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Project Report on Term Loan Appraisal & Assessment of Working Capital limit In Partial Fulfilment of Post Graduate Diploma in Management By Surbhi Sareen Under the guidance of Mr. Mahender Singh Prof. S.C. Kapooor Chief Manager HR Department Credit Division JIMS Punjab National Bank (HO) ROHINI
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Project Report on

Term Loan Appraisal & Assessment of Working Capital limit

In Partial Fulfilment of

Post Graduate Diploma in Management

By

Surbhi Sareen

Under the guidance of

Mr. Mahender Singh Prof. S.C. Kapooor

Chief Manager HR Department

Credit Division JIMS

Punjab National Bank (HO) ROHINI

Jagan Institute of Management Studies, Rohini

2011

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CERTIFICATE

This is to certify that the project work done on “Term Loan Appraisal and Assessment of Working Capital Limits” is an original work carried out by Ms. Surbhi Sareen under my supervision and guidance. The project report is submitted towards partial fulfilment of two – year, full time Post Graduate Diploma in Management.

This work has not been submitted anywhere else for any other degree/diploma. The work was carried out from 2nd May, 2011 to 30th June, 2011 in Punjab National Bank (HO).

Mr. Mahender Singh Dr. Madan Mohan

Chief Manager, CAD Dean

PNB(HO).

Date: Surbhi Sareen

FA10055

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Acknowledgement

Many people have contributed directly and indirectly to bring this project to completion. By sharing what they know and encouraging me to pursue the answers of my own questions, there are many individuals who have helped me make this work possible.

First and foremost I would like to express my gratitude towards my industry mentor Mr. Mahender Singh Dagar, Chief Manager, Credit Division, PNB (HO), for his immense contribution in making me understand the mechanism of CAD and in taking up an independent study of the same and its culmination in the form of project report.

My gratitude towards faculty mentor Prof. S.C. kapoor, for his unending support and contribution in completion of SIP and giving an overall enriching experience of working under his valuable guidance.

A special thanks to the CRMC Department for its guidance.

Thanking all the department heads for their guidance in understanding work of different departments.

Also acknowledging the support of Ms. Tenzin Mehru, Library Manager, PNB (HO), for providing with various books and study material relevant in the preparation of the project report.

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Declaration

I hereby declare that the project report titled ‘Term Loan Appraisal and Assessment of Working Capital limits’ written and submitted by me to Jagan Institute of Management Studies, New Delhi, in partial fulfilment of Post Graduate Diploma in Management, is a bonafide piece of original work carried under the guidance of Mr. Mahender Singh Dagar, Chief Manager, Punjab National Bank(HO).

I further declare that this project work has not been submitted to any other degree, diploma or equivalent course.

Place: New Delhi

Date: Name: Surbhi Sareen

Jagan Institute of Management Studies.

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Preface

Knowledge remains incomplete unless it touches upon both theoretical as well as practical aspects of a subject. Theory, no matter how detailed, does not suffice the quest for practical implications.

This project report on ‘Term loan Appraisal and Assessment of Working Capital limits’ is a modest attempt towards the understanding of appraising term loan and assessing the working capital requirements of large and medium enterprises, in the practical scenario. This report grows out of eight weeks of summer training in Credit Administration Department (CAD) or credit division(CD) of Punjab National Bank ( PNB), Head Office at 7-Bhikaiji Cama Place, New Delhi, as a requirement on partial fulfillment of my Post Graduate Diploma in Management (PGDM) 2010-12 Batch from Jagan Institute of Management Studies.

The major thrust of this report is towards analyzing the proposals for granting loans (Term Loans for Capital Expenditure and Working Capital Loans for facilitating day to day financial requirements) with the help of various methods and tools identified and recommended by the bank and RBI, in making the final decision.

The contents of the report have been carefully selected and so organized that the reader is exposed to the concept of term loan appraisal and assessment of working capital limits in general and of the bank in particular, enabling him/her to comprehend briefly the vital aspects of the topic.

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Contents

List of Tables

List of Figures

Chapter I: Introduction

1.1 Banking Industry Overview 1.2 Basics of Bank Lending 1.3 About the organisation 1.4 About the Project

Chapter II: Literature Review

Chapter III: Term Loan

3.1 Meaning of term Loan 3.2 Term Loan Sanction Procedure 3.3 Pre-Sanction Procedure 3.4 Follow Up

Chapter IV: Project Appraisal

4.1 Term Loan Appraisal 4.2 Procedure for Appraisal 4.3 Study on Term Loan Appraisal

Chapter V: Working Capital 5.1 Fundamentals of Working Capital 5.2 Operating Cycle Concept of Working Capital 5.3 Assessment of Working Capital Requirement (Fund-Based & Non Fund-Based)

Chapter VI: Risk Management

Chapter VII: Research Methodology

Chapter VIII: Case Study

8.1 Case on Term Loan Appraisal 8.2 Case on Assessment of Working Capital Limits.

Chapter IX: Conclusion, Findings of Financial Indicators, Suggestions, Limitation of Study.

Glossary

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Appendix/Appendices

List of Tables

Table 1: Exposure Norms for Commercial banks in India

Table 2: Forms for Assessment of Working Capital Requirement

Table 3: Rating and Score Matrix

Table 4: Calculation of DSCR

Table 5: Calculation of IRR

Table 6: Sensitivity Analysis

Table 7: Working Capital Ratio Summary

Table 8: Operating Cycle

Table 9: Assessment of Letter of Credit Limit

Table 10: Assessment of bank Guarantee limit

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List of Figures/Graphs

Figure 1: Major Banking Operations Figure 2: Banking Structure in India Figure 3: Organisation Structures Figure 4: Major Departments of the Organisation Figure 5: Procedure of Term Loan Appraisal Figure 6: Fundamentals of Working Capital Figure 7: Operating Cycle Concept of Working Capital Figure 8: Working Capital Sanction Procedure Figure 9: Measurement of operating Cycle Figure 10: Procedure for Issuing Letter of Credit Figure 11: Procedure for Negotiation of Documents and Receiving payments Figure 12: Composition of Total Financing Figure13: Composition of Total Equity Contribution Figure 14: Break – Even Analysis Figure 15: Current ratio Figure 16: Debt – Equity Ratio Figure 17: Cost of Production to Sales Ratio Figure 18: Net Profit to Sales Ratio Figure 19: TOL/TNW Ratio Figure 20: Operating Cycle

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I) Introduction

Definition of banksIn India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal, by cheque, draft, and order or otherwise.' This definition points to the three primary activities of a commercial bank which distinguish it from the other financial institutions. These are: (i) maintaining deposit accounts including current accounts, (ii) issue and pay cheques, and (iii) collect cheques for the bank's customers.

1.1 Banking Industry Overview

Today, banks play a very important role in the economic growth of the country. The health of the economy is closely related to the soundness of the banking system. The activities of the banks lead to a stronger economic growth.

Bank is the main confluence that maintains and controls the “flow of money” to make the lending mechanism possible. Government uses it to control the flow of money by managing Cash Reserve Ratio (CRR) and thereby influencing the inflation level. The functions of banks include accepting deposits from the public and private institution and then to direct them as loans and advances to various companies for growth and development of industries. The banks take the deposits at a lower rate of interest and give loans at a higher rate, thus constituting the only source of income for banks.

Banking in India has undergone startling changes in terms of growth and structure. Organized banking was active in India since the establishment of The General Bank of India in 1786. The Reserve Bank of India (RBI) was established as the central bank in1955. The Imperial Bank of India, the largest bank at that time, was taken over by the government to form state owned, State bank of India (SBI). RBI undertook an exercise to reduce the fragmentation in the Indian Banking Industry by merging weaker banks with stronger ones. The total number of banks reduced from 566 in 1951 to 85 in 1969.

With the objective of reaching out to masses and servicing credit needs of all the industries, the government nationalized 14 large banks in 1969 followed by another 6 banks in 1980. This period saw an enormous growth in the banking sector.

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However, the economic reforms unleashed by the government in 1990s played a significant role in the growth of Indian economy. Entry of new private banks was permitted under RBI guidelines. A number of liberalized and deregulation measures like efficiency, asset quality and profitability were introduced to bring Indian banks in line with best international practices. With a view of giving the operational flexibility and functional autonomy, partial privatization was authorized, thus reducing the stake of government to 51%.

Today, Indian banking system is among the best in the world and is growing at a very high pace. According to FICCI survey:

Newly granted autonomy would certainly make public sector banks more competitive and profitable.

Up gradation of technology being used would certainly make Indian banks more competitive.

Major Banking Operations

The main operations of a bank can be segregated into three main areas: (i) Balancing Profitability with Liquidity Management (ii) Management of Reserves (iii) Creation of Credit.

Balancing Profitability with Liquidity Management

Banks are commercial concerns which provide various financial services to customers in return for payments in one form or another, such as interest, discount fees, commission and so on. Their objective is to make profits. However, what distinguishes them from other business concerns is the degree to which they have to balance the principle of profit maximization with certain other principles. Banks in general have to pay much more attention in balancing the profitability with liquidity. Therefore, they have to devote considerable attention to liquidity management. Banks deal in other people’s money, a substantial part of which is repayable on demand. That is why, for banks unlike other business concerns liquidity management is as important as profitability management.

Management of Reserves

Operations of Bank

Balancing Profitability with

Liquidity Management

Management of Reserves Creation of Credit

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Banks are expected to hold voluntarily a part of their deposits in the form of ready cash which is known as cash reserves and the ratio of cash reserves to deposits is known as Cash Reserve Ratio (CRR). The Central Bank in every country is empowered to prescribe the reserve ratio that all banks must maintain. The Central Bank also undertakes as the lender of last resort, to supply reserves to banks in times of genuine difficulties. Since the banks are required to maintain a fraction of their deposit liabilities as reserves, the modern banking system is also known as the fractional reserve banking.

Creation of Credit

Unlike other financial institutions, banks are not merely financial intermediaries but “they can create as well as transfer money”. Banks are set to create deposits or credit or money or it can be said that every loan given by bank creates a deposit. This has given rose to the concept of deposit multiplier or credit multiplier. The importance of this is that banks add to the money supply in the economy and hence, banks become responsible in a major way for changes in the economic activities.

Banking Structure in India

Banking Regulator

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.

Scheduled Banks in India

Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country (see Table 1.1). Our focus in this module will be only on the scheduled commercial banks. A pictorial representation of the structure of SCBs in India is given in figure below.

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1.2 Basics of Bank Lending

Banks extend credit to different categories of borrowers for a wide variety of purposes. For many borrowers, bank credit is the easiest to access at reasonable interest rates. Bank credit is provided to households, retail traders, small and medium enterprises (SMEs), corporates, the Government undertakings etc. in the economy.

Retail banking loans are accessed by consumers of goods and services for financing the purchase of consumer durables, housing or even for day-to-day consumption. In contrast, the need for capital investment, and day-to-day operations of private corporates and the Government undertakings are met through wholesale lending. Loans for capital expenditure are usually extended with medium and long-term maturities, while day-to-day finance requirements are provided through short-term credit (working capital loans).

1.2.1 Principles of Bank Lending and Loan Policy

Principles of Bank Lending

To lend, banks depend largely on deposits from the public. Banks act as custodian of public deposits. Since the depositors require safety and security of their deposits, want to withdraw deposits whenever they need and also adequate return, bank lending must necessarily be based on principles that reflect these concerns of the depositors. These principles include: safety, liquidity, profitability, and risk diversion.

i)Safety

Banks need to ensure that advances are safe and money lent out by them will come back. Since the repayment of loans depends on the borrowers' capacity to pay, the banker must be

Scheduled Banks in India

Scheduled Commercial

Banks

Public Sector Banks

Nationalized Banks

State Bank of India & its Associates

Private Sector Banks

Old Private Sector Banks

New Private Sector Banks

Foreign Banks in India Regional Rural

Banks

Scheduled Co-operative

Banks

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satisfied before lending that the business for which money is sought is a sound one. In addition, bankers many times insist on security against the loan, which they fall back on if things go wrong for the business. The security must be adequate, readily marketable and free of encumbrances.

ii)Liquidity

To maintain liquidity, banks have to ensure that money lent out by them is not locked up for long time by designing the loan maturity period appropriately. Further, money must come back as per the repayment schedule. If loans become excessively illiquid, it may not be possible for bankers to meet their obligations vis-à-vis depositors.

iii)Profitability

To remain viable, a bank must earn adequate profit on its investment. This calls for adequate margin between deposit rates and lending rates. In this respect, appropriate fixing of interest rates on both advances and deposits is critical. Unless interest rates are competitively fixed and margins are adequate, banks may lose customers to their competitors and become unprofitable.

iv)Risk diversification

To mitigate risk, banks should lend to a diversified customer base. Diversification should be in terms of geographic location, nature of business etc. If, for example, all the borrowers of a bank are concentrated in one region and that region gets affected by a natural disaster, the bank's profitability can be seriously affected.

Loan Policy

Based on the general principles of lending, the Credit Policy Committee (CPC) of bank prepares the basic credit policy of the Bank, which has to be approved by the Bank's Board of Directors. The loan policy outlines lending guidelines and establishes operating procedures in all aspects of credit management including standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, portfolio management, loan review mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's lending strategy (both at the macro level and individual borrower level) and have to be in conformity with RBI guidelines. The loan policy typically lays down lending guidelines in the following areas:

Level of credit-deposit ratio Targeted portfolio mix Hurdle ratings Loan pricing

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Collateral security

Credit Deposit (CD) Ratio

A bank can lend out only a certain proportion of its deposits, since some part of deposits have to be statutorily maintained as Cash Reserve Ratio (CRR) deposits, and an additional part has to be used for making investment in prescribed securities. Banks have the option of having more cash reserves than CRR requirement and invest more in SLR securities than they are required to. Further, banks also have the option to invest in non-SLR securities. Therefore, the CPC has to lay down the quantum of credit that can be granted by the bank as a percentage of deposits available. Currently, the average CD ratio of the entire banking industry is around 70 percent, though it differs across banks.

Targeted Portfolio Mix

The CPC aims at a targeted portfolio mix keeping in view both risk and return. Toward this end, it lays down guidelines on choosing the preferred areas of lending as well as the sectors to avoid. Banks typically monitor all major sectors of the economy. They target a portfolio mix in the light of forecasts for growth and profitability for each sector. If bank perceives economic weakness in a sector, it would restrict new exposures to that segment and similarly, growing and profitable sectors of the economy prompt bank to increase new exposures to those sectors. This entails active portfolio management.

Hurdle ratings

There are a number of diverse risk factors associated with borrowers. Bank has a comprehensive risk rating system that serves as a single point indicator of diverse risk factors of a borrower. This helps taking credit decisions in a consistent manner. To facilitate this, a substantial degree of standardization is required in ratings across borrowers. The risk rating system should be so designed as to reveal the overall risk of lending. For new borrowers, a bank usually lays down guidelines regarding minimum rating to be achieved by the borrower to become eligible for the loan. This is also known as the 'hurdle rating' criterion to be achieved by a new borrower.

Pricing of loans

Risk-return trade-off is a fundamental aspect of risk management. Borrowers with weak financial position and, hence, placed in higher risk category are provided credit facilities at a higher price (that is, at higher interest). The higher the credit risk of a borrower the higher would be his cost of borrowing. To price credit risks, bank devises appropriate systems, which usually allow flexibility for revising the price (risk premium) due to changes in rating. In other words, if the risk rating of a borrower deteriorates, his cost of borrowing should rise and vice versa.

At the macro level, loan pricing for a bank is dependent upon a number of its cost factors such as cost of raising resources, cost of administration and overheads, cost of reserve assets like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan pricing is also dependent upon competition.

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Collateral security

As part of a prudent lending policy, bank usually advances loans against some security. The loan policy provides guidelines for this. In the case of term loans and working capital assets, bank takes as 'primary security' the property or goods against which loans are granted. In addition to this, banks often ask for additional security or 'collateral security' in the form of both physical and financial assets to further bind the borrower. This reduces the risk for the bank. Sometimes, loans are extended as 'clean loans' for which only personal guarantee of the borrower is taken.

1.2.2 Compliance with RBI Guidelines

The credit policy of a bank should be conformant with RBI guidelines; some of the important guidelines of the RBI relating to bank credit are discussed below.

Directed credit stipulations

The RBI lays down guidelines regarding minimum advances to be made for priority sector advances, export credit finance, etc. These guidelines need to be kept in mind while formulating credit policies for the Bank.

Capital adequacy

If a bank creates assets-loans or investment-they are required to be backed up by bank capital; the amount of capital they have to be backed up by depends on the risk of individual assets that the bank acquires. The riskier the asset, the larger would be the capital it has to be backed up by. This is so, because bank capital provides a cushion against unexpected losses of banks and riskier assets would require larger amounts of capital to act as cushion.

Credit Exposure Limits

As a prudential measure aimed at better risk management and avoidance of concentration of credit risks, the Reserve Bank has fixed limits on bank exposure to the capital market as well as to individual and group borrowers with reference to a bank's capital. Limits on inter-bank exposures have also been placed. Banks are further encouraged to place internal caps on their sartorial exposures, their exposure to commercial real estate and to unsecured exposures.

