SIDBI Project-Detailed Appraisal

Acknowledgement
This project would have been a babbling effort and a bumpy

ride uphill if my Project Guides Mr. P. S. Manoj and Professor B.
Prasad would not have been shining like a beacon throughout the
whole journey of this mammoth effort. I would like to thank them for
their unconditional support and guidance without which it many a
times seemed impossible to bring the project to its present form.
I am obliged towards the people of SIDBI especially Mr. R. N.
Yadav (DGM) and Ms. Isha Dhawan for providing the
information as and when required and sparing their valuable time
from their busy schedules while helping me.
Nothing in this world is perfect. So, is this project. Despite my
best efforts some errors may have crept in. I hope this project is seen
as an effort to gain knowledge insight the workings of an
organisation and is treated as start of a journey.
In the end I would like to thank all those who have helped me while
completing this detailed project and who have become an integral
part of this project. I dedicate this project to all these people.
Obliged:
Jaya Kumari
(Amity Business School, Noida)
Index
Page no.
Chapter 1 .
Introduction to the project
Chapter 2.
Objectives of the project
Chapter 3.
Introduction to SIDBI
Chapter 4.
Detailed project appraisal process
Chapter 5.
Project MPPPL
Chapter 6.
Project ACPPL
Chapter 7.
Project CPL
Chapter 8.
Analysis of the projects
Chapter 9.
Conclusion and Recommendations
Chapter 10.
Limitations
Bibliography
Annexure
CHAPTER 1
INTRODUCTION TO
THE PROJECT
CREDIT - THE LIFELINE OF BUSINESS

Of all the elements that go into a business, credit is perhaps the most crucial. The
best of plans can come to naught if adequate finance is not available at the right
time. SSIs need credit support not only for running the enterprise & operational
requirements but also for diversification, modernisation/ up gradation of facilities,
capacity, expansion etc. In respect of SSIs, the problem of credit becomes all the
more critical when ever any episodic event occurs such as a large order, rejection of
consignment, inordinate delay in payment etc. In general, SSIs operate on tight
budgets, often financed through owner's own contribution, loans from friends and
relatives and some bank credit.
Government of India recognised the need for a focused credit policy for SSIs in the
early days of promotion of SSIs. This in turn led to a credit policy with the
following components:Priority Sector Lending: Credit to the small scale sector is ensured as part of the
priority sector lending by banks. Banks are required to compulsary ensure that
defined percentage (currently 40%) of their overall lending is made to priority
sectors as classified by Government. These sectors include agriculture, small
industries, export etc. The inclusion of small industries in this list makes them
eligible for this earmarked credit.
Institutional Arrangement: Small Industries Development Bank of India ( SIDBI )
was set up as the apex refinance bank. Term loans are provided by State Financial
Corporations (SFCs) and Scheduled Banks. Credit lending in direct/indirect forms
is also undertaken to some extent by NABARD , NSIC etc.
With the liberalisation of the Indian economy, greater emphasis was placed on
meeting the credit needs of SSIs. This was manifest through the following
initiatives:1.
2.
3.
4.
5.
6.
7.
Earmarking of credit for tiny sector within overall lending to small industries.
Opening of specialised SSI bank branches.
Establishment of National Equity Fund for venture capital support.
Technology Development & Modernisation Fund through SIDBI.
Enhancement of turnover limit for assessing aggregate working capital
requirement.
Enhancement of limit of composite loan to Rs. 10 lakh. (Rs 1 million)
No collateral security for loans up to Rs. 5 lakh. (Rs 0.5 million)
The Comprehensive Policy Package announced on 30 th August 2000 took this

process further. This included:1.
2.
Launch of Credit Guarantee Scheme to cover loans up to Rs. 25 lakh. (Rs 2.5
million)
Launch of Credit Linked Capital Subsidy Scheme to provide for subsidy
against loans taken for technology up gradation.
3.
4.
Further enhancement of ceiling composite loan limit to Rs. 25 lakh. (Rs 2.5
million)
Enhancement of project cost limit under National Equity Fund to Rs. 50
lakh.(Rs 5 million)
Many of these initiatives were based on the recommendations made by the Nayak
Committee, the Kapur Committee and the Dr. S.P. Gupta Study Group.
Credit to SSI Sector From Public Sector Banks

The table below gives the status of credit flow to Village & Small Industries (VSI)
Sector since 1991:-
Year
Net Bank Credit

(in Rs. crores)
To SSI
(in Rs. crores)
Share of SSI
March 1991
1,05,632
16,783
15.89%
March 1992
1,12,160
17,398
15.51%
March 1993
1,32,782
19,388
14.60%
March 1994
1,40,914
21,561
15.30%
March 1995
1,69,038
25,843
15.29%
March 1996
1,84,381
29,485
15.99%
March 1997
1,89,684
31,542
16.60%
March 1998
2,18,219
38,109
17.50%
March 1999
2,46,203
42,674
17.33%
March 2000
2,92,943
45,788
15.6%
March 2001
3,40,888
48,445
14.2%
March 2002
3,96,954
49,743
12.5%
March 2003
4,77,899
52,988
11.1%
Source: RBI
The Table below give the status of credit flow to Tiny Sector since 1995:-
At the At the At the At the At the At the At the At the At the

end of end of end of
end of
end of end of end of March March March end of end of
'98
'99
'2000
March
Marc Marc Marc
Marc Marc '2003
h '95 h '96 h '97
h
h
'2001 '2002
Net Credit
To
Tiny
7734
Sector
(Rs.
Crore)
8183
9515
Tiny
Credit as
percentag
29.93 27.76 30.2
e
of net SSI
credit
10273.1 8837.47 22,742*

26,019 27,030 26,937
3
*
*
27.0
20.7
54.03
53.7
* Refers to units with investment in P&M up

** Refers to units with investment in P&M up to Rs. 25 lakh.
Note: Rs. 1 Crore = Rs. 10 million, Rs. 1 Lakh = Rs. 100,000/-
to
54.34 50.84
Rs.
lakh.
Assistance to SSIs by SFCs

The main objective of State Financial Corporations(SFCs) is to meet Term
Loan/Fixed Capital needs of the Small Scale Industries. There are 18 SFCs in the
country.
The Table below gives the total assistance and assistance to SSIs by SFCs:-
SANCTIONS (Rs Crores)

Year
DISBURSEMENTS (Rs
Crores)
Total
Assistance
To SSIs
Total
Assistance
To SSIs
1992-93
2015.3
1686
1557.4
1163.9
1993-94
1908.8
1561
1563.4
1175.2
1994-95
2702.4
1920
1880.9
1314.5
1995-96
4188.5
2513
2961.1
1675.4
1996-97
3544.8
2115
2782.7
1529.6
1997-98
2626.0
1786
2110
1222
1998-99
1864
1365
1625
1004
1617
1754
1083
1999-2000
2203
Source: IDBI Annual Report
Improving the Credit Flow

Nayak Committee (1991-92)
Nayak Committee set up by the Reserve Bank of India in December 1991 (Report
came in September 1992) dealt with aspects of adequacy and timeliness of credit to
SSIs. Nayak Committee found that small scale sector was getting working capital to
the extent of 8.1% of its annual output which was less than the normative
requirement of 20%. Accordingly, Nayak Committee recommended that the SSI
sector should obtain 20% of its annual projected turnover by way of working
capital. Based on these, as well as other recommendations of the Nayak
Committee, RBI issued a number of guidelines advising the banks to grant working
capital to the extent of 20% of the projected annual turnover, timely disposal of
loan applications and setting up of specialised bank branches for SSI loaning in
areas of higher SSI concentration. This norm is applicable to units with annual
turnover up to Rs. 5 crore.
Seven Point Action Plan (1995-96)
As a follow up of Nayak Committee recommendations, the Union Finance Minister

in the Budget Speech of 1995-96, announced a Seven Point Action Plan for
improving the flow of credit to small scale sector. This included:
Setting up of specialised SSI bank branches;
Adequate delegation of powers at branch and regional levels;
Conducting sample surveys of their performing SSI accounts by banks
Sanction of composite loans as far as poSSIble;
Regular meeting with SSI entrepreneurs;
Sensitization of bank managers towards working of SSI Sector; and
Simplification of procedural formalities by banks.

Action has been taken by banks on the above action plan.
Kapur Committee (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One Man
Committee headed by Shri S.L. Kapur, the then Member, Board for Industrial &
Financial Reconstruction (BIFR), to review inter-alia:
i.
The working of credit delivery system of small scale industries with a view to
making the system more effective, simple and efficient to administer ; and
ii.
To make suggestions for simplification and improvement in system and

procedures. The committee submitted its report to rbi on 30 th june 1998, which
contains 126 recommendations. Out of 126 recommendations, 103 have been
examined by rbi and decision taken thereon. Banks/ financial institutions and
other agencies have already implemented 86 recommendations. Some of the
important measures taken pursuant to the recommendations of the committee
include:-
Delinking of SIDBI from IDBI.

Opening of more specialized branches.
Enhancement in the limits of Composite Loan from Rs. 2 lakh to Rs. 5 lakh.
Setting of DRTs.
Introduction of Credit Guarantee Scheme.
Raising the exemption limit for collateral security from Rs. 25,000/- to Rs. 5
lakh.
Other steps taken by Reserve Bank of India to improve credit flow to SSI Sector
a. In order to ensure that credit is available to all segments of SSI sector, RBI has
issued instructions that out of the funds normally available to SSI sector, 40%
be given to units with investment in plant and machinery up to Rs.5 lakh, 20%
for units with investment between Rs.5 lakh to Rs.25 lakh and remaining 40%
for other units.
10
b. Public sector banks have been advised to operationalise more specialised SSI
branches at centres where there is a potential for financing many SSI
borrowers. As on March 2002, 391 specialised SSI branches are working in the
country.
c.
Extension of 'Single Window Scheme' to all districts to meet the financial
requirements (both term loan & working capital) of SSIs.
d. With a view to moderating the cost of credit to SSI units, banks have been
advised to accord SSI units with a good track record, the benefit of lower
spreads over the prime lending.
e. In order to take expeditious decision on credit proposals of SSI units, banks
have been advised to delegate enhanced powers to the branch managers of the
specialised SSI branches so that most of the credit proposals are decided at
the branch level.
f.
Laghu Udyami Credit Card (LUCC) Scheme launched by Public Sector Banks
for providing simplified & borrower friendly Credit facilities to SSI, tiny
enterprises retail traders & artisans.
g. An interest rate band of 2% above & below PLR should be applicable to SSIs.
h. Bank advised to fix self set targets for growth in advances to SSI sector based
on previous year's achievements and overall tread in growth of net bank
credit.
i.
Bank to consider 3 slabs for rate of interest-loans up to Rs.50,000, between
Rs.50,000 and Rs.2 lakh and above Rs.2 lakh.
j.
Composite loan limit to be enhanced to Rs.50 lakh from Rs.25 lakh.
k. Limit on collateral free loans to be increased to Rs.25 lakh in deserving cases.
l.
Deposits of foreign banks with SIDBI to earn interest at Bank Rate.
m. Working Group to be set up on flow of credit to SSI sector.
Incorporating credit requirement in the identified clusters in the banks
Annual Credit Plans for the year 2003- 04:
As a follow up to the decisions of Review Meeting, the Ministry of SSI had
forwarded to the RBI a list of 60 identified clusters for focused development of SSIs
to disseminate the information to all public sector banks. As per RBIs directives,
all SLBC Convenor Banks to initiate action for incorporating the credit
requirements in the State Credit Annual Plans in respect of 60 clusters identified
by the Ministry of SSI for focused development of SSIs. Further, as decided in the
meeting of the Standing Advisory Committee held at RBI, Mumbai on 1st
September, 2003, the banks have been advised by the RBI that credit requirement
in the identified clusters to be incorporated in the banks Annual Credit Plans for
the year 2003-04.
Adequate publicity by the banks to various schemes/ facilities like availability of
collateral- free/composite loan:
As decided in the meeting of Standing Advisory Committee held on 1st September,
2003, the banks have to give adequate publicity to their schemes/facilities like
availability of collateral free /composite loans and schemes under
TUFs/NEF/KVIC/CGTSI etc.
11
Interest rate band of 2% above and below PLR:

As per the announcement made by the Honble Finance Minister in the Union
Budget 2003-04, Indian Banks Association (IBA) has advised the banks to adopt
the interest rate band of 2% above and below their prime lending rates (PLRs) for
advances to SSI
12
Chapter 3
Objectives of the Project
13
Research Objectives
Following are the objectives of this summer training report:

To study the credit schemes of SIDBI
To study and evaluate the project appraisal process at SIDBI
To appraise Greenfield and Brownfield projects based on the project
appraisal norms followed at SIDBI and find out whether or not loan
should be given to the applicants.
To study the risk rating of the projects.
14
Chapter 2
Introduction to SIDBI
15
SIDBI AN INTRODUCTION
Established in April 2,1990, SIDBIs entire issued capital of Rs.450 crore has been
divided into 45 crore shares of Rs.10 each. Of the total Rs.450 crore subscribed by
IDBI, while setting up of SIDBI, 19.21% has been retained by it and balance 80.79%
has been transferred / divested in favour of banks / institutions / insurance
companies owned and controlled by the Central Government.
Principal Development Financial Institution for :

