Project Finance

( Banks v/s NBFC )

Executive Summary

Considering the growing use of project finance, we undertook this project with an

objective of understanding the salient features of project finance. It is a method of

financing very large capital intensive projects, with long gestation period, where the

lenders rely on the assets created for the project as security and the cash flow

generated by the project as source of funds for repaying their dues.

As project financing is adopted by a majority of companies at least once in their

lifetime, we decided to study this concept in detail. Banks as well as non-banking

financial companies provide project financing.

Banks enjoy a major market share among the borrowers and the NBFC firms are

lagging far behind and will slowly loose their market share if adequate steps are not

taken. Banks are usually preferred over NBFC firms due to the security aspect and

brand name. also the documentation process is one such aspect which the borrowers

find lengthy and tiresome in both the banks and NBFC.

Awareness regarding the nationalized banks providing project finance is more than

the NBFC firms providing the same. Also a borrower chooses a project finance

provider mainly due reference and time frame within which the loan would be

approved.

The NBFC firms need to take adequate steps to improve their position in the minds

of the borrowers so as to stay in the market. The NBFC firms should try to inculcate

in the minds of the borrowers that NBFC is as safe as any bank and should try and

develop a feeling of security among borrowers with regard to NBFC.

Table of Contents

Introduction to project finance.

Origins of project finance

Project financing is generally sought for infrastructure related projects. Its linkages to

the economy are mutiple and complex, because it affects production and consumption

directly, creates negative and positive externalities, and involves large flow of

expenditure.

Prior to World War I, private entrepreneurs built major infrastructure projects all over

the world. During the 19th century ambitious projects such as the suez canal and the

Trans-Siberian Railway were constructed, financed and owned by private companies.

However the private sector entrepreneur disappeared after world War I and as colonial

powers lost control, new governments financed infrastructure projects through public

sector borrowing. The state and the public utility organizations became the main clients

in the commissioning of public works, which were then paid for out of general taxation.

After World War II, most infrastructure projects in industrialized countries were built

under the supervision of the state and were funded from the respective budgetary

resources of sovereign borrowings.

This traditional approach of government in identifying needs, setting policy and

procuring infrastructure was by and large followed by developing countries, with the

public finance being supported by bond instruments or direct sovereign loans by such

organizations as the world Bank, the Asian Development Bank and the International

Monetary Fund.

Development In the early 1980s

The convergence of a number of factors by the early 1980s led to the search for

alternative ways to develop and finance infrastructure projects around the world.

These factors include:

Continued population and economic growth meant that the need for additional

infrastructure- roads, power plants, and water-treatment plants-continued to

grow.

The debt crisis meant that many countries had less borrowing capacity and

fewer budgetary resources to finance badly needed projects; compelling them to

look to the private sector for investors for projects which in the past would have

been constructed and operated in the public sector

Major international contracting firms, which in the mid-1970s had been kept

busy, particularly in the oil rich Middle East, were, by the early 1980s, facing a

significant downturn in business and looking for creative ways to promote

additional projects.

Competition for global markets among major equipment suppliers and operators

led them to become promoters of projects to enable them to sell their products

or services.

Outright privatization was not acceptable in some countries or appropriate in

some sectors for political or strategic reasons and governments were reluctant to

relinquish total control of what maybe regarded as state assets.

During the 1980s, as a number of governments, as well as international lending

institutions, became increasingly interested in promoting the development for the

private sector, and the discipline imposed by its profit motive, to enhance the efficiency

and productivity of what had previously been considered public sector services. It is

now increasingly recognized that private sector can play a dynamic role in accelerating

growth and development. Many countries are encouraging direct private sector

involvement and making strong efforts to attract new money through new project

financing techniques.

Such encouragement is not borne solely out of the need for additional financing, but it

has been recognized that the private sector involvement can bring with it the ability to

implement projects in a shorter time, the expectation of more efficient operation, better

management and higher technical capability and, in some cases, the introduction of an

element of competition into monopolistic structures.

However, the private sector, driven by commercial objectives, would not want to take

up any project whose returns are not consumerate with the risks. Infrastructure projects

typically have a long gestation period and returns are uncertain. What then are the

incentives of private capital providers to participate in infrastructure projects, which are

fraught with huge risks? Project finance provides satisfactory answers to these

questions.

Definition of project finance

Project finance is typically defined as limited or non-recourse financing of a new

project through separate incorporation of vehicle or Project Company. Project financing

involves non-recourse financing of the development and construction of a particular

project in which the lender looks principally to the revenues expected to be generated

by the project for the repayment of its loan and to the assets of the project as collateral

for its loan rather than to the general credit of the project sponsor.

In other words the lenders finance the project looking at the creditworthiness of the

project, not the creditworthiness of the borrowing party. Project Financing discipline

includes understanding the rationale for project financing, how to prepare the financial

plan, assess the risk, design the financing mix, and raise the funds.

A knowledge base is required regarding the design of contractual arrangements to

support project financing; issues fior the host government legislative provisions,

public/private infrastructure partnerships, public/private financing structures; credit

requirements of lenders, and how to determine the projects borrowing capacity; how to

prepare cash flow projections and use them to measure expected rates of return; tax and

accounting considerations; and analytical techniques to validate the projects feasibility.

Comparison between corporate finance and project finance

Traditional finance is corporate finance, where the primary source of repayment for

investor and creditors is the sponsoring company, backed by its entire balance sheet,

not the project alone. Although creditors will usually still seek to assure themselves of

economic viability of the project being financed so that it is not a drain on the corporate

sponsors existing pool of assets, an important influence on their credit decision is the

overall strength of the sponsors balance sheet, as well as their business reputation. If the

project fails, lenders do not necessarily suffer, as long as the company owning the

project remains financially viable.

Corporate finance is often used for shorter, less capital-intensive projects that do not

warrant outside financing. The company borrows funds to construct a new facility and

guarantees to repay the lenders from its available operating income and its base of

assets. However private companies avoid this option, as it strains their balance sheets

and capacity, and limits their potential participation in future projects. Project financing

is different from traditional forms of finance because the financier principally looks to

the assets and revenue of the project in order to secure and service the loan.

In project finance a team or consortium of private firms establishes a new project

company to build, own and operate a separate infrastructure project. The new project

company to build own and operate a separate infrastructure project. The new project

company is capitalized with equity contributions from each of the sponsors. In contrast

to an ordinary borrowing situation, in a project financing the financier usually has little

or no recourse to the non-project assets of the borrower or the sponsors of the project.

The project is not reflected in the sponsors’ balance sheets.

Extent of recourse

Recourse refers to the right to claim a refund from another party, which has handled a

bill at an earlier stage. The extent of recourse refers to the range of reliance on sponsors

and other project participants for enhancement to protect against certain projects risks.

In project financing there is limited or no recourse. Non-recourse project finance is an

arrangement under which investors and credit financing the project do not have any

direct recourse to the sponsors.

In other words, the lender is not permitted to request repayment from the parent

company if borrower fails to meet its payment obligation. Although creditors security

will include the assets being financed, lenders rely on the operating cash flow generated

from those assets for repayment.

When the project has assured cash flows in the form of a reliable off taker and well-

allocated construction and operating risks, the lenders are comfortable with non-

recourse financing. Lenders prefer limited recourse when the project has significantly

higher risks. Limited recourse project finance permits creditors and investors some

recourse to the sponsors.

This frequently takes the form of a precompletion guarantee during a projects

construction period, or other assurance of some form of support for the project. In most

developing market projects and in other projects with significant construction risk,

project finance is generally of the limited recourse type.

Merits and Demerits of project financing

Project financing is continuously used as a financing method in capital-intensive

industries for projects requiring large investments of funds, such as the construction of

power plants, pipelines, transportation systems, mining facilities, industrial facilities

and heavy manufacturing plants. The sponsors of such projects frequently are not

sufficiently creditworthy ot obtain tr5aditional financing or unwilling to take the risk

and assume the debt obligation associated with traditional financing. Project financing

permits the risk associated with such projects to be allocated among number of parties

at levels acceptable to each party. The advantages of project financing are as follows:

1. Non recourse: the typical project financing involves a loan to enable the sponsor

to construct a project where the loan is completely “Non-recourse” to the

s[sponsor i.e. the sponsor has no obligation to make payments on the project

loan if revenues generated by the project are insufficient to cover the principle

and interest payable on the loan. This safeguards the assets of sponsors. The

risks of new projects remain separate from the existing business.

2. Maximizes leverage: in project financing. The sponsors typically seek to finance

the cost of development and construction of project on highly leverage basis.

Frequently such costs are financed using 80 to 100 percent debt. High leverage

in an non recourse financing permits a sponsor to put less in funds at risk,

permits a sponsor to finance a project without diluting its equity investment in

the project and in certain circumstances, also may permit reduction in cost of

capital by substituting lower cost, tax deductible interest for higher cost, taxable

return on equity.

3. Off balance sheet treatment: depending upon the structure of project financing

the project sponsors may not be required to report any of the project debt on its

balance sheet because such debt is non recourse or of limited recourse to the

sponsor. Off balance sheet treatment can have the added practical benefit of

helping the sponsor comply with convenient and restrictions related to the

board. Borrowings funds contain in other indentures and credit agreements to

which the sponsor is a party.

4. Maximizes tax benefits: project finance is generally structured to maximize tax

benefit and to assure that all available tax benefit are used by the sponsors or

transferred to the extent possible to another party through a partnership, lease or

vehicle.

5. Diversifies risk: by allocating the risk and financing need of the projects among

a group of interested parties or sponsors, project financing makes it possible to

undertake project that would be too large or would pose too great a risk for one

party ion its own.

Demerits

1. Complexity of risk allocation: project financing is complex transaction

involving many participants with diverse interest. If a project is to be

successful risk must be allocated among the participants in an economically

efficient way. However, there is necessary tension between the participants.

For e.g between the lender and the sponsor regarding the degree of recourse,

between the sponsor and contractor regarding the nature of guarantees., etc

which may slow down the realization of the project.

2. Increase transaction cost: it involves higher transaction costs compared to

other types of transactions, because it requires an expensive and time-

consuming due diligence conducted by the lenders lawyer, the

independent engineers etc., since the documentation is usually complex and

lengthy.

3. higher interest rates and fees: the interest rates and fees charged in project

financing are higher than on direct loan made to the project sponsor since the

lender takes on more risk.

4. lender supervision: in accordance with a higher risk taken in project

financing the lender imposes a greater supervion on the mangement and

operation of the project to make sure that the project success is not impaired.

The degree of lender supervision will usually result into higher costs which

will typically have to be borne by the sponsor.

Importance of project finance

Whether expanding manufacturing facilities, implementing new processing capabilities,

or leveraging existing assets in new markets, innovative financing is often at the core of

long-term projects to transform a company’s operations. Akin to the underlying

corporate transformation, the challenge with innovative financial structures such as

project finance is that the investment is made upfront while the anticipated benefits of

the initiative are realized years later.

There has been a rise in number of companies that need innovative financing to satisfy

their capital needs, in a significant number of instances they have viable goals but find

that traditional lenders are unable to understand their initiatives. And so the need

emerged for project finance.

Project financing is a specialized form of financing that may offer some cost

advantages when very large amounts of capital are involved It can be tricky to

structure, and is usually limited to projects where a good cash flow is anticipated.

Project finance can be defined as: financing of an industrial (or infrastructure) project

with myriad capital

needs, usually based on non-recourse or limited recourse structures, where project debt

and equity (and potentially leases) used to finance the project are paid back from the

cash flow generated by the project, with the project's assets, rights and interests held as

collateral. In other words, it’s an incredibly flexible and comprehensive financing

solution that demands a long-term lending approach not typical in today’s market place.

