1. PREPARATION OF PROJECT REPORT

2. AGENDA What is a project report?
What are different types of bank finances available?
What are the typical steps in availing a debt?
What are the typical contents of project report?
How to make financial projections and bank proposals?
We have discussed role of a CA, bankers perspective earlier. So we exactly know now what the lenders are looking at and now we will look at how to make a case study so that banks understand the deal quickly and get required info
Preparation of a project report is a vital exercise which needs to be carried out by a person raising a debt. However, preparation of the report is just documenting the thought s of the individual and creating a case for availing finance.
FOr preparation of a project report, one needs to be clear of the entire deal which is being worked out; especially understandin g of the product, market, promotors. Financial feasibility, sensitivity towards changes in assumptions, banks targeted etc.
There is no standard format, no standard rules like there has to be a 100% security cover, minimum 3 years profitable operations etc.
Its an art to create a case, document it and convince it to the bankers.

3. PROJECT REPORT
Project report is a document stating the existing facts about the organisation, projected business model, feasibility studies, lenders assistance required and own commitments.

4. TYPES OF BANK FINANCES Fund based Term Loan Foreign currency loan
General Purpose Corporate Loan
Working Capital Term Loan
Working Capital Loan
Equipment Finance
Lease rental discounting
Various products for import and export financing
Collateral free unsecured loans
Structured transactions
Non fund based
Bank guarantee and Letter of Credit limits
Term Loan: Typically 5 – 7 years, with moratorium. Feasibility indicators DSCR-Long term finance resource. Typically required a security cover ranging between 50% - 110% depending on banks. Normally range between 12% - 15% (current scenario)
Foreign currency loan: ECB – Directly from a foreign bank or brokered by an Indian Bank. RBI regulations on interest rates and end use purposes. Typically cost between 7% to 10% if hedged.
General purpose corporate loans: Not favourites of bankers as normally given when the standard thumbrules for setting limits are not applied. The amount disbursed is also less, depending on the bank. Eg. Loan to pay off creditors. Typically range between 13% - 16%. These are of shorter durations – normally max 3 yrs with minimal or no moratorium.
Working Capital Term Loan: Again something similar to the above, where the limits are preset and disbursements are dependent on actual expenses incurred by the entity. Eg. Given in case of construction of a mall, where asset is getting built and revenues will flow later
Working capital loan: Depends on the MPBF. Typically 25% of inventory and debtors. Debtors max 180 days. Inventory is computed less creditors. Sanctioned for one year and around 1% costlier than term loan
Equipment finance: Normally collateral free and provided only for purchase of assets. Specialised companies like Sriram tpt finance, L & T finance etc. They also have an option of leasing in some cases
Lease rental discounting: Loan provided to the developer towards fixed lease rental in advance. Typically computed at an IRR.
Various products for import and export financing: Buyers credit/ Packing credit in foreign currency
CGTMSE: Upto 1 cr. It’s a government scheme to support entrepreneurs where the business model is good but security is not available
Structured loans: Varied structures and typically favored by NBFC. IT may be in the form of quasi equity .
Non fund based limits: BG/ LC. Typically required for bids, imports etc.

5. UNDERSTANDING OF THE PROJECT
Understanding the project and finalizing the financial structure
Setting up a plant
Construction of a commercial or residential complex
Funding for infrastructure project
Funding for obtaining capital assets
Working capital finance
Understanding the required end use of money
Bank money cant be used for acquisition of land, capital market transactions and speculative businesses
Advisor needs to understand the project as assess independently whether the project is prima facie feasible or not. The primary considerations will be management expertise, equity contribution, security offered etc.
Project understanding is the most important part of the advisory as one arrives at the right form of debt, debt equity mix, right bankers, proposing a structure etc.
Discuss the variety under each of the above category
Setting up of a plant: Routine term loan. Depending on the magnitude of the loan decision for foreign currency / Rupee loan. Capital intensive or not. Eg. Engineering plant vs. Chemical process plant/ continuous process plant. Required gestation period for the plant. Eg. Pharma is high gestation.
Construction of commercial complex: Type of tenants, anchor commitments, equity contribution of promotor, execution and leasing history
Construction of Residential complex: Advance bookings, residential demand generators, price points, capability of completing the project in a timely manner,
BOT or BOOT. In case of BOT, execution records and incase of BOOT operational capabilities. Judgement on whether the tender will be accepted, security available. Visibility of cash flows. Eg. Road, solar etc.
Asset finance like tippers, machines and other equipments. Technological obsolescence risk, visibility of cash flows
Working capital: Domestic, packing credit, buyers credit etc.
Quick viability needs to be checked:
Legal: Give KPDL example of general purpose loan for acquisition of shares in a private listed company. If land is not NA then project cant be constructed on such land
Marketing viability: One cannot sell the best invertors in America and there no cases of power outage
Technical viability like environmental clearances
One needs the art to bifurcate the various requirements and fit the right banking product . Eg. A capital intensive company with primary components of project cost are land, building, imported equipments, domestic equipments, high gestation period.

