Bank Management

PGDM
IMT
June –July 2018
Praloy Majumder
1
Loan against property
Loan Against Property ( LAP)
• Fundamental concept of LAP :
– Money is invested in immovable asset
– Immovable asset would not be sold at the present
by the borrower
– Immovable asset value would go up in the future
– Money from LAP would be invested in asset that
should be generating more return than the LAP
interest
– Repayment of LAP would be from cash
generation from assets created out of LAP
Loan Against Property ( LAP)
• Understanding of end use of LAP is essential
• The end use should go for building up of
assets :
– Physical assets
– Financial assets
• Invested in the business
– For equity purpose
– For bridge financing
• The repayment sources must be found out for
LAP
• The repayment would be from the cash flow
of the borrower and also cash flows from the
assets created out of LAP.
Loan Against Property ( LAP)
• The repayment formula :
– Incremental salary after LAP :
• Incremental gross salary
– Less Tax Payment
• Incremental Net Salary
– Sources of such incremental salary
• Incremental return from assets created out of LAP
• Escrowing of Incremental salary after LAP at
the source of origination of this cash flow
Loan Against Property ( LAP)
• Higher margin for LAP to check :
– Higher amount of valuation by valuers
– Steep reduction in the value of assets during the
down turn
• Proper legal documents
• Place of disbursement, investment and
repayment sources of LAP should be within
acceptable geographical locations
• RBI norms to be followed by way of proper
data sharing and compliance of Multiple
Banking norms
Project Finance
 Different methods of
financing
Financing

Long Term Short Term

Equity Debt Debt

 Long Term Debt Financing
Long Term
Debt Financing

Term Loan Project Financing

Primary Security Collateral Security Primary Security

 Long Term Debt Financing
Long Term
Debt Financing

Term Loan Project Financing

Non Non
Infrastructure Infrastructure
Infrastructure Infrastructure
Project Finance – Repayment

Repayment

Realised Cash
Refinancing Disinvestment
Accrual
Project Financing Characteristics
 Basic features of Project
Financing …
• In case of prevention of operations :
– Contract among financially responsible
parties to make :
• Financial arrangements
• Technical arrangements
• In the event of delay in insurance
recoveries the financially responsible
parties would bring the cash in the
form of advances
 Project Financing

• Sponsors : Main anchor of the project.

• Sponsors provide at most limited
recourse to cash flows from their
other assets that are not part of the
project.
• Pledge of the project assets, but none
of their other assets, to secure the
project loans.
 Project’s uniqueness

No operating History

Pillar II
Pillar I
Credit
Anticipated
Support by
Profitability
Various
Contracts
Of 3rd parties
 Lender’s requirement

Project
Would
Be put Project
Into Output
Service Would
Generate
Profit
 Project Loan V/S General
Loan
• Sponsors main requirement :
– Technical Feasibility
• Technology
– Acceptable
– Proven
– Economic Viability
• Financially Viable
• Environmental Impact compliance
 Prerequisite of Project
Financing
• Technical feasibility :Lenders must be satisfied
that the technological processes to be used to the
project are feasible for commercial application on
the scale contemplated.
• The providers of fund need assurances that the
project will generate output at its design capacity.
• The technical feasibility has a significant concern
if the project is trying to build a new facilities .
 Prerequisite of Project
Financing
• Economic Viability :The ability of a project to operate
successfully and generate a cash flow is of paramount
concern to prospective lenders.
• The providers of funds must be satisfied that the project will
generate sufficient cash flow to service project debt and pay
an acceptable rate of return to equity investors.
• There must be a clear , long term need for the project’s
output , and the project must be able to deliver its products (
or services ) to the marketplace profitably
 Prerequisite of Project
Financing
• Raw material :
– Availabilty
• Natural
• Synthetic
– Other factors of production
– Management of raw material production
factors
 Prerequisite of Project
Financing
• Confirmation of output sales:
– Power Purchase Agreement
– No alternate facilities to be set up
– Clear cut guidelines on tariff escalation
formula
• Proper safeguard for meeting the
adverse situation :
– Sponsors support in case of urgency
– Insurances claim
 Determination Determination
Of Of Margin Money for
Fixed Asset Cost Working Capital

