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HLCPE

HLCPE. Project Finance. Session I. Project Finance : An Overview, Project formulation & Appraisal. GITCO. A Multi-disciplinary Consultancy Organisation Promoted by National & State level Financial Institutions and Industrial Development Agencies.

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HLCPE

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  1. HLCPE Project Finance

  2. Session I Project Finance : An Overview, Project formulation & Appraisal

  3. GITCO • A Multi-disciplinary Consultancy Organisation • Promoted by National & State level Financial Institutions and Industrial Development Agencies. • Close linkages with Central and State Governments • Offers/undertakes consultancy to / for • Private Sector Companies • Government/Public Sector organizations • Works at all India level

  4. GITCO : Wide Spectrum of Consultancy Service Mix • New Projects • Project Identification • DPR / TEFR • Project Appraisal • For existing / working Projects / Units • Modernization / expansion / Diversification Projects • Diagnostic Reports • Valuation of Fixed assets

  5. SMEs • Backbone of economy world over • More so to India’s economy • Huge & diversified infrastructure • Provides great employment opportunities • To face constrains of Indian economy, SMEs are innovative & risk taking

  6. SME Finance. . . • Unlike large units … • Which can raise finance from Capital market or Foreign sources • SMEs are dependent on Banks / SFCs

  7. SME Finance . . . • India has . . . • One of the most extensive and robust banking system in the world

  8. Issues : Perception of SME Sector • Finance • Inadequate • Delayed • Costly • Inadequate Working Capital • The flow of credit to SMEs has not kept pace with its growth

  9. SME Finance : Perception of Banking Sector • Considering huge & vast SME base significant success in financing it • Issues of • Higher incidence of sickness / NPAs • Higher processing cost • Difficulty in establishing credit worthiness of project proposals • Unavailability of authentic data, analysis & projections in required format

  10. SME Finance In a market driven economy lack of authentic and properly documented data . . . . . . makes it difficult for the lenders to appraise the true value of proposals

  11. Project Proposals / Feasibility assessment

  12. Project Finance Phase of Project Cycle Pre-investment Investment Operating Phase Identification Negotiation/ Commissioning (Opportunity Study) Constraint Start-up Pre-selection Engg. Design Replacement (Pre-feasibility Study) Rehabilitations Preparation Construction Expansion/ (Feasibility Study) innovation Support Studies Pre-prodn. marketing Appraisal (Appraisal Report)

  13. The pre-investment phase of Global Project Management is the most important because the success or failure of a project depends on its findings and interpretation

  14. Project Report / Feasibility Report • Feasibility Reports (DPR, TEFR, TEV, etc.) traditionally are prepared by investors • These are basically proposals to the funding agencies, outside investors, etc. • Studies/analyses the project from investor’s point of view • Seeks finances, incentives, etc.

  15. Project Report for Soliciting Funds • Should be as per the requirement of the concerned funding agency • It should be such which is acceptable by other funding agencies also with small changes

  16. Project Finance:Main Components of Feasibility Report • Introduction • Promoters Background & Past Performance • Market Assessment • Technical Feasibility Analysis • Cost of Project & Means of Finance • Financial Viability Analysis • Key Elements & Concluding Observations

  17. TECHNICAL FEASIBILITY • Is it feasible to Manufacture/ Execute • The Product(s) • The Service • Components/Factors which have to be considered

  18. Technical Analysis • Machineries / Equipments • Raw Materials • Technology options • Infrastructure and Utilities • Manpower • Compliance to Statutory & Industry Specific Norms

  19. TECHNICAL FEASIBILITY (Contd.) The Technical Feasibility Analysis helps in deciding: • Output levels (Quantity) • Quality / Nature of Output • Cost • Pricing

  20. Market Feasibility FOCUS • Focuses on gross market demand - present and future • Highlights gap : between expected demand and supply (quantum & Characteristics) for a given product • Gap could be positive or negative

  21. Approaches to Information Collection Talk : To Customers, Traders, competitors Observe: Competitors and traders in action Talk: : To knowledgeable people Refer : To published information Surf : The Net

  22. Information Gathering Methods • Secondary Source Research • Primary Data Collection • Test Marketing

  23. Secondary Sources of Information Normally the Starting Point • Important to save resources and decide further work • Sources: • Publications (trade, industry, magazines) • Govt. Notifications • Industry Directories • Census • News Paper cuttings • Paid Reports • Net

  24. Primary Research Typically known as Market Survey (Field Survey) Steps: • Sampling • Questionnaire • Obtaining Information • Scrutiny & Analysis

  25. Market Survey :Questionnaire • Is it required ? • Open Ended questions • Close Ended questions • Structured / Un-structured • Multiple choice questions • Ranking questions