6. IDENTIFYING THE RIGHT BANK
Every bank has created a niche in the current competitive market and the advisor should be capable of identifying the banks which will take up the proposal
Examples:
Infrastructure projects:
Funding to SME’s:
Established Manufacturing companies:
Greenfield projects:
Quasi equity fund raising:
Transportation finance:
Financing with high risk and less security cover but good business model:
Infrastructure projects: Typically infrastructure company like IDBI, PSU’s
Funding to SME’s: Foreign banks have made it a focus area
Established Manufacturing companies: Large Private banks
Greenfield projects: Small private banks/ Large co operative banks
Quasi equity fund raising: Certain private banks specialise in this field
Transportation finance: Equipment finance companies
Financing with high risk and less security cover but good business model: NBFC

7. DOCUMENT VERIFICATION
Before starting the credit appraisal process or preparation of a project report, one must obtain the following documents:
Memorandum and Articles of Association
List of directors and partners
Revenue records of land
Registration under Shop and Establishment Act
Audited financial statements for atleast prior three years and unaudited financial statements as at the date of project appraisal
List of securities the client will be offering
One should make a quick due diligence on the project before investing substantial time. Following things may be checked
Fradulent promoters
Dreamers/ Non meticulous borrowers
Over enthusiats
Untested technologies
Asset overvaluations

8. PROJECT REPORT The typical contents of a project report are as under:
Executive summary
Proposal to the banks
Project details
Promoter details
Details of proposed financial closure
Financial projections and ratio analysis
Sensitivity analysis
Market and technical analysis

9. PROPOSAL TO BANKS
This is the wish list of the borrower and your negotiations should start based in this document
Typically following points need to be covered in a proposal:
Total amount of facility
Purpose of loan
Desired rate of interest
Drawdown and repayment schedules
Desired security to be offered
Processing fees
Financial covenants
Show the proposal to the audience after discussing for a minute on each of the point above:
Facility amount should be as per the desired debt equity mix. This should be arrived based on the worst case scenario of cash flows. If not, a project overrun comes to the account of the promotor. Break down of the total facility requested
Purpose of the loan: Clearly state the purpose as any objection post draw down may create lot of execution problems
Desired rate of interest: Typically should be linked to base rate. Try to push for a cap incase of a foreign bank. Give example of experience of Citibank and Standard charter where cap was established.
Drawdown and repayment schedules: Draw down schedules should be adhered to otherwise bankers may not extend the drawal beyond a point of time. Can be in tranches. Can be directly to vendors or even to your account. Repayments can be equated/ ballooned, depending on the cash flows. Prepayment clauses should be factored in.
Desired security to be offered: Typically has to be immovable (around 50%, but again depending on banks). Most of the banks do not accept machineries as primary security. If security already provided to other banks, NOC from such banks to be obtained and charge given pari passu/ first charge/ second charge. Hard cash can be an option for security. Recurring deposits can also be negotiated. BG margin can also be considered for security. Latest valuation of land and building is taken. Shares can be pledged incase of listed securities. Other liquid securities can also be considered
Processing fees: IRR needs to be worked out where both the combined earnings of the banks need to be worked out. Eg. 5% processing fees and 11% ROI is costlier than 1% processing fee and 13% ROI. Can also be negotiated to a fixed fee incase of existing relationships
Financial covenants: DSCR, ICR, Escrow mechanism etc. Banks may state that incase the DSCR is not met in the interim review, equity contribution/ loan repayment to be made to match the preagreed DSCR
The proposal should be such that customers needs are met at the least IRR to banks. Hence an optimum mix needs to be worked out between the various products offered by the bankers

10. PROJECT DETAILS
This portion should provide the complete details and operational feasibility of a project
Land details
Man, Machine and Material details
Product specification. Details of raw materials and end use of finished product
List of top vendors and suppliers
List of assets
SWOT analysis
Land is the most critical part. Whether owned or leased. In MIDC or not. Any surplus area available for expansion. Clear or litigative title. Current valuation. Most important security. Explain Sonoma case regarding sale tax lien. One of the most important papers which needs to be checked by the advisor before submitting the proposal to the bankers
List of manpower with details of top management regarding education qualification and prior work experience. Provides executional capability comfort. Important for people specific industry like IT. Here the most important aspect is the promoter background
List of machines very important for capital intensive sectors like infrastructure.
Easy availability of material. Provide example of Sunbeam and regarding availability of blasting material
List of debtors and creditors important for evaluation. Eg. Kingfisher debtor will not be considered for the purpose of WC limits of their vendors
A SWOT analysis has to be prepared. For the weaknesses and threats an explanation should be provided stating the actions company intends to take to mitigate the risks.