Sales Margin
Inventory
Expenses Money for
Receivable
Holding Working
Other CA
Level Capital

Determination IDC Calculation,

Of Pre Operative Exp
Project Cost

Cash Flow Calculation

Project Cost

Project Cost

Fixed Asset
Current Asset Pre Op
Related
Related Cost Expenses
Cost

Margin
Cost of Fixed Money of Original
IDC IDC IDC
Asset Working Cost
Capital
 Fixed Asset
Means of Finance

Current Asset

Current Liability
Current Asset
Means of finance

Means of Finance

Equity & Internal Accrual Debt

Domestic Foreign

Private Placement Private Placement

Public Issue Public Issue

Means of finance

Debt

Domestic Foreign

Preference Trade
Term Loan Debenture ECB FCCB
Shares Finance
Stages of Project Cash Flows

Project Cost

IDC

IDC
Proper method of funding

Project
Implementation
Stage
COP Initial successful running
1 2 3 4
Types of Types of Types of
Financing Financing Types of
Financing
•Short term •Medium Term •Medium Term
Financing
•Normal Debenture Debenture
working • Medium •Long Term Bond
• Medium
Capital Term Loan •Normal Equity and
Term Loan
financing to •Equity Loan •Normal
stake sale
Suppliers and •Strategic
Equity
contractors Disinvestment
•Non Fund
Based
Products
•Mainly
debt
Infrastructure Asset

Book • Same at t=0

• Higher than market at t=t1

Value • Substantially Lower than

market t=t2 ; t3 > t2 > t3

Market • Same at t=0

• Lower than market at t=t1

Value • Substantially Higher than

market t=t2 ; t3 > t2 > t3
Risk Analysis

Risk
Analysis

Post
Pre Construction
Construction
Risk
Risk
Risk Allocation

Risk Type Particulars Allocated to Prudent policy

Pre construction

Should not disburse

Land acquisition Land acquisition NHAI unless entire land is
allocated

State Government
Should not disburse
and other
Rights of Way Access to the site unless all ROW are
government
obtained
bodies
Risk Allocation

Risk Type Particulars Allocated to Prudent policy

Pre
construction

EPC contractor Lender should put this as

Construction
Fixed Price through proper part of the terms and
cost
competitive bidding conditions

Lender should use

EPC contractor
Project Prevention of service LC and
through proper legal
implementation delays disbursement for phased
format
wise disbursement
Risk Allocation

Risk Type Particulars Allocated to Prudent policy

Pre construction

Debt lender should

Financing Risk Interest rate Debt lenders lend under fixed
rate

Debt lender must

Financing Risk Currency risk Debt lenders put conditions for
complete hedge
Risk Allocation

Risk Type Particulars Allocated to Prudent policy

Pre construction
Cash flow trapping,
Margin money Promoter undertaking and
Sponsors
contribution contribution particular form of
instrument

Proper insurance to be
Force majeure
Force majeure risk Insurance taken to address this
risk
risk

Government Proper insurance to be

Political and legal
change , judicial Insurance taken as per advise of
risk
verdict insurance consultant
Project implementation monitoring

Project Implementation Schedule and Monitoring

Half year 0 1 2 3 4 5 6
Physical
Completion
% of completion as
10% 20% 45% 70% 95% 100%
per projections
% of completion as
5% 12.50% 25% 45% 55% 65%
per actual
% amount of debt
to be disbursed as 10% 20% 45% 70% 95% 100%
per projections
% amount of debt
actually disbursed 10% 20% 45% 70% 95% 100%
as per actual
Excess debt
5% 8% 20% 25% 40% 35%
disbursed
Project implementation monitoring
Project implementation monitoring
• Progress report
• Covenant
• If the actual completion is less than 15% of
the projected figure, the promoter would
bring in additional subordinate loan to the
tune of shortfall amount till the time the
delayed work is addressed ;
• If the delayed work is not rectified within 6
months, then the subordinate loan amount
would automatically converted into equity;
• If , during any point of time , the project
implementation fell short of projected by
25% or more , then the lender has to right to
invoke substitution clause and would
replace the sponsors within next 3 months .
Sponsors would be given 3 months to
reduce the shortfall by carrying out the
physical work .
Post construction risk