  26. Market SurveyQuestionnaire Design : Some Tips • Keep it brief • Give background • Proper Sequence • Do not leave things to investigators discretion (e.g. Units) • Avoid Country specific Sensitive questions • Language- more than one if so required • Open Ended Questions at the end

  27. Financial Viability • Cost of Project • Means of Finance • Financial Returns

  28. Feasibility / Viability exercise to demonstrate . . . • Projects’ and Promoters’ capability to • Provide required finance • Produce • Market • Achieve financial returns • Repayment to the lender institute • Supported by authentic documents & Realistic assumptions

  29. Towards Project Finance • Identification & Selection of Project • Feasibility Report • Project Appraisal Project Finance Tie up

  30. Project Finance Project Appraisals

  31. Project Appraisals • Decision making tool / mechanism by Funding / Licensing Agencies • Pre-investment stage • Funding / sanctioning agencies’ point of view

  32. Project Appraisals : Project Financing Decisions • The Funding agency would assess the Project Report • Cross-checking of all & particularly key aspects & assumptions • Authenticity & validity of data • Can also be undertaken by an independent organisation (e.g. GITCO) • Based on Project Report & its Appraisal decision for Project Financing would be taken

  33. Session II • Financing of Projects • Financing Methods • Documentation in Project Financing

  34. Project Financing • Cost of Project • Means of Finance • Financial Returns

  35. Cost of Project : Main components • Land & its development • Building • Plant and Machineries • Technology • Other Assets • P&P Expenses • Contingencies • Working Capital Margin Capital Investment

  36. Capital Investment :Land & site development • Rate • Status of Land (Contour Mapping) • Cost of Site Development • Any Statutory Requirements

  37. Capital Investment :Building • Production Block • Raw Materials • Finished Goods • Quality Control • Office Block • Special Provisions • Air conditioning • Service Floor • Packing Division • Utilities • Rate of Construction

  38. Capital Investment :Plant & Machineries • Main Equipments • Supporting & Balance Equipments • Quality Control • ETP • Utilities • Quoted Price • Negotiated Price

  39. Cost of Project Preliminary & Pre-operative Expenses • Legal, Financial & other Consultancy Fees • Traveling & Conveyance • Salary drawn during construction period • Interest on Term Loan during construction period • Other Miscellaneous Expenses

  40. Cost of Project Working Capital Margin • Working Capital includes : raw material stock, Work in Process, Finished Goods Storage, Receivables, Some Admn Expenses.. • Bank Loan may be to the extent of 70% • The balance is to be brought by promoters • This is WC Margin

  41. Sources of Finance • Debt • Equity

  42. Managing Own Finance . . . is the fundamental need

  43. Sources & Modes of Finance • Term Loan • Own Funds / Promoter's Contribution • Unsecured loans • Incentive / Subsidy • Bridge Loan • IPO : market • Public Private Partnership (PPP)

  44. Sources of Finance • Term Loan available on Fixed Assets • Quantum of Term Loan vary • Term loan on P& P as well as Contingency also may be available • Term loan on Miscellaneous Fixed Assets not sure • Ratio of Term Loan & Own Funds important

  45. Sources of Finance General : All India • ICICI Bank • IDBI Bank • IFCI • SIDBI • Nationalised Banks • Private Sector Banks

  46. Sources of Project Finance (Contd…) General : State Level • State level Finance Corporations (e.g. APSFC) • State level Co-operative Banks • Branches of the all India level Institutes Specific: • Venture Finance Companies, e.g. GVFL, Ahmedabad • NABARD • IDFC

  47. Sources of Project Finance (Contd…) • Public Private Partnership (PPP) • Joint Sector • Joint Venture • Line of Credit for Plant & Machineries

  48. Sources of Project Finance (Contd…) • Subsidy / Grants / Interest subsidy • Central Government Department/Agencies • State Government Department/Agencies • Development Financial Institutions • Ministry of Food Processing • Ministry of Alternate Energy • Ministry of Environment and Forest • Ministry of Industries • MSME Development Institute, Government of India

  49. Credit Guarantee Scheme • Credit Guarantee Funds Trust for Micro & Small Enterprises (CGFTMSE) by GoI & SIDBI • An institutional mechanism to support banks / FIs • Covers manufacturing and Service Sector • Eligible loan limit Rs. 1.00 crore. • The scheme does levy charges : time guarantee fees and annual service charges

  50. Credit Guarantee Scheme :Some suggestions for SME Finance • Work out special appraisal yardsticks / norms for Start up units • Also industry specific norms • Increasing the limit from Rs. 1.00 crore to 3.00 crores • Reduced charges for certain categories • Sensitisation of the scheme to the industry / business

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