Table 1: Exposure norms for Commercial Banks in IndiaExposure to Limit

1. Single Borrower 15% of capital fund (Additional 5% on infrastructure

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exposure)2. Group Borrower 40% of capital fund (Additional 10% on infrastructure

exposure)3. NBFC 10% of capital fund4. NBFC – AFC 15% of capital fund5. Indian Joint Venture/ Wholly owned

subsidiaries abroad/ Overseas step down subsidiaries of Indian corporate

20% of capital fund

6. Capital Market Exposure (a) Bank’s holding of shares in any company

(b) Bank’s aggregate exposure to capital market (solo basis)

(c) Bank’s aggregate exposure to capital market (group basis)

(d) Bank’s direct exposure to capital market (solo basis)

(e) Bank’s direct exposure to capital market (group basis)

The lesser of 30% of paid-up share capital of the company or 30% of the paid-up capital of the banks 40% of its net worth

40% of its consolidated net worth

20% of its net worth

20% of its consolidated net worth

7. Gross holding of capital among banks/ FIs 10% of capital fundSource: Financial Stability Report, RBI, March 2010

1.3 Introduction of the Organization

a) Aims and Establishment of the Company

Beginning Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 435931 crore. PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network, business and many other parameters.The corporate office of the bank is at New Delhi.With over 56 million satisfied customers and more than 5000 offices including 5 overseas branches, PNB has continued to retain its leadership position amongst the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking.

Vision

“To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof".

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Mission

"Banking for the unbanked"

Organizational Structure

The bank has a three tier structure comprising of head office, circle office and branch office. There are 58 circle offices and 4267 branch offices. There is decentralized power up to the branch level which has improved speed of decision making.

Head Office

Circle Office

Branches

Chairman

Executive Director

General Manager

Deputy

General

Assistant Manager

General

Manager

Chief

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Manager

Senior

Manager

Officers

Sub-Ordinate

Clerical

Staff

Types of Products/Services

The bank is happily servicing its millions of customers with the following wide variety of services:

Corporate Banking Personal Banking Industrial Banking Agricultural Banking International Banking

PNB’s principal activities are to provide treasury and banking operations. The activities include accepting deposits, lending loans and to provide other financial related services. The banking operations provides short and long term loans to agricultural, small scale industries and other priority sectors. PNB also offers internet banking facilities to its customers.

Punjab National Bank has been ranked 38th among the top 50 companies by The Economic Times. Punjab National Bank has earned 9th position among top 50 most trusted brands in India.

Other ancillary businesses of PNB

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Mutual fund business – The bank is distributing and marketing mutual fund products of principal PNB AMC and UTI AMC and earned brokerage to the tune of Rs.176Lacs during 2009-10. The earnings from this rose to Rs.140Lacs in 2009-10 as against rs.102Lacs in 2008-09.

Gold coin business – Under the gold coin scheme, the bank is presently selling Gold coins of 2gms, 5gms, 8gms, 10gms, 20gms through our branches. Bank’s earnings from sale of gold coins in 2009-10 stood at rs.138Lacs as against Rs.157Lacs last year.

Depository Services – Presently bank is having a client base of 57,800 demat account. The bank earned an income of Rs.67lacs in 2009-10 as against Rs.97lacs in 2008-09 due to subdued global sentiment.

Online Trading facility – Presently, the bank has a client base of 13,050 online trading accounts. Bank’s earning registered a significant increase to Rs.21lacs in 2009-10 as against Rs.8lacs in 2008-09.

Insurance business – Under “Referral Arrangement” in case of insurance Tie-up for Non-Life Insurance business with M/s Oriental Insurance Co. Ltd. (OICL). Similarly, under “Referral Arrangement” Tie-up with LIC of India in respect of life- Insurance, the premium collections amounted to Rs.38.52crore from 10,433 policies referred from leads generated by the bank which earned the bank revenue of Rs.1.74crore.

Credit Card Venture – Corporate/Individual over 48000 Gold and Classic Cards issued since February, 2009.

b) Departments of the Company

Credit

Administration

Division

Human Resource Treasury

Department Punjab Division National

Bank

International Risk Management

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Banking Division Department

Major Departments of Punjab National Bank (HO)

Brief introduction of Departments

i) Credit Administration Department - Credit administration Division(CAD) is operational wing of the bank for sanction of credit proposals & monitoring thereof. All credit proposals falling beyond the power of field functionaries are appraised/sanctioned at CAD (O), head Office.

Work Profile- Appraisal and Sanction of Credit proposals

Appraisal and sanction of credit proposals falling under HO power, viz. GM (HO), ED, CMD,MC and Board, received from ZONES/LCBs.

Review/renewal including enhancement in all HO sanction accounts. Overall administration and monitoring of the large corporate branches. To consider amendment in the terms of sanction, ie. Rate of interest (ROI), repayment,

concessions/exemptions, etc. Convening of new business group(NBG) meetings to consider fresh credit proposals. Conduct of credit committee meetings. Online tracking of proposals in pipeline for faster decision making.

ii) Human Resource Division – The banking industry being a service industry, the human Resource constitutes its most precious resource. With the fast changing economic scenario, technological advancement and increase in competition in the market, the success of any bank would depend upon the ability and capacity to leverage its human talent, potential and capabilities to achieve the greater efficiency increase in its market share as well as its profitability. This calls for attracting talented people, nurturing and developing them, providing them necessary space for their individual growth, looking after their well being, creating a facilitating environment, developing an organizational culture that removes

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impediments and foster in them the feeling of pride and belongingness to the organization, enabling them to align their personal goals with the goals of the organization. In this scenario, the role of Human Resource Development Division(HRDD) of the bank is thus to find, attract, engage, upgrade skills, motivate, retain, grow the scarce talent and to increase their efficiency level to enable them to deliver as per the bank’s Vision and Mission through series of HR interventions.

iii) International Banking Division – International trade has assumed importance in the recent years with encouraging performance of the country in the area of exports/imports and growth in Indian economy. Banks play a vital role in facilitating international trade by way of exports and imports. Foreign trade business is important for banks, in view of the fact that it is a good source of generating non interest income. International banking division(IBD) having adequate infrastructure is playing a major role in handling foreign exchange business particularly in exports, imports, remittances, travel related business and Non- Resident Accounts.

iv) Risk Management Division – Bank is exposed to various risks namely credit, market

and operational risk. Risk Management Division (RMD) is undertaking the functions related to these risks as well as integration of all the risks. The RMD consists of the following sections:

Credit Policy Systems and Models Industry Desks Industry Analysis Group Mid Office ALM Cell Operational Risk Management Department Integrated Risk Management Department.

v) Treasury Division – Treasury is an important at Head Office as its management and trading provides a source of income to the bank. This function in recent times has become higly specialised and the Division is equipped with best resources for optimizing the treasury portfolio and augmenting income for the bank.

Work Profile – Laying down investment strategy and taking day tto day investment decisions Executing investment decisions Settlement Accounting

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Hedging of balance sheet Foreign exchange(trading and merchant cover) Precious metal (trading and sale on consignment basis.

1.4 Objective of the Study

The main objective of the study is to study in depth the sanctioning and analysis of the term loan, working capital demand loan and their appraisal by PUNJAB NATIONAL BANK for corporate.

This includes the following:

To study in-depth the process of project appraisal for term loan and working capital demand loan sanctioning by Punjab National Bank for corporate.

To assess the credit rating of borrower company. Judge whether the project is viable or not, i.e. whether it can generate adequate

surplus for servicing its debts within a reasonable period of time and still left with some funds for future development. This involves taking an overall view to analyze the strengths and weaknesses of the project.

II) Literature Review

Term loans are usually granted to finance capital expenditure, for acquisition of land, building and plant and machinery, required for setting up new industrial undertaking or expansion/diversification of an existing one and also for acquisition of movable fixed asset. Term loans are given for modernisation, renovation, to improve the product quality or increase the productivity and profitability.

Term loans are normally granted for periods varying from 3 to 7 years. The exact period for which a loan is sanctioned depends on the circumstances of the case.

The basic difference between short-term facilities and term loans is that the former are granted to meet the working capital gap and are intended to be liquidated by realisation of asset, whereas the latter are given for the acquisition of fixed assets and have to be liquidated from the surplus cash generated out of earnings.

Working capital is defined as the total amount of funds required for day to day operations of a business unit. It is often classified as gross working capital & net working capital. Gross

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working capital refers to the fund required for financing total current assets of a business unit. Net Working Capital (NWC) , on the other hand , is the difference between the current assets and current liabilities ( including bank borrowing) which is nothing but surplus of long term sources over long term uses. As such it is known as the liquid surplus available in a unit which can be either negative. A positive NWC is always desirable because of the factthat it provides not only margin for the working capital requirement but also improves the ability of borrower to meet its short term liabilities.

It is very important for a company to manage its working capital carefully. This is particularly true where there is a substantial time lag between making the product and receiving the money for it. A short working capital cycle suggests a business has good cash flow.

Every business unithas an Operating cycle which indicates that a unit procures raw Material(RM) from its funds, converts the RM into “ Stock in Process” (SIP) which is again converted into “ Finished Goods” (FG). FG can be sold in cash and thus transforms into fund. Alternative FG is converted into receivables, when sold on credit and on realization threof gets converted into ‘funds’.

This cycle continues in order to keep the Operating Cycle going on, certain level of current assets are always required, the total of which gives the amount of total working capital required. Thus total working capital can be obtained by assessing the level of the various components of current assets in terms of time and value.

III) Term Loan Appraisal

3.1 Meaning of Term Loan

Term loans are usually granted to finance capital expenditure, for acquisition of land, building and plant and machinery, required for setting up new industrial undertaking or expansion/diversification of an existing one and also for acquisition of movable fixed asset. Term loans are given for modernisation, renovation, to improve the product quality or increase the productivity and profitability.

Term loans are normally granted for periods varying from 3 to 7 years. The exact period for which a loan is sanctioned depends on the circumstances of the case.

The basic difference between short-term facilities and term loans is that the former are granted to meet the working capital gap and are intended to be liquidated by realisation of asset, whereas the latter are given for the acquisition of fixed assets and have to be liquidated from the surplus cash generated out of earnings.

3.2 Term Loan Sanction Procedure

procedure associated with a term loan sanction involves the following steps:

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Submission of loan application : The borrower submits an application form which seeks comprehensive information about the project such as:(a) Promoters’ background(b) Particulars of industrial concern (c) Cost of project(d) Means of financing(e) Marketing and selling arrangements(f) Economic considerations

Initial processing of loan application : The loan application is reviewed to ascertain whether it is complete for processing, if it is incomplete then it is sent back to the borrower for resubmission with all relevant information.

Appraisal of the proposed project : The detailed appraisal of the project covers the marketing, technical, managerial, and economic aspects.

Issue of letter of sanction: If the project is accepted, a financial letter of sanction is approved to the borrower.

Acceptance of terms and conditions by the borrowing unit: On receiving the letter of sanction the borrowing unit convenes its board meeting at which the terms and conditions associated with the letter of sanction are accepted and appropriate resolution is passed to the effect.

Execution of loan Agreement: After receiving the letter of acceptance from the borrowers. The FI sends the draft of the agreement to the borrower to be executed by the authorized person

Creation of Security: The term loans and the DPG assistance provided by the financial institutions are secured through the first mortgage, by way of deposit of title deeds, of immovable properties and hypothecation of movable properties.

Disbursement of loan: Periodically, the borrower is required to submit the information on the physical progress of the projects, financial status of the projects, arrangements made for financing the projects, contribution made by the promoters, projected fund flow statement, compliance with various statutory requirements and fulfillment of disbursement conditions.

Monitoring : Monitoring of the project is done at the implementation stage as well at the operational stage.

3.3 Pre-Sanction Inspection

Satisfying himself regarding the worth of the proposal for term loan, the incumbent should inspect the factory/place of business, to check the authenticity of the information supplied.

The assets of the concern which are proposed to be charged should be verified physically and the title of the borrower should also be examined. Following information regarding the borrower should be collected:

Purpose of loan Background of borrower Operation in current or any other account(if any), maintained by the party. Products to be manufactured to deal in. Position of availability of various inputs, like, raw material to be used, stored to be consumed,

labour charges, power, fuel, etc. Estimated turnover and whether achievable taking into account competition, buyer’s

requirement, place of selling, production and industry outlook. Amount of total current assets required to be maintained for achieving the given level of

sales. Financial standing in terms of own contribution of partners, directors, promoter etc. Level of liquidity reflected by current ratio and net working capital as worked at by doing

ratio analysis in respect of old units and projections for the new ones.

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Whether facilities asked for are in line with the estimated sales and estimated amount of current assets.

Collateral security offered and its value.

3.4 Follow up

A well-designed follow up of term loan is as important as the pre-sanction financial appraisal. It is important to keep a close watch on the progress of the project during the tenure of loan. The following objectives should be kept in mind, for a systematic follow up and supervision of term loan:

a) Whether the end-use of funds is in accordance with the sanction,

b) Whether the construction of building, installation of plant and machinery and commencement of commercial production have proceeded as per schedule,

c) Whether the sales, profits and generation of funds are in line with the projections furnished to the bank earlier, by the borrower while seeking the loan, and repayment schedule is adhered to etc.

The following procedure should be adopted to ensure that a term loan is properly followed up:

a) The borrower should be asked to furnish a quarterly statement on utilisation of term loans.

b) The incumbent should carry out inspection of the borrower’s factory every quarter and submit his report to the Regional manager/Zonal Office/Head Office.

IV) Project Appraisal

4.1 Term Loan Appraisal

Assessment of earning potentials and generation of cash surpluses is the vital ingredient in appraisal of term loans. The unit should make enough surplus earnings after meeting all the expenses, taxes and other necessary provisions and the same should be adequate for servicing the loan and interest thereon within a reasonable period of time. The appraisal of term loans broadly involves an analytical assessment of the following:

i. Purpose, cost of project and how it is to be tied upii. Future trends of production and sales

iii. Estimates of costs, expenses, earning and profitabilityiv. Cash flow statements during the period of loan

4.2 Procedure of Term Loan Appraisal

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Proposal Detailed Project Report

Banned items Checklist from

RBI & Bank

Exposure Should For individual company

not exceed prescribed

ceiling Of Bank For Group

If Decline

Industry Rating Unfavourable Proposal

If

Favourable

Cost of project

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Means of financing Ratio of Debt to equity

In the financing structure

Study of If Refer to

Techno – Economic Desired TEV Cell

Viability

If

Not Desired

Calculation of Monitoring of

BEP, IRR, DSCR Repayment Position

(Sensitivity analysis) of Borrower

Financial Closure Multiple Banking

(Tying – up of Funds Sole Banking

By Banks & Financial Consortium

Institutions) Syndication

Documentation

And

Disbursement of Loans

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Post Sanction QMS

And Follow-up

By Banks PMS

While appraising proposal for term loan, the following four fundamentals should be carefully studied and analyzed:

i. Technical feasibility of the projectii. Economic viability of the project

iii. Financial viability of the projectiv. Managerial competence

i) Technical Feasibility –

This is an attempt to determine how well the technical requirements of the project can be met. This comprises consideration of availability of infrastructural facilities, raw materials, skilled and semi-skilled labour and other utilities on the one hand, and the technology required for the manufacturing process on the other hand. This should also cover as to whether the product mix of specified quantity and quality as projected can be manufactured and whether the projections are realistic or achievable. Assessment should be made with an eye on productivity which depends on the profitability of the unit. In technical appraisal, following aspects are generally looked into:

a) Location and Siteb) Raw Materialc) Plant and Machinery, Plant Capacity and Manufacturing Processd) Lande) Buildingf) Technology & processg) Size of the planth) Power Supplyi) Water Supplyj) Labour supplyk) Implementation Schedule

ii) Economic Viability – This has bearing on the earning capacity of the project and earnings are dependent on sales. Therefore, the borrower’s projection of sales should be assessed keeping in view the following factors:

a) Demand and Supply position of the product and its substitutes;

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b) Proposed selling price vis-a-vis prices of the competing products;c) Quality of the product as against the quality of competing products

iii) Financial Aspect - By undertaking technical appraisal, a credit analyst has a fair idea whether the project passes the test of feasibility in respect of technical, technological, economic, market and demand-supply aspects in a long term context. Next step is to examine the financial feasibility aspects of the project. This seeks to determine:

a) Whether cost of project and means of finance are realistic;b) Whether project is capable of profitable operations;c) Whether project is capable of generating adequate surpluses for servicing the debt and

interest and can take care of future organizational development;d) Whether estimates of cost of production fully cover all items of expenditure;e) Whether sources of finance are adequate;f) Whether there is a reasonable basis for competitive profitable operations.

iv) Managerial Competence –

The performance of an industrial concern, under competition, measures the quality of its management. Therefore, for existing concerns, the past performance in terms of ROI should help in relative assessment of its managerial competence. It should be ascertained that the promoters had the desired background, experience and knowledge to successfully implement the project.