11. FEASIBILITY ANALYSIS
Any proposal will be tested for feasibility by the bankers. Primarily two types of feasibility analysis are done:
Technical feasibility
Market feasibility
Technical feasibility can be proved the historic track record of the company incase of existing product. Incase of a new product, the feasibilty completely depends on some market study.
Specialised consultants in this field do a market study to comfort the lenders that the sales projections presumed are achievable

12. FINANCIAL VIABILITY
Following are the key drivers to prepare the financial projections. Bankers will look at these numbers at the time of credit appraisal.
Sales volumes
Growth pattern
Efficiency in operation
Short term survival
Long term survival
Safety of funds
Earnings from the unit to the bank
Sales Volume: Check on the installed capacity, growth percentage
Growth pattern: Benchmarking. Eg. Consumer goods volumes are growing
Efficiency in operations: Operating margins, EBIDTA margins, PBT margins etc
Short term survival: Current ratio. Need to check the old oustanding debtors as it may vitiate the analysis
Long term survival: DSCR
Safety of funds: Security cover
Bank IRR

13. FINANCIAL PROJECTIONS
Financial closure. Debt equity ratio to be finalised
Projected financial statements including Balance Sheet, Profit and Loss Account and Cash Flow Statement
Computation of relevant ratios, especially DSCR and ICR.
Sensitivity analysis for major attributes to test financial closure
Detailed list of projected end use of funds incase of a term loan.
Financial closure is the statement which proves that the sources of funds have been tied up. While arriving at the financial closure, consultant needs to work out various sensitivity scenarios and check whether the proposed funding pattern is holding good. Eg. Incase of residential real estate decrease in selling price or increase in major raw material costs, incase of solar financing, unit generation affected by lesser heat, incase of toll companies, reduction of traffic etc. Incase financial closure is not done after funding, the banks ask the promotors to bridge the funding gap or else one needs to go for a restructuring.
Incase of TL atleast 5 year projections should be made. All the assumptions must be jotted down properly. The assumptions should be backed up by some market analysis or some order projections or orders in hand. Statistical data can also be used to project future financials. If historic ratios are going to undergo a change, an explanation should be available to prove the change. Eg. Increase in PBT ratio (better utilisation of available capacity) etc.
Sales may be backed by a market survey. SG&A can be projected based on historic data
Cash Flow statement is very important as the bankers want to see whether enough cash is getting generated from the business to repay the debt. Along with the DSCR, the cash flow statement is equally important.
DSCR = PAT + Depreciation + Interest / (Principal + Interest). This should ideally by atleast 1.5 times. In this case too, an average over a period of projections is considered
Incase of working capital loans, every banker will have their own CMA format depending on maximum permissible borrowing power is worked out.

14. QUESTIONS
Financial closure is the statement which proves that the sources of funds have been tied up. While arriving at the financial closure, consultant needs to work out various sensitivity scenarios and check whether the proposed funding pattern is holding good. Eg. Incase of residential real estate decrease in selling price or increase in major raw material costs, incase of solar financing, unit generation affected by lesser heat, incase of toll companies, reduction of traffic etc. Incase financial closure is not done after funding, the banks ask the promotors to bridge the funding gap or else one needs to go for a restructuring.
Incase of TL atleast 5 year projections should be made. All the assumptions must be jotted down properly. The assumptions should be backed up by some market analysis or some order projections or orders in hand. Statistical data can also be used to project future financials. If historic ratios are going to undergo a change, an explanation should be available to prove the change. Eg. Increase in PBT ratio (better utilisation of available capacity) etc.
Sales may be backed by a market survey. SG&A can be projected based on historic data
Cash Flow statement is very important as the bankers want to see whether enough cash is getting generated from the business to repay the debt. Along with the DSCR, the cash flow statement is equally important.
DSCR = PAT + Depreciation + Interest / (Principal + Interest). This should ideally by atleast 1.5 times. In this case too, an average over a period of projections is considered
Incase of working capital loans, every banker will have their own CMA format depending on maximum permissible borrowing power is worked out.

15. THANK YOU
Financial closure is the statement which proves that the sources of funds have been tied up. While arriving at the financial closure, consultant needs to work out various sensitivity scenarios and check whether the proposed funding pattern is holding good. Eg. Incase of residential real estate decrease in selling price or increase in major raw material costs, incase of solar financing, unit generation affected by lesser heat, incase of toll companies, reduction of traffic etc. Incase financial closure is not done after funding, the banks ask the promotors to bridge the funding gap or else one needs to go for a restructuring.
Incase of TL atleast 5 year projections should be made. All the assumptions must be jotted down properly. The assumptions should be backed up by some market analysis or some order projections or orders in hand. Statistical data can also be used to project future financials. If historic ratios are going to undergo a change, an explanation should be available to prove the change. Eg. Increase in PBT ratio (better utilisation of available capacity) etc.
Sales may be backed by a market survey. SG&A can be projected based on historic data
Cash Flow statement is very important as the bankers want to see whether enough cash is getting generated from the business to repay the debt. Along with the DSCR, the cash flow statement is equally important.
DSCR = PAT + Depreciation + Interest / (Principal + Interest). This should ideally by atleast 1.5 times. In this case too, an average over a period of projections is considered
Incase of working capital loans, every banker will have their own CMA format depending on maximum permissible borrowing power is worked out.