--Promotion
--Financing and Development of Industries in the small scale sector and

--Coordinating the functions of other institutions engaged in similar activities.
Provision of Charter
SIDBI was established on April 2, 1990. The Charter establishing it, The Small
Industries Development Bank of India Act, 1989 envisaged SIDBI to be "the
principal financial institution for the promotion, financing and development of
industry in the small scale sector and to co-ordinate the functions of the
institutions engaged in the promotion and financing or developing industry in the
small scale sector and for matters connected therewith or incidental thereto.
Business Domain of SIDBI

The business domain of SIDBI consists of small scale industrial units, which
contribute significantly to the national economy in terms of production,
employment and exports. Small scale industries are the industrial units in which
the investment in plant and machinery does not exceed Rs.10 million . About 3.1
million such units, employing 17.2 million persons account for a share of 36 per
cent of India's exports and 40 per cent of industrial manufacture. In addition,
SIDBI's assistance flows to the transport, health care and tourism sectors and also
to the professional and self-employed persons setting up small-sized professional
ventures.
SIDBI Among Top 30 Development Banks of the World

SIDBI retained its position in the top 30 Development Banks of the World in the
latest ranking of The Banker, London. As per the May 2001 issue of The Banker,
London, SIDBI ranked 25th both in terms of Capital and Assets.
16
SIDBI is committed to developing a strong, vibrant and responsive small scale

sector. This commitment is to be achieved through a variety of means. Principal
amongst them is finance. Alongside finance, SIDBI provides appropriate support in
the form of promotional and developmental services. SIDBI has been built up as a
financially sound, vibrant, forward looking and technically oriented institution
and, it intends to sustain this orientation in future. SIDBI intends to provide
quality services to its clients, devoid of any systemic and procedural difficulties.
Operational Emphasis
SIDBI, in its operational strategy, emphasises:
Enhancement in the flow of financial assistance to SSIs and

Enhancement in the capabilities of SSIs at all levels, with focus on adoption of
improved and modern technology.
The small industries sector in India is dominated by a large number of small units.
These micro-enterprises require special nurturing. SIDBI has been operating
schemes like:
Single Window Scheme and
Composite Loan Scheme
To ensure that financial assistance is made available to such units on easy terms
and with hassle-free procedures.
It has been a matter of policy in SIDBI to identify the areas of gaps in credit
delivery system and fill them through devising appropriate new schemes and
implementing them. In the last 9 years, 26 new schemes have been introduced.
Operational Emphasis
SIDBI's assistance now covers:
Equity
Term loan (domestic and foreign currency)
Working capital
o
o
o
for inventory
for raw material
through finance against bills receivables and for intangibles.
The purposes for which SIDBI's assistance is provided include new projects,
expansion, diversification, technology up gradation, modernisation, quality
17
improvement, environmental management, marketing (domestic and

international) and rehabilitation of sick SSIs.
Promotional Orientation
Besides financing, SIDBI provides developmental and support services to SSIs
under its Promotional and Developmental (P&D) schemes. The focus of such
assistance is to ensure:
Enterprise Promotion
Human Resource Development
Technology Up gradation
Environmental and quality management
Information Dissemination and
Market Promotion
The P&D initiatives of SIDBI have crystallised over the years and are now oriented
to serve rural entrepreneurs and youth, particularly women through programmes
to empower them and motivate them to undertake entrepreneurial ventures.
Four basic objectives are set out in the SIDBI Charter. They are:
Financing
Promotion
Development
Co-ordination
For orderly growth of industry in the small scale sector. The Charter has provided
SIDBI considerable flexibility in adopting appropriate operational strategies to
meet these objectives. The activities of SIDBI, as they have evolved over the period
of time, now meet almost all the requirements of small scale industries which fall
into a wide spectrum constituting modern and technologically superior units at one
end and traditional units at the other.
Development Outlook
The major issues confronting SSIs are identified to be:
Technology obsolescence
Managerial inadequacies
Delayed Payments
Poor Quality
Incidence of Sickness
Lack of Appropriate Infrastructure and
Lack of Marketing Network

There can be many more similar issues hindering the orderly growth of SSIs.
18
Over the years, SIDBI has put in place financing schemes either through its direct
financing mechanism or through indirect assistance mechanism and special focus
programmes under its P&D initiatives. In its approach, SIDBI has struck a good
balance between financing and providing other support services.
Co-ordination and Understanding

As an apex institution, SIDBI makes use of the network of the banks and state level
financial institutions, which have retail outlets. SIDBI supplements the efforts of
existing institutions through its direct assistance schemes to reach financial
assistance to the ultimate borrowers in the small scale sector. Refinancing, bills
rediscounting, lines of credit and resource support mechanisms have evolved over
the period of time to route SIDBI's assistance through the network of other retail
institutions in the financial system.
Improved levels of co-ordination for development of the small scale sector is also
achieved through a system of dialogue and obtaining feedback from the
representatives of institutions of small scale industries who are on the SIDBI's
National Advisory Committee and Regional Advisory Committees.
SIDBI has entered into Memoranda of Understanding with many banks,

governmental agencies, international agencies, research & development
institutions and industry associations to facilitate a coordinated approach in
dealing with the issues for development of small scale industries.
SIDBI's MOUs
Banks-(18)
Swiss Agency for Development and Co-operation
Small Industries Development Organisation
Auto Components Manufactures Association
Asia and Pacific Centre for Transfer of Technology
Council for Scientific and Industrial Research
United Nations Industrial Development Organisation
Confederation of Indian Industry
National Research Development Organisation
Government of India for channelising TREAD assistance
Small
Enterprise
Assistance
Funds
(SEAF)
For setting up of SEAF India SME Equity Fund and for other capacity
building initiatives for SMEs
19
Chapter 2
Schemes
20
Small Industries Development

Bank of India
Scheme profiles
Direct Finance Schemes

Bills Finance Schemes
Refinance Schemes
International Finance Schemes
Scheme Name
Direct Finance Scheme
Background / Objective
SIDBI had been providing refinance to State Level Finance Corporations / State
Industrial Development Corporations / Banks etc., against their loans granted to
small scale units. Since the formation of SIDBI in April, 1990 a need was felt/
representations were made that SIDBI being the principal financial institution
should take up the financing of SSI projects directly on a selective basis. It was felt
that SFCs/SIDCs and banks etc., had confirmed themselves to financing of rather
traditional/conventional projects and at times projects with advanced technology/
projects with slightly higher investment outlay etc., were not being supported to
the extent required. Further investment activity in SSI sector in some states was
not picking up due to poor financial position of SFCs/SIDCs. Considering all the
above factors it was decided to start extending direct finance to SSI units by
introduction of Equipment Finance Scheme. While introducing the DFS, the
intention was to enhance the flow of credit to the sector by following a selective
approach of direct financing.
The various sub schemes that have been introduced as part of direct financing by
SIDBI are given below.
Sub schemes
1.
2.
3.
4.
5.
6.
Vendor Development Scheme (VDS)

Equipment Finance Scheme (EFS)
Scheme of Integrated Infrastructure Development (IID)
Scheme for development of industrial infrastructure for SSI sector (DII)
ISO 9000 scheme (ISO 9000)
Project Finance Scheme (PFS)
7.
Technology Development and Modernisation Fund Scheme (TDMFS)

21
8.
Tannery Modernisation Scheme (TMS)
9.
Technology Up gradation Fund Scheme for Textile Industries (TUFS)
10. Working Capital Term Loan (WCTL)

11. Fast Track Financing Scheme (FTFS)
Scheme Name
Bills Finance Scheme
Bills Finance Scheme involves provision of medium and short-term finance for the
benefit of the small-scale sector. Bills Finance seeks to provide finance, to
manufacturers of indigenous machinery, capital equipment, components subassemblies etc , based on compliance to the various eligibility criteria, norms etc as
applicable to the respective schemes. To be eligible under the various bills
schemes, one of the parties to the transactions to the scheme has to be an industrial
unit in the small-scale sector within the meaning of Section 2(h) of the SIDBI Act,
1989.
Sub schemes
1. Scheme for Domestic Factoring (FAC)
2. Scheme for Invoice Discounting (IDS)
3. Direct Discounting Scheme Components (DDS C)
4. Direct Discounting Scheme Equipment (DDS E)
5. STL To SEBs (STL)
6. Bills Rediscounting Scheme Equipment (BRS E)
Process note explaining the broad steps involved in the scheme
Relevant circulars pertaining to scheme eligibility and sanction criteria
Common irregularities as observed by SIDBI Audit Department
Refinance Scheme
Refinance scheme is introduced for catering to the need of funds of Primary
Lending Institutes for financing small-scale industries. Under the scheme, SIDBI
grants refinance against term loans granted by the eligible PLIs to industrial
concerns for setting up industrial projects in the small scale sector as also for their
22
expansion / modernisation / diversification. Term loans granted by the PLIs for

other specified eligible activities / purposes are also eligible for refinance.
Ceiling on re financeable term loan under the scheme is given below:
(Rs. in lakh)
Type of PLI
Scheduled Commercial Banks
and State Co-operative Banks
Revised ceiling
300
Other Co-operative Banks

Regional Rural Banks
50
20
SFCs, SIDCs
and TFIDCs
Type of PLI
SFC
SIDC
TFIDC
Category
A
400
400
250
B
300
250
150
(Rs. in lakh)
C
200
150
90
Refinance business of SIDBI is carried on under various Lines of Businesses which

are:
Automatic Refinance Scheme (ARS):

ARS is available to all eligible banks.
The objective of ARS is to expedite the flow of assistance under refinance scheme.
Schemes covered under ARS

Composite Loan Scheme (CLS)
Single Window Scheme (SWS)
Refinance for Small Road Transport Operators (SRTOs)
Refinance Scheme for Technology Development and Modernisation
(RTDM)
Refinance Scheme for Acquisition of ISO series Certification, by SSI unit
(RISO 9000)
Refinance Scheme for Rehabilitation of Sick Industrial Units (RSR)
23
Relief Refinance Scheme (RRS), National Equity Scheme (NEF)

Mahila Udyam Nidhi (MUN) and
General Refinance Scheme (GRS).
SIDBI does not carry out any appraisal of the proposal and completely relies on
the scrutiny carried out by Primary Lending Institutions.
Ceiling on re financeable amount under ARS is as follows:
(Rs. in lakh)
Type of PLI
Ceiling
Scheduled Commercial Banks

200
State Co-operative Banks (including 50
loan proposals routed by PCBs/CCBs
and reimbursed by SCBs) and
Scheduled Urban Co-operative Banks
Regional Rural Banks
20
Normal Refinance Scheme (NRS):
NRS is available to all eligible banks.

