A PROJECT REPORT ON

“Project Finance Performance for SBI”

SUBMITTED BY:
S. Laxmi Reddy
+3 COMMERCE, FINAL YEAR
ROLL NO: 011603CM268

Under The Guidance Of

Dr. YAJNYA DUTTA NAYAK
(Lecture in Commerce)

UNDER GRADUATE DEPARTMENT OF COMMERCE,

KHALLIKOTE AUTONOMOUS COLLEGE BERHAMPUR,

GANJAM

Session 2016-2019
 CERTIFICATE

This is certifying that S. Laxmi Reddy, a student of B.COM Final year in

Khallikote Autonomous College, Berhampur, bearing Exam Roll no
011603CM268, has worked a project on “Project Finance Performance for
SBI” under the guidance and supervision. This project report has the requisite
standard and to best of my knowledge no part of it has been reproduce from any
other project, monograph, report or book.

(Signature)

2
 DECLARATION

I hereby declare that, this project work entitled “Project Finance Performance
for SBI” is my work carried out under the guidance of my faculty guide Dr.
Yajnya Dutta Nayak sir. This project report is being submitted by me alone, at
Khallikote Autonomous College, Berhampur for the partial fulfillment of the
course B.com [Hons.]. This report neither full nor in part has ever been submitted
for award of any other degree of either this college/university or any other
college/university.

(S. Laxmi Reddy)

Roll no: 011603CM268
B. Com Final Year
Place: Berhampur
Date: _____________

3
 ACKNOWLDEGEMENT

I would like to express my gratitude to all those who gave me the possibilities to
complete this project. I would like to thank Dr. Yajnya Dutta Nayak, Lecture
in Commerce of Khallikote College who has provided such an opportunity and
motivation to gain knowledge through this type of project. This will help me a
lot in my career.

Secondly, I would like to bestow my gratitude to the Khallikote Autonomous

College, which provides me such opportunity to undertake the project report on
Project Finance Performance for SBI for providing valuable input resources
for preparing project like library.

I am thankful to my other faculty members, my friends who gave their full-

fledged co-operation for successful of my project.

(S. Laxmi Reddy)

Roll no: 011603CM268
B. Com Final Year

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 CONTENT

SL. NO. CHAPTER PAGE NO.

1 Executive summary 06-07

▪ Main Objective
▪ Methodology
2 Industrial Profile 08-17
▪ History of Banking in India
▪ Nationalization
▪ Liberalization
▪ Current Scenario
▪ Bank overview
▪ Mission Statement
▪ Vision Statement
▪ Value
3 Theoretical Background for the Project Work 18-33
▪ Project Financing
▪ Principle Advantages and Objectives
▪ Process of Project Financing
▪ The Project Company
▪ Project Agreement
▪ Principal Agreement in a Project Financing
▪ Risk Minimization Process
▪ Type of Risk
4 Financial Analysis 34
• Ratio Analysis
5 Measures Taken by SBI When the Repayment is Not 35-37
Possible
• Analysis
• Finding
• Recommendation
• Limitation of Study
6 Conclusion 38
Bibliography 39

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 Executive Summary

Title of the project “Financial Appraisal of the Project Financed By

SBI”. As a part of curriculum, every student studying under graduation has to
undertake a project on a particular subject assigned to him/her. Accordingly, I
have been assigned the project work on the study of project financing in Banking
Sector. As it is rightly said that finance is the life blood of every business
so every business need fund for smooth running of its activities and bank is the
one of the sources through which the business gets funds, before financing the
bank appraise the projects and if the projects meet the requirement of the bank
rules than only, they will finance.

Project financing is commonly used as a financing method in capital

intensive industries for projects requiring large investments of funds, such as the
construction of power plants, pipelines, transportation systems, mining facilities,
industrial facilities and heavy manufacturing plants. The core area of this project
focuses on the financial appraisal of SL flow controls, which has started
Manufacturing of industrial valves which is financed by SBI. This project has
been undertaken at State Bank of India, Hubli branch which is one of the largest
banks in India having vast domestic network of over 9000 branches. SBI
deals with all financial activities which involves all types of deposits, advancesi
ncluding project financing, mutual funds etc.

Financial appraisal which mainly leads to the feasibility study consisting

of ratioanalysis and capital budgeting calculations.

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Main Objective
“Financial appraisal of project”
Sub Objectives -
➢ To know the projects financed by SBI.
➢ To know the policies of SBI towards the project financing.
➢ To know the risks involved in projects financing.
➢ To appraise the projects using financial tools.
➢ To know the measures taken by bank when the clients fail to repay the
amount.

Methodology: -
Data collection method: The report will be prepared mainly using secondary data
viz,
Secondary data
www.sbi.com.
Company manuals.
Commercial Banks Book.
The techniques, which would be used for the study:
1. Discussions with Bank guide and customers.
2. By studying projects reports.3. Using Project Techniques:

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 INDUSTRIAL PROFILE

HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a
healthy economy. The banking system of India should not only be hassle free but
it should be able to meet new challenges posed by the technology and any other
external and internal factors.

