJECT REPORT PROJECT/COMPANY SNAPSHOT

INTRODUCTION MANAGEMENT EVALUATION

• OBJECTS OF THE COMPANY • DETAILS OF MANAGERIAL/ KEY PERSONNEL

• DETAILS OF THE PROJECT PROPOSED TO BE • DETAILS OF THE GROUP CONCERNS

• RATIONALE BEHIND THE PROJECT

• PROCESS KNOW-HOW AND TECHNICAL SERVICES

• RAW MATERIALS REQUIREMENTS

• UTILITIES AND ARRANGEMENTS MADE

• LOCATION OF THE PLANT

COMMERCIAL EVALUATION SWOT ANALYSIS

1. REDUCTION IN SELLING PRICE

5. Projected Balance Sheet

6. Details of Working Capital and Margin Money

7. Calculation of Production Capacity

8. Calculation of Raw Material Mix and Value

10. Sales Realisation at 100%

ASSUMPTIONS 12. Power Cost

13. Calculation of Factory Wages

14. Calculation of Factory Overheads

15. Calculation of Consumables & Stores

16. Administrative Salary

17. Calculation of Administrative Expenses

19. Calculation of Depreciation for Project Working Particulars Amount

24. Internal Rate of Return Stamp Duty 2.00

25. Cost of Capital Registration Charges 0.25

26. Pay Back Period Brokerage paid 0.25

27. Ratio Analysis Total Cost 25.00

Building & Civil works 100

Expenses on Foreign Technicians 25

Administrative building 10.00 Cooling Tower 5.00

Total Cost 100.00

PLANT AND MACHINERY

Fire fighting equipment 2.00 Loan processing fees 2.50

Total cost 25.00 Courier and Postage 1.00

PRELIMINARY EXPENSES PROVISION FOR CONTINGENCIES

Other expenses 2.50 Expenses on foreign technicians and 2.50

CREDIT RATING FOR RISK CLASSIFICATION OF SOURCES OF

 Short Term Loans

 Short Term Bank Guarantees

CREDIT MONETORY ASSESSMENT

IMF estimates total global losses on account of the Not Classified

IPO’s / Right’s Issues 2008-09 2007-08

Preferential Issues No of Amount No of Amount

Pre-money / Post money valuation

India is supposed to be the third largest NPA market after

Short Term Loans

Short Term Bank Guarantees

Analysis of Profit & Loss Statement

Analysis of Balance Sheet

Working Capital/Bank Borrowings Assessments

Calculations of Maximum Permissible Bank Finance (MPBF)

Fund Flow Analysis