Whether expanding manufacturing facilities, implementing new processing capabilities,

or leveraging existing assets in new markets, innovative financing is often at the core of

long-term projects to transform a company’s operations. Akin to the underlying

corporate transformation, the challenge with innovative financial structures such as

project finance is that the investment is made upfront while the anticipated benefits of

the initiative are realized years later.

Infrastructure is the backbone of any economy and the key to achieving rapid

sustainable rate of economic development and competitive advantage. Realizing its

importance governments commit substantial portions of their resources for

development of the infrastructure sector. As more projects emerge getting them

financed will continue to require a balance between equity and debt. With infrastructure

stocks and bonds being traded in the markets around the world, the traditionalist face

change. A country on the crest of change is India. Unlike many developing countries

India has developed judicial framework of trust laws, company laws and contract laws

necessary for project finance to flourish.

Types of Project Finance

Build operate transfer (BOT)

Build own operate transfer (BOOT)

Build own operate (BOO)

Build operate transfer

Build operate transfer is a project financing and operating approach that has found an

application in recent years primarily in the area of infrastructure privatization in the

developing countries. It enables direct private sector investment in large scale

infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period.

The public agency pays the contractor a fee, which may be a fixed sum, linked to

output or, more likely, a combination of the two. The fee will cover the operators fixed

and variable costs, including recovery of the capital invested by the contractor. In this

case, ownership of the facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a

public infrastructure project. The company then secures their own financing to

construct the project.

Operate – The private developer then operates, maintains, and manages the facility for a

agreed concession period and recoups their investment through charges or tolls.

Transfer - After the concessionary period the company transfers ownership and

operation of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances

its construction and operates and maintains it over a period, often as long as 20 or 30

years. This period is referred to as the “concession” period. In short, under a BOT

structure, a government typically grants a concession to a project company under which

the project company has the right to build and operate a facility. The project company

borrows from the lending institutions in order to finance the construction of the facility.

The loans are repaid from “tariffs” paid by the government under the off take

agreement during the life of the concession. At the end of the concession period the

facility is usually transferred back to the government.

Advantages

The Government gets the benefit of the private sector to mobilize finance and to use the

best management skills in the construction, operation and maintenance of the project.

The private participation also ensures efficiency and quality by using the best

equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency

through performance-based contracts and output-oriented targets

The projects are conducted in a fully competitive bidding situation and are thus

completed at the lowest possible cost.

The risks of the project are shared by the private sector

Disadvantages

There is a profit element in the equity portion of the financing, which is higher than the

debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a BOT

financing deal as it involves multiple entities and requires a relatively complicated legal

and institutional framework. There the BOT may not be suitable for small projects

It may take time to develop the necessary institutional capacity to ensure that the full

benefits of BOT are realized, such as development and enforcement of transparent and

fair bidding and evaluation procedures and the resolution of potential disputes during

implementation.

Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT

provider) who designs, builds, funds, owns and operates the scheme for a defined

period of time and then transfers this ownership across to a agreed party. BOOT

projects are a way for governments to bundle together the design and construction,

finance, operations and maintenance and potentially marketing and customer interface

aspects of a project and let these as a package to a single private sector service provider.

The asset is transferred back to the government after the concession period at little or

no cost.

The Components of BOOT.

B for build

The concession grants the promoter the right to design, construct, and finance the

project. A construction contract will be required between the promoter and a

contractor. The contract is often among the most difficult to negotiate in a BOOT

project because of the conflict that increasingly arises between the promoter, the

contractor responsible for building the facility and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the

construction contract are reasonable and that the construction risk is placed as far as

possible on the contractors. The contractor undertakes responsibility for constructing

the asset and is expected to build the project on time, within budget and according to a

clear specification and to warrant that the asset will perform its design function.

Typically this is done by way of a lump-sum turnkey contract.

O for Own

The concession from the state provides concessionaire to own, or at least possess, the

assets that are to be built and to operate them for a period of time: the life of the

concession. The concession agreement between the state and the concessionaire will

define the extent to which ownership, and its associated attributes of possession and

control, of the assets lies with the concessionaire.

O for Operate

An operator assumes the responsibility for maintaining the facility’s assets and the

operating them on the basis that maximizes the profit or minimizes the cost on behalf of

the concessionaire and, like the contractor undertaking construction and be a

shareholder in the project company. The operator is s often an independent through the

promoter company.

T for Transfer

This relates to a change in ownership of the assets that occurs at the end of the

concession period, when the concession assets revert to the government grantor. The

transfer may be at book value or no value and may occur earlier in the event of failure

of concessionaire.

Stages of Boot Project

Build

Design

Manage project implementation

Carry out procurement

Finance

Construct

Own

Hold in interest under concession

Operates

Mange and operate facility

Carry out maintenance

Deliver products/services

Receive payment for product/ service

Transfer

Hand over project in operating condition at the end of concession period

Advantages

The majority of construction and long term risk can be transferred onto the

BOOT provider.

The BOOT operator can claim depreciation on the facility constructed and

depreciation being a tax-deductible expense shareholder returns are maximized.

Using an output based purchasing model, the tender process will encourage

maximum innovations allowing the most efficient designs to be explored for the

scheme. This process may also be built into more traditional tendering

processes.

Accountability for the asset design, construction and service delivery is

very high given that if the performance targets are not met, the operator stands

to lose a portion of capital expenditure, capital profit, operating expenditure and

operating profit.

Boot operators are experienced with management and operation of

infrastructure assets and bring these skills to scheme.

Corporate structuring issues and costs are minimal within a BOOT model, as

project funding, ownership and operation are the responsibility of the BOOT

operator. These costs will however be built into the BOOT project pricing.

Disadvantages

Boot is likely to result in higher cost of the product/ service for the end user.

This is a result of the BOOT provider incurring the risks associated with 100

percnet financing of the scheme and the acceptance of the ongoing maintenance

liabilities.

Users may have a negative reaction to private sector involvement in the scheme,

particularly if the private sector is an overseas owned company.

Management and monitoring of the service level agreement with the BOOT

operators can be time consuming and resource hungry. Procedures need to be in

place to allow users to assess service performance and penalize the BOOT

operator where necessary.

A rigorous selection process is required when selecting a boot partner. Users

need to be confident that the BOOT operator is financially secure and

sufficiently committed to the market prior to considering their bid.

Build Own Operate

In BOO, the concessionaire constructs the facility and then operates it on behalf of the

public agency. The initial operating period {over which the capital cost will be

recovered} is defined. Legal title to the facility remains in the private sector, and there

is no obligation for the public sector to purchase the facility or take title. The private

sector partner owns the project outright and retains the operating revenue risk and all of

the surplus operating revenue in perpetuity. As an alternative to transfer, a further

operating contract {at a lower cost} may be negotiated.

Design Build Finance Operate (DBFO):

Under this approach, the responsibilities fro designing, building, financing and

operating are bundled together and transferred to private sector partners. They are also

often supplemented by public sector grants in the from of money or contributions in

kind, such as right of way. In certain cases, private partners may be required to make

equity investments as well. DBFO shifts a great deal of the responsibility for

developing and operating to private sector partners, the public agency sponsoring a

project would retain full ownership over the project.

Others:

Build Transfer Operate (BTO)

The BTO model is similar to BOT model except that the transfer to the public owner

takes place at the time that construction is completed, rather than at the end of the

franchise period. The concessionary builds and transfers a facility to the owner but

exclusively operates the facility on behalf of the owner by means of management

contract.

Buy Build Operate (BBO)

A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing

facility. The government sells the asset to the private sector entity, which then makes

the improvements necessary to operate the facility in a profitable manner.

Lease Own Operate (LOO)

This approach is similar to a BOO project but an existing asset is leased from the

government for a specified time. the asset may require refurbishment or expansion.

Build Lease Transfer (BLT)

The concessionaire builds a facility, lease out the operating portion of the contract, and

on completion of the contract, returns the facility to the owner.

Build Own Lease Transfer (BOLT)

BOLT is a financing scheme in which the asset is owned by the asset provider and is

then leased to the public agency, during which the owner receives lease rentals. On

completion of the contract the asset is transferred to the public agency.

Build Lease Operate Transfer (BLOT)

The private sector designs finance and construct a new facility on public land under a

long term lease and operate the facility during the term of the lease. the private owner

transfers the new facility to the public sector at the end of the lease term.

Design Build (DB)

A DB is when the private partner provides both design and construction of a project to

the public agency. This type of partnership can reduce time, save money, provide

stronger guarantees and allocate additional project risk to the private sector. It also

reduces conflict by having a single entity responsible to the public owner for the design

and construction. The public sector partner owns the assets and has the responsibility

for the operation and maintenance.

Design Bid Build (DBB)

Design bid build is the traditional project delivery approach, which segregates design

and construction responsibilities by awarding them to an independent private engineer

and a separate private contractor. By doing so, design bid build separates the delivery

process in to the three liner phases: Design, Bid and Construction. The public sector

retains responsibility for financing, operating and maintaining infrastructure procured

using the traditional design bid build approach.

Design Build Maintain (DBM)

A DBM is similar to a DB except the maintenance of the facility for the some period of

time becomes the responsibility of the private sector partner. The benefits are similar to

the DB with maintenance risk being allocated to the private sector partner and the

guarantee expanded to include maintenance. The public sector partner owns and

operates the assets.

Design Build Operate (DBO)

A single contract is awarded for the design, construction and operation of a capital

improvement. Title to the facility remains with the public sector unless the project is a

design\build\operate\transfer or design\build\own\operate project. The DBO method of

contracting is contrary to the separated and sequential approach ordinarily used in the

United States by both the public and private sectors. This method involves one contract

for design with an architect or engineer, followed by a different contract with a builder

for project construction, followed by the owner's taking over the project and operating

it.

A simple design build approach credits a single point of responsibility for design and

construction and can speed project completion by facilitating the overlap of the design

and construction phases of the project. On a public project, the operations phase is

normally handled by the public sector under a separate operations and maintenance

agreement. Combining all three phases in to a DBO approach maintains the continuity

of private sector involvement and can facilitate private sector financing of public

projects supported by user fees generated during the operations phase.

Lease Develop Operate (LDO) or Build Develop Operate (BDO)

Under these partnerships arrangements, the private party leases or buys an existing

facility from a public agency invests its own capital to renovate modernize, and expand

the facility, and then operates it under a contract with the public agency. A number of

different types of municipal transit facilities have been leased and developed under

LDO and BDO arrangements.

Project Finance Strategic Business Unit

A one-stop-shop of financial services for new projects as well as expansion,

diversification and modernization of existing projects in infrastructure and non -

infrastructure sectors

Since its inception in 1995 the Project Finance SBU has built-up a strong reputation for

it's in-depth understanding of the infrastructure sector as well as non-infrastructure

sector in India and they have the ability to provide tailor made financial solutions to

meet the growing & diversified requirement for different levels of the project. The

recent transactions undertaken by PF-SBU include a wide range of projects undertaken

by the Indian Corporates. Wide branch network ensuring ease of disbursement.

Expertise

Being India's largest bank and with the rich experience gained over generation,

SBI brings considerable expertise in engineering financial packages that address

complex financial requirements.

Project Finance SBU is well equipped to provide a bouquet of structured

financial solutions with the support of the largest Treasury in India (i.e. SBI's),

International Division of SBI and SBI Capital Markets Limited.

The global presence as also the well spread domestic branch network of SBI

ensures that the delivery of your project specific financial needs are totally

taken care of.