All eligible proposals over and above the ceiling mentioned in ARS are covered
under NRS.
Schemes covered under NRS
Single Window Scheme (SWS)
Refinance for Small Road Transport Operators (SRTOs),
(RTDM), Refinance Scheme for Acquisition of ISO series Certification, by
SSI unit (RISO 9000),
Refinance Scheme for Rehabilitation of Sick Industrial Units (RSR),
Relief Refinance Scheme (RRS),
National Equity Fund (NEF) Scheme,
Mahila Udyam Nidhi (MUN) and
SIDBI carries out re-appraisal of proposals submitted under NRS based on the
appraisals done by the PLIs.
24
Line of Credit (LOC):

Line of Credit is available to all eligible financial institutions.
The objective of LOC is to provide a consistent credit facility to all eligible financial
institutions.
Schemes covered under LOC
Composite Loan Scheme (CLS), Single Window Scheme (SWS),
Refinance for Small Road Transport Operators (SRTOs),
(RTDM),
Refinance Scheme for Acquisition of ISO series Certification by SSI unit
(RISO 9000),
Relief Refinance Scheme (RRS),
National Equity Fund (NEF) Scheme,
Mahila Udyam Nidhi (MUN),
Self Employment for Ex-servicemen Scheme (SEMFEX) and
SIDBI does not carry out any appraisal of the proposal and completely relies on the
scrutiny carried out by Primary Lending Institutions.
Short Term Loan (STL):

STL is available to Scheduled Banks (including State Co-operative Banks, Urban
Co-operative banks, Private Sector banks, etc.)
The objective of STL is to provide refinance assistance to the eligible banks against
their outstanding portfolio relating to loans and advances to SSI units provided no
other financial support has been sought against the same.
SIDBI carry out financial appraisal of the applying bank before sanctioning STL.
Sub schemes
1. Composite Loan Scheme (CLS)
2. Single Window Scheme (SWS)
3. Refinance for Small Road Transport Operators (SRTOs)
4. Refinance Scheme for Technology Development and Modernisation (RTDM)
5. Refinance Scheme for Acquisition of ISO Series Certification, by SSI unit (RISO
9000)
6. Refinance Scheme for Rehabilitation of Sick Industrial Units (RSR)
7. Relief Refinance Scheme (RRS)
25
8. National Equity Fund Scheme (NEF)

9. Mahila Udyam Nidhi Scheme (MUN)
10. Self Employment for Ex-servicemen Scheme (SEMFEX)
11. General Refinance Scheme (GRS)
12. Refinance Scheme for Textile Industry under Technology up gradation Fund
(RTUF)
13. Refinance Scheme for Tannery Modernisation (RTM)
14. Refinance Scheme for Term Loans granted by SFCs/SIDCs to Industrial
Concerns other than in the Small Scale Sector (Non-SSI)
15. Credit Linked Capital Subsidy Scheme for SSIs (CLCSS)
Process note explaining the broad steps involved in the scheme
Scheme Name
International Finance
Background/ Objective
The main objective of the various International Finance schemes is to enable smallscale industries to raise finance at internationally competitive rates to fulfil their
export commitments.
The financial assistance is being offered in USD and Euro currencies. Assistance in
Rupees is also considered, independent of foreign currency limits.
SIDBI has a license to deal in foreign exchange as a "restricted" Authorised Dealer
(i.e. SIDBI confines its foreign exchange activities only to its own exposures and to
exposures for its customers.
The Mumbai Head Office (MHO) of SIDBI operates as a Category A branch that
maintains foreign currency positions, nostro account with foreign correspondent
banks and provides cover to other branches (Category B branches) that carry out
forex business.
It has a Dealing Room at Mumbai that acts as a central service provider to all
branches.
Sub schemes
1. Pre Shipment Credit in Foreign Currency (PCFC) / Rupee (PCR)
2. Export Bill Financing (EBF)
3. Foreign Currency Term Loan (FCTL)
4. Foreign Letters of Credit (FLC)
5. Forward Contracts
6. Line of Credit in Foreign Currency to Commercial Banks
(LOCFC)
Common irregularities as observed by SIDBI Audit Department
26
DIRECT FINANCE SCHEME

This is the scheme under which SIDBI grants loans to the SSI and SME sector. It
has got various sub schemes also. This is the reason why it has become so
important to give a detailed note of this scheme.
1st Scheme
Name Vendor Development Scheme
This scheme was introduced to further strengthen and foster the existing
close relationship between Original Equipment Manufacturers (OEM) /
Sub-Assembly Manufacturers (SAM) and their dedicated vendors in the SSI
sector through a package of financial assistance to such vendors thereby
enabling them to upgrade their operational capabilities The objective of this
scheme is to provide assistance for: n Encouraging SSI vendors / sub
contracting units to acquire capital equipment, as also the requisite
technology for building up export capabilities / import substitution
including the cost of TQM and ISO 9000 certification and expansion of
capacity inclusive of need based additions / modifications to existing
building and additional margin money for working capital requirement for
execution of bulk orders etc.
Eligibility criteria
Eligible borrowers
1 Registered new or existing well run SSI vendor units. Preference will be given to
limited companies. Registered partnership / proprietary concerns with good track
record may also be considered selectively.
Eligibility parameters
Loan assistance requirement not less than Rs. 5 Lakh per unit
Debt Equity Ratio not more than 2:1
Promoters contribution should be a minimum of 20%. Term loan in Rupee /
Foreign Currency. Direct subscription to equity if outlay more than Rs. 1 Crore
and clear exit route available.
2nd Scheme
27
Sub Scheme Name : Equipment Finance Scheme (EFS)

The objective of this scheme is to provide assistance for: n Acquisition of
machinery / equipment, including DG set, both indigenous and imported,
which are not related to any specific project.
Additional need based civil work at existing location, miscellaneous fixed
assets, additional margin money for working capital may also be considered.
Eligible borrowers
Existing units in the SSI sector with good track record of performance and
sound financial position
They should have been in operation for at least three years and have earned
profits and / or declared dividend during two years preceding to taking up the
scheme.
The units should not be in default to institutions / banks in payment of dues.
Debt Equity ratio not more than 2:1 for the project and not more than 1.5:1
for the company.
Requirement of loans should not be less than Rs.50 Lakh. The limits in
respect of SIDBI Offices located in Eastern Region, North Eastern Region,
Aurangabad, Dehradun, Jammu, Nagpur, Pondicherry, Raipur, Shimla,
Varanasi and Visakhapatnam shall be Rs.25 Lakh.
In case of finances for DG set alone, loan requirement should not be less than
Rs.5 Lakh.
4. Repayment - 5 years including moratorium up to 12 months.
3rd Scheme
Sub Scheme Name : Scheme of Integrated Infrastructure Development
(IID)
The objective of this scheme is to provide assistance for: n Setting up of IID
centers with facilities like water supply, power, telecommunication,
common services center including for technological backup services for SSIs
28
in rural backward areas as envisaged under the policy for promoting and
strengthening small, tiny village enterprises.
Cost of improving / upgrading the deficient infrastructure facilities to
increase the productivity and optimum utilisation of the existing centers /
clusters in backward rural areas may also be covered under the scheme.
Eligible borrowers
1. Implementing agencies ( a public sector corporation or a corporate body or a
good NGO having sound financial position) entrusted with the task of
implementing the scheme by the concerned State / Union Territory government.
Selection of IID centre should be preceded by a comprehensive industrial

potential survey of the area.
50% of the plots developed will be earmarked for the tiny sector.
Suitable land would be provided by State / U.T. Govt. cost of which may be
recovered from implementing agencies. Normally, agricultural land may not
be used for setting up of an IID centre. State Govts. and UTs should firm up
the proposals for setting up of IID centres only after taking possession of the
land and ensuring power supply.
The size of IID centre would be about 15 to 20 hectares. The centre should
provide for various facilities like water supply, power, telecommunication,
effluent treatment, etc.
The ceiling on project cost is Rs.5 crores. Cost in excess of Rs.5 crores may
be met by State / UT Govt. concerned.
Cost of project, subject to a maximum of Rs. 5 crores may be financed by
Grant from Govt. of India (GOI) and loan from SIDBI in a manner such that
the ratio of GOI Grant (at 40% of the project cost) to SIDBI term loan would
be 2 : 3. The ratio in respect of IID projects coming up in the North Eastern
States would be 4 : 1, i.e. GOI grant would be at 80% of the project cost. In
case sources such as grant from the State Government concerned, internal
accruals from the implementing agency, etc. are also included in financing
of IID projects within the overall project cost of Rs.5 crores, the ratio of GOI
grant to SIDBI term loan would change. The term loan requirement from
SIDBI would then be worked out after taking into account these other
components, if any, within the overall indicative project cost of Rs.5 crores.
Any amount beyond Rs.5 crores will be borne by the implementing agency /
State / UT Government concerned. Further, the quantum of GOI grant at
40% of the project cost (80% of project cost in respect of proposals from
29
North Eastern States) is subject to a ceiling of Rs.2 crores (Rs.4 crores in

respect of proposals from North Eastern States).
State Government guarantee shall be furnished as security for the loan.
4th Scheme
Sub Scheme Name :
Scheme for
infrastructure for SSI sector (DII)
development of industrial
The objective of this scheme is to provide assistance for: n Setting up of
industrial estates / development of industrial areas including such projects
found eligible under KVIC model.
Strengthening of existing industrial clusters / estates by providing increased
amenities for smooth working of the industrial units.
Setting up of warehousing facilities for SSI products / units.
Providing support services viz. common utility centers such as convention
hall, trade centers, raw material depot, warehousing, tool room / testing
centers, housing for industrial workers etc.
Any other infrastructure facilities which will benefit predominantly SSI
units / entrepreneurs. Power, road, port, telecom, urban infrastructure
projects are also covered on consortium basis subject to loan ceiling of Rs.
100 crore per project.
Eligible borrowers
1. All forms of organizations such as Public / Pvt limited companies, Registered
societies / Trusts, Government corporations, corporates / co-operative entities /
accredited NGOs approved by KVIC.
1. Maximum project cost is Rs. 10 crore.
2. Minimum promoters contribution is 25%
3. Debt equity ratio will be a maximum of 3:1
4. Repayment period should not exceed 10 years including a moratorium period of
three years
30
5 List of eligible activities that can be financed under the scheme include:
Setting up of industrial estates / development of industrial areas including such
projects found eligible under KVIC model.
Strengthening of existing industrial clusters / estates by providing increased
amenities for smooth working of the industrial units.
Providing effluent treatment and disposal systems and other waste
management initiatives.
Providing water supply / sewage by supporting projects envisaging better
supply of water and sewage systems.
Providing support services viz. common utility centres such as convention hall,
trade centres, raw material depot, warehousing, container depot services ,
industrial galas or service centres, tool room/testing centres, housing for
industrial workers etc.
Setting up of warehousing facilities for SSI products / units.
Technology parks with different kinds of infrastructure facilities like Satellite /
Earth Stations for sending the electronic data / instructions, etc.
Providing training and testing facilities including technological back-up services
like computer training and development of software.
Providing financial assistance by way of equity / term loan to institutions /
agencies engaged in development of various infrastructure facilities as
enumerated above.
Any other infrastructure facilities which will benefit predominantly SSI units /
entrepreneurs.
5th Scheme
Sub Scheme Name : ISO
9000 scheme (ISO 9000)
The objective of this scheme is to provide assistance for:
To meet the expenses on consultancy, documentation, audit, certification fee,

equipment and calibrating instruments required for obtaining ISO 9000
certification.
Eligible borrowers
Existing industrial concerns in the SSI sector having a good record of past
performance and sound financial position. The objective is to promote quality
management systems in SSI units with a view to strengthening their
marketing and export capabilities
31
Debt equity ratio not more than 2:1

Loan Limit - need based.
Repayment - maximum 5 years including an initial moratorium up to 12
months.
6th Scheme the most Important one

Sub Scheme Name : Project Finance Scheme (PFS)
The objective of this scheme is to provide assistance for: n Setting up new SSI
units. Preference will be given to units with export orientation, import
substitution, hi tech and those promoted by entrepreneurs with good track
record.
Modernisation, technology up gradation, diversification and expansion of
existing well run units in the SSI sector.
For setting up of small hotels and other tourism related activities as well as
hospitals and nursing homes upto a project cost of Rs. 25 Crore.
Eligible borrowers
New or existing SSI concerns. They should generally be at least private limited
companies. Units graduating to medium scale are also covered subject to certain
conditions.
Debt Equity ratio not to exceed 2:1

Term loan not less than Rs.100 Lakh. The limits in respect of SIDBI Offices
located in Eastern Region, North Eastern Region, Aurangabad, Dehradun,
Jammu, Nagpur, Pondicherry, Raipur, Shimla, Varanasi and Visakhapatnam
shall be Rs.50 Lakh.
32
7th Scheme
Sub Scheme Name : Technology Development and Modernisation Fund
Scheme (TDMFS)
The objective of this scheme is to provide assistance for: n Purchase of

capital equipment, need based civil works and acquisition of additional land,
acquisition of technical know how, designs, drawings etc where considered
relevant.
Up gradation of process technology and products with thrust on quality
improvement comparable with domestic and international standards
Improvement in packaging
Cost of TQM and acquisition of ISO 9000 certification can also be financed
Eligible borrowers
Existing units in SSI sector which go in for modernization / technology up

gradation.
They should have been in operation for atleast three years.
The units should not be in default to institutions / banks in payment of dues.
Units graduating out of SSI sector are also eligible subject to certain
conditions.
Minimum amount of assistance should be Rs.10 lakh per unit

Assistance by way of term loan in rupee or foreign currency. In select cases
SIDBI may consider participating in equity also, depending upon the exit
route available to SIDBI for disinvestment in due course.
Repayment - maximum 5 years including initial moratorium up to one year.
8th scheme
Sub Scheme Name : Tannery Modernisation Scheme (TMS)
33
The objective of this scheme is to provide assistance for: n To support existing
tanneries for undertaking modernization programme for positive
environmental impact, becoming competitive, effecting better capacity
utilization, achieving productivity gains and reducing wastage etc.
Capital subsidy is available from Govt. of India on eligible machinery to the
extent of 30% and 20% of the cost of such plant and machinery for SSI and
non-SSI units respectively (subject to ceilings of Rs. 28 lakh and Rs. 35 lakh
respectively).
SIDBI is the nodal agency for both SSI and Non-SSI sectors.
Eligible borrowers
All existing tannery units undertaking viable modernization programme will be

eligible for assistance. Modernisation will include: n Measures for technology
up gradation and productivity improvement
Measures for machinery / facilities up gradation
Measures for adoption of waste treatment technologies, including primary
treatment of waste.
Minimum promoters contribution is 33.33 % of the project cost for both rupee
and foreign currency term loans. For this purposes, proposed financial
assistance from the govt of India will not be reckoned.
Debt Equity ratio not to exceed 2:1 for the project and 1.5:1 for the concern as a
whole
Amount of assistance will be need based but not below Rs. 25 lakh.
th
9 Scheme
Sub Scheme Name : Technology Up gradation Fund Scheme for Textile