For the past three decades India’s banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only Metropolitans or Cosmopolitans in India. In
fact, Indian banking system has reached even to the remote corners of the
country. This is one of the main reasons for India’s growth. The government’s
regular policy for Indian bank since 1969has paid rich dividends with the
nationalization of 14 major private banks of India. The first bank in India, though
conservative, was established in 1786. From 1786 till today, the journey of Indian
Banking System can be segregated into three distinct phases. They are as
mentioned below:

▪ Early phase from 1786 to 1969 of Indian Banks.

▪ Nationalization of Indian Banks and up to 1991 prior to Indian.
▪ Banking sector Reforms.
▪ New phase of Indian Banking System with the advent of Indian.
▪ Financial & Banking Sector Reforms after 1991.

Phase I
The General Bank of India was set up in the year 1786. Next came Bank
of Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank
of Bombay (1840) and Bank of Madras (1843) as independent units and called it

8
Presidency Banks. These three banks were amalgamated in 1920 and Imperial
Bank of India was established which started as private shareholders banks, mostly
European shareholders.
In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at
Lahore. Between 1906 and1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve
Bank of India came in 1935.

During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were approximately
1100 banks, mostly small. To streamline the functioning and activities of banks,
mostly small. To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of 1965
(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers
for the supervision of banking in India as the Central Banking System.

During those days’ public has lesser confidence in the banks. As

an aftermath deposit mobilization was slow. Abreast of it the savings bank facility
provided by the Postal department was comparatively safer. Moreover, funds
were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and state government all over the country.

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Seven banks forming subsidiary of State Bank of India was nationalized in 1960
on 19th July 1969, major process of nationalization was carried out. It was the
effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major
commercial banks in the country were nationalized. Second phase of
nationalization Indian Banking Sector Reform was carried out in 1980 with seven
more banks. This step brought 80% of the banking segment in India under
Government ownership. The following are the steps taken by the Government of
India to Regulate Banking Institutions in the Country:

❖ 1949: Enactment of Banking Regulation Act.

❖ 1955: Nationalization of State Bank of India.
❖ 1959: Nationalization of SBI subsidiaries.
❖ 1961: Insurance cover extended to deposits.
❖ 1969: Nationalization of 14 major banks.
❖ 1971: Creation of credit guarantee corporation.
❖ 1975: Creation of regional rural banks.
❖ 1980: Nationalization of seven banks with deposits over 200 cores.

After the nationalization of banks, the branches of the public sector bank
India raised to approximately 800% in deposits and advances took a huge jump
by 11000%. Banking in the sunshine of Government ownership gave the public
implicit faith and immense confidence about the sustainability of these
institutions.

Phase III

This phase has introduced many more products and facilities in the
banking sector in its reforms measure. In 1991, under the chairmanship of M.
Narasimham, a committee was set up by his name, which worked for the
Liberalization of Banking Practices.

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 The country is flooded with foreign banks and their ATM stations. Efforts
are being put to give a satisfactory service to customers. Phone banking and net
banking is introduced. The entire system became more convenient and swifter.
Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is

shelteredfromany crisis triggered by any external macroeconomics shock as oth
er East AsianCountries suffered. This is all due to a flexible exchange rate
regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange
exposure.

Banking in India originated in the first decade of 18th century with The
General Bank of India coming into existence in 1786. This was followed by Bank
of Hindustan. Both these banks are now defunct. The oldest bank in existence in
India is the State Bank of India being established as “The Bank of Calcutta” in
Calcutta in June 1806. Couple of Decades later, foreign Banks like HSBC and
Credit Lyonnais Started their Calcutta operations in 1850s. At that point of time,
Calcutta was the most active trading port, mainly due to the trade of British
Empire and due to which banking actively took roots there and prospered. The
first fully Indian owned bank was the Allahabad Bank set up in 1865.

By 1900, the market expanded with the establishment of banks like Punjab
National Bank in 1895 in Lahore; Bank of India in 1906 in Mumbai-both of
which were founded under private ownership. Indian Banking Sector was
formally regulated by Reserve Bank Of India from 1935. After India’s
independence in 1947, the Reserve Bank was nationalized and given broader
powers.

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SBI Group

The Bank of Bengal, which later became the State Bank of India. State
Bank of India with its seven associate banks commands the largest banking
resources in India.

Nationalization

The next significant milestone in Indian Banking happened in late 1960s

when the then Indira Gandhi government nationalized on 19th July 1949, 14
major commercial Indian banks followed by nationalization of 6 more
commercial Indian banks in 1980. The stated reason for the nationalization was
more control of credit delivery. After this, until 1990s, the nationalized banks
grew at a leisurely pace of around 4% also called as the Hindu growth of
the Indian economy. After the amalgamation of New Bank of India with Punjab
National Bank, currently there are 19 nationalized banks in India.