The various proponents in management appraisal are:

i) Financial Statement AnalysisThe ratios about profits, liquidity etc. helps the banker in arriving at conclusion about the management’s ability and favorability. Another important type of data which should be secured is the dealings of the proponent. Generally, good credit record indicates a proponent’s discipline in servicing an account which may be a critical issue in establishing management reliability.

ii) Proponent’s performance versus industry performanceMore significance is given to the financial ratios if compared to various companies or enterprises in the same industry as the proponent. Industry average ratios should be secured and a judgment should be made on whether the proponent is an industry “leader” or a “tail-ender” in the various aspects of management.

iii) Other aspectsThe proponent’s technical & marketing competence, financial management competence, its philosophy and attitude, effectiveness of the proponent’s management information system etc. are also taken into account.

4.2 Study on Term Loan Appraisal

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The data relevant for study of above aspects should be collected from the borrower. The main data required for appraisal would be available in application. These data comprise the following:

i. Cost of project and means of financing;ii. Profitability projections covering revenue, cost of production/expenditure etc.;

iii. Fund flow and Cash flow statements;iv. Projected balance sheets.

1) Cost of Project and Means of financing –

The major cost components of any project are land and building including transfer, registration and development charges as also plant and machinery. It also involves consultancy and know-how expenses which are payable to foreign collaborators or consultants who are imparting the technical know-how.Preliminary expenses, such as, cost of incorporation of the Company, its registration, preparation of feasibility report, market surveys, pre-operative expenses like salary, travelling, start up expenses, mortgage expenses incurred before commencement of commercial production also form part of cost of project.Provisions for contingencies to meet any unforeseen expenses, such as, price escalation or any other expense which have been inadvertently omitted like margin for working capital requirements required to complete the production cycle, interest during construction period, etc. are also part of capital cost of project. It is to be ensured while appraising the project that cost and various estimates given are realistic and there is no under/over estimation.

Besides Bank’s loan, the project cost is normally financed by bringing capital by the promoters and shareholders in the form of equity, debentures, unsecured long term loans and deposits raised from friends and relatives which are not repayable till repayment of Bank's loan. Resources are raised for financing project by raising term loans from Institutions/Banks which are repayable over a period of time, deferred term credits secured from suppliers of machinery which are repayable in instalments over a period of time. It is to be ascertained that requirement of finance has been properly tied-up for unhindered implementation of a project. The financing structure accepted must be in consonance with generally accepted levels along with adequate Promoters' stake. The resourcefulness, willingness and capacity of promoter to contribute the same have also to be investigated. 2) Profitability Projections –

The profitability statement is prepared after considering the net sales figure and details of direct costs/expenses relating to raw material, wages, power, fuel, consumable stores/spares and other manufacturing expenses to arrive at a figure of gross profit. Thereafter, all other expenses like salaries, office expenses, packing, selling/distribution, interest, depreciation and any other overhead expenses and taxes are taken into account to arrive at the figure of net profit. The projections of profit/loss are prepared for a period covering the repayment of term loans. While preparing profitability projections, the past trends of performance in an industry and other environmental factors influencing the cost and revenue items should also be considered objectively. A unit may be considered as financially viable, progressive and

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efficient if it is able to earn enough profits not only to service its debts timely but also for future development/growth.

3) Break-even Analysis – Analysis of break-even point of a business enterprise would help in knowing the level of output and sales at which the business enterprise just breaks even i.e. there is neither profit nor loss. A business earns profit if it operates at a level higher than the break-even level or break-even point. If, on the other hand, production is below this level, the business would incur loss. The break-even point in an algebraic equation can be put as under:

Break-even point = Total Fixed Cost .

(Volume or Units) (Sales price _ (Variable Cost

per unit) per unit)

Break-even point = Total Fixed Cost x Sales .

(Sales in rupees) (Sales) - (Variable Costs)

The fixed costs include all those costs which tend to remain the same upto a certain level of production while variable costs are those costs which tend to change in proportion with the volume of production. As regards unit sales price, it is generally the same for all levels of output.

The break-even analysis can help in making vital decisions relating to fixation of selling price, make or buy decision, maximising production of the item giving higher contribution etc. Further, the break-even analysis can help in understanding the impact of important cost factors, such as, power, raw material, labour, etc. and optimising product-mix to improve project profitability.

4) Fund Flow Statement - A fund-flow statement is often described as a ‘Statement of Movement of Funds’ or ‘where got: where gone statement’. It is derived by comparing the successive balance sheets on two specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications (uses) of funds to ultimately give the position of net funds available with the business for repayment of the loans.

5) Balance Sheet Projections - The financial appraisal also includes study of projected balance sheet which gives the position of assets and liabilities of a unit at a particular

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future date. In other words, the statement helps to analyse as to what an enterprise owns and what it owes at a particular point of time. An appraisal of the projected balance sheet data of the unit would be concerned with whether the projections are realistic looking to various aspects relating to the same industry.

6) Financial Ratios - While analysing the financial aspects of project, it would be advisable to analyse the important financial ratios over a period of time as it may tell us a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under:

i) Debt – Equity Ratio = Debt (Term Liabilities). Equity (Share capital, free reserves)

The level of DER varies from case to case depending upon the nature of project, promoters’ strength, availability of collateral securities etc. apart from the type of industry. In capital intensive industries involving large capital investment, DER is normally higher as compared to the other industries.

Net Profit (After Taxes) +

Annual interest on long term debt +

ii) Debt – Service Coverage Ratio = Depreciation

Annual Interest on long-term debt +

Annual Instalment

The ratio of 1.5 to 2 is considered reasonable. A very high ratio may indicate the need for lower moratorium period/repayment of loan in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service its debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1.5.

iii) TNW/TOL = Tangible Net Worth Total outside Liability

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This ratio gives a view of borrower's capital structure. If the ratio shows a rising trend, it indicates that the borrower is relying more on his own funds and less on outside funds and vice versa.

iv) Profit – Sales Ratio = Operating Profit(Before Tax and excluding other income) Sales

This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure.

v) Debt to Fixed Assets Ratio = Long Term Debt Fixed Assets

This ratio should be less than one in most industries because a portion of fixed assets must be financed with equity. A ratio of less than one offers greater cushion for the bank. A complement to Debt to Fixed Asset Ratio is to compare equity to fixed assets.

vi) Current Ratio = Current Assets Current Liabilities

This ratio is indicative of short term financial position of a business enterprise. It provides margin as well as it is measure of the business enterprise to pay-off the current liabilities as they mature and its capacity to withstand sudden reverses by the strength of its liquid position.

vii) Internal Rate of Return (IRR) - IRR is that rate of discount which makes the discounted value of the net cash flow from a project just equal to the amount which has to be invested to obtain that net cash flow. In other words, IRR is that rate of discount which gives the project an NPV equal to zero and cost benefit ratio equal to one.

7) Sensitivity Analysis –

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The sensitivity analysis is carried out by the bank in order to evaluate capacity of the project to absorb shocks due to adverse movement in prices/ some other adverse developments and sustain financial viability. The analysis is carried out to capture the decline in revenue of the project assuming adverse change in values of various parameters/ factors. Sensitivity Analysis is a systematic approach to reduce the uncertainties caused by such assumptions made.The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or sensitive elements are identified which are assigned different values and the values assigned are both optimistic and pessimistic such as increasing or reducing the sale price/sale volume, increasing or reducing the cost of inputs etc. and then the project viability is ascertained. While analyzing the projects, the values of the key parameters and the underlying assumptions are critically examined for financial viability of the project and are also, subjected to sensitivity analysis which captures the effect of change in values of key parameters on the profitability of the project.

8) Management and Organisation – Appraisal of project would not be complete till it throws enough light on the person(s) behind the project i.e. management and organisation of the unit. It is seen that some projects may fail not because these are not viable but because of the ineffectiveness of the management and the organisation in controlling various functions like production, marketing, finance, personnel, etc. The appraisal report should highlight the strengths and weaknesses of the management by commenting on the background, qualifications, experience, capability of the promoter(s), key management personnel, effectiveness of the internal control systems, relation with labour, working conditions, wage structure, and the other assigned essential functions.

General Guidelines: Appraisal report should critically analyze and comment on various important functional areas like technical, marketing, economic, financial, management etc. and comment on their strengths and weaknesses, if any. The report should answer objectively various questions which may arise in the mind like what, why, where, when, how & who relating to all the above functional areas & should be conclusive as far as possible. The assumptions should be realistic. The report should reflect three cardinal rules in its content: A.B.C which stands for Accuracy, Brevity & Clarity; so that it proves useful and helpful in taking decisions as to whether the project is technically feasible and economically viable and in this case it is viable.

V) Working Capital

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5.1) Fundamentals of working capital

The term working capital refers to the current assets holding of an enterprise. This is also sometimes called the Gross Working Capital. For a manufacturing enterprise, therefore, the average levels of holding of raw material, goods in process, finished goods, receivable, cash and other current assets together constitute the working capital.

Fixed Capital and Working Capital

The funds employed in a business enterprise can, therefore, be broadly classified into two components i.e. Fixed capital and working capital. Fixed capital is invested in fixed assets (Capital Assets) which enable an enterprise manufacture goods for sale and earning profits. On the other hand, working capital is employed in purchasing those items, which are transformed into saleable goods by the production process.

. Thus, cash converts into raw material, which in turn, converts into goods in process and finally into finished goods. The finished goods can be sold in market(in cash or credit terms)and in the process, is converted back to cash again. All these forms of current assets constitute working capital.

On the other hand, assets representing fixed capital i.e. fixed assets are put to sale only when the assets have lived their economic lives, or other assets of higher productive efficiency is required. The cash conversion time in respect of fixed assets may be very high, usually years.

The dynamics of circulating capital vis-à-vis infusion of funds, withdrawal of funds (by way of dividends etc.) and the relatively stationary character of fixed capital is summed up in the diagram below:

Circulating

Fixed capital

Capital

The fixed capital forms the core of the total funds invested in business. The circulating capital continuously moves around the nucleus, i.e. the core capital. The diagram indicates that there is a continuous churning of the circulating capital.

5.2) Operating Cycle Concept of Working Capital

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The operating cycle concept of working capital envisages measurement of average time taken by an enterprise in manufacturing the goods and selling them for cash so that the funds can be deployed for starting another batch of production. In other words, the operating cycle commences when cash is initially injected into the system for purchase of the basic raw material components required for production. The system completes one cycle when cash is realized out of the sale proceeds of finished goods from the receivables/debtors.

Thus, every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added, after a lapse of a specific period of time. This length of time is popularly known as the Operating Cycle or the Working Capital Cycle. The cycle may be diagrammatically represented in the following manner:

CASH

RECEIVABLES RAW MATERIAL

FINISHED GOODS GOOD IN PROCESS

The Operating Cycle Concept

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5.3) Working Capital Sanction Procedure

Proposal

Check for Checklist from

Banned Items RBI & Bank

Exposure should for group

Not exceed prescribed

Ceiling of Bank for Individual

If

Industry rating unfavourable Decline

Proposal

If Favourable

Analysis of

Balance Sheet

Preparation of CMA Grouping of Items

Data Forms Ratio Analysis

Sensitivity Analysis

Analysis of

Projected Sales

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Capacity Utilisation

Orders - in – Hand Tie – up

Arrangement

Analysis of Cost

(RM, Power, etc.)

To Check

Assessment of WC Acceptance level of

Requirement C.A. & C.L

Calculation of

Months’ Consumption of

(RM, Cost of Production,

Cost of Sales)

Computation of Traditional Method

MPBF

Turnover Method

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5.4) Assessment of working capital requirement

Working capital loans are provided for meeting day-to-day expenses like, purchase of raw materials, consumables store/spares, fuel and other essential needs. The bank has evolved terminologies for various types of facilities which they sanction to industries for meeting their requirements of working capital. The sanction of a particular type of facility would depend upon the purpose, i.e. whether it is required for purchase of raw material and other inputs or for marketing the goods on credit etc. Working capital lending facilities can be broadly classified as, Fund-Based Working Capital facility and Non-Fund Based Working Capital facility.

5.3.1) Fund-Based Working Capital Facilities and their Assessment

a) Cash Credit Facility

The Cash Credit facility is an important facility which is generally required by most of the firms. Under this arrangement the drawings are allowed under security of stocks/merchandise and a borrower can operate this account within the limit fixed as per the terms of sanction. He can deposit the money whenever he is in a position to do so, to save the interest burden.

This facility is ordinarily allowed against pledge, or hypothecation of goods depending upon various factors – like, type of industry, nature of goods offered as security, availability of go down space, cost of material handling and creditworthiness of the borrower. Cash credit facility can be disbursed under pledge and hypothecation.

b) Packing Credit

Pre-shipment/Packing credit is an advance given to an exporter who holds Importer Exporter Code No. (IEC Code) assigned to him by the Directorate General of Foreign Trade (DGFT), for financing the purchase, processing, manufacturing or packing of goods prior to shipment/ working capital expenses towards rendering of services, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or Letter of Credit with the bank has been waived.

Forms for Assessment of Working capital Requirements

Form no. Brief DescriptionForm I Particulars of existing/proposed limitsForm II Operating StatementForm III Analysis of Balance Sheet

Form IVComparative statement of Current Assets and Current Liabilities.

Form V Computation of MPBF for Working CapitalForm VI Fund Flow Statement

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Assessment of Facilities

a) Measurement of Operating cycle concept - The operating cycle is measured in terms of days of average inventory held for every major category of working capital components. The holding ratios play a very important role at this stages. The aggregate of all these holding periods represents the length of the operating cycle. The following diagram makes the point clear.

RM holding time Processing time FG holding time Rec. holding time

RM purchased Processing starts Processing ends F G sold Rec. realised

Manufacturing activity, consist of a sequence of such operating cycles. The time that lapses between cash outlay and cash realisation by sale of finished goods & realisation of sundry debtors is known as length of operating cycle.

Operating cycle consist of:

a) Time taken to acquire raw Material and average period for which they are in store. A

b) Conversion process time. Bc) Average period for which finished goods are in store. Cd) Average collection period of receivables. D

The length of Operating cycle can be calculated as follows:

If A = 60 days, B = 10 days, C = 20 days, D = 30 days.

The operating cycle is 120 days( A+B+C+D) or 4 months. This means that there are (360/120) 3 cycles of operation in a year.

Let us consider a case where, length of operating cycle is 4 months (i.e. 3 cycles).

Sales = 10lacs p.a.

Operating expenses = 7,20,000 p.a.

Therefore, Working Capital Requirement = 2,40,000.

cashcash

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b) Simplified Turnover method ( NAYAK Committee) –

Under this method, bank credit for working capital purposes for borrowers requiring fund-based limits up to Rs.5crore for Micro, Small & Medium Enterprises borrowers and Rs.2crore in case of other borrowers, may be assessed at minimum of 25% of the projected annual turnover of which 1/5th should be provided by the borrower (i.e. minimum margin of 5% of the annual turnover to be provided by the borrower) and the balance 4/5th (i.e. 20% of the annual turnover) can be extended by way of working capital finance.

Since in terms of Nayak Committee norms the banks are required to have minimum 20% of turnover of the business enterprises as the bank finance and 5% is to be obtained as margin, the current ratio comes to 1.25:1.Therefore while considering working capital limits to Micro & Small Enterprises where working capital requirement is computed based on simplified turnover method (Nayak Committee’s norms), the maintenance of current ratio at the minimum level of 1.33:1 may not be insisted upon.

c) Traditional Method( Tandon Committee) – The group (headed by Sh. Prakash Tandon) was appointed in July 1974 which was to frame guidelines for follow-up of bank credit and submitted its final report during 1975 and gave following recommendations, applicable to borrowers availing fund based working capital limits of Rs. 10 lac or more: 

Approach to lending The committee suggested three methods of lending out of which RBI accepted two methods for implementation. According to First Method, the borrower can be allowed maximum bank finance upto 75% of the working capital gap (working capital gap denotes difference between total current assets required and amount of finance available in the shape of current liabilities other than short term bank borrowings). The balance 25% to be brought by the borrower as surplus of long term funds over the long term outlay. As per Second Method of lending, the contribution of the borrower has to be 25% of the total current assets build-up instead of working capital gap. (Method of lending as per Vaz Committee will now apply to borrowers availing working capital fund based limits of Rs. 100 lac or more only).

d) Cash Budget method –

In case of tea, sugar, construction companies, film industries and service sector requirement of finance may be at the peak during certain months while the sale proceeds may be realised throughout the year to repay the outstanding in the account. Therefore, credit limits are fixed on the basis of projected monthly cash budgets to be received before beginning of the season.

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Branches should follow the procedure/guidelines issued from time to time through various Circulars for financing tea, sugar, construction companies, film industries and service sector.

5.3.2) Non Fund-Based Working Capital Facilities and their Assessment

1) Letter of Credit - “Any agreement whereby a bank (issuing bank) acting at the request and on the instruction of a customer(the applicant of credit) or on its own behalf, is to make a payment to (beneficiary) or authorises another bank to effect such payment or authorises another bank to negotiate against stipulated document, with compilation of terms and conditions”.

a) Parties to L/C

Applicant – An Applicant is the buyer/importer of goods(generally borrower of the issuing bank). The applicant has to make payment if documents as per L/C are delivered, whether the goods are as per contract between the buyer and beneficiary or not.

Issuing Bank – Issuing bank is the Importer’s bank or buyer’s bank who lends its name or credit. It is liable for payment once the documents under L/C are secured by it from nominated(negotiating ) bank, irrespective of the fact whether it is able to recover the payment from applicant or not.

