PROJECT ANALYSIS AND ASSESSMENT OF TERM LAON

Project finance involves providing credit and other facilities to a borrower , for setting up
new projects, expansion, diversification and modernization of existing industrial units.
While considering the project for assistance, we evaluate technical feasibility,
commercial and economic viability and financial soundness of the project. The
repayment of the loans and facilities is normally fixed on case to case basis depending on
projected cash flow of the borrower.
Infrastructure Non- Infrastructure Services
Road and rban
!evelopment
Power " tilities
#il " $as, #ther natural
Resources
Ports and %irports
Telecommunication
&ement, 'teel, (ining,
)ngineering, %uto
&omponents, Textile, Pulp "
Paper, &hemicals,
Pharmaceutical **.
)tc
Tourism "
+ospitality,
)ducational
,nstitutions
)tc.
Various asects of ro!ect ana"#sis$
%& Tec'nica" Ana"#sis&
(& Co))ercia" Ana"#sis * Ana"#sis of De)an+ forecast&
,& Financia" Ana"#sis
I. Capital cost of Project & Sources of Finance.
II. Financial Projections Cash Flow and profitability Estimates.
III. Ratio nalysis
I!. "rea# E$en point
!. IRR
-& Ana"#sis of Mana.e)ent&
/& Monitorin.
Tec'nica" Ana"#sis$
Technical analysis is essential to ensure that necessary physical facilities re-uired for
production will be available and the best possible alternatives is selected to procure
them. These are to be assessed by common sense, experience and discussions with the
promoters
%& Manufacturin. Process 0 Tec'no"o.#
(& Tec'nica" arran.e)ent
,& Si1e of t'e "ant
-& Pro+uct Mi2
/& Se"ection of P"ant an+ Mac'iner#
3& Procure)ent of P"ant an+ Mac'iner#
4& P"ant "a# out
5& Location of t'e "ant&
I. %and
II. Raw &aterial
III. &ar#et
I!. %abour
!. 'tilities such as water( Power( fuel etc.
!I. Effluent disposal
!II. )ransportation
6& Sc'e+u"e of Pro!ect I)"e)entation
%& Manufacturin. Process 0 Tec'no"o.#
,f a product can be manufactured by using alternative raw materials with
alternative process routes, a comparative study should be done to choose
the most suitable process depending upon the -uality of product re-uired,
its end use.
,f a product is to be manufactured by a particular process for the first time
in the country, necessary study should be done about the success of the
process in other countries.
(& Tec'nica" arran.e)ent
Technical arrangement made to obtain technical .now how re-uired for
the proposed project.
'upport to be provided by technical collaborators in planning and
designing of the project
'election and procurement of e-uipment, installation and operation of the
plant, training etc.
&ollaborator has agreed to provide the benefits of research and
development.
%ny restriction imposed by collaborator /)xports etc.0
,& Si1e of t'e "ant
'ize of the plant depends on the manufacturing process, availability of raw material,
capital investment, size of the mar.et.
Si1e of t'e "ant or caacit# can 7e e2resse+ in one of t'e fo""o8in. ter)s$
1 With Respect to the output
/ -uantity of finished product0
Pulp and paper, &ement, 'teel, etc.
2 With Respect to input
/ -uantity of main raw material used0
'ugar (ill, &ottonseed expeller unit,
'olvent extraction plant.etc.
3 With respect to number or machines Power looms, 'pinning (ills, Textile
(ills etc.
The concept of economic size of the plant changes with the changes in technology,
price structure, availability of raw material, demand of the product and other
circumstances.
-& Pro+uct Mi2
Product mix or product range depends upon mar.et re-uirement of certain items may
have to be done in different sizes and -uality to suit different consumers.
,f plant may have flexibility to change product mix according to changes in the
mar.et conditions, such flexibility may need additional investment, its impact on the
viability of the project be analysed.
/& Se"ection of P"ant an+ Mac'iner#
'election of plant and machinery should be done according to
manufacturing process and size of the unit. !ifferent stages of
manufacturing process should have proper balance of capacity.