Liberalization-

In the early 1990’s the then Narasimha Rao government embarked a policy
of liberalization and gave licenses to a small number of private banks, which
came to be known as New generation tech-savvy banks, which included banks
like ICICI and HDFC. This move along with the rapid growth of the economy of
India, kick started the banking sector in India, which has seen rapid growth with
strong contribution from all the sectors of banks, namely Government banks,
Private Banks and Foreign banks. However there had been a few hiccups for these
new banks with many either being taken over like Global Trust Bank while others
like Centurion Bank have found the going tough.

The next stage for the Indian Banking has been set up with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign
Investors in Banks may be given voting rights which could exceed the present

12
cap of 10%, at present it has gone up to 49% with some restrictions. The new
policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods
of working for traditional banks. All this led to the retail boom in India. People
not just demanded more from their banks but also received more.

CURRENT SCENARIO

Currently (2007), overall, banking in India is considered as fairly mature

in terms of supply, product range and reach-even though reach in rural India still
remains a challenge for the private sector and foreign banks. Even in terms of
quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets-as compared to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the
Indian Rupee is to manage volatility-without any stated exchange rate-and this
has mostly been true.

With the growth in the Indian economy expected to be strong for quite
some time-especially in its services sector, the demand for banking services-
especially retail banking, mortgages and investment services are expected to be
strong. M&As, takeovers, asset sales and much more action (as it is unraveling
in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to

increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is
the first time an investor has been allowed to hold more than 5% in a private
sector bank since the RBI announced norms in 2005 that any stake exceeding 5%
in the private sector banks would need to be vetted by them.

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 Currently, India has 88 scheduled commercial banks (SCBs) - 28 public
sector banks (that is with the Government of India holding a stake), 29 private
banks (these do not have government stake; they may be publicly listed and traded
on stock exchanges) and 31 foreign banks. They have a combined network of
over 53,000 branches and17,000 ATMs. According to a report by ICRA Limited,
a rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.

Bank Overview
STATE BANK OF INDIA

Not only many financial institution in the world today can claim the
antiquity and majesty of the State Bank Of India founded nearly two centuries
ago with primarily intent of imparting stability to the money market, the bank
from its inception mobilized funds for supporting both the public credit of the
companies governments in the three presidencies of British India and the private
credit of the European and India merchants from about 1860s when the Indian
economy book a significant leap forward under the impulse of quickened world
communications and ingenious method of industrial and agricultural production
the Bank became intimately in valued in the financing of practically and mining
activity of the Sub- Continent Although large European and Indian merchants and
manufacturers were undoubtedly thee principal beneficiaries, the small man
never ignored loans as low as Rs.100 were disbursed in agricultural districts
against glad ornaments. Added to these the bank till the creation of the Reserve
Bank in1935 carried out numerous Central – Banking functions.

Adaptation world and the needs of the hour has been one of the strengths
of the Bank, In the post-depression exe. For instance – when business
opportunities become extremely restricted, rules laid down in the book of
instructions were relined to ensure that good business did not go post. Yet seldom
14
did the bank contravenes its value as depart from sound banking principles to
retain as expand its business. An innovative array of office, unknown to the world
then, was devised in the form of branches, sub branches, treasury pay office, pay
office, sub pay office and out students to exploit the opportunities of an expanding
economy. New business strategy was also evaded way back in 1937 to render the
best banking service through prompt and courteous attention to customers.

A highly efficient and experienced management functioning in a well-

defined organizational structure did not take long to place the bank an executed
pedestal in the areas of business, profitability, internal discipline and above all
credibility Impeccable financial status consistent maintenance of the lofty
traditions if banking an observation of a high standard of integrity in its operations
helped the bank gain a pre-eminent status. No wonders the administration for the
bank was universal as key functionaries of India successive finance minister of
independent India Resource Bank of governors and representatives of chamber
of commercial showered economics on it.

Modern day management techniques were also very much evident in the
good old days years before corporate governance had become a puzzled the banks
bound functioned with a high degree of responsibility and concerns for the
shareholders. An unbroken record of profits and a fairly high rate of profit and
fairly high rate of dividend all through ensured satisfaction, prudential
management and asset liability management not only protected the interests of
the Bank but also ensured that the obligations to customers were not met. The
traditions of the past continued to be upheld even to this day as the State Bank
years itself to meet the emerging challenges of the millennium.

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ABOUT LOGO

THE PLACE TO SHARE THE NEWS ...……

SHARE THE VIEWS ……

Togetherness is the theme of this corporate loge of SBI where the world of
banking services meets the ever-changing customers’ needs and establishes a link
that is like a circle, it indicates complete services towards customers. The logo
also denotes a bank that it has prepared to do anything to go to any lengths, for
customers.

The blue pointer represents the philosophy of the bank that is always
looking for the growth and newer, more challenging, more promising direction.
The key hole indicates safety and security.

MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service Group,

with world-class standards and significant global committed to excellence in
customer, shareholder and employee satisfaction and to play a leading role in
expanding and diversifying financial service sectors while containing emphasis
on its development banking rule.

