93119849 working-capital

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

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

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.

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.

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.

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
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

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

I) Introduction
Definition of banks
In 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.
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
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.
Operations of
Bank
Balancing
Profitability with
Liquidity
Management
Management of
Reserves
Creation of Credit

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.
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

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
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
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.
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 India
Exposure to Limit
1. Single Borrower 15% of capital fund (Additional 5% on infrastructure
exposure)
2. Group Borrower 40% of capital fund (Additional 10% on infrastructure
exposure)
3. NBFC 10% of capital fund
4. NBFC – AFC 15% of capital fund
5. 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 fund
Source: 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".
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
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
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
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
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
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
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:
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.
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 up
ii. Future trends of production and sales
iii. Estimates of costs, expenses, earning and profitability
iv. Cash flow statements during the period of loan
4.2 Procedure of Term Loan Appraisal
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
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
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 project
ii. Economic viability of the project
iii. Financial viability of the project
iv. 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 Site
b) Raw Material
c) Plant and Machinery, Plant Capacity and Manufacturing Process
d) Land
e) Building
f) Technology & process
g) Size of the plant
h) Power Supply
i) Water Supply
j) Labour supply
k) 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;
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 Analysis
The 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 performance
More 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 aspects
The 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
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
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
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
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 –
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
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
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

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

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

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 Description
Form I Particulars of existing/proposed limits
Form II Operating Statement
Form III Analysis of Balance Sheet
Form IV
Comparative statement of Current Assets and
Current Liabilities.
Form V Computation of MPBF for Working Capital
Form VI Fund Flow Statement

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. B
c) Average period for which finished goods are in store. C
d) 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

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.
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 –
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:
 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.
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
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. A
b) 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. C
d) Time for shipment and consignment to reach the place of customer on whose
behalf L/C is to be opened. D
e) Credit period(usance period) agreed between the beneficiary & the customer. E
f) 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:
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.
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
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
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 evaluation
It 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 Evaluation
This 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.
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
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
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
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:
) 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.
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.
(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 Rs. 1031crores

180crores)
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
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
external rating should be mapped
to the internal rating)
ABC Pvt. Ltd. is a 99.99% owned subsidiary of PQR.
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,
11.11.2010
11.02.2011.
.

received at HO
Date of placing the proposal
before competent authority
Remarks
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
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
NPA/OTS/Compromise/unscrupulous defaulters
No
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 any
ii) 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

93119849 working-capital

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