Industries (TUFS)
The objective of this scheme is to provide assistance for: n To sustain as well as

improve the competitiveness and overall long term viability of the textile sector.
To provide timely and adequate capital at internationally comparable rates of
interest in order to upgrade the textile industrys technology levels.
Special Feature
The borrower can either avail 12% credit linked subsidy or 5% interest
reimbursement on the interest actually charged in respect of rupee loan. The
scheme also provides for coverage of exchange rate fluctuation not exceeding 5%
34
p.a. from the base rate or cost of forward cover premium upto 5% p.a. on the base
rate of exchange in respect of foreign currency loan.
Eligible borrowers
SSI units in the textile sector and cotton, ginning and

pressing sector. Units graduating out of the sector after implementation of the
scheme would also be covered.
Debt Equity ratio not to exceed 2:1 for the concern as a whole
Minimum promoters contribution should be 20 per cent of project cost for
Rupee term loans and 33.33 per cent for foreign currency term loans
Amount of assistance will be need based but not below Rs.10 lakh. For units
graduating out of the SSI sector, this will be decided on a case to case basis.
Five percentage points interest reimbursement on rupee term loans shall be
available to the units from the Govt. of India through SIDBI. Cover for
exchange rate fluctuation not exceeding five percentage points shall also be
available in respect of foreign currency loans.
Repayment period should not exceed 10 years (for existing and new projects
respectively), including a moratorium period upto two years
The scheme shall be effective for a period of 5 years between April 1, 1999 to
March 31, 2004
10th Scheme
Sub Scheme Name : Working Capital Term Loan (WCTL)
The objective of this scheme is to provide assistance for: n To help SSI units in
starting their commercial production without difficulty and during upscaling of
operations. n All the assisted units of SIDBI covered under the proposed scheme
shall, however, be required to eventually switch over to commercial banks within a
reasonable time frame (Say 3-5 years) for meeting their regular working capital
requirements.
Eligibility Criteria
Eligible borrowers
New or existing SSI units whether or not assisted by SIDBI including units
graduating to medium scale.
35
The venture outlay (i.e. project cost + working capital) should be beyond
Rs.100 lakh and up to Rs.300 lakh. Lower ceiling may be considered in
respect of units assisted under SIDBI's schemes viz., TDMFS, ISO 9000,
Vendor Development, Marketing, Equipment Finance Scheme etc.
Debt Equity Ratio - Not exceeding 2:1 for total venture outlay.
36
11th Scheme
Existing assisted units of SIDBI in the SSI sector satisfying the following
requirements :
Essential
i. Unit in existence for 5 years and making profits and having a
satisfactory track record with SIDBI.
ii. Borrower to have a Debt Equity Ratio (after the proposed borrowing)
of not more than 2 : 1.
iii. Atleast 25% of the additional fund requirement to be arranged as
promoters' contribution.
iv. The term loan to be made available for acquiring specific identifiable
equipment (including on reimbursement basis), additional working
capital as a result thereof and need based civil construction.
Acquisition of additional land will not be eligible for assistance under
the scheme.
v. The borrower or any of its associate concerns to be not in default to
any bank / FI.
Desirable
i. The average annual turnover for last 3 years to be around Rs. 3 crore.
ii. The borrower to have been enjoying a limit of around Rs.50 lakh
from a scheduled commercial bank.
iii. Preferably having a corporate constitution.
Units graduating to medium scale shall also be eligible subject to certain
conditions.
Nature of Assistance
The assistance would be in the form of a Term Loan Limit ("Limit") valid for one
year. This could be in the form of Rupee / foreign currency or both.
Quantum of Assistance
Based upon the financial position and operations of the unit, an annual Limit
would be sanctioned. The minimum and maximum amount of Limits under the
Scheme for a period of one year could be between Rs. 25 lakh and Rs. 200 lakh
respectively.
Terms and Conditions

i. Rate of Interest
As per prevailing interest rate structure of SIDBI announced from time to time.
ii. Upfront Fee
Non-refundable upfront fee of 0.5% of the Limit.
iii. Repayment Period
37
3 to 5 years including an initial moratorium not exceeding 6 months.
Security
First charge by way of hypothecation of the equipment / stocks / assets

covered under the Scheme in favour of SIDBI.
Extension of charge on existing securities available with SIDBI in respect of
earlier loans granted to the unit.
38
CHAPTER 4
Detailed Project
Appraisal Process
39
Detailed Appraisal
Before starting the financial appraisal of the project the bank gathers various
information about the promoters and the associated companies, if any to
check the viability of the project on various qualitative fronts. The bank
studies the following information submitted by the borrower before
starting with the actual appraisal.
1. Examination of Memorandum & Articles of Association for Borrowing
powers / Object clause / Authorised share capital.
2. Scrutiny of willful defaulters list of RBI / Caution Advice circulated by HO /
CIBIL List to check whether any of the promoters and/or associated concern
do not feature in the list. And in case if they do, the bank abstains itself from
extending the assistance.
3. Due diligence on the promoters / market reports gathered from various
sources to weigh the standing of the borrower in the market and reputation
among the customers, suppliers and various associations.
4. In case of existing units, the bank asks for the audited balance sheets and
Bankers' report; If not obtained, specific reasons and recording of
discussion with bankers
5. Before starting the appraisal, the bank officials visit the site and this is
known as the pre sanction visit. The cost of this visit is borne by the
borrower. This visit is mandatory in all cases whether they are Greenfield or
Existing cases. This Pre-sanction site visit report is presented in the
prescribed format, including discussion with bankers etc. during the visit.
The visit gives the bank a raw experience about the project and the
discussions held with the various parties involved give their feelings towards
the viability of the project.
6. this pre sanction site visit is taken in reference to the location, distance,
availability of resources and market, labour, approach, transport facilities,
utilities and local regulatory norms etc. this way the pre sanction visit
studies the various angles of the project which are later included in the risk
assessment exercise of the project and loan amount is sanctioned according
to it.
7. as the borrower submits the details of the security ( both collateral and
overall) along with the project report and the application in a prescribed
format along with the application form, the bank officials Visit the
immovable property offered as collateral security and in the due course the
40
valuation of the property is done by one (or more) valuer of the paneled
advocates of SIDBI. The bank calculates the Distress Sale Value of the
property and this value is used to calculate the security margins against the
loan applied for.
8. the bank also investigates into the title of the immovable property offered as
security to ensure that there are no loop holes in the security offered and the
banks interest is safeguarded in case the borrower fails to repay the loan.
On the basis of the completed application form and other related documents, a
detailed appraisal of the project is carried out covering the following areas :
Promoters/ Management,
Technical,
Financial and
Commercial
Once this is done a detailed appraisal note is prepared according to the type of loan
and the amount of loan applied for. This appraisal note is prepared in a specified
format . Annexure S-3 / CART available on Citrix.
41
Once these details are covered to the satisfaction level of the bank officials, the
appraisal of the project begins covering various qualitative and quantitative
aspects of the project to study its viability in all the possible areas. The indicative
list of areas to be covered during the appraisal and covered in the detailed
appraisal report are discussed below.
Points included in Pre Sanction Visit
Activity
Date of Receipt of Application under DFS.
Inward No. of the Application.
Initial Scrutiny:
[a] Whether the application is in the prescribed format?
[b] Whether all columns were duly filled in and signed by the applicant?
[c] Whether the application was dated appropriately and signed?
[d] Whether Annexures stated to have been enclosed are all present?
[e] Whether two copies of recent passport size photographs of the applicants and the
guarantors were obtained and kept on record?
Preliminary Scrutiny:
Describe the gaps in information furnished, if any?
Whether a query letter has been issued to the applicant, after obtaining approval
from higher authority, giving a period not exceeding 30 days depending on the
number and type of queries raised?
If Yes, date of issuing of query letter?
Whether the reply was duly inwarded and examined as to its satisfactory
completeness?
Inward No.?
Date on which reply received?
Whether gaps still existing?
What information/clarifications sought in case of unsatisfactory response and
persisting gaps?
What correspondence/discussions were carried on with the applicant to plug the
gaps?
Date of receipt of response.
Whether response was received within stipulated time?
If No, date of first reminder sent?
Is second reminder was sent?
If Yes, on which date second reminder was sent?
Whether the case was recommended for closure to the competent authority?
Whether the case was treated as closed after a final reminder?
If Yes, Reasons?
If Yes, Date of closure?
In the case of closure, Whether due approval of the competent authority was taken?
If Yes, On which date?
Management Appraisal
The appraisal of the project begins with the appraisal of the management and the
promoters. It is considered the most important step in the project appraisal as it
42
brings out the zeal and resources of the management to carry on the project
successfully. This appraisal covers various aspects of the management and the
promoters including their personal details and resources. It also signifies the
patterns of the shareholding over the years ( if its an existing company ), the
reasons of changes, if any and most importantly the proposed shareholding
pattern over the life of the project apart from the various other details. A detailed
list of the aspects of the management appraisal is given below.
1. Promoters
i] Whether first
entrepreneurs.
generation/experienced
in
the
same
line/established
ii] Scrutiny of Memorandum & Articles of Association with regard to Object Clause,
Borrowing powers and authorised share capital.
iii] Bio Data of promoters / directors; Details regarding directorships /
partnerships / proprietorship / association in other companies / concerns / firms /
others.
iv] Details of all borrowings [short term / long term] from the FIs, State Level
Institutions, banks, NBFCs and others. The projected cash flow statement shall
contain the repayment of the above liabilities in line with the relative repayment
schedule wherever envisaged at the time of availing corresponding facility / loans
by the respective institutions / others.
v] Net worth statement of each guarantor should be furnished in a precribed
format containing following particulars :
a. full details of his/her immovable properties including complete address, area
(residential, commercial etc.) and whether they are mortgaged with others with
details thereof;
b. full details of movable assets including the details of investments in shares,
bonds, debentures, fixed deposits indicating name of company / firm, amount, face
value, interest rate, etc., and whether they are pledged with others with details
thereof;
c. full details of liabilities,
d. photographs/signatures attested by his/their banker/details of passport.
vi] Performance of the associate concerns to be assessed by scrutiny of financial
position/working results of each concern for three years.
vi] The resourcefulness of the promoters / guarantors.
43
viii] Discreet market information on borrowers and Branch perception of

borrowers.
xi] Scrutiny in Willful Defaulter and Caution Advice list.
2. Credit Report of Borrowers
Credit report from the bankers' about the borrowers and their associate concerns is
obtained before recommending a proposal for sanction. It is necessary that credit
reports from bankers are obtained and kept confidential when the appraisal is in
process. However, in case the credit report is not received within a reasonable time
(say 30 days maximum), the branch may follow-up with the banker through a
written communication. In the meantime, the bank proceeds with the appraisal of
the project provided they are prima facie satisfied with the credentials of the
promoters.
3. Brief history / Back Ground / Financials of the borrower:
In case of an existing company, brief details of existing facilities, capacity
utilisation etc. may be furnished. Analysis of past balance sheet and working
results of the company as per the prescribed format by SIDBI. The bank
emphasizes on financial position including various financial ratios as indicators
like
Debt equity ratio,
Current ratio
Inventory holding/receivables,
Trends in sales,
Export sales (if any),
GP/NP margins,
Plough back, market,
Order book position,
Prospects.
In case of partnership concerns, if wide fluctuations in the capital are observed,
condition may be stipulated regarding maintaining minimum capital of required
amount; in case of unsecured loans, source and terms be examined. All the items in
these ratios are taken from the statement of accounts and are grouped as detailed
in Annexure S(1). A detailed list of the ratios and their calculations used in
SIDBI are listed below:
Commonly used Financial Ratios
The bank uses basically 4 types of financial ratios viz.,
44
Appraisal ratios
Profitability ratios
Liquidity ratios
Capitalization ratios
A detailed list of the ratios and their calculations used in SIDBI are listed below
along with their minimum acceptable limit known as the THRESHOLD
LIMIT.
45
A. APPRAISAL RATIOS
1. Break Even Point Capacity Utilisation (BEPCU)
Fixed costs and Semi-fixed costs X %age capacity utilization