VISION STATEMENT:

➢ Premier Indian Financial Service Group with prospective world-class

Standards of efficiency and professionalism and institutional values
➢ Retain its position in the country as pioneers in Development banking.
➢ Maximize the shareholders’ value through high-sustained earnings per
Share.
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 ➢ An institution with cultural mutual care and commitment, satisfying and
➢ Good work environment and continues learning opportunities.

VALUES

➢ Excellence in customer service

➢ Profit orientation
➢ Belonging commitment to Bank
➢ Fairness in all dealings and relations
➢ Risk taking and innovative
➢ Team playing
➢ Learning and renewal
➢ Integrity
➢ Transparency and Discipline in policies and systems

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 THEORETICAL BACKGROUND FOR THE PROJECT WORK

PROJECT FINANCING:
Introduction-
Project financing is an innovative and timely financing technique that has
been used on many high-profile corporate projects, including Euro Disneyland
and the Euro tunnel. Employing a carefully engineered financing mix, it has long
been used to fund large-scale natural resource projects, from pipelines and
refineries to electric-generating facilities and hydroelectric projects. Increasingly,
project financing is emerging as the preferred alternative to conventional methods
of financing infrastructure and other large-scale projects worldwide.

Meaning-
Project financing involves non-recourse financing of the development and
construction of a particular project in which the lender looks principally to the
revenues expected to be generated by the project for the repayment of its loan and
to the assets of the project’s collateral for its loan rather than to the general credit
of the project sponsor.

Rationale-
Project financing is commonly used as a financing method in capital-
intensive industries for projects requiring large investments of funds, such as the
construction of power plants, pipelines, transportation systems, mining facilities,
industrial facilities and heavy manufacturing plants. The sponsors of such
projects frequently are not sufficiently creditworthy to obtain traditional
financing or are unwilling to take the risks and assume the debt obligations
associated with traditional financings. Project financing permits the risks
associated with such projects to be allocated among a number of parties at levels
acceptable to each party.

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PRINCIPLE ADVANTAGE AND OBJECTIVES

Non-Recourse
The typical project financing involves a loan to enable the sponsor to
construct a project where the loan is completely "non-recourse" to the sponsor,
i.e., the sponsor has no obligation to make payments on the project loan if
revenues generated by the project are insufficient to cover the principal and
interest payments on the loan. In order to minimize the risks associated with a
non-recourse loan, a lender typically will require indirect credit supports in the
form of guarantees, warranties and other covenants from the sponsor, its affiliates
and other third parties involved with the project.

Maximize Leverage
In a project financing, the sponsor typically seeks to finance the costs of
development and construction of the project on a highly leveraged basis.
Frequently, such costs are financed using 80 to 100 percent debt. High leverage
in a non-recourse project financing permits a sponsor to put less in funds at risk,
permits a sponsor to finance the project without diluting its equity investment in
the project and, in certain circumstances, also may permit reductions in the cost
of capital by substituting lower-cost, tax-deductible interest for higher-cost,
taxable returns on equity.

Off-Balance sheet Treatment

Depending upon the structure of a project financing, the project sponsor
may not be required to report any of the project debt on its balance sheet because
such debt is on-recourse or of limited recourse to the sponsor. Off-balance-sheet
treatment can have the added practical benefit of helping the sponsor comply with
covenants and restrictions relating to borrowing funds contained in other
indentures and credit agreements to which the sponsor is a party.

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Maximize Tax-Benefits
Project financings should be structured to maximize tax benefits and to
assure that all available tax benefits are used by the sponsor or transferred, to the
extent permissible, to another party through a partnership, lease or other vehicle.

DISADVANTAGES
Project financings are extremely complex. It may take a much longer
period of time to structure, negotiate and document a project financing than a
traditional financing, and the legal fees and related costs associated with a project
financing can be very high. Because the risks assumed by lenders may be greater
in a non-recourse project financing than in a more traditional financing, the cost
of capital may be greater than with a traditional financing.

PROCESS OF PROJECT FINANCING

Feasibility Study
As one of the first steps in a project financing is hiring of a technical
consultant and he will prepare a feasibility study showing the financial viability
of the project. Frequently, a prospective lender will hire its own independent
consultants to prepare an Independent feasibility study before the lender will
commit to lend funds for the project.

Contents
The feasibility study should analyze every technical, financial and other aspect of
the project, including the time-frame for completion of the various phases of the
project development, and should clearly set forth all of the financial and other
assumptions upon which the conclusions of the study are based, Among the more
important items contained in a feasibility study are:

1. Description of project
2. Description of sponsor(s).
3. Sponsors' Agreements.
4. Project site.

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 5. Governmental arrangements.
6. Source of funds.
7. Feedstock Agreements.
8. Off take Agreements.
9. Construction Contract.
10.Management of project.
11.Capital costs.
12.Working capital.
13.Equity sourcing.
14.Debt sourcing.
15.Financial projections.
16.Market study.
17.Assumptions.

THE PROJECT COMPANY

Legal Form
Sponsors of projects adopt many different legal forms for the ownership of
the project. The specific form adopted for any particular project will depend upon
many factors, including:

❖ The amount of equity required for the project

❖ The concern with management of the project
❖ The availability of tax benefits associated with the project
❖ The need to allocate tax benefits in a specific manner among the project
company investors.