% product has to pass through 4 stages and the capacity of proposed
machinery for each stage is as under
Production &ycle
Raw
(aterial 'tages
, ,, ,,, ,5 6inished
$oods
&apacity 78 98 :8 98
The total capacity of the plant in above case will be considered as :8 units because
the capacity in the third stage of process is only :8 units.
)-uipments for utilities /Power, water, fuel etc0 should also have sufficient
capacity to meet the re-uirements of main plant and machinery.
%de-uate provisions should also be made for tools and spares.
3& Procure)ent of P"ant an+ Mac'iner#
The machinery suppliers should be decided .eeping in view the -uality of
the machine, the reputation of the suppliers, delivery schedule, payment
terms , performance guarantee and other relevant matters.
,t is not always necessary to procure machinery from suppliers whose
-uotations are the lowest.
,f the project is being implemented on turn.ey basis , the reputation of
)P& contractor, main terms and conditions of contract to be analyzed.
,f promoters proposes to import second hand machinery a certificate from
chartered )ngineer giving details of its history, present performance,
valuation, economic life and suitability of second hand machinery should
be obtained&
,n order to have uninterrupted production, it should be ensured that
satisfactory arrangements for repair have been made and necessary spare
parts will be available in time.
4& P"ant "a#out
Proper plant lay out can reduce manufacturing cost by savings time and
money .
Plant lay out be done in such a way that minimum time is ta.en in handling
e-uipment , raw material, consumables, goods ;in ;process and finished
goods&
5& Location of t'e "ant&
I. Land
<and should be sufficient for the proposed project and the
future expansion plans.
<oad bearing capacity of the land should be ascertained.
Proposed land should be non agriculture and approved for
,ndustrial use.
II. Raw Material
The re-uirement of raw material at full capacity should be
ascertained and it should be ensured that necessary raw
material will be available at reasonable price.
,f raw material is bul.y and difficult to transport, it is better
to locate the plant near the source of raw material.
Regular supply of raw material is very necessary for the
successful operation of the plant.
III. Market
*hile decidin+ location of the project( a comparati$e study
re+ardin+ transportation of raw material and finished
products should also be done.
If transportation of finished products is more difficult than its
raw material( it may be better to set up project near to the
mar#et.
IV. Labour
'ometimes s.illed labour is not available at a particular place. ,f
labour has to be obtained from outside ,arrangements to provide
housing facilities analyzed.
V. Utilities such as water , Power, fuel etc.
rran+ement for utilities power( water( fuedl etc to be ensured. If
there is shorta+e of power supply alternati$e arran+ement be way
of ,en Sets etc be ensured.
VI. Effluent disposal
The problem of effluent differs from industry to industry
depending on nature and -uantity of effluent.
,t should be ensured that necessary treatment is provided the
effluent unit.
VII. Transportation
,f the proposed site is not connected with main road, an approach
road may have to be laid from the site to the main road.
The -uality of road may be decided .eeping in view the -uantum
of goods to be transported.
,f the unit proposes to buy their own vehicles cost benefit analysis
be made, by calculating deprecation, interest and other expenses of
maintaining vehicle compared to vehicles engaged on hire basis.
6& Sc'e+u"e of Pro!ect I)"e)entation
The Project )valuation and Review Techni-ue / P)RT0 or &ritical Path (ethod
/&P(0 helps in proper planning , scheduling and controlling various activities
essential for the execution of the project.
%ll possible activities from project identification to commencement of production
should be listed.
,t should be ensued that all the activities have been included and the time schedule
given by the promoter is reasonable.
%rrangement should be made to procure necessary raw material inputs li.e raw
material, power, labour etc appropriate time so that plant does not remain idle and the
implementation may commence soon as the installation of the plant is completed.
Co))ercia" 9 Mar:et Ana"#sis$
Ma!or ;ea+in.s Infor)ation Nee+e+
!emand Product, ses, the consumers, actual
consumption, li.ely consumption in future
and exports
'upply Production &apacity, actual production,
&apacity utilization, ,mports and li.ely
future capacity.
