PROJECT APPRAISAL BY SBI

SUBMITTED BY-AKANKSHA RASTOGI

ROLL NO.-563
 WHAT IS PROJECT APPRAISAL?

PROJECT APPRAISAL means an investigation/assessment done

by the bank prior before providing any loans & advances/project
finance & also checks the commercial, financial & technical viability
of the project proposed.
Proper evaluation of the customer is preferred which measures the
financial condition & ability to repay back the loan in future
Project appraisal is the process of appraising the credit worthiness
of the loan applicant
3 C of credit are must be kept in mind for lending funds:-
Character Capacity Collateral
If any one of these are missing in the lending officer must question
the viability of credit
 RESEARCH METHODOLOGY
PROBLEM STATEMENT:
To study the PROJECT APPRAISAL System in SME sector, at
State Bank of India (SBI).

OBJECTIVES:
To study the PROJECT APPRAISAL at SBI
To check the commercial, financial & technical viability of the
project proposed & its funding pattern
To check the primary & collateral security cover available for
recovery of such funds
 RESEARCH METHOLOGY (CONTD)
RESEARCH DESIGN :
Analytical in nature

DATA COLLECTION :
Secondary Data:
E-circulars of SBI
Books & Journals
Database at SBI
Library research
Websites
 BRIEF OVERVIEW OF LOANS
Loans can be of two types fund based & non-fund based:

FUND BASED includes:

Working Capital
Term Loan

NON-FUND BASED includes:

Letter of Credit
Bank Guarantee
 MEASURES
Debt Equity Ratio Debt Service Coverage
Ratio
Concept
Concept The amount of cash flow
Proportion of Debt fund of a available
company in relation to its equity to meet annual interest
and principal payments

Formula
Long Term Debt Formula
Tangible Net worth Net Operating Income
Total Debt Service

Comments
This ratio is an indicator of leverage
Comments
of a company
DSCR less than 1 means negative
It measures a companys
cash flows
ability to borrow and repay money
 CREDIT RISK ASSESSMENT (CRA)
The CRA models adopted by the Bank take into account all
possible factors into appraising the risks, associated with a
loan.
These have been categorized broadly into financial, business,
industrial & management risks are rated separately.
These factors duly weighted are aggregated to arrive at a
credit decision whether loan should be given or not
Financial parameters:
The assessment of financial risk involves appraisal of the
financial strength of the borrower based on performance &
financial indicators. which assessed in terms of static ratios,
future prospects & risk mitigation .
 PROJECT APPRAISAL PROCESS
Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
Properties documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution
list, etc.
|
Title clearance reports of the properties to be obtained from empanelled advocates
|
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
|
PROJECT APPRAISALPROCESS
(CONTD)
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of
accounts, renew of accounts, etc
(on regular basis)
 PROJECT APPRAISAL STANDARDS
QUALITATIVE:

The proposition is examined from the angle of viability &

also from the Banks prudential levels of exposure to the
borrower, Group & Industry

View is taken about banks past experience with the

promoters, if there is a track record to go by

Opinion reports from existing bankers & published data if

available
 PROJECT APPRAISAL STANDARDS
(CONTD)
Sector/ Mfg. Others
Parameters
QUANTITATIVE: Current Ratio (min.) 1.33 1.20
(For FBWC limits above Rs. 5cr)
(i)Working capital 1.00
(For FBWC limits upto Rs. 5cr)
TOL/ TNW (max.) 3.00 5.00
(ii)Term Loan
DSCR
Technical Feasibility
Net (min.) 2:1 2:1
Economic Feasibility Gross (min.) 1.75:1 1.75:1
Financial Feasibility
Managerial Competency
Debt/ Equity 2:1 2:1
Ratio (max.)
Promoters 30% 20% of equity
contribution* (min.) of
equity
 RATING SCALES FOR GIVING LOANS
S. No. Borrower Range of Risk level Comfort Level
Rating scores

1 SB1 94-100 Virtually Zero risk Virtually Absolute safety

2 SB2 90-93 Lowest Risk Highest safety
3 SB3 86-89 Lower Risk Higher safety
4 SB4 81-85 Low Risk High safety
5 SB5 76-80 Moderate Risk with Adequate safety
Adequate Cushion
6 SB6 70-75 Moderate Risk Moderate Safety
7 SB7 64-69
8 SB8 57-63 Average risk Above Safety Threshold
9 SB9 50-56
10 SB10 45-49 Acceptable Risk Safety Threshold
(Risk Tolerance Threshold)
 RATING SCALES FOR GIVING LOANS
11 SB11 40-44 Borderline risk Inadequate safety
12 SB12 35-39 High Risk Low safety
13 SB13 30-34 Higher risk Lower safety
14 SB14 25-29 Substantial risk Lowest safety
15 SB15 <24 Pre-Default Risk Nil
(extremely
Vulnerable to default)
16 SB16 - Default Grade