The Three Basic Forms for Ownership of a Project Are:

1. Corporations-This is the simplest form for ownership of a project. A

special purpose corporation may be formed under the laws of the
jurisdiction in which the project is located, or it may be formed in some
other jurisdiction and be qualified to do business in the jurisdiction of the
project.

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 2. General Partnerships-The sponsors may form a general partnership. In
most jurisdictions, a partnership is recognized as a separate legal entity and
can own, operate and enter into financing arrangements for a project in its
own name. A partnership is not a separate taxable entity, and although a
partnership is required to file tax returns for reporting purposes, items of
income, gain, losses, deductions and credits are allocated among the
partners, which include their allocated share in computing their own
individual taxes. Consequently, a partnership frequently will be used when
the tax benefits associated with the project are significant. Because the
general partners of a partnership are severally liable for all of the debts and
liabilities of the partnership, a sponsor frequently will form a wholly
owned, single-purpose subsidiary to act as its general partner in a
partnership.

3. Limited Partnerships-A limited partnership has similar characteristics to

a general partnership except that the limited partners have limited control
over the business of the partnership and are liable only for the debts and
liabilities of the partnership to the extent of their capital contributions in
the partnership. A limited partnership may be useful for a project financing
when the sponsors do not have substantial capital and the project requires
large amounts of outside equity.
4. Limited Liability Companies-They are a cross between a corporation and
a limited partnership.

PROJECT COMPANY AGREEMENTS

Depending on the form of project company chosen for a particular project
financing, the sponsors and other equity investors will enter into a stockholder
agreement, general or limited partnership agreement or other agreement that sets
forth the terms under which they will develop, own and operate the project. At a
minimum, such an agreement should cover the following matters:

22
 ❖ Ownership interests.
❖ Capitalization and capital calls.
❖ Allocation of profits and losses.
❖ Distributions.
❖ Accounting.
❖ Governing body and voting.
❖ Day-to-day management.
❖ Budgets.
❖ Transfer of ownership interests.
❖ Admission of new participants.
❖ Default.
❖ Termination and dissolution.

PRINCIPAL AGREEMENTS IN A PROJECT FINANCING-

1. Construction Contract: -
Some of the more important terms of the construction contracts are-
❖ Project Description-The construction contract should set for the detailed
description of all the Work necessary to complete the project
❖ Price: - Most project financing construction contracts are fixed- price
contracts although some projects may be built on a cost- plus basis. If the
contract is not fixed-price, additional debt or equity contributions may be
necessary to complete the project, and the project agreements should
clearly indicate the party or parties responsible for such contributions.
❖ Payment- Payments typically are made on a "milestone" or "completed
work" basis, with a retain age. This payment procedure provides an
incentive for the contractor to keep on schedule and useful monitoring
points for the owner and the lender.
❖ Completion Date- The construction completion date, together with any
time extensions resulting from an event of force majeure, must be

23
 consistent with the parties' obligations under the other project documents.
If construction is not finished by the completion date, the contractor
typically is required to pay liquidated damages to cover debt service for
each day until the project is completed. If construction is completed early,
the contractor frequently is entitled to an early completion bonus.
❖ Performance Guarantees- The contractor typically will guarantee that the
project will be able to meet certain performance standards when
completed. Such standards must be set at levels to assure that the project
will generate sufficient revenues for debt service, operating costs and a
return on equity. Such guarantees are measured by performance tests
conducted by the contractor at the end of construction. If the project does
not meet the guaranteed levels of performance, the contractor typically is
required to make liquidated damages payments to the sponsor. If project
performance exceeds the guaranteed minimum levels, the contractor may
be entitled to bonus payments.
2. Feedstock Supply Agreements
The project company will enter into one or more feedstock supply
agreements for the supply of raw materials, energy or other resources over the
life of the project. Frequently, feedstock supply agreements are structured on
a "put-or-pay" basis, which means that the supplier must either supply the
feedstock or pay the project company the difference in costs incurred in
obtaining the feedstock from another source. The price provisions of feedstock
supply agreements must assure that the cost of the feedstock is fixed within an
acceptable range and consistent with the financial projections of the project.

3. Product off take Agreements

In a project financing, the product off take agreements represent the
source of revenue for the project. Such agreements must be structured in
manner to provide the project company with sufficient revenue to pay its

24
 project debt obligations and all other costs of operating, maintaining and
owning the project. Frequently, off take agreements are structured on a “take-
or-pay" basis, which means that the off taker is obligated to pay for product
on a regular basis whether or not the off taker actually takes the product unless
the product is unavailable due to a default by the project company. Like
feedstock supply arrangements, off take agreements frequently are on a fixed
or scheduled price basis during the term of the project debt financing.