Lead role in many projects

Allied roles such as security agent, monitoring/TRA agent etc.

Synergy with SBI caps (exchange of leads, joint attempt in bidding for projects,

joint syndication etc.). In a way, the two institutions are complimentary to each

other.

We have in house expertise (in appraising projects) in infrastructure sector as

well as non-infrastructure sector. Some of the areas are as follows:

Infrastructure sector:

Infrastructure sector:

Road & urban infrastructure

Power and utilities

Oil & gas, other natural resources

Ports and airports

Telecommunications

Non-infrastructure sector:

Manufacturing: Cement, steel, mining, engineering, auto components, textiles,

Pulp & papers, chemical & pharmaceuticals …

Services: Tourism & hospitality, educational Institutions, health industry …

Expertise

Rupee term loan

Foreign currency term loan/convertible bonds/GDR/ADR

Debt advisory service

Loan syndication

Loan underwriting

Deferred payment guarantee

Other customized products i.e. receivables securitization, etc.

Services offered

Single window solution

Appetite for large value loans.

Proven ability to arrange/syndicate loans.

Competitive pricing.

Professional team

Dedicated group with sector expertise

Panel of legal and technical experts.

Procedural ease

Standardized information requirements

Credit appraisal/ delivery time period is minimized.

Eligibility

The infrastructure wing of PF SBU deals with projects wherein the project cost is

more than Rs 100 Crores. The proposed share of SBI in the term loan is more than

Rs.50 crores. In case of projects in Road sector alone, the cut off will be project cost

of Rs.50 crores and SBI Term Loan Rs. 25 Crores, respectively.

The commercial wing of PF SBU deals with projects wherein the minimum project

cost is Rs. 200 crores (Rs. 100 crores in respect of Services sector).

The minimum proposed term commitment is of Rs. 50 crores from SBI.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$

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The Bank has a network of about 955 branches and 3,687 ATMs in India and presence

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The Bank currently has subsidiaries in the United Kingdom, Russia and Canada,

branches in Unites States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai

International Finance Centre and representative offices in United Arab Emirates, China,

South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has

established a branch in Belgium.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the

National Stock Exchange of India Limited and its American Depositary Receipts

(ADRs) are listed on the New York Stock Exchange (NYSE).

At ICICI Bank, they offer corporates a wide range of products and services, the

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From cash management to corporate finance, from forex to acquisition financing, we

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overall financial solution for your company that helps you accomplish your objectives.

Corporate Services

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Funds/ Capital Gains Bonds issues. Besides, we have products specially designed for

the

They support international business by meeting working capital requirements of export

and import financing. They also have a host of non-funded services for our clients •

whatever the industry, size or financial requirements, ICICI Bank has the expertise and

the solutions to partner all the way.

Transaction Banking

The Bank delivers world class banking services to financial sector clients. Their current

roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed

for customers convenience.

Our comprehensive collection and payment services span India's largest CMS network

of over 4,500 branches. They provide correspondent banking tie-ups with foreign banks

to assist them in their India-related businesses.

Loan Syndication

The FISG is responsible for syndication of loans to corporate clients.

They ensure the participation of banks and financial institution for the syndication of

loans. Some of the products syndicated are

       • Project Finance

• Corporate Term Loans

• Working Capital Loans

• Acquisition Finance, etc.

Sell Down

ICICI Bank is a market leader in the securitization and asset sell-down market.

From its portfolio, the FISG offers different products to its clients in this segment.

The products are:

   

Asset-Backed Securities (ABS).

Mortgage-Backed Securities (MBS).

Corporate Loan Sell-down.

Direct Loan Assignment.

Buyouts

As a part of a risk-diversification and portfolio-churning strategy, ICICI Bank offers

buyouts of the assets of its financial sector clients.

Resources

The Bank also raises resources, from clients, for internal use by issuing a gamut of

products, which run from Certificates of Deposit (CDs) to Term deposits to Term

Loans.

IDBI was set up under an Act of Parliament as a wholly-owned subsidiary of Reserve

Bank of India in July 1964. In February 1976, the ownership of IDBI was transferred to

Government of India.

In January 1992, IDBI accessed domestic retail debt market for the first time with

innovative Deep Discount Bonds and registered path-breaking success. In December

1993, IDBI set up IDBI Capital Market Services Ltd. as a wholly-owned subsidiary to

offer a broad range of financial services, including Bond Trading, Equity Broking,

Client Asset Management and Depository Services.

In September 1994, in response to RBI's policy of opening up domestic banking sector

to private participation, IDBI in association with SIDBI set up IDBI Bank Ltd. Today,

IDBI Bank has a network of 161 branches, 369 ATMs, and 8 Extension Counters

spread over 95 cities.

It provides an array of services like:

Personal banking

Deposits

Loans

Payments

Insurance

Cards

24 hours banking

Institutional banking

Other products

Preferred banking

NRI Services

Corporate banking

Project Finance

Infrastructure finance

Advisory

Carbon credits Business

Working Capital

Cash Management Service

Trade Finance

Tax Payments

Derivates

SME Finance

IDBI has been actively engaged in providing a major thrust to financing of SMEs. With

a view to improving the credit delivery mechanism and shorten the Turn Around Time

(TAT), IDBI has set up Centralized Loan Processing Cells (CLPCs) at major centers

across the country. To strengthen the credit delivery process, the CART (Credit

Appraisal & Rating Tool) Module developed by Small Industries Development Bank of

India (SIDBI), which combines both rating and appraisal mechanism for loan

proposals, was adopted by IDBI for faster processing of loan proposals. Recently, a

number of products have been rolled out for the SME sector, which considerably

expanded IDBI’s offerings to its customers. Also, the German Technical Co-operation

and IDBI entered into an understanding for strengthening the growth and

competitiveness of SMEs by providing better access to demand-oriented business

development and financial services.

Agri Business

Agriculture continues to be the largest and the most dominant sector in India,

contributing 22 % to the country’s GDP. It provides a source of employment and

livelihood to over 60 % of the population. Its linkages with industry are growing with

increasing stress on food and agri processing industry on account of changing demand

patterns for processed food by consumers. With this background Corporate India has

started finding new opportunities in Agriculture.

   The emergence of modern economic system has institutionalized agriculture sector on

business models. Agribusiness is a broad term that encompasses a number of businesses

in agriculture including food production, farming, agrochemicals, farm machinery,

warehousing, wholesale and distribution, and processing, marketing and sale of food

products.

   The bank has launched several products catering to the rural and agri community.

Project Finance Scheme

   Under the Project Finance scheme IDBI provides finance to the corporates for

projects. The Bank provides project finance in both rupee and foreign currencies for

Greenfield projects as also for expansion, diversification and modernization. IDBI

follows the Global Best Practices in project appraisal and monitoring and has a well-

diversified industry portfolio. IDBI has signed a Memorandum of Understanding

(MoU) with LIC in December 2006 for undertaking joint and take-out financing of

long-gestation projects, including infrastructure projects

It has been a long and eventful journey of almost a century across 24 countries. Starting

in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate

Centre in Mumbai is a saga of vision, enterprise, financial prudence and corporate

governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in private

capital, princely patronage and state ownership. It is a story of ordinary bankers and

their extraordinary contribution in the ascent of Bank of Baroda to the formidable

heights of corporate glory. It is a story that needs to be shared with all those millions of

people - customers, stakeholders, employees & the public at large - who in ample

measure, have contributed to the making of an institution.

Personal Banking Services

Bank of Baroda believes in the strength and integrity of relationships built with its

customers like you. With over 90 years of experience in the banking industry and a

wide network of over 2700 branches all over the country, we have always been active

in extending financial support and adapting to your changing needs.

Their Deposit Products, Retail Loans, Credit Cards and Debit Cards help you with your

growing financial needs. With facilities like Lockers we ensure that your valuables are

safe with us.

Their countrywide branches offer you convenience and ease in operating your account

wherever you are. Their 24-hour ATMs enable you to withdraw cash, check your

account balance and request for a new chequebook even after banking hours.

Baroda Internet Banking / Baroda Mobile Banking, their latest Internet and Mobile

banking initiatives enable you to operate your account just as you would in any of our

branches. You can through the Internet check your balance, request for chequebooks

and print account details.

Choose from other various products and services, that they sincerely feel will put a

smile on your face; an investment we would like to bank on forever.

Business Operations

The small and medium business enterprise is one of the fastest growing sectors in the

country. Bank of Baroda offers various products and services that meet the specific

requirements of such enterprises and help them grow.

In addition to tailor-made products, you can depend on the strength of other nation-

wide network and facilities that will enable you to conduct your business smoothly,

without geographical constraints.

Be it Deposits, Loans & Advances, Collection Services, Working Capital Finance,

Term Finance, Non-Fund based Facilities, Trade Finance, Merchant Banking or other

such aspects of banking, they have a solution to help your business run smoothly and

efficiently.

Corporate Banking Services

As corporations grow they feel the need to expand and invest in new infrastructure.

External finance is one of the most important sources for funding expansion plans.

With services ranging from Working Capital Finance, Short Term Corporate Loans,

Project Finance to Cash Management and Merchant Banking, Bank of Baroda

Corporate Banking offers various options that help fund and enable corporations in

their investment and expansion plans. These products also offer merchant banking and

cash management solutions.

Their global presence, large-scale operability, highly networked systems and local

market penetration allow our customers to reap financial benefits to the maximum.

Loans & Advances

For immediate financial need in times, Bank of Baroda has a host of loan options for a

corporate to choose from. These enable smooth functioning without monitory hassles.

Project Finance

Bank of Baroda provides its customers with the option of a loan to take care of the

needs of an ongoing project, whether it is in Indian or foreign currency. This facility is

available for project finance and also for project exports.

International Operations

Bank of Baroda started its overseas journey by opening its first branch way back in

1953 in Mombassa, Kenya. Since then the Bank has come a long way in expanding its

international network to serve NRIs/PIOs and locals. Today it has transformed into

India’s International Bank.

It has significant international presence with a network of 70 offices in 24 countries

including 45 branches of the Bank, 21 branches of its eight Subsidiaries and four

Representative Offices in Malaysia, China, Thailand, & Australia. The Bank also has

one Joint Venture in Zambia with 9 branches.

The Bank has presence in world’s major financial centers i.e. New York, London,

Dubai, Hong Kong, Brussels and Singapore.

The "round the clock around the globe", Bank of Baroda is further in the process of

identifying/opening more overseas centers for increasing its global presence to serve its

29 million global customers in still better way.

The Bank has recently upgraded its operations in Hong Kong on 2nd April 2007 and

now offers full banking service through its two branches at Central and Tsim Sha Tsui.

It would also be upgrading its operations to full banking service in China and through

JV in Malaysia shortly.

It is also in process of establishing offices in Canada, New Zealand, Qatar, Bahrain,

Saudi Arabia, Mozambique, Russia etc. Besides this, it has plans to extend its reach in

existing countries of operations in US and UAE.

Treasury operations

In the changing economic environment of the country in particular and the globe in

general, Bank of Baroda was the premier public sector bank in India to set up a

Specialized Integrated Treasury Branch (SITB) in Mumbai and the integrated approach

initiated by the Bank in its treasury operations is now being emulated by other peer

banks.

Bank of Baroda has consciously adopted a focused approach towards improving

efficiency and profitability by successfully integrating the operations of different

financial markets, viz. Domestic Money, Investments, Foreign Exchange and

Derivatives and has made its mark as an important player in the market-place.

The SITB at Mumbai, equipped with the State-of-the-art technology, with modern

communication facilities, handles all types of financial transactions, both for managing

its resources and deployments and effective compliance of regulatory requirements.