Advising Bank – It is the Issuing bank’s branch(or correspondent in exporter’s country) to whom the L/C is sent for onward transmission to the seller or beneficiary, after authentication of genuineness of credit where it is unable to verify the authenticity, it can seek instructions from the opening bank or can advice the L/C to beneficiary, without any liabilities on its part. This bank has no obligation to negotiate the documents.

Beneficiary – It is the party to whom the credit is addressed i.e. seller or supplier or exporter. It gets payment against documents as per L/C from Nominated Bank within validity period for negotiation, maximum 21 days from date of shipment.

Negotiating Bank – It is the bank to whom the beneficiary presents the documents for negotiation. It claims payment from the reimbursing bank or opening bank and gets 5 banking days to check documents.

Reimbursing bank – It is the third bank which repays, settles or funds the negotiating bank at the request of its principle, the issuing bank.

Confirming Bank – The bank adding confirmation to the credit, which undertakes the responsibility of payment by the issuing bank and on its failure to pay. The confirmation is added on request of the opening bank.

b) Mechanism of L/C –

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The transaction under a Letter of Credit agreement progresses through the following stages in sequence:

i) Issuing of Credit – The seller and buyer enter into sales contract in which they agree that payment shall be made by issuing an L/C, whether against payment or against acceptance.

Buyer (Applicant of L/C) applies to a bank at his place of business (Issuing Bank) for the opening of L/C in favour of the seller (known as beneficiary). In his application, buyer specifies the terms & conditions under which L/C shall be issued.

Issuing Bank issues L/C, thus undertaking the definite obligation of effecting payment to the beneficiary upon presentation of documents, strictly compiling with the terms & conditions of credit.

The Issuing bank may invite another bank into transaction, preferably with a presence in the country of seller. This second bank (called corresponding bank) may act as an advising bank, if it merely informs seller of L/C without any obligation on its part. It may also act as a confirming bank, if it confirms the L/C issued by the issuing bank and thus undertakes primary obligation to effect payment to beneficiary. It may also be a Nominated Bank, if L/C calls for.

ii) Negotiation of Documents – The following steps are involved in the negotiation of documents under L/C:

As soon as seller receives the L/C, he is in a position to effect shipment – provided the terms & conditions of credit meet the terms of underlying sales contract.

The seller then presents the documents stipulated under the credit to the correspondent(negotiating) bank, which is authorized to take up the documents. The correspondent (negotiating) bank examines the documents whether they strictly comply with the T & C of credit. If the documents need the requirement, the correspondent bank makes payment to seller in the manner stipulated under credit.

The correspondent(negotiating) bank then, sends the documents to the issuing bank, which examines the documents and reimburses the correspondent bank that has effected payment to seller, if it(Issuing Bank) finds that the documents comply with the credit.

iii) Settlement of Bills drawn under L/C – the following steps are involved in the settlement of bills drawn under L/C:

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The next step, the Issuing Bank sends the documents to the buyer(applicant) and obtains reimbursement in the manner agreed when he(applicant) opened the L/C (usually by debit to applicant’s account).

On receiving the documents, the buyer now, is in a position to take over the goods.

Procedure for issuing of L/C

Application for opening L/C

Specifies T&C of L/C

Buyer (Applicant of L/C) Issuing Bank(Opening bank)

(2)

Entering into inviting other bank

Contract (1) (3) in transaction

(4)

Advising/confirming L/C

To Seller

Seller (Beneficiary) Correspondent Bank, a-k-a

Advising Bank If it merely informs the seller

of L/C, without any

obligation on its part.

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Confirming Bank If it confirms the L/C issued

And undertakes primary

Obligation to effect payment.

Procedure for Negotiation of Documents and Receiving Payment

(10)

Sends Documents

Buyer (Applicant of L/C) Issuing / Opening bank

(12) Takes over goods (11)

Obtains Reimbursement

Shipment (5) Sends Documents for (8) (9) Reimburses

Of goods further examination payment

(6)

Presentation of Documents

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Seller (Beneficiary) Correspondent bank

(Examines the Documents)

Makes payment as per T&C

(7)

c) Types of L/C - Letter of credit may be divided in two broad categories as under:

Revocable letter of credit. This may be amended or cancelled without prior warning or notification to the beneficiary. Such letter of credit will not offer any protection and should not be accepted as beneficiary of credit.

Irrevocable letter of credit. This cannot be amended or cancelled without the agreement of all parties thereto. This type of letter of credit is mainly in use and offers complete protection to the seller against subsequent development against his interest.

Letter of credit may provide drawing of documents on following two bases:

Delivery against payment (DP) – Sight: In this case documents are delivered against payment. The beneficiary is paid as soon as the paying bank or borrower’s bank has determined that all necessary documents are in order.

Delivery against acceptance (DA) – Usance (time): In this case documents are delivered against acceptance. The borrower pays after certain due date of payment specified.

d) Appraisal of L/C - While sanctioning L/C for purchase of raw material , the banker has to collect the needed particulars and estimate the following:

a) Value of raw material projected to be consumed in the ensuing year. Ab) Value of RM to be purchased on credit out of the total requirement. B c) Time that will be taken for advising establishment of L/C, to the beneficiary. Cd) Time for shipment and consignment to reach the place of customer on whose

behalf L/C is to be opened. De) Credit period(usance period) agreed between the beneficiary & the customer. Ef) Credit period projected as available by the borrower in the CMA form

reckoned for calculation of MPBF while sanctioning funded limits. F

Once the above information is available, banker can assess the letter of credit limit requirements of customer.

As can be understood by the following example:

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Value of raw material consumed projected 3600lacs Value of raw material to be bought on credit 2400lacs Time for advising L/C 10 days Shipment time 20 days Credit period agreed upon between the seller & the buyer OR

the credit period projected, as available in CMA form for calculation of MPBF, (whichever is less) 30 days

Therefore, the time that will be taken for one cycle of operation of L/C will be (10+20+30) 60 days.

Assuming 360 days in a year, there could be 6 rotation / cycle in a year. If RM consumed to be bought on credit is 2400lacs in a year, the limit of L/C per rotation / cycle will work out to be : 2400/6 = 400lacs.

The L/C required, would be 400lacs. A banker should take care to ensure that the stock procured through L/C are taken under hypothecation charge in his favour and they are kept separate and are not included in stocks declared as security for fund based limit granted to customer. If the L/C are sanctioned for purchase of capital goods, same shall be taken under hypothecation charge.

2) Bank Guarantee - “a contract to perform the promise or discharge the liability of a third person in case of his default.” - Indian Contract Act, 1872.

Types of bank Guarantee - Various types of bank guarantees are discussed on the basis of their nature and purpose.

i) Financial Guarantee – Financial guarantee is a certificate issued by bank regarding the financial ability/ worth of its client to meet certain financial obligation, making payments and satisfying dues. For instance, a bank guarantee issued to a government department in lieu of security deposit/earnest money means that the issuing bank assurances the beneficiary of the bank guarantee(government deposit) about financial capability of its client to pay indicated amount.

ii) Performance Guarantee - In a performance guarantee, on the other hand, the issuing bank provides guarantee to the beneficiary to make good the monetary loss in the event of non-performance or short-performance guarantee of a contract by client(applicant).

Thus, issue of a performance guarantee involves an assessment of technical competency, managerial ability or vocational experience to execute a contract successfully.

iii) Bid Bonds – Bid bonds are the bank guarantees required in lieu of earnest money that a bidder has to deposit against a tender. These bonds do not exceed 5% of value of the contract for which tender has been invited. Bid bonds are in the nature of a performance guarantee where the assessment is focused on the capability of contractor to take up a job he is bidding against.

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iv) Advance Payment Guarantee – These are issued on behalf of the customers who are in the business of execution of major export orders, implementation of turnkey projects, construction contracts etc. which entail high outlay of funds. Such service providers need funds in advance from time to time for purchase of raw material. Such advance payment also form part of contract entered into by the supplier and the buyer/user. The buyer releases the advance payment only after a bank issues an advance payment guarantee, which ensures payment of the advance amount in case latter fails to complete the contract as agreed.

v) Retention Money Guarantee – In construction contracts, it is common for the employers to retain a small portion (not exceeding 10%) of the payments to be released by them in stages. This is in order to take care of any expense or loss which the employee might have to incur in future on account of mistakes or oversight. Since such retention of payments adversely affect the cash flow of the contractor, the employee agrees to release the retention money if contractor submits a bank guarantee for an equivalent amount. The amount involved in bank guarantee is limited to the extent of amount retained by the employer. The liability under bank guarantee extinguishes when the contractor completes his job to the satisfaction of the employer. The contractor then substitutes the retention money guarantee with a maintenance guarantee for further agreed period of time.

vi) Maintenance Bond – When the contractor successfully completes his job to the satisfaction of the employer, the bank guarantees issued by bank would have served the purpose and the liability would cease to exist. But employer would still like to play safe and would ask the contractor to submit a fresh bank guarantee that would protect the former against any mistake/defect in the work which might surface latter.

vii) Deferred Payment Guarantee – Sometimes, a bank is required to issue guarantee for making payment to the supplier of machinery, supplied to bank’s client(borrower) on deferred terms, in agreed instalments with provision for changing a stipulated interest on the respective due dates in case of default in payment by the buyer. These guarantees are popularly called Deferred Payment Guarantee(DPG). In a contract of deferred payment guarantee, the bank executes a guarantee on behalf of the buyer to the seller’s banker. On the strength of such guarantee, the seller’s banker discounts the seller’s bills drawn on the buyer and pays to the seller. The buyer repays his obligation in instalments by returning those bills on the respective maturity dates.

3) Co-acceptance of bills - Bills is a commitment provided by banks on behalf of their customers to the suppliers of goods for affecting payment of the consignment. The facility

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of co-acceptance is generally extended by banks as an alternative to letter of credit facilities provided to their customers.

VI Risk Management

Risk management is the identification, assessment and prioritization of risks followed by co-ordinate and economical application of resources to minimize, monitor and control the probability or impact of unfortunate events.

The risk that a borrower might fail to meet its obligations towards the bank in accordance with the agreed terms and conditions, is the credit risk contracted during sanctioning of loan. It is the risk of default of on the part of borrower, which could be due to either inability or unwillingness to repay his debts.

Factors determining credit risk:

State of Economy Wide swing in commodity prices Trade restrictions Fluctuations in foreign exchange rates and interest rates Economic sanctions Government policies

Following procedure is followed at PNB, HO for risk rating:

The head office of the bank at Bhikaiji Cama place receives the proposals of various organizations demanding loans.

They receive a copy of the company’s financial results. The branches also send their rating after some initial screening to the head office for vetting.

These branches obtain the data from the proposal and the discussions with other banks in the consortium. They can also contact the company for further clarifications

The auditor’s report and notes to accounts serve as a useful guide. The past records of company’s transactions with the bank (if any) are also considered.

The officials at the HO study and check the financials and the subjective parameters. Then the final rating is done after making suitable amendments.

The credit risk rating tool has been developed with a view to provide a standard system for assigning a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is applicable to all large corporate borrower accounts availing total limits (fund

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based and non-fund based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore.

The Bank has robust credit risk framework and has already placed credit risk rating models on central server based system ‘PNB TRAC’, which provides a scientific method for assessing credit risk rating of a client.

This credit risk rating captures risk factors under four areas:

1. Financial evaluation (40%)

2. Business or industry evaluation (30%)

3. Management evaluation (20%)

4. Conduct of account (10%)

Financial evaluation

Under this, various parameters are taken and based on the financial data scores are assigned during the risk rating process. The financial evaluation involves past financials classified based on industry comparison and absolute comparison.

Business evaluation

It involves the evaluation of the operating efficiency of the concerned company under which various factors are considered which is extremely important for risk rating purposes. These could be raw material/ cost of production or it could be credit period availed and allowed. All these factors help in judging the efficiency in operating the business.

Management evaluationIt is done by comparing the targets set with the targets achieved by the management during the year. Subjective assessment is also done based on the factors risk like track record or sincerity of the management.

Conduct of Account EvaluationThis evaluation involves PMS rating. PMS is a macro level monitoring tool. In other words, it is a close actions oriented follow up of the health of borrower. It aims to minimize the loan losses by capturing early warning signals of deterioration and taking preventive action. It has a memory of one year and reporting frequently is linked to credit rating.

How to rate

The ratios of the company are compared with the benchmark ratios and rating is given to the company up to 2 decimal points based on its position within the benchmark values.

Procedure for evaluation at PNB is as follows:

1. Each industry has its own risk and depending on it, a suitable risk factor is chosen and industry risk is adjusted into the score of rating.

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2. These areas cover different parameters based on which the past and the future performance of the company are evaluated.

3. The combined scores of these areas are calculated.

4. Then based on the weight age assigned (given in brackets above) the overall score is calculated.

5. This overall score is used to determine the ratings as illustrated in following table:

Table 2: The rating and score matrix

Rating Category Description Score obtained Grade

AAA Minimum risk Above 80.00 AAA

AA Marginal risk Between 77.50 - 80.00 AA+

Between 72.50 – 77.50 AA

Between 70.00 – 72.50 AA-

A Modest risk Between 67.50 – 70.00 A+

Between 62.50 – 67.50 A

Between 60.00 – 62.50 A-

BB Average risk Between 57.50 – 60.00 BB+

Between 52.50 – 57.50 BB

Between 50.00 – 52.50 BB-

B Marginally acceptable

risk

Between 47.50 – 50.00 B+

Between 42.50 – 47.50 B

Between 40.00 – 42.50 B-

C High risk Between 30.00 – 40.00 C

D Caution risk Below 30.00 D

Based on the above table rating is done. Once the rating is done, the rate of interest at which the bank will be lending the money is determined. Normally, a company with higher rating is

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given loan at a lower interest as compared to company with lower ratings. This is because the risk involved with higher rated company is lower.

VII) Research Methodology

a) Descriptive Research

Involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data. It uses visual aids such as graphs and charts. It involves collecting quantitative information. To determine the impact of changes in the financial statements as a result of various financial decisions, through mapping the movement in the tool and methods used for analysis in the form of financial indicators such as ratio analysis.

b) Type of data used for analysis

Data collected for some purpose other than the problem at hand. It is the data gathered and recorded previously for purposes other than the current project. The data is usually already assembled and does not require any access to respondents or subjects.

c) Data used for Analysis

The data used in the study has been collected from the bank’s documents used for their study and the original documents of the companies’ sent for appraising loans. Other important journals and manuals of bank are used for conducting the study.

d) Research tools used

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The tools used for research are the various financial indicators such as ratio analysis, sensitivity analysis to assess the feasibility and viability of different loan proposals and taking the final decision of granting loan.

e) Techniques used for analysis of data

The data for the study has been analysed with the help of relevant schedules of tables and pictorial representation with the help of flow charts and graphs for each individual tool used for the study.

The detailed description is done in the following chapter with the help of a case study, its findings and conclusion are discussed in the following chapters.

VIII) Case Study

After taking a sneak peek into the process of project appraisal and working capital assessment, I got proposal of real companies to illustrate the learning, in the project. Due to confidentiality clause of the bank, companies’ real name has not been used in the report. There is a medium scale textile manufacturing company for assessing the working capital financing by bank and a large scale infrastructure company for project appraisal.

8.1 Infrastructure Sector Overview – Over the past four years, the Indian Economy consistently recorded growth rates in excess of 8.5% per annum resulting in rapidly increasing infrastructure spending. Total infrastructure spending is expected to increase from US$24billion in 2005 to US$47billion in 2009. Total investment requirement in the infrastructure sector over the next five years is US$ 445 billion. (FICCI)

It is estimated that the Infrastructure Sector needs to grow at a CAGR of 15% over the next five years to support the growing requirements of virtually every other sector of the Indian Economy. With the objective of stimulating and mobilizing increased private sector investments, either from domestic sources or foreign avenues, the government has offered various incentives:

1) Liberalization of FDI Regulations -

a. Barring aviation, 100% FDI under the automatic route is now permitted in all infrastructure sectors.b. FDI under the automatic route is permitted up to 49% - 100% for various services in the aviation sector.

2) Extended tax holiday periods - Under section 80-IA of the Income Tax Act, 1961, a ten year tax holiday is available to enterprises engaged in the business of

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development, operation and maintenance of infrastructure facilities, subject to compliance with the conditions prescribed therein.

3) Introduction of Public Private Partnerships (PPP) - Based on resounding global success, the government has introduced the concept of public-private partnerships in India, to combine the best practices of public and private sectors to efficiently develop and maintain infrastructure facilities. PPPs are aimed at inducing private sector participation in activities which might otherwise prove to be cost prohibitive e.g. development, operation and maintenance of toll roads.

About National Highway Authority Of India (NHAI)

The National Highways Authority of India (NHAI) (Hindi: भा�रती�य र�ष्ट्री�य र�जमा�र्ग� प्रा�धि�करण) is an autonomous agency of the Government of India, responsible for management of a network of over 60,000 km of National Highways in India. The Authority is a nodal agency of the Ministry of Road Transport and Highways.