BEPCU(%) = ----------------------------------------------Contribution
Where,
Contribution = Net Sales Less Variable Costs
Fixed and semi fixed costs include
(i)
Salaries and wages,
(ii)
Repairs and maintenance,
(iii) Administrative and miscellaneous expenses,
(iv) Fixed portion of selling expenses,
(v)
Fixed royalty and know-how payments,
(vi) Interest on term debt, and
(vii) Depreciation on straight line basis (not to be included for cash break-even
calculation).
Variable costs include
(i)
Raw materials,
(ii)
Outside purchases,
(iii) Purchase of goods for resale,
(iv) Consumable stores and spares,
(v)
Packing materials,
(vi) Power, fuel and water,
(vii) Royalty payments linked to sales,
(viii) Variable selling expenses,
(ix) Interest on working capital and
(x)
Other variable expenses varying directly in proportion to output. Since in
the short-run, the semi-fixed costs may not vary materially with the level of
output, the entire semi-fixed costs are added to the fixed costs for BEPCU
calculation.
Capacity utilisation is to be worked out on the basis of installed capacity
(not optimum/licenced capacity).
BEPCU is to be calculated on the basis of cost structure related to
capacity utilisation for the year of normal operations.
Cash BEPCU is to be worked out on the basis of same formula without
taking depreciation as part of fixed costs.
46
Threshold limit depends upon the nature of the industry.
2. Fixed Assets Coverage Ratio
Net fixed assets + Capital WIP

Fixed Assets Coverage (times) = ------------------------------Assets
A = {Deferred Credits + Term Loans + Debentures secured by first
charge over fixed assets + External Commercial Borrowings + Foreign
Suppliers Credit + Working Capital Term Loan + Deferred Interest +
Other Loans}.
This ratio is an indicator of overall coverage / security cover available for future
borrowings.
Net fixed assets which form part of security for institutional loans only to be
included in this ratio and to be calculated for the date of project completion.
3. Debt Service Coverage Ratio (DSCR)
Gross Cash Accruals + Interest on Term Debt + Lease Rentals

DSCR = ---------------------------------------------------Repayment of Term debt + Interest on Term Debt + Lease Rentals
Average DSCR to be computed by taking the total of all values of the numerator
and denominator for the Entire Period of the proposed term loans commencing
from the year in which commercial production starts.
The threshold value is 1.5 : 1.
B. PROFITABILITY RATIOS
1. Profit before Interest Lease rentals and Depreciation (PBILD) / Total
Income (%)
47
Profit before Interest, Lease Rentals and Depreciation x 100

= ----------------------------------------------------Net Sales + Operational Income
2. Operating Profit / Total Income (%)
Operating Profit
= ------------------------------------- x 100
Net Sales + Operational Income
3. Net Cash Accruals / Income (%)
(Net Profit / (Loss) + Depreciation - Dividend + Cash Adjustments)

= ---------------------------------------------------------Net Sales + Operational Income + Non-operational Income.
This percentage indicates what part of the income contributes to the cash
resources: trend may help predict impending liquidity strains and potential
sickness. This can be contributed to the reason as the net cash accruals are taken as
important parts of the means of financing of the project cost.
4. Return on Capital Employed (%)
Operating Profit + Non-operational Income + Interest +Lease Rentals x

100
= --------------------------------------------------------Net Fixed Assets + Lease Rentals Payable + Investments + Current
Assets - Provisions - Creditors
48
The ratio reflects the earning capacity of the assets deployed. Capital work-inprogress and advances against capital expenditure are not included in capital
employed as these assets do not start generating returns. Future lease rentals
payable is taken as part of capital as it adds to the asset base. The non-interest
bearing current liabilities i.e. Provisions and Creditors are excluded
5. Interest Cover (times)
PBILDT - Tax
= ------------------------------Interest + Lease Rentals
This ratio is taken as an indicator of ability to meet interest and rental

commitments of the concern arising out of loan repayment and other such
liabilities. It a ratio in absolute term and shows the firms commitment to generate
enough funds to cover these expenses.
49
C. LIQUIDITY RATIOS
6. Current Ratio
Acceptable threshold limit at SIDBI is 1.5 : 1. that means the value should hover
around this value.
Current assets, Loans & Advances

= -------------------------------------Current liabilities & Provisions
7. Quick Ratio
Current assets - Inventory

= -------------------------------------Current liabilities & Provisions
50
D. CAPITALISATION RATIOS
1. Debt (Long-term )/Equity Ratio = A/B,
Where,
A = (Preference Share Capital Redeemable within three years + Sales Tax

Loan repayable within three years + Other Incentive Loans repayable
within three years + Debentures + Term Loans + Future Lease Rentals
Payable + Working Capital Term Loan + External Commercial
Borrowings + Deferred Interest + Other Loans + Deferred Credits +
Foreign suppliers' Credit + Unsecured Loans and Deposits repayable
after one year) - (Installments of all the above dues except institutional
dues during the next financial year + portion of Debentures to be
compulsorily converted into equity shares);
B = Equity Share Capital + Preference Share Capital redeemable after 3
years + Other type of Share Capital + Reserves and Surplus + Subsidy +
Sales Tax Loan repayable after three years + Other Incentive Loans
repayable after three years + Subordinated Loans from promoters +
portion of debentures to be compulsorily converted into equity shares (intangibles/Losses).
51
2. Overall Debt/equity ratio

Acceptable threshold limit at SIDBI is 2 : 1.
[Preference Share Capital reedemable within three years + Sales Tax

Loan repayable within three years+ Other Incentive Loans repayable
within three years + Debentures + Term Loans + Future Lease
Rentals payable + Working Capital Term Loan + External
Commercial Borrowings + Deferred Interest + Other Loans +
Deferred Credits + Foreign Suppliers' Credit + Bank Borrowings for
working capital + Unsecured Loans and Deposits) - (portion of
debentures to be compulsorily converted into equity shares)]
= ---------------------------------------------------------[Equity Share Capital + Preference Share Capital redeemable after 3
years + other type of Share Capital + Reserves and Surplus + Subsidy
+ Sales Tax Loan repayable after three years + Other incentive loans
repayable after three years + Subordinated Loans from promoters +
portion of debentures to be compulsorily converted into equity
shares - intangibles / losses.]
3. Total Income / Net Fixed Assets (times)
{Net Sales + Other Income (Operational)}

= ------------------------------------{Net Fixed Assets + Future Lease Rentals payable.}
4. Creditor Days
52
[Sundry Creditors + Acceptances] x 365

Creditors Days = -------------------------------------------Annual Purchases
5. Debtors days
Sundry Debtors (both over and below six months] x 365

Debtor Days = ----------- ------------------------------------Gross Sales
6. Turnover of Working capital [Times]
Gross Sales
Working Capital Turnover = ------------------------------Sundry Debtors + Inventory
53
4 Management and shareholding pattern

Composition of the Board, executive management, chief executive, adequacy of
organisational set up, arrangements for executive staff responsible for major areas
like project implementation, production, marketing, finance. This shows the
strength of the management and the competency of the people employed by the
company. In case the promoters are the managers, it adds more to the
responsibilities of the promoters. And on the other hand, if the promoters are not
qualified enough the concern should file a list of the managers detailing their
educational qualifications and their experience in the present line of business and
others also.
54
FINANCIAL APPRAISAL
The financial appraisal process is a complex and completely intermingled process.
There are various details each like a different strand of a web interwoven together.
The calculation of one affects the others and these calculations are done many a
times simultaneously, sometime one following the other and sometimes the figures
are updated once one calculation is finalised. The appraisal starts with the
establishment of the project cost which in turn depends upon the costs of land,
building, plant & machinery and margin money for working capital. A provision for
contingency (Normally @ 5%) is included in the project cost to cover the surge in
prices, taxes, rise in other expenses and including other unforeseen contingencies.
The most important aspect of appraising any project is to establish its
type as a Greenfield project ( entirely new project) or a Brownfield Project, the two
broad heads under which the projects are classified. So broad areas to distinguish
between two project types are given as following:
1. Existing/Brownfield Projects
The existing projects are those projects in which the company (which has
applied for the loan) is working for the past few financial years. These projects
include:
i.
The expansion project
ii.
The technological up gradation project
iii.
The relocation projects
iv.
The loan for the working capital requirements.
v.
Any other.
2. Greenfield projects
These are the projects which are completely new and are started from the
scratch by the promoters. It is just an idea started to take shape. The bank takes
great precautions while funding such a project. Unlike the existing project, the
bank goes into every details of the project and establishes and rechecks the cost
of the project. The process of establishing cost of the project and risk appraisal
involves various qualitative and quantitative measures. In such a project the
technical, financial and marketing feasibility of the project is studied along with
the details of the management risk(promoters qualifications, experience in the
field, net worth).
As already said that the project appraisal is a completely intermingled process.

Value of one item depends upon the value of another item and this way the whole
process is completely cyclic in nature. All these are the projections of the
companies probable profit & loss, and cash generating power. Where projections
are future-oriented financial document/information that is prepared using
assumptions that reflect the entity's planned course and current status.
SIDBI uses following details while appraising any project:
(i)
Cost of land
55
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
(xvi)
(xvii)
Cost of Building
Cost of Plant and Machinery and MFA
Project Cost
Means of Finance
Assumptions
Profitability Analysis
Existing Balance Sheet Calculations (of existing in case of Brownfield
Project and Sister concerns in case of Greenfield project)
Depreciation Schedule
Interest Amortisation Schedule (based on an intrest rate depending upon
the initial qualitative appraisal of the project including the pre appraisal
visit)
Working Capital schedule
DSCR Calculations
Taxation Schedule
IRR Calculations (Post and Pre Tax)
Break Even Point Calculations
Projected Balance sheet
Projected Cash flow
These details remain the same in every project, the only difference is of approach.
The approach of the bank changes while dealing with the two types of the project
being appraised. The thrust is more on the returns in case of the Greenfield project
on one hand then the thrust is more on the qualitative aspects like management
appraisal and balance sheet calculations of the existing company with the new
project in case of a brown field project.
56
1.
Project Cost
Project cost includes the expenditure to be incurred on the project. It usually

comprises of the costs of land and building, plant and machinery, miscellaneous
fixed assets, margin money for the working capital, cost of contingency and pre
operative expenses like interest during the construction phase, traveling, legal and
professional expenses, and such expenses in the construction phase.
The project cost is not taken exactly as submitted by the borrower. The
appraising officer knocks off the unnecessary items featuring in the project report
and furnishes the cost. This is done taking the borrower in confidence and
sometimes it so happens that the bank may also ask the borrower to increase the
cost of the project if felt so.
The following pages show the details of the components of the project cost
along with their sub heads. Details of expenditure under each is given as separate
Annexure.
In case the project includes vehicles, details of owner, registration no. etc. are given
as a separate statement.
Cost of Project
Cost already incurred up to
Rupee Rupee
Total
cost
equivalent
to foreign
exchange
cost
1
2
3
(Rs. lakhs)
Cost to be incurred
Grand Total
Rupee cost Rupee
Total
(3) + (6)
equivalent
of foreign
exchange
cost
4
5
6
7
Particulars
Description of Asset
1
2
3
4
5
6
7
8
9
Cost
Firm Cost Non-Firm Total Cost
Cost
Land & Site Development

Building
Plant and Machinery
Other Fixed Assets
Vehicles
Prelim. & preoperative expenses
Advance payment
for Capital
Expenditure
Margin money for working capital
Cash and bank balance
57
Total
1.
Land and site development:
Adequacy, availability for future expansion. Whether land acquired is

disproportionate to requirement, whether permission for non-agricultural use is
obtained. Freehold or leasehold. If leasehold, who owns, period of lease, whether
lease deed registered, whether mortgage of leasehold and mortgage rights possible,
period of lease and adequacy thereof, price and reasonableness thereof, when
acquired, land in the name of whom, if not steps taken for transfer to the company,
break-up of site development cost viz. leveling & filling, connecting and the
internal roads (approach of the land), barbed wire compound etc. and
reasonableness thereof.
The cost includes the following:
a)
Cost including conveyance, land acquired/ proposed to be acquired @
Rs._______ per acre/sq. m.
b)
Premium payable on leasehold land and conveyance charges (______acre/
sq. m @ Rs.___ per acre/sq. m.
c)
Cost of leveling & development of land at Rs.______ per acre/sq. m.
d)
Cost of laying roads:
i)
Approach Road connecting the factory site to main road of (type of
construction) at Rs. per rm.
ii)
Internal roads for the factory (type of construction) at Rs.__ per rm.
e)
Cost of fencing/ compound wall of (type of construction) at Rs. per rm.
f)
Cost of gates (No. of gates_______)
2. Building:
Nature and type of construction . Justification, of Cost per sq.ft/sq.mt assumed for
construction. Reasonableness to local rates as also rates which are accepted by
other FIs.
a) Factory building for the main plant & equipment
b) Factory building for auxiliary services like
steam supply,
water supply,
laboratory,
workshop etc.
c) Administrative
building
d) Godowns, warehouses and open yard facilities
e) Misc. non-factory buildings, like
58
canteen,
guest house,
time office,
excise house etc.
f) Quarters for essential staff.
g) Silos, tanks, wells,
chest, basin,
cisterns, hoopers
bins and other
structures which are necessary for installation of plant and equipment and
which may be constructed in RCC and such other structural civil
engineering materials.
h) Garages
i) Cost of Sewers drainage, etc.
j) Civil Engineering works not included above.
k) Architects' fees.
The detailed Performa of the appraisal is given below:
Brief
Area/jus
Type of
descriptio tificatio constructio
n of each
n
n
block
/justificatio
n, if RCC
3. Plant
Cost
Cost per
sq.ft/sq.
mt
Justificat
ion/reas
onablene
ss to
local
rates/acc
epted by
other FIs
and machinery
Whether imported / indigenous, basic cost, duties, cost of transportation,