Rural Operations

Rural India contributes a major chunk to the economy every year. To give this sector a

stronghold on finance and to enable economic independence, Bank of Baroda has

special offerings that extend credit facilities to small and marginal farmers, agricultural

labourers and cottage industry entrepreneurs.

With the objective of developing rural economy through promotion of agriculture,

trade, commerce, industry and extending credit facilities particularly to small and

marginal farmers, agricultural labourers and small entrepreneurs, Bank of Baroda, over

the years, has reached out to larger part of rural India. They extend loans for

agricultural activities and a host of services for farmers well tuned to the rural market,

and aim to make a Self Reliant Rural India.

Axis Bank was the first of the new private banks to have begun operations in 1994,

after the Government of India allowed new private banks to be established. The Bank

was promoted jointly by the Administrator of the specified undertaking of the Unit

Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General

Insurance Corporation Ltd. and other four PSU companies, i.e. National Insurance

Company Ltd., The New India Assurance Company, The Oriental Insurance

Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 357.48 crore with the public holding

(other than promoters) at 57.03%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at

Mumbai. Presently, the Bank has a very wide network of more than 608 branch offices

and Extension Counters. The Bank has a network of over 2595 ATMs providing 24 hrs

a day banking convenience to its customers. This is one of the largest ATM networks in

the country.

The Bank has strengths in both retail and corporate banking and is committed to

adopting the best industry practices internationally in order to achieve excellence. It

provides an array of services like Personal Banking, Corporate Services, NRI services

and Priority Banking.

In personal Banking it offers different accounts like EasyAccess Account Senior

Citizen's Account Prime Savings Account Women's Account Salary Power etc. . It also

offers deposits services like Fixed Deposit, Recurring Deposit, and Tax Saving Fixed

Deposits. It provides an array of loan services like Home Loan, Car Loan, Personal

Loan, Study Loan, Mortgage etc.

In Corporate Services it offers the option of different accounts like Normal Current

Account Business Advantage Account Current Account for Govt. Organizations

Business Classic Account Current Account for Banks Business Privilege Account

Trust/NGO Savings Account, further it also offers Credit Facility like Structured

Finance, Microfinance Commodity Power, Microfinance project Finance. It also offers

Capital Market Services in the form of Debt Solutions Advisory Services Private

Equity, Mergers & Acquisitions Capital Market Funding Trusteeship Services

eDepository Services

It also provides Cash Management Services as in today's competitive market place,

effectively managing cash flow can make the difference between success and failure.

Axis Bank offers a wide range of collection and payment services to meet your

complex cash management needs. Payments received from your buyers and made to

your suppliers are efficiently processed to optimize your cash flow position and to

ensure the effective management of your business' operating funds.

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen

from Mumbai. The Bank was under private ownership and control till July 1969 when

it was nationalized along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50

employees, the Bank has made a rapid growth over the years and blossomed into a

mighty institution with a strong national presence and sizable international operations.

In business volume, the Bank occupies a premier position among the nationalized

banks.

The Bank has 2644 branches in India spread over all states/ union territories including

93 specialized branches. These branches are controlled through 48 Zonal Offices .

There are 24 branches/ offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997. Total number of shareholders

as on 30/09/2006 is 2, 25,704.

While firmly adhering to a policy of prudence and caution, the Bank has been in the

forefront of introducing various innovative services and systems. Business has been

conducted with the successful blend of traditional values and ethics and the most

modern infrastructure. The Bank has been the first among the nationalized banks to

establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at

Mumbai way back in 1989.

The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction

of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into

an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing

House. It is an association that has blossomed into a joint venture with BSE, called the

BOI Shareholding Ltd. to extend depository services to the stock broking community.

Bank of India was the first Indian Bank to open a branch outside the country, at

London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank

has sizable presence abroad, with a network of 23 branches (including three

representative office) at key banking and financial centres viz. London,

Newyork,Paris,Tokyo,Hong-Kong,and Singapore. The international business accounts

for around 20.10% of Bank's total business.

Apart from personal banking services it offers different products like Insurance

Products:

Tie-up for Life Insurance: ICICI Prudential Life Insurance Co Ltd.

Tie-up for General Insurance ( Non-life) National Insurance Co Ltd.

(NICL)

Mutual Funds Products:

It also offers credit facility like Personal Loan, Bullion Banking, Kisan Credit Card,

Agriculture Loan, Bill Finance, Bank Guarantee, export Finance, Interest Rates,

Channel Credit etc. It also offers deposit services like Safe Deposit Vaults, fixed

Deposits, Term Deposits, Tax Saving Deposits etc. It also offers corporate services like

Bonds, Loans, and Project Finance Etc.

NBFC – The Future

OVER the last decade or so, the Reserve Bank of India has been blowing hot and cold

about non-banking finance companies (NBFCs). The RBI reacted to a series of defaults

and misdemeanors by a few NBFCs, restricting their ability to take public deposits.

This unfortunately led to a collapse of many NBFCs which depended on a continuous

inflow of deposits to meet redemption obligations. Subsequently, there seems to have

been a better realization of the role of NBFCs in financing the small-scale industry,

particularly the transport sector.

The RBI in its latest monetary policy statement has cautioned that NBFCs should be

encouraged to exit from public deposits, in essence saying NBFCs should not take

public deposits. This is, indeed, extraordinary. The reasons given are that nowhere in

the world are private financial institutions allowed to accept public deposits.

The fact is that non-bank finance institutions are active in other economies. They accept

deposits in developed countries as well as in some developing countries, like Malaysia.

The existence of thrift societies in the US and housing societies in the UK is well-

known.

Thrift and savings associations are almost omnipresent in the US. Credit unions of

employees are, in effect, self-help groups, present in every organization. So are housing

societies in the UK. They perform a useful role in garnering public savings and

extending credit to those in need. The same is the situation with non-bank finance

companies in Malaysia.

The position in the US is that as against deposits of $4,391 billion held by commercial

banks, thrift institutions and finance companies hold $1,247 billion. These non-banks as

a whole hold 28.4 per cent of the deposits of banks. In India, however, public deposits

of NBFCs are only 0.003 per cent of banks in India.

Non-bank finance institutions in the US are even covered by deposit insurance even as

they are subject to supervision by a special office of thrift supervision. These

institutions handle a substantial channel of local savings and transfer them as loans to

deserving borrowers, besides small and medium-scale industries, as well as housing

needs. These institutions are also liberally allowed to access the capital market, where

banks subscribe to bonds issued by them.

The situation in UK is broadly similar. Building Societies in the UK have a big share of

business compared to their analogues in India, which hold deposits amounting to 18 per

cent of total retail deposit balances.

They also are entitled to receive compensation from the Financial Services

Compensation Scheme in the event of failure in the business of deposit-taking, among

others. In Malaysia, non-bank finance companies' deposits as a percentage of bank

deposits amount to 21 per cent. It is, therefore, wrong to argue that non-bank finance

companies cannot access public deposits in other countries.

Again, the new-fangled notion of Grameen banks and self-help groups is nothing but

thrift societies in another form. Traditionally in India, chit funds have performed the

role of collecting deposits from savers and lending money to those who are in need.

Constrained as they are by numerous restrictions, they still perform a signal service in

funding small and medium business, trade and transport

The fact is that NBFCs in India have played a useful role in financing various sectors of

the economy, particularly those that have been underserved by the banks. No business

flourishes unless there is a need for it and it fulfils the need efficiently.

The success of NBFCs bears testimony to its role. Anywhere in India, the small

entrepreneur goes first to an NBFC for funds even before he approaches banks in view

of the former's easy access, freedom from red-tape and quick response. The large

expansion of the consumer durable business in India in the last few years would not

have taken place if NBFCs had not entered the trade.

Similarly, housing activity has also been encouraged by NBFCs. The role of NBFCs in

funding transport activities is well-known. Latterly, some NBFCs have been active in

funding infrastructure quite successfully using the securitization of obligations.

NBFCs in India have played a useful role in financing various sectors of the economy,

particularly those that have been underserved by the banks. The tendency of regulators

to deny access to these institutions to public deposit is a confession of inability to see

the economic reality, which calls for a flexible and customer-friendly financial

intermediary, which is what NBFCs and chit funds are.

The tendency of regulators to deny access to these institutions to public deposit is a

confession of inability to see the economic reality, which calls for a flexible and

customer-friendly financial intermediary, which is what NBFCs and chit funds are.

In fact, many banks are forming NBFCs to take advantage of their greater flexibility in

dealing with customers. The fact that some NBFCs were found abusing their position in

the 1990s seems to have scared the regulator out of its wits. The answer lay in better

regulation, supervision and prudential norms.

The RBI has now strengthened its machinery of registration and supervision and

extended prudential norms to NBFCs. Denying access to deposits would seem a case of

throwing the baby out with the bathwater. On the contrary, the RBI should apply its

mind to strengthening the functioning of NBFCs, if necessary, facilitating better access

to the capital market.

It is, however, interesting to note that the RBI is thinking of using in some form an

instrumentality like the NBFC to extend its credit reach. Observations in recent RBI

reports show that the central bank would prefer to use microfinance credit agencies

dedicated to serving SME clusters.

The RBI's Report on Trend and Progress of Banking in India 2004 mentions that

"banks should extend wholesale financial assistance to non-governmental

organizations/microfinance intermediaries and work as innovative models for

securitisation of MFIs' receivable portfolios. Such micro-credit institutions can take the

form of NBFCs funded by individuals or a group of banks, but not permitted to take

public deposits".

A strange requirement, indeed, of exclusion from public deposits! The recommendation

of setting up an institution in the form of NBFC is significant, although excluding such

institutions from deposit-taking is not correct.

NBFCs have, indeed, served a useful purpose as instruments for extending outreach of

credit in the Indian countryside. To ignore them but recreate them in the form of

microfinance institutions or NGOs of the same kind is being ritualistic.

After all, let us recognise that NBFCs have a set of characteristics that have made them

an effective form of financial intermediation. It is these characteristics that the RBI

wants to incorporate in its version of microfinance groups. The path of wisdom is to

incorporate NBFCs as such into India's financial structure rather than reinventing them

in another form.

There are, of course, some persistent problems for NBFCs, apart from deposit-taking.

These relate to flexible handling of their capital issues. Both SEBI and the RBI need to

revisit their case for relaxations with sympathy, especially since they are rated and

supervised. These specific relaxations are more a matter of confidence-building. The

requests made by NBFCs deserve sympathetic treatment by both the securities market

regulator and the central bank.

In short, NBFCs are vitally needed to give the Indian economy a much-needed boost by

enabling easier access to credit. As it is, public and private sector banks are finding it

difficult to extend their reach for various reasons. It behooves the RBI and the

Government to look at the problems faced by NBFCs with sympathy rather than with a

recollection of the past follies of a few institutions.

The time has come for the RBI to "make" peace with NBFCs as a class. They are

proven instruments of efficient and customer-friendly outreach in the credit space —

not only for consumer durables, but also housing and transport, besides infrastructure.

These are also critical areas in which the Government is vitally interested as part of

boosting economic growth. I hope the regulators will not forget that their role is not

only to regulate but to spur the growth of the economy. The NBFCs' request to be

allowed to continue to accept public deposits deserves to be nurtured, not restricted.

Over the years, in its developmental role, the RBI has been attempting to expand credit

by exhortation. But public sector banks have proved that even with their best efforts

they are able to reach only a limited extent of credit expansion.