The NHAI was created through the promulgation of the National Highways Authority of India Act, 1988. In February 1995, the Authority was formally made an autonomous body. It succeeded the erstwhile Ministry of Surface Transport.

It is responsible for the development, maintenance, management and operation of National Highways, totaling over 70,548 km (43,836 mi) in length.

About National Highways Development Project (NHDP)

The National Highways Development Project is a project to upgrade, rehabilitate and widen major highways in India to a higher standard. The project was implemented in 1998. "National Highways" account for only about 2% of the total length of roads, but carry about 40% of the total traffic across the length and breadth of the country. This project is managed by the National Highways Authority of India under the Ministry of Road, Transport and Highways. The NHAI has implemented US$ 71 billion for this project, as of 2006.

The NHAI has the mandate to implement the National Highway Development Project (NHDP). The NHDP is under implementation in different Phases.

Phase I: Approved in December 2000, at an estimated cost of INR 300 Billion, it included the Golden Quadrilateral (GQ), portions of the NS-EW Corridors, and connectivity of major ports to National Highways.

Phase II: Approved in December 2003, at an estimated cost of INR 343 Billion, it included the completion of the NS-EW corridors and another 486 km (302 mi) of highways.

Phase IIIA: This phase was approved in March 2005, at an estimated cost of INR222 Billion; it includes an upgrade to 4-lanes of 4,035 km (2,507 mi) of National Highways.

Phase IIIB: This was approved in April 2006, at an estimated cost of INR 543 Billion; it includes an upgrade to 4-lanes of 8,074 km (5,017 mi) of National Highways.

Phase V: Approved in October 2006, it includes upgrades to 6-lanes for 6,500 km (4,000 mi), of which 5,700 km (3,500 mi) is on the GQ. This phase is entirely on a DBFO basis.

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Phase VI: This phase, approved in November 2006, will develop 1,000 km (620 mi) of expressways at an estimated cost of INR 167 Billion.

Phase VII: This phase, approved in December 2007, will develop ring-roads, bypasses and flyovers to avoid traffic bottlenecks on selected stretches at a cost of INR 167 Billion.

The progress of the NHDP can be tracked from the NHAI official website, which updates maps on regular basis.

Future Plans of NHDP

The Indian Government has set ambitious plans for upgrading of the National Highways in a phased manner in the years to come. The details are as follows:

4-laning of 10,000 km (6,200 mi) (NHDP Phase- III) including 4,000 km (2,500 mi) that has been already approved. An accelerated road development program for the North Eastern region.

2-laning with paved shoulders of 20,000 km (12,000 mi) of National Highways under NHDP Phase-IV.

6-laning of GQ and some other selected stretches covering 6,500 km (4,000 mi) under NHDP Phase-V.

Development of 1,000 km (620 mi) of express ways under NHDP Phase-VI. Development of ring roads, bypasses, grade separators, service roads, etc. under

NHDP Phase-VII.

8.2 Brief overview of Infrastructure company –

ABC Private Limited is a Special Purpose Vehicle (SPV) company promoted by PQR for construction of the proposed Project on Build-Operate-Transfer (BOT) basis. ABC was incorporated on May 26, 2010 to implement the Project which entails Design, Engineering, Finance, Construction, Operation and Maintenance of a section of NH 2 road (length 179.5 km) in the states of Haryana and Uttar Pradesh awarded to PQR by the NHAI on May 19, 2010.

The proposed Project is part of the National Highway Development Project (NHDP) being developed by National Highways Authority of India (NHAI). NHAI undertook development of the proposed road and invited bids from parties interested in Design, Engineering, Finance, Construction, Operation and Maintenance of a section of NH-2 through the international competitive bidding route. The Project is to be executed on a Build-Operate-Transfer (BOT) – toll basis on Design Build Finance Operate and Transfer (DBFOT) pattern under NHDP-Phase V which involves expansion of the road from 4 lane to 6 lane.

8.3 Term Loan Proposal –

There is a standard format for the proposals in the bank. The parts of the proposals and the process and analysis to appraise the loans are described below:

1. Name of the Borrower: M/s. ABC Ltd.

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(Rs. In Crore)

Gist Of The Proposal

A. Sanction of Working Capital Limits

Existing Proposed

FB NIL Nil

NFB -- ---

B. For Term Loan

Purpose To part finance the development of 6 laning of a Section of NH-2

Cost of Project Rs. 2945crores

Total Debt Rs. 1914crores

Equity ( including Grant of 180crores)

Rs. 1031crores

Proposed RTL (our share) Rs. 300.00crores

Proposed ECB ( our share) US$ 50.0 Million(Not approved by NBG)

DER 1.86:1 (65:35)

Repayment Period 11.5 years

Door to door tenor 15 years

C. Approval of ROI/ Service charges as under:-

Facility Existing Proposed Applicable rate

Income Earned

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Last Year Current year upto_______

Rate of interest

CC --- --- N.A. N.A.

PC --- --- N.A. N.A.

RTL NA During Construction

11.50% p.a. linked to the our bank base rate

During Operation : 11.25%p.a. linked to our bank base rate

BR + 5.00%

+TP i.e. presently 15%

Upfront Fee RTL NA 0.15% of the allocated loan amount.

1.00%

Documentation

Charges

---- On actual basis 25000/-

The facility proposed is under syndication, with the lead Syndicator being SBI Capital Markets Ltd.

D. Approval of other Issues, if any : 6 months time period for creation of security.

Whether fresh/renewal/ enhancement

Fresh

Asset Classification as on 30.9.2010 and last PMS score

NA- Fresh Account.

Credit Risk Rating by Bank is BB indicating average risk

Rating Date of Rating

Score ABS Reasons for degradation

Present BB 1.12.10 51.84 NPM

Previous

.

Rating from External Agency (The ABC Pvt. Ltd. is a 99.99% owned subsidiary of PQR.

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external rating should be mapped to the internal rating)

Currently, external credit rating not available since the Borrower is an SPV incorporated on May 26, 2010. ABC Pvt. Ltd. shall obtain external credit rating within six months from the Financial Closure.

Whether Agriculture/Retail/ SME/Others (Please specify)

Others

a) Whether Sensitive Sector –

Real Estate/Capital Market

b) Applicable Risk weight

NA.

100%

Consortium/Multiple Banking Consortium

Lead Bank To be decided at the time of Financial Closure

PNB’s Share % 15.67%-RTL of Rs. 300.00 crores

Date of application

Date of receipt of proposal

- At HO

Date of clarifications, if any, received at HO

Date of placing the proposal before competent authority

Remarks

11.11.2010

11.02.2011.

.

04.03.2011

07.03.2011

Date of last sanction & authority/’In Principle’ Consent

Fresh, However, NBG in its meeting held on 11.02.2011 has approved RTL of Rs.300crores subject to ROI of BR +TP+2.00% presently 12% p.a. (against 11% proposed). ROI has been re-negotiated at 11.50% p.a. during construction period and at 11.25% during operation linked to our bank base rate.

Customer ID No. New Account

Activity code (as per ladder) XYZ

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PART – I

2. Borrower’s Profile

a. Group Name AAA group

b. Address of Regd./Corporate Office XYZ Mumbai

b. Works/Factory PQR

c. Constitution and constitution code as per ladder

Private Limited Company

d. Date of incorporation/

Establishment

2010

e. Dealing with PNB since NA

New Account.

f. Industry/Sector Infrastructure – Roads

g. Business Activity (Product)/

Installed Capacity.

Construction & Development of Roads

3. Directors (S/Shri)

Name and Designation Address/Mobile No./e-mail address of Main Directors/

Guarantor Directors/

Key persons

Whether Promoter/ Professional/Nominee

Mr. SS, Director XYZ Mumbai Professional

Mr. AA, Director XYZ Mumbai Professional

a) If any of them, in the list of Caution Advices circulated by the Bank from time to time/RBI's/Wilful defaulters' list/Caution List of ECGC/

No

b) If any one of them connected in the past with any No

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NPA/OTS/Compromise/unscrupulous defaulters

c) If any of them, related to Directors/Senior Officers of PNB:

No

d) i) Management Change since last sanction, if any .NA

e) i) Report on due diligence carried out in terms of L&A Circular No. 170 dated 25.10.2008 and comments on adverse features, if anyii) Confirmation that CRs have been compiled/reviewed as per extant guidelines

iii) Confirmation that CRs have been drawn from CIBIL Database and comments on adverse features, if any

YES

Yes

4.A Facilities Recommended :

(Rs. In Crore)

Nature Existing Proposed Secured/Unsecured along with the basis thereof

(As per RBI’s guidelines)Fund Based

Rupee Term Loan 0.0 300.00 Secured

Limit of credit exposure on account of all derivative products

0.0 0.0

TOTAL COMMITMENT 0.0 300.00 Secured

4.B Our Commitment and Maximum Permissible Exposure Norms

(Rs. In crores)

Existing Proposed

%age of Bank’s Capital Funds as on 31.03.10

As per Exposure Norms

Amount (%age)

Company Nil 300.00 1.12% 3211.62 12%

Group 7015.14 7315.14 27.33% 8029.07 30%

5. SECURITY

A. Primary

i) For working capital limits

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No working capital is proposed currently.

ii) For Term Loan

I. Charges and Mortgages

1. Assignment by way of security in favour of the Lenders of all benefits, rights, titles, interests, benefits & claims of the Borrower in, to and under all assets of the Project and all Project documents, contracts, insurance policies, permits/approvals/licenses/consents etc. to which the Borrower is a party, which can be legally assigned, Subject to Concession Agreement

2. First charge on movable assets of the Borrower.3. First charge on all the Project’s bank accounts including but not limited to the Trust &

Retention Account (TRA) opened in a designated bank, where all cash inflows from the Project shall be deposited and all proceeds shall be utilised in a manner and priority as per Concession Agreement. The Lenders will appoint TRA Agent for operating the account.

4. First charge on the operating cash flows, commissions, revenues of whatsoever nature and wherever arising, present and future, intangibles, goodwill, uncalled capital, present and future;

5. Negative Lien over 51% of the equity shares of the Borrower which can be reduced to 26% on repayment of 75% of the Debt.

Execution of Security documents, including creation and perfection of Security as agreed above within 180 days of first disbursement.

Provided that the Security stipulated hereinabove, shall in all respects, exclude the Project Assets (as defined in the Concession Agreement) unless such security is consented to by NHAI pursuant to the Concession Agreement. Further, the security creation as mentioned above shall be subject to modifications from NHAI.

The aforesaid Security, assignment and charges shall rank pari passu among all participating Lenders.

II. Sponsor Support Undertaking

The Sponsor shall furnish an undertaking:

1. To bring in additional funds along with its associates/subsidiaries in a form & manner satisfactory to the Lenders, for any shortfall in internal accruals envisaged in the proposed Means of Finance of the Project Cost.

2. To bring in additional funds along with its associates/subsidiaries for any cost overrun upto 5% of the Project Cost in the form and manner acceptable to the Lenders, without any recourse to the Project assets and any cost overrun beyond 5% on account of exceptional circumstances, will be funded in a manner mutually decided by the Lenders and the Borrower.

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3. The Sponsor shall not seek repayment/redemption of Sponsor’s contribution to the Project brought in the form, other than equity share capital until entire outstanding amount under the facility agreement is paid in full to the Lenders or prior written permission from Lenders is obtained with respect to the same.

4. Sponsor shall undertake that it together with its associates/subsidiaries shall bring in the entire Equity requirement for the Project and that minimum 51% equity shares of the Company will be held by Promoter/subsidiaries/associates throughout the currency of the Facility which can be reduced to 26% on repayment of 75% of the Debt.

The Sponsor shall provide Letter of Comfort:

To cover the shortfall in the repayment of Debt in the event of termination of the Concession Agreement due to Concessionaire event of default during the construction period.

5.A Security Margin ( Fixed Asset Coverage Ratio – for term loans)

Existing Proposed

Nature Book value FACR Book Value FACR on project completion

Primary -- -- 2945 1.54

Collateral -- -- - -

Total -- -- 2945 1.54

The proposed TL is secured by Project Assets .

6. CONFIRMATION

1. Compliance of last sanctioned terms NA

2. Security documents are valid/duly vetted/enforceable NA

3. Proper charge on securities created NA

4. Confirm that company/directors are not under bank/RBI/ECGC/ CIBIL defaulters/caution list

Yes

5. Confirm that payment of statutory liabilities is not in arrears

Yes

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6. Confirm that no litigation against/by the company is pending

Yes

7. Corporate governance practices are being followed as per Auditor’s report

Yes

8. Confirm that no deviations are made from usual norms/policy guidelines

Yes

9. Confirm that Exposure is within bank’s internal ceilings/RBI prudential norms

Yes

PART – II

11.A(i) Industry Rating as per RMD :. Neutral for infrastructure Road

A.(ii) Detailed Industry Scenario and Comments on management, production and marketing as well as Borrowers' diversification, expansion, modernization program : As per Appendix – IV

12. Present Proposal

The present proposal is for sanction of Rupee term loan of Rs 300 crore at ROI of 11.50%(BR+TP+1.50%) linked to SBBR during construction and 11.25%(BR+TP+1.25%) after COD,upfront fee of 0.15%,Documentation charge of Rs.25000/- to part finance the development of road from 4 laning to 6 laning of the Delhi- Agra Section of NH-2 at the total cost of Rs.2945 crores with debt of Rs. 1914 crores and promoters contribution of Rs. 1031 crores.

Justification for term loan/DPG

i.) Purpose

To part finance the development of 6 laning of a Section ofNH-2 for a Concession Period of 26 years.

ii.) A.Appraising agency : The project has been appraised by SBI Capital Markets Ltd.

(iii) Summary of cost of project and means of finance

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Project Cost (Rs. Crore)

EPC Cost 2673

Preliminary & Pre-operative Expenses 55

Financing Expenses 14

IDC 145

Contingencies 58

Total Project Cost 2945

Means of Finance:

The total project cost is proposed to be financed by a debt - equity mix of 65:35. The proposed means of financing is shown below

% Composition of Total Financing

2.88%

11.47%

6.11%

14.53%

% Composition of Total Equity

Equity Share Capital

Promoter sub debt

NHAI Grant

Internal Accruals

Description% of Total Amount

Project Cost (Rs. Cr.)Equity Share Capital 2.88% 85Promoter Sub Debt / Preference Shares 11.47% 338NHAI Grant 6.11% 180Internal Accruals 14.53% 428

Total Equity 35.00% 1,031RTL / ECB 65.00% 1,914

Debt 65.00% 1,914Total Project Cost 100.00% 2,945

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ABC Pvt. Ltd has approached XYZ for arranging the mix of External Commercial Borrowings of Rs. 670.0 crores equivalent and Rupee Term Loan of Rs. 1244 crores to fund the project.

The door-to-door tenor of the RTL is 15 years (including a construction period of 30 months and post-construction moratorium of 12 months). Repayment would be made in 11.5 years by way of 46 unequal quarterly installments.

iv.) Sources of Promoters’ Contribution and the time schedule as to when the funds will be brought.

NHAI Grant

NHAI shall provide a grant of Rs. 180 crore to be disbursed during the construction period, once the entire equity has been expended by the Promoters. Also the same shall be disbursed proportionately along with the loan funds remaining to be disbursed by the Lenders.

Equity Share Capital & Promoter’s Sub Debt/Preference Shares

The equity contribution required for the Project would be brought in by PQR/associates of PQR from their own sources in the form of equity share capital, subordinate debt/preference shares.

Internal Accrual

ABC Pvt. Ltd. shall start collecting toll for the existing 4 lane road immediately after the financial closure viz. the Appointed Date under the Concession Agreement. The toll receipts during the construction period shall be utilized to fund the Project Cost. Further, the Sponsor shall provide an undertaking to bring in additional funds for any shortfall in internal accruals during the construction period.

PQR had a tangible net worth of Rs. 16,897.60 crores as on 31st March 2009. As per the un-audited financials, the company recorded a cash profit of Rs 1670 crores on a consolidated basis for the financial year ended 31st March 2010. The cash and cash equivalents of the company as on March 31, 2010 was over Rs. 8,850 crore. Of the above cash and cash equivalents, about Rs. 3,675 crore is in cash and debt funds. The company doesn’t have any exposure to equity markets.

Thus, the promoters have sufficient cash funds available to finance the required equity contribution towards the project cost. However, a condition has been stipulated stating that the sponsors shall bring in at least 25% of the envisaged equity (excluding grant) prior to seeking disbursement of debt. The balance equity will be brought in as per the Debt-equity ratio.

Page 66: working capital

v.) Status of tie-up of loansXYZ Ltd. has been appointed as the Mandated Lead Arranger for the entire debt. The syndication for the proposed project is under progress

vi.) Brief explanation for each major individual item of cost of Project with present status along with comments on the reasonableness/competitiveness

Cost Components(Rs. In crores)

Major Cost Component Amount

Details

EPC Cost 2673.00

Consists of expenditure on procurement of materials for construction, cost of manpower, construction and maintenance of bridges and culverts, construction of toll plazas etc.

Preliminary & Pre-operative Expenses

55.00

Consist of Bidding & security expenses, Performance guarantees, Personnel costs, Establishment expenses, Site expenses, Professional fees, DPR cost, Independent Engineer fees, Lenders Engineer’s fee, legal counsel’s fee, traffic consultant fee, financing expenses, Insurance and other expenses.