!istribution &hannels of !istribution involved, the cost
of distribution and the mode of transport
Pricing !omestic and international price trends,
control on prices, duties and taxes
)xternal forces $overnment Policies regarding
industrialization, exports, imports, foreign
collaboration, Plan outlay etc.
Financia" Ana"#sis$
%& Caita" Cost of Pro!ect
I. %and and Site -e$elopment.
II. "uildin+s
III. Plant and &achinery
I!. En+ineerin+ and consultation fees
!. &iscellaneous Fi.ed ssets
!I. Preliminary and Pre operati$e E.penses
!II. Pro$isions for contin+encies
!III. &ar+in &oney for *or#in+ Capital
(& Sources of Finance&
,& Financia" Pro!ections
I. Profitability Estimates
II. Cash flow Estimates
III. Projected "alance Sheet
-& Ratio Ana"#sis
I. -ebt E/uity Ratio
II. Current Ratio
III. -ebt Ser$ice Co$era+e Ratio
I!. Fi.ed ssets Co$era+e Ratio
/& <rea: Even Point
Caita" cost of Pro!ects an+ sources of Finance
)stimation of capital cost of the project provides the basic information to decide its
pattern of financing and viability. ,f cost of project is not estimated correctly, the
preparation of cash flow and profitability estimates will be futile exercise because the
amount of deprecation , interest and dividend will change with the change in the capital
cost of the project.
<enders generally are ta.ing an underta.ing from the promoter to meet the cost over run ,
if any, in the implementation of the project. =ut such an underta.ing does not have much
practical meaning. (any a times a promoter is not in a position of tobring additional
resources sto finance the overrun, ultimately <enders have to provide the additional
resources to safeguard the money already invested in the project.
#verestimation of the cost of the project is also e-ually bad as underestimation. ,f the
cost of a project is overestimated, the 6inancial ,nstitution may have to ma.e
unnecessarily higher commitments and the promoters may divert resources for other
purposes
Esti)ation of t'e caita" cost of t'e ro!ect is necessar# not on"# in t'e interest of
t'e ro)oter 7ut a"so in t'e interest of t'e "en+er&
DETAILS OF CAPITAL COST OF PROJECT AND MET;ODS OF ANALYSIS
Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
A Lan+ an+
Site
Deve"o)ent
&ost of <and
<egal &harges and
Registration
&ost of levelling
&ost of laying Roads
&ost of fencing
&ost of $ates
%scertain from plant layout
and proposed construction of
buildings that land is
sufficient for the project and
possible future projections.
%greement for purchase of
land
Rates of legal charges
Total area of road and cost
per s- meter.
Total area of fencing and the
basis on which provision has
been made.
Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
< <ui"+in.s
(ain factory building
%ncillary factory building
%dministrative building
$odowns
&anteen, $uest +ouses
etc.
>uarters for essential staff
'oils , tan.s, wells etc
$arages
&ost of sewers, drainages
ec
%rchitect?s fee
!esign of buildings
!ifferent types of
construction and area
under each type of
construction
%scertain from plant
outlay whether
proposed construction
of building is sufficient
and also no unnecessary
construction is done.
Rate per s-uare meter
of each construction
%greement with
building &ontractor, if
any
% note on past record of
building contractor and
%rchitect.

Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
C P"ant an+
Mac'iner#
I)orte+ P"ants
6#= value of plant to be
imported
'hipping, freight and
insurance
,mport duty
&learing <oading ,
unloading and
transportation charges
6oundation and
installation charges
)nsure that proposed
plant is necessary
)nsure that necessary
stores and spares are
also imported.
>uotations of plant to
be imported
#rders, if already
placed of plant to be
imported.
,mport license
Report of an
independent )ngineer,
if second hand plant is
being imported.