The experiment of Regional Rural Banks, Urban Cooperative Banks and Kisan Credit

Cards has also been a mixture of success and failure. It is in this background that the

proven successful record of credit growth, exemplified by the NBFCs, deserves to be

replicated at least in respect of their better features by the banking system.

Commercial banks by their very nature cannot take on all the features of NBFCs, but

they can collaborate with NBFCs by extending credit and participation in the

securitisation.

While the flow of bank finance will help, it will be more important to remember that

NBFCs started by accessing public deposits. These can be an additional window for

savings. All this would of course require a change of mindset on the part of both our

regulators and policy-makers.

The government is planning to treat mortgage guarantee Companies as non-banking

finance Companies (NBFCs). This would enable foreign firms to set up wholly owned

subsidiaries in India as there is no foreign direct investment (FDI) cap for NBFCs. The

rules governing this are expected to be unveiled soon, according to sources.

The finance ministry favoured the inclusion of mortgage guarantee Companies in the

relatively relaxed NBFC norms rather than the stricter insurance sector guidelines.

The move would help overseas Companies like Genworth Financial, PMI Group,

Mortgage Guaranty Insurance Corporation and Radian set up wholly owned mortgage

guarantee subsidiaries in India. It will also allow joint ventures such as India Mortgage

Guarantee Company Ltd and ICICI Lombard General Insurance start local operations.

Though mortgage guarantee Companies usually fall under the non-life insurance sector

overseas, in India they want to be governed by rules similar to NBFCs, an industry

insider said requesting anonymity. This is because only 26% FDI is allowed in the

insurance sector.

Commercial Banks and non-banking finance companies are not subject to uniform

regulation although for both the principal regulator is the Reserve Bank of India.

The dichotomy has many practical implications. While the two undertake many

common functions, there are also certain spheres in which they do not compete. For

instance, certain typical NBFC activities such as hire purchase and leasing, IPO

funding, small ticket loans and venture capital are financial services that mainline banks

in India have traditionally kept away from or placed much less emphasis.

On their part, banks alone provide working capital by way of cash credits and mobilize

demand deposits (savings bank and current accounts).

As a category, NBFCs are heterogeneous in their ownership patterns (such as foreign or

domestic) and in the nature of activities undertaken. Hence regulation impacts unevenly

even within this broad category. Hence there is no level playing field not only between

banks and NBFCs but among NBFCs themselves.

Banks, by definition, are the most regulated, being subject to prudential norms, capital

adequacy stipulations, CRR/SLR requirements, priority sector lending limits and so on.

While deposit taking NBFCs have been brought under regulation, non-deposit taking

companies (NBFC-NDs) are, for all practical purposes, still out of it. "Even in the

former case, regulation is less rigorous than for banks. This gives NBFCs as a category

and the minimally regulated non-deposit taking ones among them in particular an

opportunity to exploit the "regulatory arbitrage.''

An outstanding example is the enormous capacity of NBFC-NDs to leverage their

balance sheets to raise funds. There is practically no regulation to constrain them. As

pointed out, only deposit taking NBFCs have been brought under regulation and even

they have fewer norms than banks.

Banks and NBFCs complement as well as compete with one another. This should on

the whole lead to a widening of the financial sector and benefit the customer. For

instance, ownership of an NBFC by a bank gives the former a status and an assurance

that its well-regulated owner will ensure its solvency.

At the same time the relatively easy regulatory norms have made it easier to set up

NBFCs. (Many foreign banks have used the NBFC route to expand or even enter

India). Naturally the cost of conducting similar businesses should be lower with

NBFCs.

In 2006 the RBI laid down a number of guidelines to fine-tune the existing financial

linkages between banks and NBFCs, the objective being to protect the interests of bank

depositors.

In the normal course, NBFCs are more advantageously placed than banks. Likewise

there are norms covering the structural linkages between the two. However, there are

still several grey areas. The RBI identified the following key principles that should

guide a revised framework for NBFCs.

(1) While as a rule any financial service provider should be regulated, as a first step all

"systemically relevant entities'' should be covered. What is systemically relevant will be

covered from time to time.

(2) To avoid regulatory arbitrage, regulation and supervision should be centered on

activities and not be institution centric, as it is now.

(3) New norms should be made applicable to NBFCs that are less regulated now, the

objective being to enhance their governance.

(4) Ownership of an NBFC should not be the criterion for deciding on the products it

offers.

(5) Foreign entities now gain a foothold in the Indian financial sector by investing in an

NBFC through the automatic route available for FDI. Certain checks and balances must

be prescribed to monitor their movements into other fields without undergoing an

authorisation process.

(6) Banks should not use an NBFC as a vehicle for creating arbitrage opportunities.

Under no circumstances should the NBFC route be used for undermining existing

regulations.

Some of these have been put into practice already. For now, all NBFC-NDs with an

asset size of Rs. 100 crore and more will be considered systemically important.

They cannot raise borrowings more than ten times their net owned funds. These will

have to follow new capital adequacy norms. Other restrictions such as those laid down

under group exposure limits will have to be complied with.

Among the other new guidelines, the one that has received wide publicity relates to

ownership and governance of NBFCs.

The RBI has laid down that banks including foreign banks operating in India shall not

hold more than 10 per cent of the paid up capital of a deposit taking NBFC. Housing

finance companies have been excluded from this stipulation.

Some of these new regulatory norms have had a far-reaching impact on the NBFCs.

Procedural aspects of project financing in banks as well as NBFCs

Development operations financed by follow a procedure cycle, which is almost

identical for all kinds of projects whose technical, economic, and financial feasibility

has been established. These projects must have a reasonable economic rate of return

and should be intended to promote development in the beneficiary country. The

procedure consists of the following

1) Identification of the project:

The project’s idea is introduced to providers by various sources: a request from the

government concerned or financials identification missions may identify a proposal

from other financiers, or it. Applications for financing are then sorted out and

classified: projects to be financed are selected from amongst projects which have top

priority in the development plans of the beneficiary countries and which meet the

requirements established by the rules for financing set out by the providers and agreed

upon by the government concerned. In all cases, an official request from the

government should be submitted to financials before it decides to participate in the

financing.

2) Desk review and determination of the project’s scope:

Experts, each in his field of specialization, study all the documents available on the

project and examine its components, its estimated local and foreign costs, the

preliminary financing plan, the position of the other sources of financing, the current

economic situation and the development policy of the beneficiary country and,

generally, review all elements which may help in making the project a success.

3) Preliminary approval:

The findings of the project’s review are set out in a report prepared by financials

experts and submitted to Board of Directors for preliminary approval for undertaking

further studies on the said project with the intention of considering the possibility of

organization’s participation in its financing.

4) Project appraisal and submission to the Board:

After the project has been granted preliminary approval, organizations usually

dispatches an appraisal mission to the project’s site. The appraisal stage is considered to

be one of the key stages of the procedure in this stage the project’s objectives,

components, cost, financing plan, justification and all its economic, technical and legal

aspects are determined. The project’s implementation schedule, the methods of

procurement of goods and services, the economic and financial analysis and the

implementing and operating agencies are also examined at this stage. Based on the

results of the appraisal mission, an appraisal report is prepared, as well as a Director

General’s report which is submitted to the Board of Directors for final approval.

5) Consultations with other co financiers:

Consultations are considered to be one of the important stages in the procedure. It is

during this stage that agreement is reached regarding the financing plan, the type of

financing, and distribution of the components of the project so as to ensure the smooth

flow of disbursements during execution of the various components of the project. This

coordination should continue throughout the project implementation period to ensure

the fulfillment of its objectives.

6) Negotiations and signature of the loan agreement:

After the beneficiary government is informed of the Board of Directors’ decision to

extend the loan according to the terms agreed upon during the appraisal of the project,

the loan agreement is prepared and negotiated, and eventually signed with the

government concerned.

7) Declaration of effectiveness of the loan agreement:

A loan agreement is declared effective after continuous contacts with the government

concerned and the other co-financiers and after fulfillment of all conditions precedent

to effectiveness stipulated in the loan agreement.

8) Project implementation and disbursement from the loan:

After the declaration of effectiveness of the loan agreement, the project’s

implementation and, consequently, the disbursements from the loan funds start

according to the plan agreed upon during the appraisal process and in line with the rules

and provisions of the loan agreement signed between the two parties.

9) Supervision and follow-up:

Financials undertakes the follow-up of the project’s implementation through its field

missions sent to the project’s site or through the periodic reports which it requires the

beneficiary country to provide on a quarterly basis. These reports enable them to advise

the government concerned on the best ways to implement the project.

10) Current status reports:

Whenever necessary, experts prepare status reports which include the most recent

information and developments on the project’s implementation. These reports are

submitted to the Board of Directors for information and approval of any possible

amendments, which may be required for implementation. This is done in coordination

and agreement with the government concerned and the other co-financiers.

11) Project completion report:

This report is prepared at the project’s site and in the office as well, after completion of

the project. This report enables organizations to make use of the experience gained

from the completed project, when implementing similar projects in future. In addition,

it may help in identifying a new project in the same sector.

Risk involved in project financing

Each of these risks, along with their possible mitigates, is discussed in the following

sections.

Completion Risk

Completion risk refers to the inability of a project to commence commercial operations

on time and within the stated cost. Given that project financiers are often reluctant to

underwrite the completion risk associated with a project, project structures usually

incorporate recourse to the sponsors during the construction stage. However, this link

gets severed once the project starts generating its own cash flows. Hence, during the

construction period, risk perception is significantly influenced by the credit worthiness

and track record of the sponsors and their ability and willingness to support the project

via contingent equity/subordinated debt for funding cost and time over-runs, if any.

The risks are also dependent on the complexity of construction, as greater the

complexity (for instance, in the case of a petrochemical facility), higher the risks arising

on this count. In addition, for projects with strong vertical linkages, the non-availability

of upstream and downstream infrastructure is an important source of completion risk.

Typical examples of such projects would be liquefied natural gas (LNG), natural gas,

and toll road projects. In certain types of projects, such as ports and roads, project

completion is also a function of the permitting risks associated with obtaining the

necessary Rights of Way (ROW), environmental clearances and Government approvals.

Completion risks are usually mitigated through strong fixed price; date certain, turnkey

contracts with credit-worthy contractors, along with the provision of adequate

liquidated damages for delays in construction, which need to be seen in relation to debt

service commitments.

While assessing completion risk, adequate attention is also paid to the experience of the

engineering, procurement & construction (EPC) contractor and its track record in

constructing similar projects, on time and within the cost budgets. Further, it looks at

the reasonableness of the time available for project completion, and an aggressive

schedule for project completion, which does not provide for adequate contingency

provisions, is often viewed negatively.

Funding and Financing Risks

A project company’s financial structure and its ability to tie up the requisite finances

are the focus of analysis here. The financing structure is usually reviewed for the capital

structure of a project, which is evaluated to assess whether the debt-equity ratio is in

line with the underlying business risks and that of other projects of similar size and

complexity.

The protections provided to bondholders such as minimum coverage ratios that must be

met before shareholder distributions are made, and the availability of substantial debt

reserves to meet unforeseen circumstances. The matching of project cash flows (under

various sensitivity scenarios) with the debt service payouts and the potential for cash

flow mismatches.

The pricing structure adopted for debt and the exposure of the debt to interest rate and

currency risks. Such risks are particularly significant where the project raises variable

rate debt or liabilities in a currency other than the one in which its revenues would be

denominated. The presence of an experienced trustee to control cash flows and monitor

project performance on behalf of the bondholders.

Limitations on the ability of the project company to take on new debt. The average cost

of debt, given that the cost of financing is increasingly becoming a key determinant of

project viability, in view of the fact that differences in technical and operating abilities

have virtually become indistinguishable among front-runners.