installation, erection; in case of imported machinery basic cost and import
duty/rate to be worked out separately. Reputation of suppliers of main machinery.
Basis of selection of machinery as also examination of recent competitive
quotations obtained, guarantees regarding the performance. Justification of cost in
case of fabricated equipment.
i) Imported
a) F.O.B. value
f.e. cost exchange rate adopted for arriving at upper equations
b) Shipping freight & Insurance (__% of (a))
c) Import duty
d) Clearing, loading unloading & transport charges to factory site
59
ii) Indigenous
a) F.O.R. cost
b) Sales tax (%), Octroi (%) and other taxes if any.
c) Railway freight & transport charges to site
iii) Machinery stores & spares
iv) Foundation & installation charges on imported and indigenous machinery.
v)Technical know-how fees and expenses on drawings etc. payable to technical
collaborators.
vi) Expenses on foreign technicians & training of Indian technicians abroad
a) Foreign technicians
b) Indian technicians (_____ persons for ___ months).
A. Importe
d:
Suppliers
Basic Cost
Import Duty Total (A)
Add:
Transportati
on,
insurance
etc.
1
2
3
4
4. Misc.
fixed assets
Details and justification / reasonableness. Technical know-how fees

reasonableness in the context of services to be provided under the agreement.
It includes the following:

a. Furniture
b. Office machinery & equipment
c. Misc. tools & equipment including erection tools.
d. Cars, trucks etc. (___ cars; ____ trucks).
e. Railway siding
f. Equipment (including cost of installation), cabling etc. for distribution of
power and light for factory and colony.
g. Equipment and piping for supply & treatment of water (including cost of
h. installation)
i. Equipment & piping for distribution of steam, air etc. (which do not form
part of the main plant & machinery).
j. Laboratory equipment
k. Workshop equipment
l. Fire fighting equipment
60
m. Effluent collection treatment & disposal arrangement

n. Misc. fixed assets
5. Preliminary
and preoperative expenses
Company formation expenses, upfront fees, insurance, establishment expenses,

Interest during construction period and other expenses before commencement of
operations. Reasonableness of expenses to be seen and interest during construction
period to be related to implementation schedule.
6. Contingencies
A suitable provision is made towards contingency to be related to non- firm costs
only which is usually taken as 5%.
7. Margin
money for working capital
On the basis of the credit policy of RBI, it has been decided to adopt the following
methods :
a. Turnover method for assessing the working capital to the borrowers having
working capital limits up to Rs.2 crore i.e., to borrowers whose projected annual
turnover is up to Rs.10 crore.
b. Where the projected annual turnover is more than Rs.10 crore, the second
method of lending for arriving at the MPBF may be applied. However, the various
holding periods for raw materials, work in process, finished goods, receivables and
sundry creditors shall be considered on a realistic basis taking into consideration
the various factors like availability of raw material, processing time, credit
practices prevalent in the industry etc. and also RBI guidelines issued from time to
time and as per recommendations of Nayak Committee, wherever appropriate.
Once, the assumptions are set then the profitability analysis is done for the
construction/current year and for the life of the project. The life of the project here
means the total time in which the assistance extended to the borrower will be
repaid. It has nothing to do with the life of the assets or any such things.
61
Means of finance:
Once the project cost is arrived at the next step is to find the means to fund the
project. This funding is done by using various methods known as means of
financing. This include Promoters Contributions, Internal Cash accruals,
Term Loans, Working Capital Loans, Quasi Equity etc.
1. Promoters' Contribution [PC] including Unsecured Loans
i] Only interest free unsecured loans is taken as part of promoters' contribution.
ii] It would be ideal if the entire PC is raised by way of equity share capital.
However, in case PC is to be brought in through equity share capital and interest
free unsecured loans, the ratio of fresh equity share capital and interest free
unsecured loans brought in for the project shall be around 3:1 (i.e. fresh equity
share capital 75% and unsecured loans 25%) and, in any case, it shall not be below
2:1.
iii] If PC is brought in by way of internal cash accruals, the audited accounts of the
company/ firm, prima facie, should corroborate availability of adequate/surplus
internal accruals for investment in the project being financed by us. In such cases,
it shall be necessary to have a critical analysis of the current assets, current
liability, fluctuation in the profit figures during the past 2-3 years, dividend
payment/withdrawal by the partners etc., so as to estimate and decide upon the
extent and availability of adequate internal generation for investment in the project
as PC.
Other Sources of finance

a. Subsidy :
State Subsidy is not to be treated as a means of finance, while arriving at
promoter's contribution. ZO / BOs to obtain confirmation whether unsecured loans
in lieu of subsidy are being raised; power of attorney in favour of SIDBI would be
registered with the authorities for direct release of subsidy to SIDBI. The key issues
to be observed in the above issue are as given as under:
Power of Attorney for release of subsidy in favour of SIDBI shall be executed by the
borrower as per format at Annexure L-1, and registered with the subsidy disbursing
authority as also the utilisation thereof shall be subject to the approval / discretion
of SIDBI must be necessarily stipulated and complied with.
PoA duly executed and acknowledged by the authorities concerned should be kept
in our records and proper liaison to be maintained with the disbursing authorities
to keep track of release of subsidies.
62
Upon release of subsidy, the same may be utilised towards reduction of loan
instalments. However, in respect of irregular accounts, the subsidy amount could
be utilised to first appropriate the overdues and then towards loan instalment with
proper approval from the delegated authority. On appropriation of the subsidy
amount, the borrower to be suitably advised and the repayment schedule revised, if
necessary.
d. Term Loans
This includes term loans from SIDBI as well as from other banks also.
e. Quasi Equity
This is generally considered debt but having characteristics of equity capital, e.g.
flexible repayment, expected higher rate of return and for the most part unsecured.
It usually refers to funds, other than paid-up capital and retained earnings,
employed in a business and which will remain in a business as permanent capital.
Money granted to a company by the shareholders or some other party in the form
of a loan might be classified as quasi-equity provided the repayment of such a loan
is formally postponed to the benefit of other creditors.
In some instances long term debt may be considered quasi-equity especially where
the repayment is spread over a long period of time.
63
Assumptions
Detailed assumptions including product mix, product specifications, export sales,
arrangements for export - direct or through export houses, selling prices, inputoutput norms, prices of raw materials, other input costs, depreciation method,
income tax rate, exemptions under various sections of IT Act assumed for
calculation of tax, sales tax deferment, if any, rates of interest on loans and working
capital finance, on which profitability estimates have to be prepared. Project
profitability statement, projected utilisation of capacity assumed in the profit, cash
flow statement and projected balance sheet are to be prepared. Basis of
assumptions on projected capacity utilisation, selling prices for finished
products/raw materials. Comparison of gross profit percentage with industry
average, earning per share, dividend prospects. Examination of critical factors on
which viability depends. In modernisation/technology up gradation proposals,
qualitative as well as quantitative benefits of proposed modernisation on up
gradation of the product, process or technology, energy saving, cost of production
and profitability of the unit etc. may be assessed.
64
Existing Balance Sheet Calculations

While appraising any project the bank also looks for the past records of the
company in case of Brownfield Project and Sister concerns in case of Greenfield
project. This is done to serve two basic purposes-first, these existing balance sheet
calculations show the past working of the company including its cash reserves and
status of its financial health. Second, these calculations help to predict the future
trends for the generation of revenue and expenses which are of great help while
preparing the financial statement for the company with the new project in hand.
Performa for financial position and working results of associate concerns
Name of Associate Concern : A
Product:
Established in:
Shri ____ and Shri ____ of the applicant unit are interested as ________(pl
indicate in what capacity)
Their financial stake in the associate concern A is Rs. lakh.
For 3 years
Share capital
Reserves & surplus
Net worth
Total income
Gross profit
Interest
Depreciation
Net profit
Similarly for :
Associate Concern: B
Associate Concern: C
Associate Concern: D
65
Performa for the balance sheet analysis is given as:

Analysis of balance-sheet
As on As on
As on
31-Mar- 31-Mar- 31-MarFIXED AND NON-CURRENT ASSETS
1. Gross Block
a) Land
b) Buildings & Roads
c) Plant & machinery
d) Others
Total fixed assets
2. Less: Accum. depreciation
3. Less: Revaluation reserves
4. Net Block (1-2-3)
5. CWIP(incl. adv. for capex)
6. Noncurrent assets
a) Sundry debtors over 6 months
b) Others (Incl.Advances to
Subsidiaries)
7. Total (4+5+6)
CURRENT ASSETS, LOANS AND ADVANCES
8. Investments
9. Sundry Debtors
10. Inventory
a) Raw mtls.& components
b) WIP
c) Finished Goods
d) Stores, spares & tools
Total Inventory
11. Cash & Bank Balances
66
12. Advances (Incl.Adv.Tax)

13. Other Current Assets
14. Total (Sum of 8 to 13)
15. TOTAL ASSETS (7 + 14)
LIABILITIES AND EQUITY
OWNERS' FUNDS
16. Capital
a) Preference
b) Equity
Total
17. Free Reserves
18. Less: Exp not written off\ Intangible
assets
19. Less : Loss Balance
20. Tangible Net Worth
LONG-TERM BORROWINGS
21. Debentures
22. Secured Term Loans
23. Fixed Deposits
24. Other unsecured borrowings
25. Deferred payment credits
26. Total (Sum of 21 to 25)
CURRENT LIABILITIES AND PROVISIONS
27. Instalments of term liabilities
28. Bank Borrowings (CC,OD)
67
29. Acceptances
30. Sundry Creditors
31. Interest accrued, not due
32. Bridge loan/short term loan
33. Other current liabilities.
34. Provisions
a) for taxation
b) for dividend
c) others
Total
35. Total current liabs & provisions (Sum of
27 to 34)
36. TOTAL LIABILITIES AND EQUITY
(20 + 26 + 35)
=
Projected Profitability Analysis

The main objective of doing a profitability analysis of a company is to check the
ability of generating cash that is it is the inflow and outflow of cash which matters
the most in practice. It is the cash which the firm can invest, or pay to the bank to
discharge its obligations toward the bank and other creditors, or distribute to the
shareholders. The profitability analysis of a project depends upon the forecasts of
the total revenue generated and the forecasts of expenses (on the basis of past
records of the company in case of an existing company or on the basis of sister
concerns or companies in same business with comparable sizes in case of a
Greenfield project).
There are various factors involved in preparing the Projected profitability analysis.
One of them is to establish the time horizon for analysis. This time frame can be
decided depending upon various factors like
The Physical life of the project,
Technological life of the project
68
Product market of the project

Investment planning horizon of the firm
At SIDBI, the project life depends upon the tenure of the loan which in turn is
decided after holding discussions with the borrower. The repayment schedule of
the loan decides the life of the project for the bank i.e. the time till which the bank
has its interest vested in the project is the project life for the bank.
This analysis generates the details not only about the internal accruals but also
releases the reasons for any rise or fall in the internal accruals. A detailed Performa
of the Profitability analysis is given below:
II
III
IV
Year
Installed Capacity
production capacity
Capacity Utilisation (%)
Production Capacity
Net Sales
Total Income
Raw Material
Consumables & Others
Salary & Wages
Power
Administrative & Other
Exp.
Repairs and maintenance
Selling expenses
Preliminary Expenses
written off (Avg.)
SUB-TOTAL (1)
Gross Profit EBIDTA
Interest
(a) On term borrowings
(b) On working capital
Depreciation
Repayment of Loan to
SIDBI
SUB-TOTAL (2)
Total cost of production
Total sales
69
Operating profit
Other Expenses
Profit/loss before taxation
Taxation
Net distributable PAT
Gross cash accruals
Withdrawal ( Equity
Dividend)
Net cash accruals
Reserves and Surplus
% of net profit to net
sales
% of operating profit to
total sales
% of operating profit plus
interest to
capital employed
(ROCE)
% of Raw materials to net
sales
% of Salaries and wages to
net sales
% of total cost of
production/net sales
DSCR
Average DSCR
BEP
70
Depreciation Schedule
Depreciation is a financial tool for replacing an asset at the end of its
useful life. Depreciation is allowed as a deduction while computing income under
the head profits and gains of business or profession and income from other
sources. It is allowed on all fixed assets, save and except land. However, it is not
allowed to a person earning salary income, even if he uses his car for commuting
between his office and residence. Likewise, a person who owns house property and
lets it out cannot claim depreciation on the building while working out income
from house property.
Why provide for depreciation? There are two reasons. Firstly, the use of any
asset erodes its value due to wear and tear or due to the passage of time, or due to
obsolescence resulting from a change in technology. The cost of an asset should be
written down to reflect its correct value. Since assets like plant and machinery,
buildings, and furniture and fixtures are used to generate revenue, the reduction in
their values represents a charge, which is debited to the profit and loss account to
arrive at the correct profits of the year.
Secondly, depreciation is a non-cash expenditureit does not involve an outflow of
cash from the business, and therefore results in the accumulation of funds. But
since it is debited to the profit and loss account like any other expense, it reduces
the taxable profits and, therefore, the burden of tax. It acts as a source of internal
financing for replacement of an asset at the end of its useful life.
Computation under the Companies Act. Depreciation is computed using
either the straight-line method (where the amount of depreciation is
uniform for all the years@ 3.39% for Plant and Machinery and Building
And its 12.89% for Misc. Fixed Assets.) or the written-down value method
(where the amount of deprecation is highest in the first year and goes on reducing
year after year).
Under the Income Tax Act. Depreciation is charged on the block of assets, and
not on individual assets. The block represents the group of assets for which the
same rate of depreciation applies. Under the Income Tax Act, depreciation is
computed using the written-down value method, except in case of an undertaking
engaged in generating and distributing power.
While the actual cost of new asset is added to the block, the amount received on
the sale of an asset (including scrap value) is reduced from it. Depreciation at the
prescribed rates is computed on the written-down value of the block as on the last
day of the financial yeartypically 31 March. This value is the aggregate cost of
acquisition of the assets in a block as reduced by the depreciation charged in
previous years
71
For this reason, SIDBI includes calculation of depreciation in the financial