In+i.enous P"ant
(ain Plant and other
(achinery
(achinery stores and
spares
'ales tax
Transportation charges
6oundation and
installation charges
<ist of main items of
machinery to be purchased
; )nsure that all items ae
included and they have
proper balance of capacity
&ross chec. with some
reputable potential
suppliers
6rom whom the promoters
could have as.ed, but have
not as.ed to bid or -uote
'election should be done
on the basis of not only
price but also technical
sophistication, reputation
of suppliers, delivery dates
credit terms, etc.
#rders of machinery if any
placed
&ontact entered between
the company and
machinery suppliers.
Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
D En.ineerin.
9
Consu"tanc#
Fees
)xpenses of foreign
technicians
)xpenses of training for
,ndian technicians
Technical @now how
fees
)xpenses on drawings
&onsultancy fees for
preparing project report.
&ontract between
company and foreign
collaborator
&ontract between
company and
consultants
% note on past record of
consultants
Relationship, if any,
between promoters of a
project and consultants.
Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
E Misc Fi2e+
Assets
6urniture
#ffice machinery and
e-uipments
5ehicle &ars, truc.s etc.
&ost of electric
installation
)-uipments and pipes for
distribution of water , air
and steam
<aboratory )-uipment
Wor.shop )-uipment
6ire fighting )-uipments
)ffluent collection,
treatment and disposal
arrangements
(isc fixed assets.
!etails of various items of
furniture, office machinery,
e-uipment, etc and cost thereof.
%scertain whether it is
necessary to invest in vehicles
for the project. )stimate cost of
maintaining vehicles /s0 and
compare with transportation
charges to be paid , if outside
vehicles are hired.
&ontract regarding electric
installation, piping etc.
Price list of laboratory
e-uipment , wor.shop
e-uipment etc.
Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
F Pre"i)inar#
an+ Pre
oerative
E2enses
(ar.et 'urvey,
6easibility Report,
Project Report
=ro.erage and
&ommission on capital
6ind the total amount of
&apital ,ssue and
calculate charges
thereon
issue
#ther &apital issue
)xpenses
&ommitment charges
,nterest on Term <oans
during construction
period
(ortgage )xpenses
(isc )xpenses during
construction period
&ash losses if any
6ind the construction
period and calculate
interest for that period
&alculate the amount of
mortgage expenses.
&alculate other expenses
during construction
period.

Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
= Provisions for
Contin.encie
s
Probable increase in cost due to
new additions
Probable increase in cost due to
rise in prices, sales tax, excise
duty, transportation charges,
fluctuation in foreign exchange
rates etc.
!ivide total cost
estimates into two
groups ; considered
6irm and Aon 6irm
(a.e provisions for
contingencies for non
firm items of cost at the
rate of BC to 1BC
depending upon
inflationary trend and
period of project
implementation.
<onger the project
implementation, higher
the contingencies
re-uired.
Sr
No
Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e
Scrutini1e+
; Mar.in
)one# for
8or:in.
Caita"
,ndigenous Raw (aterial
re-uired.
,mported Raw (aterial
re-uired
&onsumable stores
'toc. of goods in process
#utstanding debtors.
&alculate total re-uirement of
wor.ing capital on the basis of
expected production in first
year. +owever, if profitability
estimates of first year indicate
cash loss, ta.e wor.ing capital
re-uirement on the basis of the
production for second or third
year when the project is li.ely
to get the profit.
The level of raw materials,
consumable stores, goods in
process, finished goods and
debtors should be decided
.eeping in view of production
re-uirements, process time and
practice prevailing in the
industry.
2BC of the total current assets
should be financed by long term
resources and included in the
capital cost of the project.
Means of Finance$
%& Pro)oters contri7ution
(& De7ts
Pro)oter>s contri7utions
The minimum promotorDs contribution envisaged in the project is wor.ed out on the basis
of !ebtE)-uity norm and the security margin norm applicable at the time of sanction of
the loan. The debt e-uity ratio is the ratio of loan component and the e-uity contribution
in the total project cost. The maximum amount of assistance shall be lower of the two
amounts wor.ed out on the basis of !ebtE)-uity norm and the security margin norm. The
normal lending norm for debtE e-uity is 2F1, however in some specific schemes this norm
may be flexible.