Banks has introduced New Rating Scales for borrower for

giving loans. Rating is given on the basis of scores out of
100. Bank gives loans to the borrower as per their rating like
SBI gives loans to the borrower up to SB8 rating as it has
average risk till SB8 rating. From SB9 rating the risk
increases. So banks does not give loans after SB8 rating.
 SBI NORMS FOR PROJECT APPRAISAL

LOAN ADMINISTRATION PRE SANCTION

PROCESS

Preliminary appraisal:
Sound Project Appraisal involves analysis of the viability
of operations of a business and the capacity of the promoters
to run it profitably and repay the bank the dues
The companys Memorandum and Articles of Association
should be scrutinized carefully to ensure that there are no
clauses prejudicial to the Banks interests
 SBI NORMS FOR PROJECT APPRAISAL
Towards this end the preliminary appraisal will examine the
following aspects of a proposal. Banks lending policy and other
relevant guidelines/RBI guidelines:
Industry related risk factors
Credit risk rating
Profile of the promoters/senior management personnel of
the project
List of defaulters
Caution lists
Government regulations impacting on the industry
Financial status whether it is acceptable
 SBI NORMS FOR PROJECT APPRAISAL
Whether the project cost acceptable or not
Debt/ Equity ratio whether acceptable
Organizational set up with a list of Board of Directors & indicating
the qualifications & experience in the industry
Demand and supply projections based on the overall market
prospects together with a copy of the market survey report
Estimates of sales, cost of production and profitability
Projected profit and loss account and balance sheet for the
operating year
Audited profit loss account and balance sheet for the past three
years
 SBI NORMS FOR PROJECT APPRAISAL

LOAN ADMINISTRATION POST SANCTION PROCESS

The post-sanction credit process can be broadly classified into three

stages:
Follow-up
Supervision
Monitoring
which together facilitate efficient and effective credit management
and maintaining high level of standard assets
 CASE STUDY

Company:- Akshat Polymers

Firm:- Partnership Firm (M/S Umiya Polymers)
Industry:- Manufacturing
Activity:- Maufacturing of HDPP woven sacks, which are
widely used as packaging material in cement, fertilizer,
etc.
AKSHAT POLYMERS (AP) has been established as a
partnership firm on 19th November, 2007 at Kadi.
The partnership was constituted for manufacturing and
selling of HDPP woven sacks to be manufactured from
HDPP granules.
Proposal for sanction of FBWC limits of Rs.2.25 crores
and Fresh Term Loan of Rs.2.00 crores.
 PRICING/ RATE OF INTEREST

Proposal:
Sanction for;
i) FBWC limits of Rs.2.25 crores
ii) Fresh Term Loan of Rs.2.00 crores
Approval for:
i) CRA rating of SB- 6 (71 marks) based on
projected financials as on 31.03.2010.
ii) Pricing for WC facilities @1.00% above SBAR
@13.75and for TL 1.50% above SBAR @14.25%
 Deviations in Loan Policy
Indicative Company's Company's
Parameter Min/Max level level as on level as on
s as per loan policy 31.03.2009 @ 31.03.2010

Liquidity Min. 1.33 1.34 1.52

TOL/TNW Max. 3.00 4.11 2.50

TOL/Adj. 2.64 1.80
TNW

Average Min. 1.75 2.54 2.54

gross
DSCR (TL)

Debt / Max. 2:1 2.01:1 1.03:1

equity
 ANALYSIS OF THE CASE

The unit will have installed capacity of 2520 MT

The unit is projected to achieve capacity utilization of
80% during the year 2009-10 and accordingly the sale
for the year is projected at Rs.19.77 crores.
The unit plans to initially market its product in
Gujarat, Maharashtra, Rajasthan and sale to Central
Govt. who purchases the HDPP woven sacks for grains
through open tenders
As per ICRA report, grading and research services
Flexible packaging sector is expected to grow at the
rate of 12.40%.
 ANALYSIS OF THE CASE

The promoters have sufficient experience of 15 years

in the line of activity
The firm has also started marketing activity for their
products & are having very good market contacts for
the sales of the Finished Goods
The orders worth Rs.2.50 crores is expected to be
finalized by end of August, 2008
Projected financials are in line with the financials of
the some of the unit in similar line of activity and
production level
 FINDINGS
SBI loan policy contains various norms for sanction of
different types of loans
These all norms does not apply to each & every case
SBI norms for providing loans are flexible & it may differ
from case to case
After case study, we found that in some cases, loan is
sanctioned due to strong financial parameters
From the case study analysis it was also found that in some
cases, financial performance of the firm was poor, even
though loan was sanctioned due to some other strong
parameters such as the unit has got confirm order, the unit
was an existing profit making unit & letter of authority was
received for direct payment to the bank from ONGC which is
public sector
 CONCLUSION
Credit is the core activity of the banks & important
source of their earnings which go to pay interest to
depositors, salaries to employees & dividend to
shareholders
Credit & risk go hand in hand
Banks main function is to lend funds/ provide
finance but it appears that norms are taken as guidelines
not as a decision making
A bankers task is to indentify/assess the risk
factors/parameters & manage/mitigate them on
continuous basis
Thank You..