Usually, most projects have a high leverage, and while equity is arranged privately

from sponsors, the project would be dependent on financial institutions and banks for

arranging the debt component. In assessing the funding risk, the extent to which the

funding is already in place and the likelihood of the balance funding being available in

time is considered, so that the project’s progress is not delayed.

Operating and Technology Risks

Operating and technology risks refer to a project’s inability to function at the desired

production levels and within the design parameters on a sustainable basis. Such risks

usually arise in projects using complex technology (power plants or refinery projects,

for instance); for projects in the roads, ports, and airport sectors, such risks are usually

of a lower order. Technology risk usually arises because of the newness of technology

or the possibility of its obsolescence, most often seen in telecom projects.

Where technology is well established, the focus of analysis is usually on determining

its reliability and the sustainability of the technology platform over the tenure of debt.

The Independent Engineer’s Report (IER) is used to review and assesses whether the

engineer’s findings support the views of the sponsors and the EPC contractor..

Technology risks, where imminent, are usually mitigated through performance

guarantees/warranties from the manufacturer, contractor or operator, and the

availability of adequate debt reserves to allow for operating disruptions.

The sponsors would conduct a due diligence to establish the credit-worthiness of the

technology suppliers/operators and the ability of these participants to compensate the

project for failure of the technology adopted. The risks associated with disruptions in

operations due to mechanical failure of equipment are usually mitigated through

Operations and Maintenance (O&M) contracts.

Here again, sponsors evaluates the quality/experience of the O&M contractor, the

familiarity of the O&M contractor with the technology being used, and the adequacy of

the performance guarantees from the O&M contractor.

Market Risks

Market risks usually arise because of insufficient demand for products/services,

changing industry structures, or pricing volatility (for input and also output). Given the

long-term nature of project financing, a considerable source of market risk is the

possibility of dramatic changes in demand patterns for the product, either because of

product obsolescence or sudden and large capacity creations, which could severely

affect the economics of the project under consideration.

For analytical convenience, one can group projects into two categories: one, which

produces commodities (e.g. LNG projects, refinery projects, and power projects), and

two, where certain natural monopolies exist (e.g. roads, ports, airports, power or gas

transmission projects). While the first category of projects is exposed to most of the

risks identified above, the market risks for the latter type of projects are more demand

related, with the pricing usually being subject to regulatory or political controls.

Until recently, the implementation of some of these “commodity” projects, such as

power and LNG projects, in the international markets was supported by long-term off-

take contracts, which provided considerable comfort to project financiers. However,

with the development of a spot market for these commodities, customers of such

projects are not willing to commit themselves to such long-term contracts; this has

considerably increased the market risks associated with such projects.

Under the circumstances, cost competitiveness and the nature (regional or global) and

adequacy of demand have emerged as critical determinants of a project’s long-term

viability.

For instance, even in India, despite power projects being backed by off-take

commitments and adequate payment security mechanisms, there are numerous

instances where cost competitiveness has emerged as the principal mitigant against the

rather well documented market risks associated with India’s power sector. Thus the

point of focus, while assessing market risks for projects producing a commodity, is

usually the cost structure of a project, which is a function of the capital costs incurred to

set it up, the input costs and also the costs required to operate and maintain the asset.

One usually benchmarks the capital cost of a project with those of recently

commissioned facilities across the world to ascertain the global cost competitiveness of

the project; this is a key determinant of the project’s long-term economic viability. On

the input side, ICRA looks at issues related to certainty of supply, ability of the supplier

to meet contractual commitments over the life of the project, the pricing structure of

such supplies, and the ability of the project to pass on variations in input costs.

In situations where the primary input is scarce or is not actively traded, one attempts to

evaluate the cost implications for replenishing shortfalls in supply and the availability

of liquidated damages in the supply contracts for compensating the project for such

costs. For the second category of projects, the primary focus is on evaluating the

adequacy of existing demand, the potential for growth in demand and the possibility of

alternative assets being created, which could undermine demand for the project being

financed.

Assessing demand patterns for such projects, particularly road projects, is often a

daunting task since in most cases, the demand is highly price elastic and a function of

the pattern of socioeconomic development in the service area of the road.

One refers to “independently” conducted traffic/demand studies by reputed agencies to

establish the veracity of the demand estimations prepared by the project sponsors.

Counter-party Risks

As discussed earlier, a project involves a number of counter-parties who are bound to it

by the contractual structure. Therefore, an evaluation of the strength and reliability of

such participants assumes considerable importance in ascertaining the credit strength of

the project. Counter-parties to projects usually include feedstock/raw material suppliers,

principal off takers, and EPC contractors.

Even a sponsor could become a source of counter-party risk, as it needs to provide

equity during the construction stage. Because projects have inherently complex

structures, a counter-party’s failure can put a project’s viability at risk. The counter-

party risks are usually addressed through performance guarantees, letters of credit and

payment security mechanisms (such as escrows), most commonly seen in the case of

power projects.

However, it has been observed that such contractual risk mitigants, however strong,

may not be effective in insulating a project from this risk, unless the project is

fundamentally cost competitive and makes commercial sense for all the project

participants.

Regulatory and Political Risks

Political and regulatory risks continue to play an important role in the development of

the project finance business in India. Most project financing transactions carry an

element of political risk by virtue of the fact that they are often related to capital-

intensive infrastructure development and the resultant goods/services are consumed by

the masses, directly or indirectly.

Political and regulatory risks could manifest themselves in various forms, and

significantly impact the economics of the project under evaluation. For instance, such

risks may take the form of: Lack of transparency and predictability in the functioning of

the regulatory commissions which are typically involved in granting licences,

specifying the terms and conditions for use of infrastructure on a “common carrier”

basis and fixing tariffs.

For instance, some of the stand-alone LNG projects being set up in the country require

a change in regulatory policy for allowing them to use the available gas evacuation

infrastructure on a common carrier basis. Resistance to increases in user charges for

common utilities such as water charges, toll tax rates, and energy charges, despite such

tariff increases being envisioned in the project documents. Changes in environmental

norms, which could impact power plants and refinery projects by requiring them to

invest substantially in meeting such norms.

Problems in acquisition of land, which are typical in the case of road projects. As is

apparent from the preceding discussion, regulatory and political risks are often difficult

to quantify and also mitigate. While assessing such risks, an attempt is often made to

understand the vulnerability of the project to such risks and also the nature of the

relationship between the local/central Government and the project under review.

Force Majeure Risks

Project financed transactions, which are different from corporate or structured finance

because of their dependence on a single asset for generating cash flows, are potentially

vulnerable to force majeure risks. The legal doctrine of force majeure excuses the

performance of parties when they are confronted by unanticipated events beyond their

control. A careful analysis of force majeure events is critical in project financing

because such events, if not properly recompensed, can severely disrupt the careful

allocation of risk on which project financing depends.

Natural disasters, such as floods and earthquakes, civil disturbances, and strikes can

potentially disrupt a project’s operations and hence its cash flow. In addition,

catastrophic mechanical failure, due to either human error or material failure can be a

form of force majeure that may excuse a project from its contractual obligations.

Projects are usually not able to cope with force majeure events as well as large

corporations, which have a diversified portfolio of assets.

It is therefore important that force majeure events be tightly defined, and that such risks

be allocated away from the project through suitable insurance covers taken from

financially strong insurance companies. One usually studies the nature, coverage and

appropriateness of the insurance policies taken and also evaluates the adequacy of debt

reserves for meeting debt service commitments in force majeure circumstances.

Types of Project Finance

1) Build operate transfer (BOT)

2) Build own operate transfer (BOOT)

3) Build own operate (BOO)

Build operate transfer

Build operate transfer is a project financing and operating approach that has found an

application in recent years primarily in the area of infrastructure privatization in the

developing countries. It enables direct private sector investment in large scale

infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period.

The public agency pays the contractor a fee, which may be a fixed sum, linked to

output or, more likely, a combination of the two. The fee will cover the operators

fixed and variable costs, including recovery of the capital invested by the contractor. In

this case, ownership of the facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a

public infrastructure project. The company then secures their own financing to

construct the project.

Operate – The private developer then operates, maintains, and manages the facility for a

agreed concession period and recoups their investment through charges or tolls.

Transfer - After the concessionary period the company transfers ownership and

operation of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances

its construction and operates and maintains it over a period, often as long as 20 or 30

years. This period is referred to as the “concession” period. In short, under a BOT

structure, a government typically grants a concession to a project company under which

the project company has the right to build and operate a facility. The project company

borrows from the lending institutions in order to finance the construction of the facility.

The loans are repaid from “tariffs” paid by the government under the off take

agreement during the life of the concession. At the end of the concession period the

facility is usually transferred back to the government.

Advantages.

The Government gets the benefit of the private sector to mobilize finance and to use the

best management skills in the construction, operation and maintenance of the project.

The private participation also ensures efficiency and quality by using the best

equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency

through performance-based contracts and output-oriented targets

The projects are conducted in a fully competitive bidding situation and are thus

completed at the lowest possible cost.

The risks of the project are shared by the private sector

Disadvantages

There is a profit element in the equity portion of the financing, which is higher than the

debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a BOT

financing deal as it involves multiple entities and requires a relatively complicated

legal and institutional framework. There the BOT may not be suitable for small

projects

It may take time to develop the necessary institutional capacity to ensure that the full

benefits of BOT are realized, such as development and enforcement of transparent and

fair bidding and evaluation procedures and the resolution of potential disputes during

implementation.

Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT

provider) who designs, builds, funds, owns and operates the scheme for a defined

period of time and then transfers this ownership across to a agreed party. BOOT

projects are a way for governments to bundle together the design and construction,

finance, operations and maintenance and potentially marketing and customer interface

aspects of a project and let these as a package to a single private sector service provider.

The asset is transferred back to the government after the concession period at little or

no cost.

The Components of BOOT.

B for build

The concession grants the promoter the right to design, construct, and finance the

project. A construction contract will be required between the promoter and a

contractor. The contract is often among the most difficult to negotiate in a BOOT

project because of the conflict that increasingly arises between the promoter, the

contractor responsible for building the facility and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the

construction contract are reasonable and that the construction risk is placed as far as

possible on the contractors. The contractor undertakes responsibility for constructing

the asset and is expected to build the project on time, within budget and according to a

clear specification and to warrant that the asset will perform its design function.

Typically this is done by way of a lump-sum turnkey contract.

O for Own

The concession from the state provides concessionaire to own, or at least possess, the

assets that are to be built and to operate them for a period of time: the life of the

concession. The concession agreement between the state and the concessionaire will

define the extent to which ownership, and its associated attributes of possession and

control, of the assets lies with the concessionaire.

O for Operate

An operator assumes the responsibility for maintaining the facility’s assets and the

operating them on the basis that maximizes the profit or minimizes the cost on behalf of

the concessionaire and, like the contractor undertaking construction and be a

shareholder in the project company. The operator is s often an independent through the

promoter company.

T for Transfer

This relates to a change in ownership of the asssets that occurs at the ent of the

concession period, when the concession asets revert to the government grantor. The

transfer may be at book value or no value and may occur earlier in the event of failure

oof concessionaire.

Stages of Boot Project

Build

Design

Manage project implementation

Carry out procurement

Finance

Construct

Own

Hold in interest under concession

Operates

Mange and operate facility

Carry out maintenance

Deliver products/services

Receive payment for product/ service

Transfer

Hand over project in operating condition at the end of concession period

Advantages

The majority of construction and long term risk can be transferred onto the

BOOT provider.