The entire promoterDs contribution envisaged in the project is desired to be raised by way
of capital before first disbursement of the loan installment. +owever in case the
promoters are short of own capital, some amount may be raised as unsecured loans in the
form of -uasiEcapital. The -uantum is ascertained during the appraisal of loan proposal.
Pro)oter>s contri7utions inc"u+e?
10 'hare &apital to be subscribed by promoters
20 nsecured <oans from promoters
30 )-uity shares issued as rights to existing share holders
40 &onvertible debenturesGbonds issued as rights to existing share holders.
B0 &ash %ccruals.
&entral or 'tate 'ubsidy is treated as e-uity for debt e-uity ratio, however,
it is not counted as promoters contribution because the finance does not
come from promoters.
,f it is felt that the 'ubsidy form center or state will not be available during
the project implementation period, bridge loan to be set off against the
subsidy receivables may be considered.
!ebt e-uity ratio is generally allowed about 2H1 depending upon nature of
the project , its location, promoters bac.ground etc.
+igher debt e-uity is allowed for projects promoted by Technocrats,
capital intensive projects, projects located in bac.ward areas etc.
Profita7i"it# Esti)ates
Profitability estimates are estimates of expected sales realizations and expenses to be
incurred by the unit. )xcess of sales realization over expenses indicates the expected
profit of the unit.
,tems to be included in profitability estimatesF
'ales Realizations
Raw (aterials and &onsumable 'tores.
tilities / Power, fuel, Water etc0
Repair and (aintenance
Wages and salaries
Rent insurance etc.
!epreciation
BC on =uilding
18C on Plant and (achinery / %dd B C for every extra shift0
28C on (isc fixed %ssets
&ontingencies provided in the estimation of capital cost of project should
be added to the fixed assets proportionately to ascertain the value of fixed
assets for calculating depreciation.
Preliminary expenses upto a limit of 2.BC of the project cost / excluding
margin money for wor.ing capital 0 can be written off from profits at the
rate of 18C every year over a period of 18 years.
,f preliminary expenses are more than 2.BC of capital cost , the excess
portion and also pre ;operative expenses should be added to fixed assets
proportionately to ascertain that value of fixed assets for calculating
deprecation on them.
!epreciation to be calculated on straight line method for the purpose of
profitability estimates and on written down method for the purpose of tax
calculations.
%dministrative expenses
'elling )xpenses
,nterest on Term <oan
,nterest on =an. =orrowings
Profit.
CAS; FLO@ ESTIMATES
&ash flow estimates are prepared to ensure that unit will have necessary cash with it and
it will not face li-uidity problems
While profitability estimates are prepared only from the year in which unit os li.ely to
commence production, &ash flow estimates are necessary for the construction period also
to ensure availability of cash according to the re-uirement of the project.
Sources of fun+s$
10 'hare &apital
20 Term <oansG !ebentures
30 Aet profit after deprecation and writing off preliminary expenses but before
interest and taxes.
40 !epreciation
B0 Preliminary )xpenses written off.
:0 !eferred &redits
I0 Trade &redits
90 =an. =orrowings
70 &apital 'ubsidy from $overnment.
180 !evelopment <oans G 'ales Tax <oans in notified areas.
110 nsecured <oans and deposits.
120 %ny other 'ource.
,t is presumed that level of production , current assets, and current liabilities will remain
in the same proportion once the utilization of capacity and expected production is
presumed stable at a particular level after first 2, 3 or 4 years.

Ases of fun+s$
&apital )xpenditure
Preliminary )xpenses.
&urent assets ; ,ncrease in level of inventoriesG deferred credits.
!ecrease in Term <oans GdebenturesGdeferred credits
!ecrease in secured loansG public deposits.
Repayment of ban. borrowings
,nterest
Taxation
!ividends
%ny other items.
The level of inventories and boo. debts will increase in first 2E3 years with the increase
in the level of production.