Financing Expenses 14.00

It mainly involves the debt syndication fees & debt upfront fees.

Interest During Construction

145.00

The interest on Rupee Term Loan during the construction period works out to Rs. 145 crores.

Contingencies 58.00 The contingency cost for the project is assumed at 2.00% of EPC Cost and 2.00% of other soft costs (preliminary and pre-operative expenses and interest during the construction period).

Reasonableness of Project Cost

The EPC cost Rs. 2673 crores has been estimated by the company on the basis of past experience in similar constructions and prevailing market rates. The project company shall enter into a fixed time, fixed price turnkey Engineering Procurement and Construction (EPC) contract.

The project entails 6 laning of Delhi Agra (179.50kms). The EPC cost per new-lane per km for the project works out to Rs. 7.44 crores.

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The proposed Project envisages following additional works, which forms part of the construction cost.

1.4 km of elevated corridor – Rs. 107 crore More than 50 structures About 240 km of service roads

The other costs have been estimated based on actual expenditure on the Project and estimates based on the past experience of the sponsors in implementing similar infrastructure projects in India.

A comparison of the EPC cost with other 6 laning projects under development viz. PCC Pvt. Ltd. , SS NH One Toll way Pvt. Ltd. and LLT Toll way Pvt. Ltd. are given below:

(Rs. crore)

PCC SS LLT

EPC cost 2400 3780 700

Length (road km) 225 291 43

EPC cost / new lane/ km 5.33 6.49 8.13

It may be observed that the cost of ABC at Rs. 7.44 cr per km/new-lane is reasonable compared to other 6-laning projects. In view of this the cost of ABC is considered reasonable. The project cost shall be reviewed by Lenders' Engineer.

The debt servicing ability of ABC Pvt. Ltd. would also be comfortable, with the average DSCR being 1.70.

Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix VII

vii.) Implementation schedule:

Key activities To be completed by

Signing of Concession Agreement Jul 16, 2010Date of issuance of LoA Aug 16, 2010

Signing of EPC Agreements Aug 23, 2010

Notice to ProceedPrior to the Appointed Date

Completion of Designs By Financial Closure

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Construction start dateJan 2011 (Expected FC date)

Tolling start dateJan 2011 (Expected FC date)

Site Mobilization In ProgressCompletion of all Structures 31 Dec 2012

First Milestone 30 Sep 2011

viii.) Draw Down Schedule Annual

The tentative drawdown schedule is as under:

 

31-Mar-

11

31-Mar-

12

31-Mar-

13

31-Mar-

14Tota

lPercentag

e

Debt 108 490 764 5531,91

4 65%Promoters Equity 21 11 41 12 85 3% Grant - - - 180 180 6% Internal Accruals 29 98 241 60 428 15% Promoters Sub Debt 162 - 129 46 337 11%

  321 599 1,175 8502,94

5 100%

Our share of the loan amount shall be drawn proportionately to the above along with the other lenders.

ix.) Proposed repayment schedule

a) The RTL facility shall be repaid in 46 structured quarterly installments from end of the Moratorium period as under:

FYQtr %

Qtr %

Qtr %

Qtr %

2015         1

0.50% 2

0.50%

2016 3

0.50% 4

0.50% 5

0.50% 6

0.50%

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2017 7

0.50% 8

0.50% 9

0.50% 10

0.50%

2018 11

0.50% 12

0.50% 13

0.50% 14

0.50%

2019 15

0.50% 16

0.50% 17

0.75% 18

0.75%

2020 19

0.75% 20

0.75% 21

0.75% 22

0.75%

2021 23

0.75% 24

0.75% 25

0.75% 26

0.75%

2022 27

0.75% 28

0.75% 29

3.50% 30

3.50%

b) The ECB Loan will be repaid in 26 quarterly instalments from end of the Moratorium period as under:

FYQtr %

Qtr %

Qtr %

Qtr %

2015         1

0.50% 2

0.50%

2016 3

0.50% 4

0.50% 5

1.50% 6

1.50%

2017 7

1.50% 8

1.50% 9

2.50% 10

2.50%

2018 11

2.50% 12

2.50% 13

4.00% 14

4.00%

2019 15

4.00% 16

4.00% 17

5.25% 18

5.25%

2020 19

5.25% 20

5.25% 21

6.50% 22

6.50%

2021 23

6.50% 24

6.50% 25

9.50% 26

9.50%

13. Pricing:

For RTL Loan: During Construction: 11.50% p.a. linked with State Bank Base Rate (SBAR) floating plus Spread. The Spread shall be determined on the date of execution of the financing documents to arrive at the effective rate of 11.50% p.a. The Spread will remain fixed during the construction period. Presently SBAR rate is 7.60%

During Operations:11.25%effective interest rate during operations period shall be linked with SBAR (floating) plus Spread arrived on the date of execution. The Spread shall be reset annually thereafter.

Interest will be paid monthly on the outstanding principal amount of the Facility at the end of every month.

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Interest will accrue from day to day and will be calculated on the actual number of days elapsed in a 360 day year. Interest will be payable in arrears at the end of each Interest Period.

Interest will be paid on monthly basis.

15. Strengths & Weakness with mitigants, if any

STRENGTHS

The Project is an outcome of the conscious recognition by NHAI to improve the road transport network in the country. The Project is thus, assured of political and administrative support, which is important for projects of this nature.

NHAI commitment to the Project is further demonstrated in the form of Grant of Rs.180.0 crore for meeting the Project cost by way of equity support.

The Project is being sponsored by RInfra, one of the emerging infrastructure development companies of India having recently successfully executed two NHAI road projects and nine more under implementation.

The EPC Agreement is a fixed price, fixed time contracts with provisions for liquidated damages for any delay in completion of construction of the Project.

In case of termination of the CA due to any Force Majeure event / Concessionaire event of default or NHAI event of default during the operations period, DATRL is entitled to receive termination payments from NHAI..

The financial projections of the Project are satisfactory with an average DSCR of 1.70 for the Lenders.

WEAKNESS - NHAI is not liable to pay any termination payment, on account of Concessionaire event of default, during the construction period.

The Sponsor shall furnish a Letter of Comfort to cover the shortfall in the repayment of Debt in the event of termination of the Concession Agreement due to Concessionaire event of default during the construction period. The Project is exposed to traffic risk as NHAI does not provide any traffic guarantee.

The Concession Agreement provides for proportionate modification of Concession Period accordingly and a shortfall loan facility from the Authority at concessional rates if revenues fall below subsistence levels.

OPPORTUNITIES - The Project already has a substantial traffic movement. The main influence area of the Project is Delhi, Haryana and UP. Higher usage of the Project Highway is expected based on the potential outlook of the region’s economic growth.

THREATS - Construction of Additional Tollway/ competing facility in the future. As per the CA, no Additional Tollway shall be built before the 12th anniversary of the Appointed Date. In case an Additional Tollway is opened to traffic between the 12th & 26th anniversary of the Appointed Date, the Concession Period shall be increased by the duration of the period between the opening of the Additional Tollway & the 26th anniversary of the Appointed Date. The CA also stipulates that the fee charged from vehicles using such Additional Tollway shall

Page 71: working capital

at no time be less than 25% higher than the fee being charged from similar vehicles using the Project Highway.

APPENDIX – I : Detailed Projected Financials

Page 72: working capital

8.4 Detailed Repayment Capacity Analysis

DSCR Calculations:

FY Ending Mat 31st

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

                           Profit after Tax (50) (58) (21) 14 54 99 156 211 298 332 425 534 658Depreciation 84 125 125 125 125 125 125 125 125 174 174 174 174Interest 115 171 167 162 155 145 132 116 104 87 66 41 13Coverage 148 238 271 302 334 369 413 453 527 594 665 749 704                           Interest 115 171 167 162 155 145 132 116 104 87 66 41 13Loan repayment - 19 52 78 112 155 195 252 106 187 224 261 274Obligation 115 190 219 241 267 300 326 368 210 274 290 303 287                           DSCR 1.29 1.25 1.24 1.25 1.25 1.23 1.27 1.23 2.51 2.17 2.29 2.47 2.45Min DSCR 1.23  Average DSCR 1.68  

Sensitivity Analysis:

Type of Case Avg. DSCR

Min DSCR

Proj. IRR

BASE CASE 1.68 1.23  Reduction in base traffic in 2017 by 5% 1.68 1.19  Increase in the RTL interest rate by 2% 1.68 1.22  

Break Even Analysis:

Page 73: working capital

14/M

ar

16/M

ar

18/M

ar

20/M

ar

22/M

ar

24/M

ar

26/M

ar0

200

400

600

800

1000

SalesTotal Cost

8.5 Textile Industry Overview

a) Indian Overview

 Indian Textile Industry contributes about 11 percent to industrial production, 14 per cent to the manufacturing sector, 4 percent to the GDP and 12 per cent to the country's total export earnings. It provides direct employment to over 35 million people, the second largest provider of employment after agriculture. Besides, another 54.85 million people are engaged in its allied activities The industry is expected to grow from the present US$ 70 billion to US$ 220 billion by 2020, according to Mr Dayanidhi Maran, Union Minister of Textiles.

The following important positions reckon by this industry across globe  are :  1. Cotton – Second largest cotton and cellulosic fibres producing country in the world. 2. Silk – India is the second largest producer of silk and contributes about 18% to the total world raw silk production. 3. Wool –India has 3rd largest sheep population in the world, having 6.15 crores sheep, producing 45 million kg of raw wool, and accounting for 3.1% of total world wool production. India ranks 6th amongst clean wool producer countries and 9th amongst greasy wool producers. 4. Man-Made Fibres- the fourth largest in synthetic fibres/yarns globally. 5. Jute – India is the largest producer and second largest exporter of the jute goods. 

b) International Overview

As per the latest available WTO data, India’s percentage share in the global textiles and clothing trade was 4.3% in textiles, and 3.6% in clothing during the year 2009. India’s rank in world trade has been 4th in textiles and also in clothing. China is largest exporter of T&C in world. Other remarkable position achieved by it as 2nd largest producer, consumer and exporter of Cotton and cotton yarn. It is also 2nd largest producer of staple fibre and filament yarn . It accounts for one fourth of global trade in cotton yarn.

8.6 Brief Overview of Textile Company

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M/s AS Ltd. was incorporated in Gujarat as a Private Limited Company in 1984, and it was converted into a Public Limited Company in the same year. It has been listed at BSE & ASE since August 1995.

Company is having its Registered Office at 2, XYZ, Ahmedabad. It is a process house, equipped with Dyeing, Bleaching, Printing and Finishing

Machinery for Cotton Fabrics, Cotton Blended Fabrics and Polyester Fabrics. For printing, the company has 5-flat Bed Printing Machines (with rotary hands) and One Rotary Screen Printing Machines with the facility of printing 8 Colours at a time. For dyeing, the company has Jumbo Jiggers, Mercerizing Machines, Decasting Machines, Padding Mangles, Zero Machine, Peach Machine, Steam Ager Machines etc.

It is one of the leading process house in textile industry, engaged in bleaching, Printing, dyeing and processing of cotton and manmade fabrics for own and for outsiders on job work basis.

8.7 Working Capital Proposal

1. Name of the Borrower: M/s. AS Pvt. Ltd

(Rs. In crore)

Whether fresh/renewal/ enhancement Renewal cum Enhancement

Asset Classification as on 31.12.2010 and last PMS score

Standard

PMS Rank is 1 for QE Sep’10

Credit Risk Rating by Bank is BB indicating Average risk.

To be vetted by RMD, HO

Rating Date of Rating

Score ABS Reasons for degradation

Present BB 04.03.2011 52.11 31.03.10 --

Previous BB 27.11.09 55.24 31.03.09 --

Rating from External Agency

(Condition is proposed for updation of external rating within Three months based on ABS 31.03.201.)

Facility rated

Rating Date of rating

Rating Agency

Remarks

Short Term CARE BB+

30.03.10 CARE High Credit Risk

Long term PR4 30.03.10 CARE Very High Credit Risk

Whether Agriculture/Retail/ SME/Others (Please specify)

Others ( Large)

a) Whether Sensitive Sector – Real Estate / Capital Market

b) Applicable Risk weightNo

100% (BB risk rated account)

Consortium/Multiple Banking No

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Lead Bank NA

PNB’s Share % 100%

Date of application

Date of receipt of proposal

At BO/ CO/ HO

Date of clarifications, if any, received at CO/HO

Date of placing the proposal before competent authority

Remarks

10.12.2010

14.02.2011

19.03.2011

26.03.2011

Date of last sanction & authority/’In Principle’ Consent

18.01.2010, ED

09.03.2010 ED for amendment & substitution of IP

Customer ID No. FZL000009

Activity code (as per ladder) 6599

PART – I

2. Borrower’s Profile

a. Group Name Not a recognized Group

b. Address of Regd./Corporate Office XYZ, Ahmedabad

Works/Factory ABC, Ahmedabad.

d. Date of incorporation/

Establishment

Incorporated on 20.06.1984 and then converted into Public Limited Company on 15.06.1994

f. Industry/Sector Textile Industry

g. Business Activity (Product)/

Installed Capacity.

Processing of grey Clothes and owns a fully modernized composite house.

d) Share Holding Pattern as on: 30.09.2010

Name of the Promoters/Major Share holders No. of shares Amount

Rs. in crore

% Holding

Promoters and promoter Group Holding 65,709,400 6.57 60.84

Fis/ Mutual Funds/ UTI/ Banks /FIIs/ Pvt. Corpo 11,414,151 1.14 10.57

NRI’s/OCBs 124,830 0.01 0.11

Page 76: working capital

Public 30,761,619 3.08 28.48

Total 30886449 10.80 100.00

h) Brief history

M/s Anjani Synthetics Ltd. was incorporated in Gujarat as a Private Limited Company on 28th June 1984, subsequently on 15.6.94 it was converted into a Public Limited Company. Co & got listed at BSE & ASE since August 1995.

Company is having its Registered Office at 202, Kaivanna, Near Panchvati Circle, Ellisbridge, Ahmedabad.

It is a process house, equipped with Dyeing, Bleaching, Printing and Finishing Machinery for Cotton Fabrics, Cotton Blended Fabrics and Polyester Fabrics. For printing, the company has 5-flat Bed Printing Machines (with rotary hands) and One Rotary Screen Printing Machines with the facility of printing 8 Colours at a time. For dyeing, the company has Jumbo Jiggers, Mercerizing Machines, Decasting Machines, Padding Mangles, Zero Machine, Peach Machine, Steam Ager Machines etc.

It is one of the leading process house in textile industry, engaged in bleaching, Printing, dyeing and processing of cotton and manmade fabrics for own and for outsiders on job work basis.

4.A Facilities Recommended : (Rs. in Crore)

Nature Existing Proposed Secured/Unsecured along with the basis thereof

(As per RBI’s guidelines)

Fund Based

Secured

CC (H) 29.50 35.00

CC (Book Debts) (20.00) (20.00)

EPC / PCFC/FBP / FBD / FUBD / FOBNLC / FOUBNLC

20.00 20.00

DD (Clean) 0.00 (1.00)

Fund Based Ceiling 49.50 55.00

Non Fund Based

FLC 2.00 2.00

ILG – Interchangeable with ILC/FLC 0.25 0.25

Non Fund Based Ceiling 2.25 2.25

Term Loans

TL I (Existing O/s to continue) 0.00 0.00

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TL II (Existing O/s to continue) 0.20 0.20

TL III (Existing O/s to continue) 0.38 0.38

TL IV (Existing O/s to continue) 0.54 0.54

TL V (Fresh) 0.00 2.00

Term Loan Total 0 3.12

TOTAL COMMITMENT 52.87 60.37

5.A Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease, ICDs, Corporate Loans, Debentures etc.) (Rs. in crore)

Name of the Bank/FI Facility sanctioned

Balance O/s. as on 30.09.10

Overdue, if any

Rate of interest

HDFC Bank Metador Loan 0.06 Nil 12.75%

Kotak Mahindra Prime Ltd.

Vehicle Loan 0.46 Nil 12.75%

CH has confirmed repayment in the vehicle loans is regular & no irregularity has been reported.5.B Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of rating

Facility rated Rating Date of rating Rating Agency Remarks

Short Term CARE BB+ 30.03.10 CARE High Credit Risk

Long term PR4 30.03.10 CARE Very High Credit Risk

The company has taken steps to streamline & strengthen production base with proposed TL to improvise niche production & productivity for get better & performance in terms of sale realization in future. It is stipulated that CH to ensure that external agency rating is upgraded based on ABS as at 31.03.2010 within a max. period of Three months failing which penal Intt be invoked.