The BOOT operator can claim depreciation on the facility constructed and

depreciation being a tax-deductible expense shareholder returns are maximized.

Using an output based purchasing model, the tender process will encourage

maximum innovations allowing the most efficient designs to be explored for the

scheme. This process may also be built into more traditional tendering

processes.

Accountability for the asset design, construction and service delivery is

very high given that if the performance targets are not met, the operator stands

to lose a portion of capital expenditure, capital profit, operating expenditure and

operating profit.

Boot operators are experienced with management and operation of

infrastructure assets and bring these skills to scheme.

Corporate structuring issues and costs are minimal within a BOOT model, as

project funding, ownership and operation are the responsibility of the BOOT

operator. These costs will however be built into the BOOT project pricing.

Disadvantages

Boot is likely to result in higher cost of the product/ service for the end user.

This is a result of the BOOT provider incurring the risks associated with 100

percnet financing of the scheme and the acceptance of the ongoing maintenance

liabilities.

Users may have a negative reaction to private sector involvement in the scheme,

particularly if the private sector is an overseas owned company.

Management and monitoring of the service level agreement with the BOOT

operators can be time consuming and resource hungry. Procedures need to be in

place to allow users to assess service performance and penalize the BOOT

operator where necessary.

A rigorous selection process is required when selecting a boot partner. Users

need to be confident that the BOOT operator is financially secure and

sufficiently committed to the market prior to considering their bid.

Swot analysis of banks

Strengths

Over the years both private sector and public sector banks have developed to a great

extent and are a major factor for the flow of money in the economy. Banks are using

latest technologies to cater to the needs of the people. The number of branches that a

bank opens, the ATM facility, other services like payment of bills etc. is proof to the

fact that customer satisfaction is the objective of any bank. Retail Banking, Business

Banking, Merchant Establishment Services (EDC Machine), Personal loans & Car

loans, Demat Services with E-Broking, Mutual Fund, Insurance, and Housing Loans.

Keeping the need of the consumers in mind, banks all over are offering an array of

services.

Weakness

The rural market is still waiting to be tapped. There is latent demand for the same, only

awareness is to be created. If the organized urban financial sector can somehow connect

to its rural counterpart, it can accelerate the growth of the rural financial sector. With

the help of latest technologies this feat could be achieved. Banks currently provide

overdrafts against property. While the younger population believes in looking at future

cash flows to spend today, senior citizens often have their investments locked in not-so-

liquid securities. This could lead to a problem in future for the banks. Affluent investors

typically overlook banks as a source for personal financial advice. Wealthy clients tend

to consult financial advisers and accountants for personal financial advice before they

speak with banks.

Opportunity

The Budget provides for increased medical insurance coverage through more insurance

companies of the GIC group. There is perhaps an opportunity here for banks to look at

bundling insurance with liability products. Income from rural insurance is around Rs

2,700 crore and is estimated to grow to Rs 8,000 crore in three years. Banks could

easily exploit this opportunity. Even after the Reserve Bank of India having okayed

institutional lending to the film industry, very few banks have even done a study of

financing films. The film industry could provide banks with good business

opportunities, at a time when the credit off take is poor.

Threats

With distribution of financial services in the rural areas being touted as the next big

wave, there could be more competition for banks and NBFCs (non-banking financial

companies) operating in the hinterland. The regional rural banks would be given charge

of rural areas hence increasing competition. Exploiting the impressive growth of e-

commerce and the desire of many merchants to provide their customers with more

online payment options at a lower cost, nonblank players like PayPal and BillMeLater

are carving out a niche in the Internet payments business. At the same time, the e-check

is emerging as an attractive payments alternative for merchants tired of paying high

credit card interchange fees. The e-check is essentially a debit against the customer's

checking account that travels over the Automated Clearing House network.

These and other technologies threaten to wrest more payments revenues from banks,

which still rely on the credit card as their primary online payments product.

Swot analysis of NBFC

Strengths

The core strengths of NBFCs lie in their strong customer relationships, good

understanding of regional dynamics, service orientation, and ability to reach out to

customers who would otherwise have been ignored by banks. Because of their niche

strengths, local knowledge, and presence in remote topographies, these NBFCs are able

to appraise and service non-bankable customer profiles and ticket sizes. They are thus

able to service segments of the population whose only other source of funding would be

moneylenders, often charging usurious rates of interest

Weakness

With the onset of retail financing, NBFCs are loosing ground to banks. Also the

profitability of NBFCs has also come under pressure due to the competitive dynamics

in the Indian financial system. Under these circumstances, NBFCs have begun to look

at high-yield segments such as personal loans of small ticket sizes, home equity, loans

against shares, and public issue (IPO) financing, to boost profitability. To benefit from

access to funding at lower costs, among other reasons, some leading NBFCs have also

metamorphosed into banks: Ashok Leyland Finance Ltd, for instance, merged into

IndusInd Bank Ltd, and Kotak Mahindra Finance Ltd converted into Kotak Mahindra

Bank Ltd.

Opportunity

Virgin business segments are likely to have NBFCs as innovators. The NBFCs will

leverage their first mover advantage to make reasonable profits in these segments.

NBFCs will play the role of innovators, going forward, with some doubling up as

partners to banks. As innovators, they will help identify new businesses, or new ways

of doing traditional businesses; they will build business models that will attain a

measure of stability over time, before the banks step in.

When that happens, it will be difficult for some NBFCs to hold their own against the

competition, and some will move out; others will enter into partnerships with banks,

resulting in a win-win relationship for both. Partnerships with banks can take a variety

of forms. Some NBFCs will become originating agents working for a fee, like DSAs,

but others are likely to have more substantial partnerships with banks. Such a

partnership could, for instance, involve the NBFC performing credit appraisals, and

sharing credit risk on assets that it has originated and sold to its partner bank. The

success of this business model will depend critically on the NBFCs ability to assess the

risks involved in the exposures it originates.

Threats

Factors such as ability to sustain good asset quality, provide prompt and customized

services, enter into franchises or tie up arrangements with manufacturers and dealers,

and build large networks to reach out to customers, are vital for success on the business

front; so are strong collection and recovery capabilities. NBFC lack such facilities. On

the financial side, competitive cost of funds and the ability to capitalize at regular

intervals, in line with growth requirements, are key requirements for maintaining

competitive positions. Slowly and steadily NBFC is loosing ground to banks and it only

way out is go for partnership with banks.

Analysis

Q.1 Have you obtained project financing previously?

First time takers 11Taken previously 69

Not aware 20

11%

69%

20%

fitst time takers

taken previously

not aware

Of the 100 respondents, 11 were first time takers of project financing, 20 had never

taken project financing and most of them had not heard of the same, 69 of the

respondents had taken project financing previously.

Q.2 If yes, how many times?

1to3 604to6 67to9 1>10 2

60

61 2

0

10

20

30

40

50

60

70

1to3 4to6 7to9 >10

Of the 100 respondents, 20 have never taken project financing, 11 are first time takers,

60 fall in the category of having taken project financing 1to 3 times previously, 6 who

have taken project finance 4 to 6 times, one respondent falls in the category of having

taken project finance 7 to 9 times and 2 who have taken project financing more than 10

times.

We can see that majority of the respondents have taken project finance 1to3 times and

only 2 respondents have taken project finance more than 10 times. This shows that

project finance is not such a favorable option of finance among the borrowers. This is

be due to the fact that documentation process involved in financing a project is very

lengthy and also that approval time for funding is long. Also the borrowers have other

options like loan from banks, deposits, loan from relatives, investment in bonds etc.

Q.3 Please name the lenders from whom you have obtained project financing in past.

SBI 21ICICI 16DENA 10Others 22

29%

22%14%

35% SBI

ICICI

DENA

Others

29% of the respondents had taken project financing from State Bank of India, 22%

from ICICI Bank and 14% from Dena Bank and 35% have taken project finance from

other banks.

None of the respondents had taken project finance from NBFCs, all of them had opted

for Banks as there is more security and also it is backed by strong brand name. Further

of all the banks, nationalized banks have more market share than private banks in terms

of popularity. Majority of the respondents have taken project financing from SBI,

followed by ICICI and Dena Bank.

Q4 Please describe your experience with the lender in terms of the following criteria

(A) Accessibility of officers:

Very satisfied 26Satisfied 40

Neither satisfied nor dissatisfied 14Dissatisfied 0

Fullydissatisfied 0

26

40

14

0 00

5

10

15

20

25

30

35

40

45

Ver

y sa

tisfie

d

Sat

isfie

d

Nei

ther

satis

fied

nor

diss

atis

fied

Dis

satis

fied

Fully

diss

atis

fied

26 respondents were very satisfied in terms of the accessibility of officers, 40 were

satisfied in terms of accessibility of officers, 14 respondents were neutral on this aspect

and none were dissatisfied or dissatisfied.

It can be observed that majority of the respondents are very satisfied or near to satisfied

with regard to accessibility of the officers. The lenders have taken care to see that the

borrowers can easily access the officers. Majority of the respondents had taken project

fiancé from SBI and are very satisfied in terms of accessibility of officers. This is the

starting point for any prospective borrower and lenders should take care to see that their

officers are easily accessible because many a times bad response in terms of

accessibility repulses the prospective lender.

Q 4 (B) Speed of dealing: (documentation and formalities)

Particulars No.Very satisfied 10

Satisfied 42Neither satisfied nor

dissatisfied 19Dissatisfied 7

Fully dissatisfied 2

10

42

19

72

05

1015202530354045

Ve

ry s

atis

fied

Sa

tisfie

d

Ne

ithe

rsa

tisfie

d n

or

dis

satis

fied

Dis

satis

fied

Fu

llyd

issa

tisfie

d

Only 10 of the respondents were very satisfied with the speed of dealing with regard to

documentation process, 42 were satisfied with the speed of dealing, 19 were neutral on

this aspect, 7 dissatisfied and 2 fully dissatisfied with the speed of dealing.

Those that were very satisfied with the documentation process had taken project

finance from ICICI and also the customers of Dena Bank were satisfied with

documentation process. This shows that ICICI and Dena Bank Have taken due care in

finishing the paper work quickly so that the borrowers can start with the project as soon

as possible.

It has been observed that the documentation process in terms of SBI is the lengthiest.

Many a times due to this factor SBI is not preferred by the borrowers as the approval

time is more and the borrowers cannot afford this delay.

Q4(C) Quality of interaction:

Particulars No.Very satisfied 15

Satisfied 45Neither satisfied nor

dissatisfied 19Dissatisfied 1

Fully dissatisfied 0

15

45

19

1 005

101520253035404550

Ve

ry s

atis

fied

Sa

tisfie

d

Ne

ithe

rsa

tisfie

d n

or

dis

satis

fied

Dis

satis

fied

Fu

llyd

issa

tisfie

d

From the above chart we can see that 15% of the respondents were very satisfied with

the quality of interaction, 45% were satisfied with the interaction, and 19% were neutral

on this aspect, 1% dissatisfied with the quality of interaction.

It can be observed that the above graph more or less depicts the graph of accessibility

of officers. It means that those who felt that officers were easily accessible also felt that

quality of interaction was also good.

All the lenders are taking care to see that the prospective borrowers feel at ease with the

officers and that it results in a project finance deal. This is also an important aspect that

the lenders should consider as the quality of interaction would determine whether the

project would be financed or not.

Q5 What was/were the reason/s fro selecting this particular project financing company?