!ecrease in Term <oansGdebenturesG unsecured loans Gdeferred credits is to be shown as
per proposed repayment schedule.
The difference between sources and uses of funds indicates the net cash surplus or deficit
arising out of movement of funds in the year.
Pro!ecte+ <a"ance S'eet
Projected balance sheets are prepared on the basis of profitability estimates and cash flow
estimates.
The position of share capital , term loans, sundry creditors, ban. borrowings,
current assets etc is ascertained at the end of each year, according to the
movement shown in cash flow and profitability estimates.
6ixed %ssets are ta.en after deducting depreciation provided in profitability
estimates.
Preliminary expenses are ta.en after deducting the amount which is already
written off from the expected profits of the unit.
&umulative surplus shown in profitability estimate represents the position of
reserve at the end of each year.
&losing balance shown in cash flow estimates represents the position of cash and
ban. balances at the end of each year.

Ratio Ana"#sis$
De7t EBuit# Ratio$ !ebtG )-uity
Current RatioF &urrent %ssetsG &urrent <iabilities
De7t Service Covera.e Ratio$
The ratio indicates the capacity of the unit to repay term debt and interest thereon .
Profit after tax J !epreciationJ ,nterest on term !ebt J <ease rentals if any
Repayment of term debt J ,nterest on term debt J lease rentals if any.
The ratio is calculated for the entire repayment period separately for each year and also as
an average for the entire repayment period.
Fi2e+ Asset Covera.e Ratio$
Term <oans are generally sanctioned against the security of fixed assets. The excess of
fixed assets over Term <oans secured by them provides margin on security. ,n order to
find out the available security cover , 6ixed %sset coverage Ratio is calculated as underF
Aet 6ixed %ssets J &apital wor. in progress
!eferred &redits J Term <oan J 'ecured !ebentures J other loans having first charge on
fixed assets.
,n case of exiting units , fixed assets to be created for implementation of the
project are added to the present fixed assets, similarly Proposed term loans are
added to existing term loans if both have pari passu charge on fixed assets.
,f any fixed asset is having specific charge for a particular <oan, the amount of
such fixed asset and loan should be excluded.
,n case of Aew units, proposed fixed assets will cover the proposed Term <oan.
Proposed fixed assets will be e-ual to the entire capital cost of the project except
those preliminary expenses which will not be capitalized.
The fixed assets coverage ratio depends on debt e-uity ratio. +igher the debt
e-uity ratio, lower will be the margin available because the amount of term loan
will be higher for creation of fixed assets.
<rea: Even Point&
=rea. even point is the point at which the unit is neither earns profit nor incurs losses. The cost of
production is just recovered at brea. even point.
The cost of production is divided into two categoriesF 6ixed &ost and 5ariable &ost.
The brea. up of fixed and variable costF
Fi2e+ Cost$
,. 'alaries and wages
,,. Repairs and (aintenance
,,,. %dministration and (isc )xpenses
,5. 6ixed portion of selling expenses
5. 6ixed Royalty and .now how payments
5,. ,nterest on Term !ebt
5,,. !epreciation on straight line basis.
Varia7"e Cost$
,. Raw materials
,,. &onsumable 'tores and spares
,,,. Pac.ing material
,5. Power fuel and water
5. Royalty payments lin.ed to sales
5,. 5ariable selling expenses
5,,. ,nterest on wor.ing capital
5,,,. #ther variable expenses varying directly in proportion to output.
<rea: Even Point$ C Fi2e+ Cost
Contri7ution
Contri7ution$ !ifference between sale price and variable cost is called contribution. The
contribution helps a unit to recover its fixed cost. The level of production at which the
contribution recovers entire fixed cost is called brea. even point.
6ixed &ost Rs. :888.88
'ale Price Rs. 12 per unit
5ariable &ost Rs. :
=rea. even Point K 6ixed &ost K :888 K1888
'ale Price ; 5ariable &ost 12E:
The brea. even point will be at 1888 units, the contribution of Rs. : per unit will recover
the entire cost of Rs. :,888 at the production of 1888 units.