Post
construction
risk

Trust and
Uncertainty Dual
Retention DSRA Insurance
capturing amortisaation
account
Characteristics of Infrastructure
Business

 Without infrastructure growth is not possible

 Infrastructure requires huge amount of investment
 Government does not have the sufficient fund
 Private Participation is must
 Private must be given incentive to invest

Characteristics of Infrastructure
Business

 Services would be used by the common public

 Demand would be more certain than other industry as users have to
use it
 Price regulation in some form would always be there
 Pricing should be in balance between :
– Incentive
– Loss
Characteristics of Infrastructure
Business

 Constraints on business return

 Higher leverage
 Fiscal incentive for higher leverage
 More certainty in revenue would support higher leverage
 Risk is going up for higher leverage
 Suitable adjustment for these two factors are critical for infrastructure
financing
Building up of Infrastructure

Process of
Building up of
Infrastructure

Government’s
PPP
Own Book

Without Toll With Toll Annuity BOT

Process of Awarding Contract
– Stages

High Fiscal PPP-

PPP- BOT
Deficit Annuity
Rationale for PPP

Project Increased
High Fiscal Project
Implementation
Deficit
Delays Cost
Viability Gap

Adequate
Return

Desired Viability Affordable

Quality Service
GAP

Timely
Completion
Types of VGF

Negative
Return

Positive
Viability
Gap Funding
Types of VGF

Negative
Viability Gap
Funding

Positive
Return
Financing Infrastructure

48
Risks of Infrastructure
Projects
 Specialised Assets
– Not usable for other purpose
 Location disadvantage
– Not saleable easily
 Amount investment huge
– Lenders are more at risk than borrower
 Regulatory hurdle
– Government intervention
Infrastructure Financing
Pattern
Financing Pattern

Central Government State Government

Private Sector
Sources of Debt
Future Methods of Lending
 Bank’s involvement is imperative
– Short Tenure Deposit
– ALM May Hit
• Not so much problem provided alternate model

 Bond Market to be developed :

– Normal time required
• 5 years

 Can we wait ?
Future Methods of Lending
 Banks have to lend to Infrastructure
Sector
 NBFC would lend to Infrastructure
 Banks would lend to NBFC
 But Banks would not be able to lend
long term
 NBFC would not be able to lend long
term :
– Sources of fund from Banks
– Selected amount can be raised from long
Risks of Infrastructure Project
 Understanding the risk :
– Key for the new models
– Addressing the key risks in the new model
would be the key driver
– Innovative methods of reducing the risk
• Use the financial stake taking capability of the
new parties
Proper method of funding

Project
Implementation
Stage
COP Initial successful running
1 2 3 4
Types of Types of Types of
Financing Financing Types of
Financing
•Short term •Medium Term •Medium Term
Financing
•Normal Debenture Debenture
working • Medium •Long Term Bond
• Medium
Capital Term Loan •Normal Equity and
Term Loan
financing to •Equity Loan •Normal
stake sale
Suppliers and •Strategic
Equity
contractors Disinvestment
•Non Fund
Based
Products
•Mainly
debt
Infrastructure Asset

Book • Same at t=0

• Higher than market at t=t1

Value • Substantially Lower than

market t=t2 ; t3 > t2 > t3

Market • Same at t=0

• Lower than market at t=t1

Value • Substantially Higher than

market t=t2 ; t3 > t2 > t3
Risk Analysis

Risk
Analysis

Post
Pre Construction
Construction
Risk
Risk