Particulars No.Reference 54

Time frame 14Documentation process 10

Others 5

65%

17%

12%6% Reference

Time frame

Documentationprocess

Others

From the above chart we can see that 65% of the respondents choose a particular firm

because of reference, i.e. either they had a bank account there or someone

recommended the firm, for 17% time frame was the deciding factor, 12% of the

respondents gave importance to documentation process and 6% gave importance to

other factors like security, brand name etc.

The lenders should promote project finance facility to all its existing customers as we

can see that 65% of respondents choose a particular firm because of reference. The

lenders should take care to see that the time needed for approval of project should also

be shortened as this one of the factors which gives advantage to the competitor.

The lenders should also try and reduce the number of documents that a borrower is

expected to present. This is also one deciding factor for the borrowers as in the case of

SBI there is stringent checking of documents and the approval of finance takes more

than 1 month usually.

Q6 Which other source of finance would you prefer for financing projects?

Particulars No.Loan from banks 62

Loan from relatives 17Deposits 14

Investments in bonds 3Others 0

62

17 143 0

010203040506070

Loan

fro

mba

nks

Loan

fro

mre

lativ

es

Dep

osits

Inve

stm

ents

in b

onds

Oth

ers

From the above chart we can see that 62 respondents would take loans from banks to

finance their projects, 17 would have taken loan from relatives, 14 would use their

deposits to finance their projects and 3 respondents would use their investments in

bonds for the same.

Apart from taking project finance to finance their project, there are various other

avenues from where the borrowers can finance their project. The major competitor of

project finance is the loans provided by the banks, we can say this as this is the most

favored option of the respondents. Better promotional strategies should be adopted by

the lenders so as to meet the competition.

The lenders should try and educate the customers regarding the benefits of taking

project finance over other options like loan, deposits etc. in order to meet competition.

Also the NBFCs should market themselves as the easiest option available for

entrepreneurs and this is the only way they can sustain the competition.

Q7 What are/were your reasons for obtaining project finance?

Particulars No.Equipment purchase 24

New unit setup 31Further investment 26

Ongoing project 6Other 0

24

3126

60

05

101520253035

Equ

ipm

ent

purc

hase

New

uni

tse

tup

Fur

ther

inve

stm

ent

Ong

oing

proj

ect

Oth

er

From the above chart we can see that out of the 80 respondents who had taken project

financing 24 had taken it for purchase of equipment, 31 for new unit setup, 26 for

further investment and 6 for ongoing project.

We can observe that project finance is usually preferred for new unit set up. This is

because such project usually requires more capital for initialization and also as the

finance is provided on the merits of the project, approval time is less. Close to new unit

setup, the next is further investment in business for which project finance is taken. As

loan is provided on the credit of the project the borrowers would not have a problem in

getting the finance.

Q8 Are you aware of the factors considered by the lender before providing you project financing?

Particulars No.Yes 64No 16

From the above chart we can see that 80% of the respondents were aware of the factors

considered by the lender before financing the project, but most of them are not aware of

all the factors. 20% of the respondents were unaware of the factors considered by the

lender.

Only 16 respondents were unaware about the factors considered by the lender before

providing finance, they not aware about all the factors considered. These respondents

were about some factors like feasibility of the project, credit worthiness, financial

soundness and availability of documents. They were not aware that the lenders also

consider the current government policies, market scenario, macro economic factors and

also sole lendership.

80%

20%

Yes

No

Those who knew about the factors considered were aware of most of the factors

considered by the lender. They were aware regarding what all documents would be

expected by them and would keep them ready before meeting the lenders so that the

process is completed quickly. Also that agriculture related projects got easy clearance.

Q 9 Which of the following do you think are factors that your lender might have considered before giving you project financing?

Particulars No.Previous projects 54Present business 53Market scenario 38

Government policy 17Macro economic factors 6

Agriculture related 10Sole lender 8

54 53

38

17

610 8

0

10

20

30

40

50

60

Previo

us p

rojec

ts

Prese

nt b

usin

ess

Mar

ket s

enar

io

Gover

nmen

t pol

icy

Mac

ro e

cono

mic

facto

rs

Agricu

lture

relat

ed

Sole le

nder

54 respondents felt that previous projects was a deciding factor for the lenders before

financing the project, 53 respondents felt that their current business conditions was a

deciding factor, for 38 respondents market scenario was a deciding factor for the

lenders, 17 felt government policy affected the decision of the lenders,

10 respondents thought that agriculture related project got faster approval and 8

respondents felt sole lendership was given importance by the lender.

According to the lenders before giving finance to any project, the feasibility of the

project, credit worthiness of the project and availability of documents are given

foremost importance. They also consider the government policies like which sector has

been given subsidies or tax holiday, also the current market scenario as to which sector

is growing or is expected to grow, macro economic factors. The lender also preferred

that it be the only lender to the project and that no other lender had a claim on the cash

flows of the project.

Majority of the respondents were aware of the foremost three factors i.e. feasibility of

project, credit worthiness and availability of documents. So we can say that there is

considerable awareness regarding the same among the borrowers.

Q10 In which of the flowing range does your debt/equity ratio lies?

Particulars No.0.25-0.5 170.50-1.00 71.00-1.50 371.25-2.00 13

>2.00 0

17

7

37

13

005

10152025303540

0.25-0.5 0.50-1.00 1.00-1.50 1.25-2.00 >2.00

Out of the 80 respondents who had taken project financing, 4 did not want to disclose

their debt equity ratio, the debt equity ratio of firms of the respondents lied between

0.25-0.5, 44 firms had their debt equity ratio between 0.50-1, 10 firms had their debt

equity ratio between 1.00-1.50 and 5 firms had their equity ratio between 1.25-2.00

Majority of the respondents hesitated in giving this ratio. It shows that majority of the

respondents have debt equity ratio between 1-1.5 it shows that they have taken loans

from the market.

Q11 Which type of Repayment schedule do you prefer?

Particulars No.Bullet 7

Installment 73

9%

91%

Bullet

Instalment

91% of the respondents were more comfortable with the installment repayment system,

and 9% with the bullet repayment system.

Q12 Out of these how many project financing providers are you aware of?

Particulars No.SBI 61IDBI 52BOB 37

Other Banks 70GSFS 27GLF 27

Sundaram 10

6152

37

70

27 27

10

01020304050607080

SBIID

BIBOB

Other

Ban

ks

GSFSGLF

Sudar

am

Banks have a majority of mind share among the respondents, it can be clearly seen that

SBI is very well know among the respondents, 52 respondents were aware that IDBI

also provides project finance, 37 respondents were aware about Bank of Baroda giving

the same service. The awareness regarding the NBFCs in this field is very low. Of all

the respondents only 27 were aware about Gujarat State Financial Services and Gujarat

Lease Finance Ltd providing project finance and that is due to the fact that they are

state run firms.

NBFC firms need to invest more in marketing their products to stay in competition. The

awareness regarding NBFCs is very less among all the respondents, they should try and

market themselves as the lender for new entrepreneur as project finance deals with the

merits of the product. Also they should try to inculcate in the minds of the borrowers

that NBFC is as safe as any bank and should try and develop a feeling of security

among borrowers with regard to NBFC.

Q13 How would you prefer risk to be managed?

Particulars No.Lenders 53

Third party 17Allocate between two 10

65%

21%

14%Lenders

Third party

Allocate betweentwo

65% of the respondents preferred risk to be managed by the lenders, 21% wanted third

party to absorb the risk and 14% felt that risk should be allocated equally between the

lenders and the respondents.

Q14 For future projects from whom would you prefer to take project financing?

Particulars No.Banks 100NBFCs 0

100%

0%

Banks

NBFCs

All the respondents opted for banks rather than NBFC for project financing for their

future projects. The Banks have majority of mind share among the borrowers. Also the

lenders feel that if they borrow from banks they will not face any problem regarding

availability of finance and also that the banks will keep upto their word, in short the

will not face a problem with regard to working capital when it comes to banks. But the

same they do not feel regarding the NBFC.

Further the borrowers are not aware about various NBFC existing within the city, this

shows that the marketing efforts carried on by these firms is not enough. As a result

they are loosing out to the banks. Also they need to improve upon their image regarding

the NBFC being not a safe option.

Q15 Factors responsible for choosing a lender (Bank/NBFC)

Particulars No.Documentation process 29

Security 48Brand name 39

Rate of involvement 12Project approval time 8

Others 1

28

4739

11 71

0

10

20

30

40

50

Doc

umet

atio

npr

oces

s

Sec

urity

Bra

nd n

ame

Rat

e of

invo

lvem

ent

Pro

ject

appr

oval

tim

e

Oth

ers

The respondents choose bank over NBFC because they thought banks provided more

security, 47 respondents felt the same, for 39 respondents brand name was a deciding

factor, for 28 respondents documentation process was of importance, for 11

respondents rate of involvement affected their decision, 7 respondents gave importance

to project approval time.

As said earlier the NBFC firms need to make their presence felt among the borrowers.

They need to market themselves to borrowers differently than the banks and improve

their image. The major reason for choosing a bank is the security aspect, NBFC need to

prove to the lenders that they are as secure as any bank and also develop their brand

name. This will take few years but the first and foremost thing that they can do is to

market themselves and make their presence felt in the market.

Findings and Recommendations

Project finance is not that popular among the CAs. They prefer taking bank

loans over project finance. This due to the fact that the lenders have not made

much effort in creating awareness regarding the same.

The documentation process involved in financing a project is very lengthy and

also that approval time for funding is long. Also the borrowers have other

options

None of the respondents had taken project finance from NBFCs, all of them had

opted for Banks as there is more security and also it is backed by strong brand

name.

The lenders have taken care to see that the borrowers can easily access the

officers and also the interaction between the lender and borrowers is pleasant.

Majority of the banks get customers for project finance through reference that is

either they are existing customers are they have been recommended by others.

Also documentation process should be shortened as this affect the decision of

choosing a lender.

The major competitor of project finance is the loans provided by the banks.

Project Finance is usually preferred for new unit set up

According to the lenders before giving finance to any project, the feasibility of

the project, credit worthiness of the project and availability of documents are

given foremost importance.

Banks have a majority of mind share among the respondents. The awareness

regarding NBFCs is very less among all the respondents.

All the respondents opted for banks rather than NBFC for project financing for

their future projects.

The major reason for choosing a bank over NBFC is the security aspect and also

the brand name that a bank enjoys.

Recommendation

The lenders should promote project finance facility to all its existing

customers

The lenders should try and educate the customers regarding the benefits of

taking project finance over other options like loan, deposits etc. in order to

meet competition.

Also the NBFCs should market themselves as the easiest option available

for entrepreneurs and this is the only way they can sustain the competition.

The borrowers should be made aware regarding the aspects considered by

the lender before providing project finance.

The awareness regarding the NBFCs in this field is very low. Hence strong

marketing strategies should be adopted by these firms to stay in competition.

The NBFCs should make their presence felt in the market by organizing

financial fares, sponsoring financial events and other effective marketing

tools.

The NBFC firms should try to inculcate in the minds of the borrowers that

NBFC is as safe as any bank and should try and develop a feeling of security

among borrowers with regard to NBFC.

The NBFC firms need to develop their brand. Thi will definitely take a few

years but efforts need to made now so as to sustain competition

Bibliography

Books

1) Malhotra, Naresh. The Marketing Research. Delhi: Pearson Education, 2005.

2) Kothari, C. Research Methodology. New Delhi:Wishwa Prakashan,1990

3) Research Guides . Luis Gonzalez. August 2002. 31 May 2007

Magazines

Websites

http://www.thehindu.com

http://www.rbi.org

http://www.sbi.com

http://www.icici.com

http://bankofindia.com

http://bankofbaroda.com

http://idbi.com

http://axis.com

http://ibez.com