4. Operations and Maintenance Agreement-

The project company typically will enter into a long-term agreement for
the day-to-day operation and maintenance of the project facilities with
company having the technical and financial expertise to operate the project in
accordance with the cost and production specifications for the project. The
operator may be an independent company, or it may be one of the sponsors.
The operator typically will be paid a fixed compensation and may be entitled
to bonus payments for extraordinary project performance and be required to
pay liquidated damages for project performance below specified levels.

5. Loan and Security Agreement

The borrower in a project financing typically is the project company
formed by the sponsor(s) to own the project. The loan agreement will set forth
the basic terms of the loan and will contain general provisions relating to
maturity, interest rate and fees. The typical project financing loan agreement
also will contain the provisions such as-
➢ Disbursement Controls These frequently take the form of conditions
precedent to each drawdown, requiring the borrower to present invoices,
builders’ certificates or other evidence as to the need for and use of the
funds.
➢ Progress Reports The lender may require periodic reports certified by an
independent consultant on the status of construction progress.

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➢ Covenants Not to Amend The borrower will covenant not to amender
waive any of its rights under the construction, feedstock, off take,
operations and maintenance, or other principal agreements without the
consent of the lender.
➢ Completion Covenants These require the borrower to complete the
project in accordance with project plans and specifications and prohibit.
The borrower from materially altering the project plans without the consent
of the lender.
➢ Dividend Restrictions These covenants place restrictions on the payment
of dividends or other distributions by the borrower until debt service
obligations are satisfied.
➢ Debt and Guarantee Restrictions The borrower may be prohibited from
incurring additional debt or from guaranteeing other obligations.
➢ Financial Covenants Such covenants require the maintenance of working
capital and liquidity ratios, debt service coverage ratios, debt service
reserves and other financial ratios to protect the credit of the borrower.
➢ Subordination Lenders typically require other participants in the project
to enter into a subordination agreement under which certain payments to
such participants from the borrower under project agreements are restricted
(either absolutely or partially) and made subordinate to the payment of debt
service.
➢ Security The project loan typically will be secured by multiple forms of
collateral, including: -
→ Mortgage on the project facilities and real property.
→ Assignment of operating revenues.
→ Pledge of bank deposits
→ Assignment of any letters of credit or performance or completion bonds
relating to the project.
→ project under which borrower is the beneficiary.
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 → Liens on the borrower's personal property
→ Assignment of insurance proceeds.
→ Assignment of all project agreements
→ Pledge of stock in Project Company or assignment of partnership interests.
→ Assignment of any patents, trademarks or other intellectual property owned
by the borrower.
6. Site Lease Agreement The project company typically enters into long-term
lease for the life of the project relating to the real property on which the project
is to be located. Rental payments may be set in advance at affixed rate or may
be tied to project performance.
7. Insurance The general categories of insurance available in connection with
project financings are:
Standard Insurance-
The following types of insurance typically are obtained for all project
financings and cover the most common types of losses that a project may
suffer.
❖ Property Damage, including transportation, fire and extended casualty.
❖ Boiler and Machinery.
❖ Comprehensive General Liability.
❖ Worker's Compensation.
❖ Automobile Liability and Physical Damage.
❖ Excess Liability.

Optional Insurance-
The following types of insurance often are obtained in connection with
a project financing. Coverage’s such as these are more expensive than
standard insurance and require more tailoring to meet the specific needs of the
project.

❖ Business Interruption.

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 ❖ Performance Bonds
❖ Cost Overrun/Delayed Opening.
❖ Design Errors and Omissions
❖ System Performance (Efficiency).
❖ Pollution Liability.

PROJECT RISKS: -
Project finance is finance for a particular project, such as a mine, toll road,
railway, pipeline, power station, ship, hospital or prison, which is repaid from the
cash-flow of that project. Project finance is different from traditional forms of
finance because the financier principally looks to the assets and revenue of the
project in order to secure and service the loan. In contrast to an ordinary
borrowing situation, in a project financing the financier usually has little or no
recourse to the non-project assets of the borrower or the sponsors of the project.
In this situation, the credit risk associated with the borrower is not as important
as in an ordinary loan transaction; what is most portent are the identification,
analysis, allocation and management of every risk associated with the project.

The following details show the manner in which risks are approached by
financiers in a project finance transaction. Such risk minimization lies at the
heart of project finance.

In a no recourse or limited recourse project financing, the risks for a

financier are great. Since the loan can only be repaid when the project is
operational, if a major part of the project fails, the financiers are likely to lose a
substantial amount of money. The assets that remain are usually highly
specialized and possibly in a remote location. If saleable, they may have little
value outside the project. Therefore, it is not surprising that financiers, and their
advisers, go to substantial efforts to ensure that the risks associated with the

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project are reduced or eliminated as far as possible. It is also not surprising that
because of the risks involved, the cost of such finance is generally higher and it
is more time consuming for such finance to be provided.

Risk minimization process

Financiers are concerned with minimizing the dangers of any events which
could have negative impact on the financial performance of the project, in
particular, events which could result in:

i. The project not being completed on time, on budget, or at all;

ii. The project not operating at its full capacity;
iii. The project failing to generate sufficient revenue to service the debt; or
iv. The project prematurely coming to an end.