<rea: even oint can 7e e2resse+ in ter)s of $
10 Vo"u)e of ro+uction F =)P is multiplied by volume of production
20 A ercenta.e of insta""e+ caacit# F =)P is multiplied by C age of capacity
utilisation
30 A)ount of sa"es&$ =)P is multiplied by sales realization&
Interna" Rate of Return
,nternal Rate of Return /,RR0 is that rate of discount which would e-uate the
present value of investments /&ash #utflows0 to the present value of benefits
/ &ash in flows0 over the life period of the project.
,RR can not be determined by just loo.ing at the cash flows. ,t is calculated by
trial and error method. 5arious discounting rates are applied to the net present
cash flows until a rate is found that reduces the net present value to zero.
Mana.e)ent Ana"#sis
% project which is considered technically feasible, economically viable and financially
sound may run into difficulties if it is not bac.ed by sound and efficient management.
(an behind the project is very important. )xperience shows that may of the projects have
been rendered sic. owing to inefficient or dishonest management. Therefore , proper
evaluation of management is a highly essential part of appraisal
%& Dua"ities of an entrereneur
I. 0onesty and Inte+rity
II. In$ol$ement in the project
III. Financial Resources
I!. Competence
!. Initiati$e
!I. Intelli+ence
!II. -ri$e & Ener+y
!III. Self confidence
I1. Fran#ness
1. Patience
(& Various for)s of or.ani1ation&
II. Proprietary Concern
I. Partnership firm
III. Corporate Sector
Dua"ities of Entrereneur
)ach promoter has to come in contact with the appraising officer several times for discussion
regarding the project. %ppraising officer should evaluate the -ualities of the promoter after
interviewing him two three times.
% chec. list giving 18 -ualities of an entrepreneur is given below to judge promoter of a project.
%lthough the same is highly subjective , it gives and idea about the -ualities of the promoters.
E2ce""ent =oo+ Poor
E(FG E%(G E-G
% C'aracter +onest and .eep its
word under all
circumstances
(a.es sincere efforts
to honour his words
!oes not bother much
to honour his words
( Invo"ve)ent
in t'e ro!ect
+ighly ,nvolved ;
#nly source of
,ncome
+as other source of
,ncome
!oes as part time
activities
, Financia"
Resources
+as enough financial
resources to meet not
only the re-uirement
of promoter?s
contribution but also
to finance small
overrun in the project
cost
+as sufficient
financial resources to
meet the re-uirement
of promoters
contribution
(ay have to borrow
to meet the
re-uirement of
promoters
contribution
- Co)etence +as .nowledge an+
experience relating to
the project.
+as .nowledge or
experience relating to
the project.
+as neither
experience nor
.nowledge relating to
the project.
E2ce""ent =oo+ Poor
E%FG E3G E(G
/ Initiative +ighly alert to
opportunities
Performs wor. with
just the general
guidance
Routine wor.er,
awaits decisions
3 Inte""i.ence 5ery -uic. in
understanding
pertinent points of a
problem
nderstand the
problem after
reasonable
explanation
Ta.es time to
understand the
implications of any
action
4 Drive 9
Ener.#
%lways highly
energetic
6airly )nergetic %voids +ard wor.
5 Se"f
Confi+ence
=elieves strongly in
himself and his
abilities
+as faith in his
abilities
=elieves in luc.
6 Fran:ness Tal.s fran.ly about
the wea. points of the
project
Prepared to tal. on
wea. points of the
project
%voids tal.ing on
wea. points of the
project
%F Patience +as patience and does
not expect -uic.
results
%ppreciates the time
ta.en by lending
institutions in
appraisal
Wants -uic. results.