6.A Financial Position of the Company as on close of financial year for last three years and estimated for last year and projected for the next year

(Rs. in Crore)

  31.03.08 31.03.09 31.03.10 31.03.10 31.03.11 31.03.12

 AUDITED

AUDITED

ESTIMATED

AUDITED ESTIMATE

PROJECTION

Gross Sales/ Receipts 195.77 211.96 231.65 221.67 272.02 280.64

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Domestic 158.46 171.93 165.99 189.41 229.77 237.82

Export 37.31 40.03 65.66 32.26 42.25 42.82

% Growth   8.27 9.29 4.58 22.71 3.17

Net Sales (net Exise duty) 195.77 211.96 231.65 221.67 272.02 280.64

Other Income 0.16 0.17   0.22 0.00 0.00

Operating Profit/ Loss 5.04 4.56 7.29 3.95 4.71 5.01

Profit Before Tax. 5.20 4.73 7.29 4.17 4.71 5.01

Profit After Tax 3.37 3.00 4.44 2.42 2.85 3.19

Depreciation/ Amortization Exp. 2.66 3.27 3.81 3.21 3.38 3.05

Cash Profit 6.03 6.27 8.25 5.63 6.23 6.24

EBIDTA/ PBIDTA 12.09 12.81 17.81 12.73 14.94 15.20

Paid Up Capital 10.80 10.80 10.80 10.80 10.80 10.80

Reserves & Surpluses Excl Revaluation Reserves 7.91 10.27 11.74 12.69 15.57 18.75

Misc. Exp. Not W/off 0.08 0.06 0.06 0.04 0.02 0.00

Accumulated Losses 0.00 0.00 0.00 0.00 0.00 0.00

Def Tax Liabilities/ Assets 0.46 0.19 0.43 0.00 0.00 0.00

Tangible Net worth 19.09 21.20 22.91 23.45 26.35 29.55

Investments in allied concerns & of cross holding 0.00 0.00 0.00 0.00 0.00 0.00

Net Owned funds/ Adj TNW 19.09 21.20 22.91 23.45 26.35 29.55

Share Application Money 0.00 0.00 0.00 0.00 0.00 0.00

Total Borrowings 55.79 59.65 63.74 59.83 68.73 69.31

Secured 45.71 49.54 53.66 48.14 57.05 57.63

Unsecured 10.08 10.11 10.08 11.69 11.68 11.68

Investments 0.00 0.36 0.00 0.31 0.00 0.00

Total Assets 99.49 104.54 111.96 123.81 129.64 133.20

of which net fixed assets 14.72 14.72 18.29 12.83 10.46 9.14

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Net Working Capital 20.67 21.15 23.36 24.56 29.13 34.23

Current Ratio 1.32 1.31 1.33 1.29 1.33 1.38

Debt Equity Ratio 0.86 0.72 0.82 0.63 0.52 0.48

Term Liability/ Adjd TNW 0.86 0.72 0.82 0.63 0.52 0.48

TOL/ Adjusted TNW 4.21 3.93 3.89 4.28 3.92 3.51

Op profit/Sales (%age) 2.57 2.15 3.15 1.78 1.73 1.79

Long Term sources 35.48 36.37 41.65 38.18 40.08 43.86

Long Term Uses 14.81 15.22 18.29 13.62 10.95 9.63

Surplus/ Deficit 20.67 21.15 23.36 24.56 29.13 34.23

Short Term Sources 63.93 68.11 70.25 85.59 89.54 89.34

Short Term Uses 84.60 89.26 93.61 110.15 118.67 123.57

Surplus/ Deficit -20.67 -21.15 -23.36 -24.56 -29.13 -34.23

6.B Brief discussion on Financial Indicators

Paid up Capital/TNW - The authorized capital of the company is Rs. 15 crore and paid up capital remained at 10.80 crore. TNW of the company is consistently increasing with plough back of profits. TNW is Rs. 23.45 crore as at 31.03.10 and Rs. 26.07 crore as at 31.12.10. Sales - The company registered growth of 8.27% & 4.58% in sales duirng 2008-09 & 2009-10 over corrseponding previous years respectively. The company achived sales of Rs.221.67 crore against accepted estimates of Rs.231.65 crore, thus 95.69% achievments during 2009-10. The shortfall is due to non achievement of estimated export turnover. The Company could achieve export turnover of Rs.35.06 Crore only as against estimated export turnover of Rs.59.49 Crore due to sluggish export market and cancellation of some of the export orders in hand. However the Company could partially compensated the same with increase in domestic turnover. Profitability - PBT of company marginally declined from Rs.4.73 crore during 2008-09 to Rs.4.17crore during 2009-10 and company could not achieve estimated PBT of Rs.7.29crore. The decline in profit is primarily on account of huge fluctuations in raw material prices & also lower than estimated export turnover.However informed that prices have stabilized at higher levels and to counter raw material price fluctuations, Company has increased grey trading. Considering this and expected increase in turnover, Company submitted PBT estimates of Rs.4.71 Crore for FY 2010-11, and as on 31.12.10 PBT stood at Rs.3.94 Crores. The projected op. profit to sales yield is 1.73% & 1.79% for current accounting year & is in line with previous year actual of 1.78% during 2009-10. Other Income - The other income includes interest on FDR, profit on sale of M/c, commission income & insurance claims received aggregating Rs.0.22 Crores for 2009-10 and same is negligible to aggregate income to operations @ 0.10% to Rs.221.67 Crores. Diversion of Funds - CH has not reported any diversion of Funds during review period.

Page 80: working capital

Current ratio/NWC - Current Ratio of company were 1.31:1 as at 31.3.09, 1.29:1 as at 31.3.10 and 1.31:1 as at 31.12.10, which are slightly below the benchmark level and may be accepted keeping in view the export oriented unit. However, company has est./projected CR level of 1.33:1 & 1.38:1 for current & ensuing year 2011-12. Net Working Capital of the company increased from Rs. 21.15 crore as at 31.03.09 to Rs. 24.56 crore as at 31.03.10 (against accepted level of Rs. 23.36 crore). NWC further improved to Rs. 28.15 crore as at 31.12.10. The company has est./ projected NWC level of Rs.29.13 crores & Rs.34.23 Crores for current & ensuing year and same has been accepted for PBF being reasonable & achievable on the basis of past.

DER - Debt Equity Ratio of the company were 0.71:1 as at 31.03.09, 0.63:1 as at 31.03.10 and 0.55:1 as at 31.12.10, which are well within the benchmark level.

7. SECURITY

 A. Primary 

i) For working capital limits :-First charge on entire current assets of the company (present & future) including stocks of raw material, stock-in-process, finished goods, stores and spares, Book Debts and all other current assets of the Co. Depositing of confirmed orders/original irrevocable LCs of approved foreign banks for EPC

ii) For Term Loans (Existing and Proposed) :- First charge on entire existing as well as future block of assets of the company

A. Collateral i) Hypothecation/ Mortgage of Block Assets Immovable Properties for and term

loan and working capital ii) First charge for Term Loan / WC: (Rs. in Crore)

Nature of limits Security Value of Net Block assets as on ABS 31.03.10

Market Value of block assets

Extent of first/second charge holders

Balance/residual value of charge available to Bank

Working Capital/ Term Loan

Plant and Machinery 6.51 18.30*

(WDV Block asset per ABS 31.3.10 is Rs.12.83 Crores)

2.57 15.73

Working Capital / Term Loan

Pledge of FDR of Rs. 9.04 lakh to be kept under bank’s lien & duly discharged.

 7. C Security Margin (Fixed Asset Coverage Ratio – for term loans)

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Existing (TL = 2.60) Proposed (TL= 4.60)

Nature Book Value FACR Book Value FACR on project completion

Primary 12.83 4.93 15.56 3.38

Collateral 12.75 4.90 12.75 2.77

Total 25.58 9.83 28.31 6.15

PART – II

8. Present Proposal

Renewal cum Enhancement in FBWC Limit from Rs. 49.50 crore to Rs. 55.00 crore. Renewal of existing NFB Limit of Rs. 2.25 crore. Fresh sanction of Term Loan of Rs. 2.00 crore (Rs. Two Crores only, Review of existing TLs Loan with O/s Rs. 1.12 crore on applicable review charges. Relaxation in ROI from applicable rate BR+5% (14.50%) to BR+4.50% (14.00%) in

CC (H & BD) Limit and from BR+5%+TP (15%) to BR+4.5%+TP (14.5%) in TLs in line with previous approved ROI of BPLR+1.00% on FB limits & BPLR+1.00%+TP on TLs..

a) Justification for working capital sanction

i) Assessment of Fund Based Limits

(A) Detailed Note on Assessment of Maximum Permissible Bank Finance (MPBF) (Rs. in Crore)

  31.03.08 31.03.09 31.03.10 31.03.10 31.03.11 31.03.12

 AUDITE

DAUDITE

DESTIMATE

DAUDITE

DPROJECTION

SPROJECTION

S

Gross Sales/

Receipts 195.77 211.96 231.65 221.67 272.02 280.64

Domestic 158.46 171.93 165.99 189.41 229.77 237.82

Export 37.31 40.03 65.66 32.26 42.25 42.82

% Growth   8.27 9.29 4.58 22.71 3.17

a)Raw Material: For the products of the company, the company is required to maintain raw material stock of grey cloth, colour chemical, yarn, etc. against actual Raw Materials Holding of 1.08 months during 2008-09 & 1.15 months during 2009-10 the company has estimated raw materials holding of 1.20 months for 2010-11 and 2011-12, which is slightly higher than previous year level and may be accepted.

b)Stocks in process:

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SIP holding level has been estimated at 0.26 months against actual level of 0.29 months & 0.28 months during last two years and the same may be accepted. c)Finished Goods: FG holding level has been estimated at 0.79 months are in line with past actual levels of 0.91 months & 0.78 months during last two years and the same may be accepted. d)Receivables – Domestic - The Company’s receivable level remained at 2.61 months as on 31.03.2009 and 3.33 months as on 31.3.2010. The company has number of regular buyers who are dealing with them for many years. Also, product of company is known for its quality, timely delivery and competitive rates compare to other manufacturers. The company allows credit period of 2-3 months to its buyers, which is as per Industry trend and practice and hence accepted.Considering the general debtor’s level at around 3 months only, Company’s estimated level of 3.00 months has been accepted. e)Receivables – Export - Export Receivables has also been estimated for 3 months period which is in line with past actual level of 2.88 months & 3.67 crore and hence may be accepted.

Holding period Rate Per month Amount

2010-11 2011-12 2010-11 2011-12 2010-11 2011-12

Raw Materials 1.20 1.20 17.83 18.15 21.35 21.73

Stocks in Process 0.26 0.26 21.36 21.77 5.64 5.76

Finished Goods 0.79 0.79 21.09 21.73 16.65 17.18

Receivables Domestic 3.00 3.00 19.15 19.82 57.44 59.46

Receivables Export 3.00 3.00 3.52 3.57 10.56 10.71

CCA 111.64 114.84

Other Current Assets:

 Particulars Actual ActualEstimated/

AcceptedProjected/ Accepted

  2008-09 2009-10 2010-11 2011-12

Cash & Bank Balance 0.65 1.39 1.44 2.13

Consumables &

Packing Materials 0.44 0.45 0.59 0.60

Others 4.60 8.86 5.00 6.00

Total 5.69 10.70 7.03 8.73

OCA level estimated are lower than past actual level & same reveals plans of company for effective fund management and hence accepted. Other Current Liabilities

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 Particulars ActualEstimate

ActualEstimated/

AcceptedProjected/ Accepted

  2008-09 2009-10 2009-10 2010-11 2011-12

S. Creditors 21.70 22.61 38.67 32.68 32.52

(Holding period) (1.56) (22.61) (2.73) (1.83) (1.79)

Others 1.90 2.29 1.82 1.86 1.82

Total 1.90 24.90 1.82 1.86 1.82

The company’ creditors level remained at 1.56 months and 2.73 months as at 31.03.2009 and 31.03.2010 respectively. The level was high as at 31.03.2010 primarily for supporting high level of debtors as at end of that year. The Company informed that with festive and marriage seasons, Company got higher demand for its product, but had to allow higher credit period to debtors and had received higher credit period from creditors even.

The Company has further informed that the higher creditors level are very costly affairs for the business and as a result of higher credit period, Company has to forego various discounts and incentives and is also charged with very heavy interest rates. The Company earlier proposed to maintain same at 1.42 months. Looking to slight excess credit available, Company proposes to maintain the same at 1.83 months for 2010-11 and 1.79 months for 2011-12, which may be accepted reasonable.

c) Justification for term loan/DPG

Review of existing Term Loans with O/s of Rs. 1.12 crore The company was sanctioned various Term Loans for capex. All terms loans are running regular and position of a/c as at 25.03.2011 are as under: (Rs. in crore)

Nature Limit VS DP Balance IrregularityFund Based (WC)TL – I 4.88 12.83 0.00 0.00 AdjustedTL – II 2.31 0.20 0.20 --TL - III 1.50 0.38 0.38 --TL – IV 4.50 0.54 0.54 --Sub Total 13.19 1.12 1.12

Keeping in view the satisfactory conduct of a/c, no irregularities, CH is recommended to review existing terms loans with O/s Rs.1.12 crore as on 25.3.11 at normal applicable review charges.

Sanction of Fresh Term Loan of Rs. 2.00 crore as under:CH has informed that company proposes to install additional plant & machinery costing Rs. 2.73 lakh against which fresh Term Loan of Rs. 2.00 crore has been proposed and balance Rs. 0.73 crore to be inducted from internal accruals.

CH has further added that in view the size & operations of company availing credit facilities of Rs.58.37crore and now propose expansion project which is meager in size having

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estimated capex Rs.2.73 crore, hence detailed TEV study was not observed for sanction of additional Term Loan of Rs. 2.00 crore. It may be observed that promoters have rich experience in the line and unit has undergone & implemented regular addition to capacities, tech upgradation, balancing machinery from time to time and unit has adequate technical staff which can take care of proposed addition of capex with fresh TL of Rs.2.00 Crore. The proposed machinery is processing unit and as well as stitching section of the company & it may be observed that with proposed addition production lines will be more balanced for smooth production & productivity.

9. Pricing

Synopsis of pricing schedule proposed for the company is as under:

  Facility Existing Proposed Applicable rate

CC BPLR + 1% i.e. 14.00%

Base Rate + 4.50% i.e. 14.00%

Base Rate + 5% i.e. 14.50%

PC/ FBP/

FBNLC

BPLR - 2.50% i.e. 10.50%

Base Rate+ 0.75% i.e. 10.25%

Base Rate+ 0.75% i.e. 10.25%

TL BPLR + 1%+TP i.e. 14.50%

Base Rate+ 4.50% +TP i.e. 14.50%

Base Rate+ 5%+TP i.e. 15%

Processing Fee  FBWC As Applicable As Applicable Rs. 225 per lakh plus service tax

Upfront Fee  TL As Applicable As Applicable @ 1.25% Plus service tax

Part III: Credit Risk Rating including Risk Factors & mitigation–Credit Risk Rating dated 16.03.2011 of company based on ABS 31.3.2010 is ‘’BB-’ (52.11%) improved as against previous year CRR of BB- (55.24%) based on ABS as at 31.3.2009. – Average Risk - Based on the above hurdle points, Credit Risk Rating Movement is appended: The previous and present HO ratings are as under:-

PARAMETERS 31.03.09 31.03.10

Financial Evaluation 55.06 52.60

Business & Industry Evaluation 51.88

Management Evaluation 51.00

Conduct Evaluation 100.00

Aggregate Weighted Score 55.24

RatingPNB BB PNB BB

The Identified Risk factors: 1) Current ratio at 1.16:1 is below benchmark value.

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2) TOL/TNW at 4.28 is below the benchmark value. (Copy of the RMD Report is enclosed) Industry Exposure as on 31.3.2010

Industry Cotton Textile

Cotton Textile (Processing) 31.3.10 30.9.10

Outstanding ( Rs. in crore) 1697.53 2161.92

% to Bank’s Gross Advances 0.90 1.03

Ceiling in terms of outstanding as per current loan policy 5.00%

Amount of NPA in industry 2.97 4.42

8.8 Assessment of Working Capital Limits8.8.1 Assessment of fund-based working Capital Limits

a) Studying the factors affecting assessment of working capitalb) Computation of permissible bank finance c) Copy of company’s CMA form and its interpretationd) Ratio summary

RATIOAudited

Audited

Estimated

Projected

Projected

Projected

Projected

Projected

SUMMARY2008-09

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Current Ratio 1.28 1.26 1.33 1.38 1.44 1.50 1.55 1.61Debt-Equity Ratio 0.71 0.63 0.52 0.48 0.41 0.35 0.30 0.26Cost of Production/Sales Ratio 0.95 0.92 0.94 0.93 0.93 0.93 0.93 0.93Net Profit/Sales % 1.42 1.09 1.05 1.14 1.3 1.37 1.44 1.47TOL/TNW Ratio 3.92 4.27 3.92 3.51 3.12 2.77 2.49 2.25

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

0.000.200.400.600.801.001.201.401.601.80

1.28 1.26 1.33 1.38 1.44 1.50 1.55 1.61Current RatioCur-rent Ratio

Values of current ratio suggest that the current assets are sufficient to pay off the current liabilities; which is desirable.

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2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-160.00

0.20

0.40

0.60

0.80 0.710.63

0.520.480.410.350.300.26

Debt-Equity Ratio

Debt-Equity Ratio

The above figure indicates that the debt equity ratio of the company is decreasing continuously over the years. It shows that company is less dependent on outside debts and has its own sufficient funds to finance its operations.