The minimization of such risks involves a three-step process.

a. The first step requires the identification and analysis of all the risks that
may bear upon the project.
b. The second step is the allocation of those risks among the parties.
c. The last step involves the creation of mechanisms to manage the risks. If a
risk to the financiers cannot be minimized, the financiers will need to build
it into the interest rate margin for the loan.

Step 1- Risk Identification and Analysis-

The project sponsors will usually prepare a feasibility study, e.g. as to the
construction and operation of a mine or pipeline. The financiers will carefully
review the study and may engage independent expert consultants to supplement
it. The matters of particular focus will be whether the costs of the project have
been properly assessed and whether the cash-flow streams from the project are
properly calculated. Some risks are analyzed using financial models to determine
the project's cash-flow and hence the ability of the project to meet repayment

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schedules. Different scenarios will be examined by adjusting economic variables
such as inflation, interest rates, exchange rates and prices for the inputs and output
of the project. Various classes of risk that may be identified in a project financing
will be discussed below.

Step2- Risk Allocation-

Once the risks are identified and analyzed, they are allocated by the parties
through negotiation of the contractual framework. Ideally a risk should be
allocated to the party who is the most appropriate to bear it (i.e. who is in the best
position to manage, control and insure against it) and who has the financial
capacity to bear it. It has been observed that financiers attempt to allocate
uncontrollable risks widely and to ensure that each party has an interest in fixing
such risks. Generally, commercial risks are sought to be allocated to the private
sector and political risks to the state sector.

Step3- Risk Management-

Risks must be also managed in order to minimize the possibility of the risk
event occurring and to minimize its consequences if it does occur. Financiers need
to ensure that the greater the risks that they bear, the more informed they are and
the greater their control over the project. Since they take security over the entire
project and must be prepared to step in and take it over if the borrower defaults.
This requires the financiers to be involved in and monitor the project closely.
Such risk management is facilitated by imposing reporting obligations on the
borrower and controls over project accounts. Such measures may lead to tension
between the flexibility desired by borrower and risk management mechanisms
required by the financier.

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TYPES OF RISKS
Basically, different types of projects are posed to different risks. Similarly,
the risks mentioned below are related to this particular project.

1) Completion Risk-
Completion risk allocation is a vital part of the risk allocation of any
project. This phase carries the greatest risk for the financier. Construction
carries the danger that the project will not be completed on time, on budget or
at all because of technical, labor, and other construction difficulties. Such
delays or cost increases may delay loan repayments and cause interest and
debt to accumulate. They may also jeopardize contracts for the sale of the
project's output and supply contacts for raw materials.
Commonly employed mechanisms for minimizing completion risk
before lending takes place include:

a. Obtaining completion guarantees requiring the sponsors to pay all debts

and liquidated damages if completion does not occur by the required date;
b. Ensuring that sponsors have a significant financial interest in the success
of the project so that they remain committed to it by insisting that sponsors
inject equity into the project;
c. Requiring the project to be developed under fixed-price, fixed-time turnkey
contracts by reputable and financially sound contractors whose
performance is secured by performance bonds or guaranteed by third
parties; and
d. Obtaining independent experts' reports on the design and construction of
the project. Completion risk is managed during the loan period by methods
such as making pre-completion phase drawdowns of further funds
conditional on certificates being issued by independent experts to confirm
that the construction is progressing as planned.

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2) Operating Risk-
These are general risks that may affect the cash-flow of the project by
increasing the operating costs or affecting the project's capacity to continue to
generate the quantity and quality of the planned output over the life of the
project. Operating risks include, for example, the level of experience and
resources of the operator, inefficiencies in operations or shortages in the
supply of skilled labor. The usual way for minimizing operating risks before
lending takes place is to require the project to be operated by a reputable and
financially sound operator whose performance is secured by performance
bonds. Operating risks are managed during the loan period by requiring the
provision of detailed reports on the operations of the project and by controlling
cash-flows by requiring the proceeds of the sale of product to be paid into
tightly regulated proceeds account to ensure that funds are used for approved
operating costs only.
3) Market Risk-
Obviously, the loan can only be repaid if the product that is generated
can be turned into cash. Market risk is the risk that a buyer cannot be found
for the product at a price sufficient to provide adequate cash-flow to service
the debt. The best mechanism for minimizing market risk before lending takes
place is an acceptable forward sales contact entered into with a financially
sound purchaser.
4) Credit Risk-
These are the risks associated with the sponsors or the borrowers
themselves. The question is whether they have sufficient resources to manage
the construction and operation of the project and to efficiently resolve any
problems which may arise. Of course, credit risk is also important for the
sponsors' completion guarantees. To minimize these risks, the financiers need
to satisfy themselves that the participants in the project have the necessary

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 human resources, experience in past projects of this nature and are financially
strong (e.g. so that they can inject funds into an ailing projector save it).