Monitorin.$
Term <oan component in the total advances / %s per 'chedule 7 of the balance sheet 0
has been at B1.1I C as on 31.83.288I
&ommitment charges of 1C applicable on undrawn portion of Term <oan. /<%& 98
dtd. 11.8I.288IG
En+ use of Fun+s in 7orro8a" accounts
5erification of the end use of funds is a basic re-uirement in lending. %s per the =an.?s
guidelines, the end use of funds has to be ensured in all cases. The &entral 'tatutory
%uditors in their preliminary audit reports for the year 288:E8I have pointed out that in
several cases branches are relying upon &hartered %ccountant &ertificates in ensuring
end use of funds in borrowal accounts. ,t is also observed that in some cases, particularly
Term <oans, the disbursements were made to the credit of borrower?s &urrent %ccount
instead of direct payment to the suppliers.
,n this regard, branches are advised to ensure that disbursement in borrowal accounts is
made strictly as per the terms of the sanction as per the =an.?s extant guidelines. Though
&hartered %ccountant &ertificate helps in assessing the end use of funds but in any case it
does not dispense with our own assessment for confirming end use of the funds lent
unless specifically provided in the sanction. 'imilarly, disbursement of Term <oans
through current account should be avoided as far as possible as it is difficult to trac. end
use of funds in such cases.
(& Monitorin. of In+ustria" Pro!ects un+er i)"e)entation
,n terms of R=, guidelines on income recognition, asset classification and provisioning
on advances, the date of completion of the project should be clearly spelt out at the time
of financial closure of the project. ,n such cases, if the date of commencement of
commercial production extends beyond a period of : months after the completion of the
project as originally envisaged at the time of initial financial closure of the project, the
account should be treated as 'ubEstandard %sset.
,n view of the above guidelines, there is a need to decide the date of commencement of
commercial production very discretely and realistically. %t the time of financial closure,
date of implementation of the projectGcommencement of commercial production
envisaged initially should be reviewed afresh and final decision should be ta.en and
documented under intimation to sanctioning authority. ,t is also important to monitor the
progress of the project under implementation on an ongoing basis to ensure
commencement of commercial production in time and as per the schedule approved at the
time of financial closureGsanction.
E2ercise for <rea: even oint$
Insta""e+ Caacit# $ 98 la.hs jewels
Caacit# uti"i1ation$ 73.IBC / ,,, rd year of operation0
Pro+uction $ IB <a.hs Lewels
Sa"es Rea"isation$ Rs. 41.2B <a.hs.
T'e Cost of ro+uction$
Particualrs RsG
<a.hs
Raw material B.2B
&onsumable 'tores 4.B8
Power fuel water etc 1.1B
Repairs and maintenance 8.IB
Wages and 'alaries 4.9:
'elling )xpenses 1.B8
,nterest on wor.ing &apital 8.7B
Rent ,nsurance etc 8.IB
!epreciation 2.72
%dministrative )xpenses 1.38
,nterest on Term <oan 3.13
Tota" (4&F3
Ca"cu"ate <EP in ter)s of
volume of production
C age of ,nstalled tilization
%mount of 'ales
A& Varia7"e Cost$
Particu"ars Rs0
La:'s
Raw material B.2B
&onsumable 'tores 4.B8
Power fuel water etc 1.1B
'elling )xpenses 1.B8
,nterest on wor.ing &apital 8.7B
Tota" %,&,/
< Fi2e+ Cost$
Particu"ars Rs0
La:'s
Repairs and maintenance 8.IB
Wages and 'alaries 4.9:
Rent ,nsurance etc 8.IB
!epreciation 2.72
%dministrative )xpenses 1.38
,nterest onTerm <oan 3.13
Tota" %,&4%
C& Sa"es Rea"isation $ -%&(/
D& Contri7ution $ EC * AG (4&6F
<EP Pro+uction C 6ixed &ost M Production K 13.I1 M IB <a.hs jewels
&ontribution 2I.78
K 3:.9B la.hs Lewels
<EP H a.e of Caacit# C 6ixed &ost M &apacity tilised
&ontribution
K 13.I1 M 73.IB K 4:.8I C of installed capacity
2I.78
<EP H a.e of Caacit# C 6ixed &ost M 'ales
&ontribution
K 13.I1 M 41.2B K 28.2I <a.hs
2I.78