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-160.850.870.890.910.930.950.95

0.920.94

0.93 0.93 0.93 0.93 0.93

Cost of Production/Sales Ratio

Cost of Production/Sales Ratio

This Ratio shows the relationship between the cost of production and sales. It indicates the proportion of cost in sales.

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

0.000.200.400.600.801.001.201.401.60 1.42

1.09 1.05 1.141.30 1.37 1.44 1.47

Net Profit/Sales %

Net Profit/Sales %

This figure represents the profit margin ratio of the company in the period. An increasing profit margin is a good indicator of the company’s prosperity. It is a good indicator of company’s profitability.

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2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-160.001.002.003.004.005.00 3.924.273.923.513.122.772.492.25

TOL/TNW Ratio

TOL/TNW Ra-tio

This figure shows the relationship between the total outside liabilities i.e. short term + long term liabilities, and the tangible net worth of the company. It means that the company is less dependent on outside sources for funds and has its own sufficient funds for operations.

Operating cycle analysis

Operating Cycle

Nature2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

Raw Material 2.25 2.27 2.38 2.37 2.36 2.37 2.36Stock-in-Process 0.29 0.28 0.26 0.26 0.27 0.27 0.27Finished Goods 0.91 0.78 0.79 0.79 0.79 0.79 0.8Receivables(Domestic) 2.66 3.38 3 3 3 3 3Receivables(Export) 2.66 3.38 3 3 3 3 3

Creditors 1.49 2.61 1.75 1.75 1.75 1.75 1.75

Total Operating Cycle 7.28 7.48 7.68 7.67 7.67 7.68 7.68

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2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

6.5

7

7.5

8

8.5

7.287.48

7.68 7.67 7.67 7.68 7.68

Operating Cycle

Operating Cycle

The above figure shows a slight increase in the operating cycle in 2008-09 and 2009-10 due to increase in the raw material consumption period and receivables consumption period as a result of expansion and modernization of the existing unit. The constant operating cycle projections are good enough to accept the proposal.

8.8.2 Assessment of Non-Fund Based Working Capital Limits

Letter of credit facility of Rs.2.00 Crore:The company has been sanctioned ILC/ FLC limit of Rs.2.00Crore for procurement of raw material i.e. Grey & Colour chemicals with usance not exceeding 120 days with 10% margin. The company purchases imported material for its quality and competitive rates from local market as also from Gulf Countries and Pakistan.

SN Particulars Rs. in Cr 1 Total estimated consumption during 2010-11 218.852 Total estimated purchases during 2010-11 223.873 Purchases proposed against LC (FOB/ CIF

Value)5.6

4 RM requirement against LC per month 0.475 Usance Period in months 4 months6 Lead Period in month 1 months7 Total period in months 5 months8 LC requirement (3 X 6) 2.359 LC recommended 2

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Bank Guarantee facility of Rs.0.25 Crore:

Nature & amount of limit sanctioned Rs.25.00 LacName of the beneficiaries in whose favour guarantees to be issued

Govt Authorities/ Railways.

Nature of the guarantee limit required i.e. performance/ financial/ Bid Bond etc.

Financial /performance

Margin proposed 10%Security Counter Guarantee of the companyJustification for the proposed limit The Bank Guarantee facility is required by the

Company to issue to the buyer mainly Government agencies for filling up of the tender. Although presently the outstanding limit for the facility is NIL, the same may be needed at the time of furnishing guarantee.

However, it is proposed that in case of disputed nature of Bank guarantees, BGs to be issued against 100% cash margin only.

IX) Conclusion, Interpretation of Financial Indicators, Suggestions and Limitation of study

9.1 Conclusion

Credit is a wide subject, which requires industrious efforts to be placed in, to get acquainted with it. However, in the limited span of project work, an effort has been made to comprehend the rationale behind various credit decision taken under WC & TL financing. The aforesaid study has thus provided an insight into various dimensions of the WC financing.It is observed that, the assessment of WC & TL requirement is a dynamic process as the banker on one side has to ensure that the WC & TL requirement is not over assessed, as it would give undue benefits to the co. in form of excess limits which is not in commensuration with the business activity of the activity of the co. & thus co. could deploy the excess limit to some other uses like long term uses which defeat the basic spirit of WC & TL capital financing.While on the other side, the banker has also to ensure that the WC & TL requirement is not under assessed, as would expose co. to risk of lower funds & hence it would lead it to access the other source of short term financing which could have impact on the financials of the co. or in some cases on the viability of the co. also.Apart from this, different industries possess different challenges in WC & TL assessment as, the WC cycle vary from industry to industry. However, it is to ensure that the holding levels of various components of the MPBF are in consensus with the peer group of the industry. There should not be large variation from market trend & if so, reasons for it should be sought from the company.

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In PNB, appraisal is done by thorough study of the project which involves the following:

1) Evaluation of management: A detailed study about the promoters is carried out in order to ensure promoters are experienced in the line of business and are capable to implement and run the project.

2) Technical feasibility: A detailed study about the technical aspect is done to determine the technical soundness of the project.

3) Financial viability: A detailed study relating to financial viability of the project is done, thereby ensuring that the project will generate sufficient surplus to repay the loan instalments and interest.

4) Risk Analysis: It determines the risk associated with the project. This is done by performing a Sensitivity analysis and credit rating. With sensitivity analysis the project’s capacity to service the debt under worsened conditions is determined. Credit rating provides rating for various parameters like management, financial market and so on, thereby determining the credit worthiness of the borrower.

It is on the basis of the credit risk level, collateral securities to be given by the borrower are determined. This shows that Punjab National Bank of India has a sound system for credit appraisal.

9.2 Findings of Financial Indicators

9.2.1 Working Capital Ratios

Current Ratio - It helps in finding the liquidity position of the company. A CR of 1.33:1 shows that the company has the required NWC for financing the working capital means. An increase in the CR means more long term funds are being inducted in the business without the corresponding increase in

the fixed assets and vice- versa. Current Ratio of the years 2008-09 and 2009-10 are slightly below the benchmark level, but, may be accepted keeping in view the export oriented unit. However, company has projected CR level of 1.33:1 & and above for the ensuring years.

DER - Debt to equity ratio shows the relationship between the long-term owed & owned funds .A DER of 2:1 is an ideal ratio except for infrastructure, power & capital intensive sectors. As per the proposal, the DER is consistently decreasing due to the repayment of debt. Debt Equity Ratio of the company were 0.71:1 as at 31.03.09, 0.63:1 as at 31.03.10 and 0.55:1 as at 31.12.10, which are well within the benchmark level.

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COP/ SALES - It shows the relationship between the cost of production & sales. Higher ratio means an increase in input cost without corresponding increase in profit. The ratio in the proposal is showing a downward trend till the year 2009-10. The increase in the value for the year 2010-11 is due to huge fluctuations in the raw material prices. Further, in future the ratio is projected to be stabilized at a higher level than 2009-10.

TOL/TNW - It shows the relationship between the total outside liabilities i.e. short term + long term liabilities, and the tangible net worth of the company. It shows slight increase in outside liabilities in the year 2009-10 due to outside borrowings for expansion and modernization in the unit. Subsequently, it is reducing in future as it is repaying long term debts. It means that the company is less dependent on outside sources for funds and has its own sufficient funds for operations. Moreover, it also shows that company is borrowing less in future which will decrease its cost of borrowings and thus it will increase the profitability. Additionally, company is ploughing back its profits and hence increasing the base of its reserves and surplus.

NET PROFIT/ SALES - It shows the relationship between the profit margin and sales. An increasing ratio means more sales or/and a less input cost and vice- versaAs per the proposal the profit margin ratio of the company is declining in the years 2009-10 and 2010-11.The decline in profit is primarily on account of huge fluctuations in raw material prices & also lower than estimated export turnover. However informed that prices have stabilized at higher levels and to counter raw material price fluctuations, Company has increased grey trading. Considering this and expected increase in turnover, the profit margin is increasing continuously over the years. It is a good indicator of company’s profitability.

9.2.2 Term Loan

DSCR - Debt Service Coverage Ratio(DSCR) shows the repayment capacity of the borrower. DSCR above 1.5 is considered good for the borrower, in terms of its repayment capacity, it means internal accruals are sufficient to repay the interest & instalments. As per the proposal, the average DSCR is more than 1.5 which shows that company can easily pay off its debt. If DSCR is below 1.5, it can be adjusted by increasing repayment period and vice-versa.

IRR - The IRR of a proposal is defined as the discount rate which produces a zero NPV i.e. the IRR is the discount rate which will equate the present value of cash inflows with the

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present value of cash outflows. In the IRR technique, the time-schedule of occurrence of the future cash inflows is known but the rate of discount is not. Rather this discount rate is ascertained by the trial and error procedure. This rate of discount so calculated, which equates the present value of future cash inflows with the present value of outflows, is known as the IRR.

FACR - It is the ratio of fixed assets of the company to its debt. An FACR above 1, is considered better, as it means that more fixed assets of the company are available with the lender for liquidation in case of winding up of the company.

BEP - Break-even point (BEP) is a no profit no loss situation of the company where the fixed cost & variable cost equals sales. A lower BEP is recommended for the fast recovery of the cost. As seen in the proposal the company is able to achieve BEP in 2017 due to efficient cost coverage as a result of increased earnings and internal accruals.

Sensitivity Analysis - It shows the impact of movement in the cost and sales components on the repayment capacity of the borrower. As per the proposal, an increase in the interest rate does not make a significant impact on the DSCR and IRR of the company as seen in the base case. On the other hand, a decrease in the Toll revenue by 5% decreases the average DSCR by 0.1% which means such fluctuations do not impact the repayment capacity of the borrower.

10.3 Suggestions/Recommendations

Social cost benefit analysis: In SCBA the focus is on the social cost and benefits of the project. These tend to differ from the monetary cost and benefits of the project. SCBA helps in evaluating the individual project within the planning frameworks which spells out national economic objectives and broad allocation of resources. The social cost is quantified in terms of employment generation, railways, road, forex etc. It is done by certain banks like World Bank etc.* (This is more discussed in glossary section)

Economic rate of return: Some term lending FIs appraise project proposals primarily from the financial point of view. However, they also scrutinize projects from the larger social point of view. IDBI introduced a method to calculate a rate of return at which the costs and benefits of a project, discounted over its life, are equal. ERR differs from the financial rate of return in that it takes into account the effects of factors such as price control, subsidies, and tax breaks to compute the actual cost of the project to the economy.

Internal Rate of Return: The bank should analyze the internal rate of return (IRR) to verify the exact financial soundness of the company. IRR should be greater than inflation rate, cost of debt and cost of equity to the company.

Comparison with peers: Company’s operating cycle and other key financials should be compared with that of competitors and peers in the same industry. This is to check inefficiency on the part of company if any. For e.g. the borrower company has operating

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cycle of 5 months but peer companies have that of 3 months. This shows the inefficiency of the borrower company which can only be highlighted if we compare it with peers. Similarly Cost comparison should be done with peers.

Working capital loan financing along with term loan financing: Bank should also finance working capital requirements of the company if it is lending the term loan to the same. This is required to monitor the cash flows, operating income etc. on a monthly basis which is not possible to track in case of term financing only. If the borrower company does not take working capital loan fund from the same bank, then the company should maintain an Escrow account with the bank so that the bank can charge its timely interest on term loan.

Consortium Banking: Banks should go for consortium banking rather than other forms of lending, for better monitoring of the borrower’s account. As under consortium system there are:

1)Common platform for all member banks . 2)Complete, easy and mandatory exchange of information. 3)Same set of terms and conditions and procedural norms 4)Continuous monitoring in the form of quarterly consortium meetings to discuss the financial performance of company, to take any remedial actions etc. 5)No conflict of interest for the pari-passu charge among the member banks

Standardization of rating process: There should be a standard rating process to remove the subjectivity and different perceptions of the ratter (person who does credit rating process for a borrower company). It will remove the human biasness in the process.

Personal Guarantee: Personal guarantee does not give any physical asset to the bank. It is for the moral binding on the part of borrower. Hence, bank should prefer to use this type of guarantee as this will reduce the default rate on the part of borrower.

CMA and Real Growth Index: CMA does not give real growth index. So it is better to compare the quantitative production, capacity utilization to ascertain real growth productivity rather than sales volume alone as sales growth can only be on account of inflation during the review period.

10.4 Limitation of Study

The data availability is proprietary, not readily shared for dissemination and is highly confidential. Assumptions and projections are based on current market conditions and have not taken into account the price volatility. Financial statements of the proposed project are subject to risks and uncertainties that could cause actual results to differ materially from those

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mentioned in the report. The risks and uncertainties include, but are not limited to, the following:

(i) Changes in Indian laws(ii) Changes in Indian in global economic conditions(iii) Changes in government regulations(iv) Introduction of new technologies

The staff although are very helpful but are not able to give much of their time due to their own work constraints.

The study is being done keeping in mind the policies of the Head Office. Due to the ongoing process of globalization and increasing competition, no single model

or method will suffice over a long period of time and constant up gradation will be required.

Glossary

Borrowing Entity: It is the entity that borrows money. For instance Videocon, Reliance borrowed money against their share of future production of oil from another company owned by them as a joint venture.

Commercial Lenders: Providers of debt both foreign and local.

Arranging bank: Bank that syndicate loan from various lenders as single bank cannot provide the entire loan.

Lead Bank: Coordinator for all banks for credit administration and compliance of covenants.

Rating Agency: Provide credit rating services for public debt (CRISIL, ICRA).

Technical Consultant: Consultants to the projects on technical matters such as energy, environment etc. Also analyses all technical aspects of the project.

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Credit Enhancement: Improvement of rating through structuring – extra collateral, guarantees from sponsor, debt service reserve fund etc.

Escrow A/C: Channelling of funds through a special account with a third party to be utilized in consultation with the lender.

Force Majeure: Occurrence of a type of risk outside the control of the participants like cyclone war etc.

Loan Amortization/ Loan Tenor: The repayment schedule of loans.

Pari Passu: A legal term that denotes equality of payment and security for all senior lenders.

Loan Agreement: Agreement entered into between the lenders and the project company.

Cost overruns: Unplanned cost incurred over the budgeted cost.

Cash Credit (CC) system: Cash credit method of delivery allows drawings by a borrowing enterprise to the extent of value chargeable assets less margin. This system dominates the scenario of credit dispensation by Indian banks.

Consortium System of credit delivery: In consortium lending, several banks pool together their banking resources and expertise in credit management and provide to a single borrower with a common appraisal, common documentation and a system of joint supervision and follow up. The consortium selects a leader which is called lead bank. Lead bank takes maximum exposure and carries out certain task like appraising the various aspects of credit proposal, convenes the consortium meeting etc.

Multiple Banking system: In multiple banking system, a company can arrange multiple finances through multiple banking arrangements. Under this system every bank has its own procedures, norms and different sets of documentation which the borrowing company has to follow. Unlike consortium system of financing there is no lead bank framing policies and procedures for other banks.

Syndication of credit: A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or

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investment banks known as arrangers. At the most basic level, arrangers serve the investment-banking role of raising investor funding for a company in need of credit. The company pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. This is a preferred mode of credit delivery especially when the amount of credit is large and is ling term in nature. Thus, syndication of credit is most suitable for long term cross border financing and long gestation period infrastructure projects.

Social Cost Benefit Analysis (SCBA) In SCBA the focus is on the social cost and benefits of the project. These tend to differ from the monetary cost and benefits of the project. SCBA helps in evaluating the individual project within the planning frameworks which spells out national economic objectives and broad allocation of resources.

In SCBA the focus is on the social costs and benefits of the project. These often tend to differ from the monetary costs and benefits of the project. The principal sources of differences are:

Market Imperfections Externalities Taxes and subsidies Concern for savings Concern for redistribution Merit wants

One principal approach for SCBA is UNIDO approach. It provides a comprehensive framework for SCBA in developing countries. This method of project appraisal involves 5 stages:

1. Calculation of the financial profitability of the project measured at market prices.

2. Obtaining the net benefit of the project measured in terms of economic (efficiency) prices.

3. Adjustment for the impact of the project on savings and investment.4. Adjustment for the impact of the project on income distribution.5. Adjustment for the impact of the project on merit goods and demerit

goods whose social values differ from their economic values. Pledge: It is delivery of goods by a borrower to a lender as security for the payment

of a debt or the performance of a promise. The ownership remains with the borrower but the possession of the goods is with the lender until the debt is paid.

Hypothecation: It is a mode of creating an equitable charge on a property to secure the payment of a debt in which the property itself continues to be in the possession of

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the debtor. It is a legal transaction whereby a merge charge is given on the goods for the amount of the debt but the hypothecated goods remain in the actual possession of the borrower. And neither possession nor ownership passes to the lender. The instrument which creates a charge is known as Letter of Hypothecation.

Lien: It is the right of one person to retain the goods or a security belonging to another person until a debt due from the latter is paid to the former. After a lien has been obtained the debtor remains the legal owner of the property although he loses his right to sell.

Mortgage: It is the creation or transfer of a legal or a equitable interest in property by the borrower to the lender as security for the payment of a debt or the discharge of some other obligation.

Moratorium: It is an agreement between a creditor and a debtor to allow additional time for the settlement of a debt.

s


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