5) Technical Risk-
This is the risk of technical difficulties in the construction and operation
of the project's plant and equipment, including latent defects. Financiers
usually minimize this risk by preferring tried and tested technologies to new
unproven technologies. Technical risk is also minimized before lending takes
place by obtaining experts reports as to the proposed technology. Technical
risks are managed during the loan period by requiring a maintenance retention
account to be maintained to receive a proportion of cash-flows to cover future
maintenance expenditure

6) Regulatory or Approval Risk-

These are risks that government licenses and approvals required to
construct or operate the project will not be issued (or will only be issued
subject to onerous conditions), or that the project will be subject to excessive
taxation, royalty payments, or rigid requirements as to local supply or
distribution. Such risks may be reduced by obtaining legal opinions
confirming compliance with applicable laws and ensuring that any necessary
approvals are a condition precedent to the drawdown of funds.

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 FINANCIAL ANALYSIS

RATIO ANALYSIS: -
An integral aspect of financial appraisal is financial analysis, which takes
into account the financial features of a project, especially source of finance.
Financial analysis helps to determine smooth operation of the project over its
entire life cycle.

The two major aspects of financial analysis are liquidity analysis and capital
structure.

For this purpose, ratios are employed which reveal existing strengths and
weakness of the project.

1) Liquidity ratios-
Liquidity ratio or solvency ratio’s measure a project’s ability to meet its
current or short-term obligations when they become due. Liquidity is the pre-
requisite for the very survival of a firm. A proper balance between the liquidity
and profitability is required for efficient financial management. It reflects the
short-term financial strength or solvency of the firm. Two ratios are calculated
to measure liquidity, the current ratio and quick ratio.

a. Current ratio- The current ratio is defined as the ratio of total current
assets to total current liabilities. It is computed by,
Current assets=Current ratio/Current liabilities

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 MEASURES TAKEN BY SBI WHEN THE REPAYMENT IS NOT
POSSIBLE

1. Firstly, they send a notice to the clients stating therein to pay their dues.
2. When there no improvements in the repayments even after the notice being
sent then the bank will forward the legal notice stating the clients to make
payments.
3. Third is the compromise dealing wherein both the parties sit together and
decide what measures has to be taken which means whether the clients make
the payments, or whether to file a suit or decide to sell the Properties etc.

ANALYSIS: -
This analysis part is related to the financial viability of the project SL Flow
Controls: -

✓ Through ratio analysis I analyzed that the liquidity position of the firm is good
and it is maintaining the standard ratio...
✓ Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its
liability portion by paying the loan year on year so the financial risk less.
✓ Profitability ratios related to sales and capital employed are in increasing
trend, it shows that the sales are increasing and the firm using its resources
efficiently.
✓ Debt Service Coverage Ratio is also in increasing trend, it shows that the
firm’s ability to make the loan repayments on time over the debt life of the
project.
✓ The payback period is within the debt life of the project.
✓ The net present value of the project is positive; the positive net present value
will result only if the project generates cash inflows at a rate higher than the

35
 opportunity cost of capital. Since the Net Present Value of the above project
is positive, the proposal can be accepted.
✓ The internal rate of the return is higher than what accepted so the project is
accepted

FINDINGS: - THESE ARE RELATED TO BANK IN GENERAL

→ State bank of India is strictly following the guidelines of RBI on Project

Financing
→ Sanctioning for the projects is approved by RASMECC (Retailed Assets
Small and Medium Enterprises Credit Cell).
→ The bank finances the projects only through term loans.
→ Interest rates are fixed depending upon the projects which is known as State
Bank advance rate.
→ When the clients fail to pay the interest, 3 months from the due date the term
loan granted will be treated as Non-Performing Assets.
→ If the interest is due further 3 more months then it will be treated as doubtful
assets and interest rates becomes zero.
→ Again, for further 3 months it goes as loss assets and the bank write off the
account.
→ Every firm starting up a new project should make an insurance policy with the
same bank itself.

RECOMMENDATIONS: -

➢ Bank check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost
benefit analysis of the project so bank should consider this because these
are also important from the point of view of risk and economy growth.

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 ➢ Bank should be caution about the availability of security and ensure
honesty of both borrower and guarantor so as to avoid the account
becoming the loss assets.

LIMITATION OF THE STUDY: -

Some of the information is confidential in nature that could not divulge for
study.

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 CONCLUSION: -
The project undertaken has helped a lot in understanding the concept of project
financing in nationalized bank with reference to state bank of India. The project
financing is an important aspect which helps in increasing the profit of the banks.
Project financing is a vast subject and it is very difficult to apply all the aspect in
all type of project when bank want to finance, and it is very difficult to cover all
aspect in this project. To sum up it would not be out of way to mention here that
the state bank of India has given a special impetus on “Project Financing” .the
concerted efforts of the management and staff of state bank of India has helped
the bank in achieving remarkable progress in almost all important aspects. Finally
the success of project financing would mostly depend on the proper analysis of
the projects before financing

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 BIBLIOGRAPHY

The data is collected from the list of books and web site given below
• www.sbi.com
• www.Google.com
• Company manuals
• Commercial Banks Book
• Project financing by – Machiraju
• Financial management by – Khan and Jain

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