appraisal of any project. Since, SIDBI does not count the Hire-Purchase or Lease
(considers only in case of Land not in other assets) contracts, depreciation adds up
to the Profit After Tax (PAT) to give the Gross Cash Accruals and finally the Net
Cash Accruals ( after deducting the withdrawals like equity payout)
72
Interest Amortisation Schedule (based on an

intrest rate depending upon the initial
qualitative appraisal of the project including
the pre appraisal visit)
Interest rate fixing is done as suggested by the results of the initial appraisals.
Cases covered under SME Fund to carry interest as may be indicated from time to
time by the Bank. The parameters, in respect of cases are decided on a case to case
basis, in consultation with HO. The interest rate is to be fixed in the band of PLR
and PLR minus 2%. The actual rate would have to be decided based on the credit
rating model. The interest rate shall be fixed in the band of PLR-2% to PLR, as
under:
Internal Risk
Rating
1
SAAA
SAA
3
4
Definition
Applicable
Band
Present
Rate
Highest safety
PLR-2% to PLR-.5%
9.5%-10%
High safety
PLR-1.5% to PLR-%
10%-10.5%
SA
Adequate safety
PLR-1% to PLR-.5%
10.5%-11%
SBBB
Moderate safety
PLR-0.5% to PLR
11% -1.5%
73
Working Capital Statement/Schedule

Working Asset Statement is a net worth statement minus any personal assets, the
car, house, boat, etc. A working asset statement will give a clear picture of an
individuals invested assets.
Working Capital (WC) is current assets minus current liabilities; also called net
current assets or current capital. It measures the margin of protection for current
creditors. It reflects the ability to finance current operations.
Working Capital Statement (WCS) is part of the financial statements Statements
of Cash Flows or Changes in Financial Position. The WCS normally includes
sections covering: Sources of Working Capital, Uses of Working Capital, and
Working Capital Changes.
Working Capital Turnover (WCT) shows how efficiently Working Capital (WC) is
employed, i.e., it measures how efficiently the business is using its available assets.
WCT measures the amount of Net Revenue generated per monetary unit of
Working Capital. It varies widely by industry; therefore it is best to compare WCT
to industry averages.
Arrangements made/ proposed to be made for working capital:

In principle letter from the banker of the borrower agreeing to provide need based
working capital to the unit, may be obtained. However, in respect of existing
units/groups enjoying working capital facilities with banks and tie up of working
capital is not expected to be a problem, submission of in-principle sanction for
working capital need not be insisted upon as a pre-disbursement condition. The
guideline regarding release of margin money for working capital, after submission
of the regular sanction of working capital facility by bank, may however be
followed.
The detailed performa of the working capital analysis is given below:
I. Current Assets
Year
1
Year
2
Year
3
Year
4
1.Raw Materials including stores

1.1 Imported (Month's consumption)
1.2 Indigenous (Month's consumption)
74
2. Other Consumable Spares

3. Stock-in-Process (Month's Cost of
Production)
4. Finished Goods (Month's Cost of

Sales)
5. Receivables other than Export and
Deferred
Receivables
(including
Bills
Purchased/Discounted by Banks)
(Month's Domestic Sales excluding deferred
payment sales)
6. Export Receivables
(including Bills Purchased / Discounted by
Banks)
(Month's Export Sales)
7. Advances to suppliers
Materials and
Stores/Spares/Consumables
of
Raw
8. Other Current Assets including Cash

and bank balances and deferred
receivables due within one year
(furnish individual details of major items)
Total Current Assets (I)
II. Current liabilities

1. Statutory Liabilities
2. Other Current Liabilities
(furnish individual details of major items)
Total Current Liabilities (II)
III. Working Capital Gap (I - II)

75
IV. Margin for Working Capital

V. Bank Borrowings
76
DSCR Calculations
DSCR is a measurement of a project's ability to repay a loan from revenues. The
higher the DSCR, the lower the risk to the lender. This ratio is used by lenders
to provide a cushion between the amount of funds remaining after payment of a
project's operating expenses and the annual mortgage or debt payments. DSCR
equals Net Operating Income divided by Debt Service. The bank calculates the
values of DSCR for every single year of the projects life and also calculates the
average value of DSCR over the life of the project.
Taxation Schedule
The bank also calculates the taxation schedule for the project even if the project
claims to have tax benefits or tax exemptions. These exemptions are not taken
into account so as to keep a conservative approach throughout.
IRR Calculations (Post and Pre Tax)

The internal rate of return (IRR) is a capital budgeting method used by firms to
decide whether they should make long term investments. The IRR is defined as any
discount rate that results in a net present value of zero, and is usually interpreted
as the expected return generated by the investment. In general, if the IRR is greater
than the project's cost of capital or hurdle rate, the project should be accepted,
though there are occasional problem in using this rule.
Problems with using IRR

As an investment decision tool, the calculated IRR should not be used to rate
mutually exclusive projects, but only to decide whether a single project is worth
investing in. In cases where one project has a higher intial investment than a
second mutually exclusive project, the first project may have a lower IRR (expected
return), but a higher NPV (increase in shareholders' wealth) and should thus be
accepted over the second project. A method called marginal IRR can be used to
adapt the IRR methodology to this case.
The IRR method should not be used in the usual manner for projects that start
with an intial positive cash inflow, for example where a customer makes a deposit
before a specific machine is built, resulting in a single positive cash flow followed
by a series of negative cash flows (+ - - - -). In this case the usual IRR decision rule
needs to be reversed.
If there are multiple sign changes in the series of cash flows, e.g. (- + - + -), there
may be multiple IRRs for a single project, so that the IRR decision rule may be
77
impossible to implement. Examples of this type of project are strip mines and
nuclear power plants, where there is usually a large cash outflow at the end of the
project.
In this case the zeros of NPV as a function of IRR may lack existence or
uniqueness. The IRR exists and is unique if one or more years of net investment
(negative cash flow) are followed by years of net revenues.
In general, the IRR can be calculated by solving a polynomial. Sturm's Theorem
can be used to determine if that polynomial has a unique real solution.
Importantly, the IRR equation cannot be solved analytically (i.e. in its general
form) but only via iterations.
A critical shortcoming of the IRR method is that it is commonly misunderstood to
convey the actual annual profitability of an investment. However, this is not the
case because intermediate cash flows are almost never reinvested at the project's
IRR; and, therefore, the actual rate of return (akin to the one that would have been
yielded by stocks or bank deposits) is almost certainly going to be lower.
Accordingly, a measure called Modified Internal Rate of Return (MIRR) is used,
which has an assumed reinvestment rate, usually equal to the project's cost of
capital..
Despite a strong academic preference for NPV, the bank prefers IRR over NPV.
Apparently, managers find it intuitively more appealing to evaluate investments in
terms of percentage rates of return than rupees of NPV.
78
Break Even Point Calculations

The Break-even Analysis lets the bank determine what the company need to sell,
monthly or annually, to cover the costs of doing business i.e. to become profitable.
The BEP varies as per the nature of the industry in which the company operates.
For example, normal and cash BEP are large for a pharmaceutical firm where as it
is comparatively less when seen in a manufacturing company. As can be seen in the
later pages this point is proved accordingly. The Break-even Analysis table
calculates a break-even point based on fixed costs, variable costs per unit of sales,
and revenue per unit of sales.
The break-even analysis is not always problem free because:
It is frequently mistaken for the payback period, the time it takes to recover
an investment. There are variations on break-even that make some people
think we have it wrong. The one we do use is the most common, the most
universally
accepted,
but
not
the
only
one
possible.
It depends on the concept of fixed costs, a hard idea to swallow. Technically,

a break-even analysis defines fixed costs as those costs that would continue
even if the company went broke. Instead, the company may want to use the
regular running fixed costs, including payroll and normal expenses.
It depends on averaging per-unit variable cost and per-unit revenue over the
whole business.
However, whether we like it or not, this table is a mainstay of financial

analysis. You may choose to leave it out, but really, a business plan would not
be complete without it. And, although there are some other ways to do a Breakeven Analysis, this is the most standard.
The Break-even Analysis depends on three key assumptions:
1. Average per-unit sales price (per-unit revenue):
This is the price that you receive per unit of sales. Take into account sales
discounts and special offers. Get this number from your Sales Forecast. For
non-unit based businesses, make the per-unit revenue $1 and enter your costs
as a percent of a dollar. The most common questions about this input relate to
averaging many different products into a single estimate. The analysis requires
a single number, and if you build your Sales Forecast first, then you will have
this number. You are not alone in this, the vast majority of businesses sell more
79
than one item, and have to average for their Break-even Analysis.
2. Average per-unit cost:
This is the incremental cost, or variable cost, of each unit of sales. If you buy
goods for resale, this is what you paid, on average, for the goods you sell. If you
sell a service, this is what it costs you, per dollar of revenue or unit of service
delivered, to deliver that service. If you are using a Units-Based Sales Forecast
table (for manufacturing and mixed business types), you can project unit costs
from the Sales Forecast table. If you are using the basic Sales Forecast table for
retail, service and distribution businesses, use a percentage estimate, e.g., a
retail store running a 50% margin would have a per-unit cost of .5, and a perunit revenue of 1.
3. Monthly fixed costs:
Technically, a break-even analysis defines fixed costs as costs that would
continue even if the company went broke. Instead, its recommended to use the
regular running fixed costs, including payroll and normal expenses (total
monthly Operating Expenses). This gives a better insight on financial realities.
If averaging and estimating is difficult, the bank uses Profit and Loss table to
calculate a working fixed cost estimateit will be a rough estimate, but it will
provide a useful input for a conservative Break-even Analysis.
80
Projected Cash Flow Statement

In finance, cash flow refers to the amounts of cash being received and spent by a
business during a defined period of time, sometimes tied to a specific project.
Most of the time cash flows are being used to determine gaps in the liquid position
of a company. For this reason only the total amount of cash flowing in and out of a
company matters. However when using cash flows as a benchmark tool (for
example when calculating the internal rate of return) it is better to separate the
total cash flow into separate cash flows streams. Another reason for separating the
different types of flows is that it makes it much easier to read cash flows statements
and to determine when earnings are being manipulated.
There are multiple types of flows of incoming and outgoing cash that are included
in the total cash flow amount:
Operational cash flows: Cash received or expended as a result of the

companies core business activities.
Investment cash flows: Cash received or expended by making capital
expenditures (i.e the purchase of new machinery), the making investments
or acquisitions.
Financing cash flows: Cash received or expended as a result of financial activities

such as receiving or paying loans, issuing stock, and paying dividends.
81
Projected Balance sheet

A balance sheet, in formal bookkeeping and accounting, is a statement of the book
value of a business or other organization or person at a particular date, often at the
end of its "fiscal year," as distinct from an income statement, also known as a profit
and loss account (P&L), which records revenue and expenses over a specified
period of time.
A balance sheet is often described as a "snapshot" of the company's financial
condition on a given date. Of the four basic financial statements, the balance sheet
is the only statement which applies to a single point in time, instead of a period of
time.
A simple business operating entirely in cash could measure its profits by simply
withdrawing the entire bank balance at the end of the period, plus any cash in
hand. However real businesses are not paid immediately, they build up inventories
of goods to sell and they acquire buildings and equipment. In other words:
businesses have assets and so they could not, even if they wanted to, immediately
turn these into cash at the end of each period. Real businesses also owe money to
suppliers and to tax authorities, and the proprietors do not withdraw all their
original capital and profits at the end of each period. In other words businesses
have liabilities.
A modern balance sheet usually has three parts: assets, liabilities and shareholders'
equity. The main categories of assets are usually listed first and are followed by the
liabilities. The difference between the assets and the liabilities is known as the 'net
assets' or the 'net worth' of the company.
The net assets shown by the balance sheet equals the third part of the balance
sheet, which is known as the shareholders' equity.
The bank on the line of profitability analysis and projected cash flow statements
appraises the projected balance sheet of the company with the projevt in hand. A
formal performa of the balance sheet is given below:
Inter firm comparison:

Inter firm comparison may be carried out in respect of capacity, overall project
cost, gross profit percentage etc. with a similar case assisted by SIDBI under direct
finance, if the data is available.
82
Sensitivity analysis:
Sensitivity analysis is carried out to Identify the factors to which project viability is
sensitive and steps taken for ensuring long term viability. A sensitivity analysis is
the process of varying model input parameters over a reasonable range (range of
uncertainty in values of model parameters) and observing the relative change in
model response. The purpose of the sensitivity analysis is to demonstrate the
sensitivity of the model simulations to uncertainty in values of model input data.
The sensitivity of one model parameter relative to other parameters is also
demonstrated. Sensitivity analyses are also beneficial in determining the direction
of future data collection activities. Data for which the model is relatively sensitive
would require future characterization, as opposed to data for which the model is
relatively insensitive. Model-insensitive data would not require further field
characterization. If data are determined to be insensitive to variations in model
input parameters, the modeler should assess the possible reasons for this
insensitivity. Typically, constant head, constant flux, or head-dependent flux
boundaries located too near the calibration targets results in a model being
insensitive to input data variation.
This is the reason why the bank uses sensitivity analysis to know the inherent
strength of the project to overcome unforeseen problems like rise in cost of raw
materials, drop in sales or both. This way it helps the bank to know the possible
DSCR values and profitability projections along with the cash generations.
Security
To safeguard its stake in the project the bank also uses the security margin as a part
of their project appraisal. The bank charges collateral and overall all security
margins. Collateral security is an impersonal security like share certificates, life
insurance policy etc. deposited with the creditor to guarantee the repayment of a
loan.
Primary security margin:

Margin on primary security: 100 X (Total value of tangible security loan
amount)/Security value. While calculating security value, preliminary expenses,
other intangible expenses, deposits with Electricity Board MM for working capital
etc. are not to be taken in security value.
Overall security margin:

While considering the value of collateral security it should generally be based on
valuation report.
In case of existing companies, please indicate the nature of charges already created
on the assets, if any
83
The following measures are adopted at the time of stipulation of security by way of
mortgage of primary and /or collateral security. The security should be finalised
after discussions with the promoters and should not generally be changed after
issue of Letter of Intent and modifications of security especially after execution of
LA should be avoided.
Issues to be addressed before acceptance of security

As far as possible, for collateral security only residential and commercial property
acceptable to SIDBI from the point of view of encumbrances, marketability, etc.,
should be accepted. In case the borrowers are unable to furnish any other security,
agricultural land/ open land may be accepted subject to the following :
The land can be described as prime land from saleability point of view
The valuation is taken on realistic basis.
There are no tenancies and encroachments.
Possession of mortgagor is confirmed.
Mortgagor undertakes not to create any tenancy during the currency of
loan/mortgage.
The boundaries should be clearly demarcated.
SIDBI officials should invariably undertake site visit to the immovable
properties offered as security (collateral and primary) to make enquiries and
confirm about the ownership of the property, owners being in possession of
property and existence of proper approach road to the property.
The advocate engaged by SIDBI for investigation of title to the property
offered as security (primary and collateral) should also visit the site and
specifically confirm in the title report about the existence of proper
approach road, property being in possession of owners and that the property
is not subject to any tenancy.
Existence of tenancy over the property offered as security should be
specifically reported. The property subject to tenancy does not prove to be a
good security as existence of tenancy substantially affects its saleability and
realisable value in the event of enforcement of security. Therefore,
ordinarily we may not accept such properties as security.
In case of third party mortgagors, it would also be advisable to ascertain the
kind of interest the mortgagor is having in the project and his relationship
with the promoter(s) besides exercising extra care about identification of the
mortgagor. Personal guarantees of the mortgagor to be obtained.
The guarantees of huf/mortgage of property owned by an huf should be
accepted only when the same is offered as security towards assistance
extended to huf. Guarantee of huf/mortgage of huf property should not be
accepted when the same is being offered to secure assistance extended to
third parties even if some indirect benefit is accruing to the huf.
84
Wherever the promoters gives the property on lease to the borrower, it may
be insisted that mortgage may be created on owners' ownership rights and
borrowers' leasehold rights simultaneously. Further, only long term
commercial lease may be considered for security because the sale /
assignment of leasehold rights will have no meaning if the lease is for a
shorter duration.
At the time of acceptance of title report, it may be ensured that it covers the
above points and the site visit report of our officials is taken into
consideration.
Before obtaining/ execution of the personal guarantee as security for the
loan/ other facilities extended/ to be extended by SIDBI, it is essential to
obtain
Full details of immovable property including complete address, area
(residential, commercial etc.), and whether they are mortgaged with others
with details thereof;
Full details of movable assets including the details of investments such as
investments in shares, bonds, debentures, fixed deposits shall be obtained
indicating name of company/ firm, amount, face value, interest rate etc. And
whether they are pledged with others with details thereof; and
Full details of liabilities of any other nature.
Acceptance of shares as security

While considering pledge of shares as security for the assistance sanctioned, it is
necessary to consider the following:The market value of shares should be calculated on the basis of the lowest price
quoted in the past 52 weeks. The bank continues with the existing practice of
accepting promoters' share in the company as security for the limit. However, these
shall not be reckoned for the purpose of margin calculations. ZOs/BOs while
accepting the security of such shares as also other shares, shall ensure their being
liquid and tradable.
As far as possible, shares of reputed and listed companies alone may be considered
as security. A condition may be stipulated in the LoI that any shortfall in the value
of the security margin due to fall in the price of the shares pledged will be made
good by pledge of additional shares, to the satisfaction of SIDBI.
The shares proposed to be pledged should not be under lock-in period and there
should not be any restriction on its transferability as in the case of shares in Private
Limited Companies.
Shares to be pledged should not be in the names of minors and/or HUF.
A list of scrips which are compulsorily tradable in demat form is periodically
announced by SEBI and a list of the same may be collected from DP from time to
time.
2.11.3 Issues relating to Security Clause
85
The security clause in the DAN/LoI/ LA should be specific and not vague such as
"All immovable assets of the borrower".
It is not advisable to incorporate the following items in the security clause
Post-dated Cheques for installments;
Power of Attorney by the Company in favour of SIDBI to the Purchaser's Bank for
making payment of fixed percentage of the value of the order directly to SIDBI in
case of default, if any;
Demand Promissory Note, etc.
Items such as those indicated above can be incorporated in the LoI as Special
Conditions.
In case a charge has to be created on the vehicles of the borrower, it should be
specifically mentioned in the LoI so that specific clauses can be added in the Deed
of Hypothecation.
Exclusive First Charge on the assets (mainly of movable nature like equipments,
etc.,) created under schemes such as DCS, TDMFS, etc., may be stipulated
however, ceding of second charge with the bankers, wherever called for, may be
considered by delegated authority as it would not erode our security margin.
Standard wording of Security Clause:
Security Clause
The loan shall be secured by (i) Exclusive/First/Second charge by way of hypothecation of all the movable
including plant, machinery and equipment acquired/to be acquired under the
project/scheme.
The Company/Firm shall furnish letters from their Bankers/ existing charge
holders that they have no objection for creation of exclusive charge in favour of
SIDBI on the above movable and confirming that their charge(s) will not extend to
the movables charged/to be charged in favour of SIDBI.
and/or
(ii) First/Second charge* on all movable assets, present and future, of the
Company/Firm, in such form as may be required by SIDBI subject to prior charges
created/ to be created in favour of the Company's/Firm bankers on current assets
of the Company/Firm as may be agreed to by SIDBI for securing the borrowing for
working capital requirements.
and/or
(iii) First/Second charge* on all the borrower's stock, raw materials, semi-finished
and finished goods, consumable goods and such other movables which are secured
for the borrowings by the Company/Firm for its working capital requirements in
the ordinary course of business.
86
and/or
(iv) First/Second charge on all the/ ________ motor vehicles of the borrower,
both present and future including its accessories and tools.
2 (i) First/Second charge* by way of mortgage of all immovable properties of the
company/Firm situate at Village ___________, Taluk ___________ , District
________, bearing Survey/Block/Plot No. ___________, admeasuring
_________. (Primary Security).
and/or
(ii) First/Second charge* by way of mortgage of leasehold rights of the borrowers
immovable properties situate at Village ___________, Taluk ___________ ,
District ________, bearing Survey/Block/Plot No. ___________, admeasuring
_________. (Primary Security).
and/or
(iii) First/Second charge* by way of mortgage of all immovable properties owned
by Shri _____________ situate at Village ___________, Taluk
___________ , District ________, bearing Survey/Block/Plot No.
___________, admeasuring _________ . (Collateral Security).
3 By way of pledge of ____ number of equity/ preferential shares held by
_____________ in ____________________ (Name of the Company) having
face value of Rs. ______________.
Disbursement of loan made, if any, pending creation of final security, shall carry
further interest @ 1% from the date of disbursement.
4 Guarantee:i) Personal Guarantee:The Company/Firm shall procure and furnish irrevocable and unconditional
Personal
Guarantee
of
Shri
__________________,
Shri
__________________ and Shri ______________. The Guarantee shall be
joint and several and no Guarantee /Commission shall be payable to the
Guarantors.
ii) Corporate Guarantee:-
87
The Company/Firm shall procure and furnish irrevocable corporate Guarantee of

_________________. No Guarantee Commission shall be payable to
Guarantors. Before execution of the Guarantee, an opinion from the Company's
advocate will have to be forwarded confirming that the Board of Directors of the
Guarantor company has necessary powers to issue Corporate Guarantee to secure
the loan sanctioned to the borrower Company/ Firm together with a copy of
Articles of Association and Board Resolution of the Guarantor Company.
Calculation of value of Collateral Security as a percentage of

term loan:
In respect of cases where extension of charge on existing assets has been taken,
Collateral Security as a percentage of term loan, is to be calculated as under:
The primary security of the earlier loan may be taken as collateral security for the
second loan to the extent available, after providing for margin on security (by way
of primary security) of 40% on the first loan outstanding. In case margin on
primary security of the first loan exceeds 40%, surplus of the primary security
along with the collateral security of the first loan and collateral security available
for the second loan may be taken for assigning the weightage under the above
parameter for the second loan. The same has been illustrated with an example in
the below.
Hypothetical Example
Primary Security of first loan (Depreciated book
value without considering revaluation) - Rs.150 lakh
First Loan [outstanding including interest and other dues] - Rs.50 lakh
In the present case, margin on primary security available = [(150 - 50) / 150]*100
= 66.67%.
In order to provide margin of 40% for the first loan outstanding (by way of primary
security), the value of primary security should be Rs.83 lakh (approx.) [(83 - 50) /
83]*100 = 39.76% say 40%].
Therefore, the value of primary security that shall be treated as collateral for
assigning weightage under the parameter [collateral security as a percentage of
term loan in Credit Risk Rating Model] for the second loan = Rs.150 lakh - Rs.83
lakh = Rs.67 lakh.
88
Further, the collateral security available for the first loan and the proposed second
loan shall also be taken for assigning weightage under the above parameter in the
Credit Risk Rating Model.
89
Technical Appraisal
Scope of the project:
Plant scale, product mix in comparison to similar projects already in existence.
Location
Availability of infrastructure facilities - independent approach road, how far away
from National/State Highway, other units in the locality, proximity to market,
power sub-station and raw materials sources, comments on the basis of site visit
carried out.
Technology
Where no foreign collaboration is involved : Selection of technology,

comments on alternative production processes, brief description of the
process, comments on technology (latest/appropriate/proven), technical
collaborators/consultants, their sales/profit/track record, reasonableness of
technical know-how fees, other concerns to whom such technology
provided, their satisfactory working, comments on technical know how
agreement - validity, quality assurance/standards to be achieved, passing on
further developments in the technology, other support in
selection/procurement of machinery and installation, guarantee regarding
performance of machinery, assistance in finalising the plant layout, setting
up facilities for quality control and R&D, training of personnel,
offtake/prices, comments on royalty/technical know-how fees,
patents/trademarks, arrangements for quality control etc.
Support from mother unit by way of transfer of know-how/technology,

provision of product designs/drawings, specifications, dies/moulds, quality
control assurance (in case of ancillary units).
Where foreign collaboration is involved: In addition to above,

banker's report on collaborator, RBI/GOI approval for the agreement, other
countries to whom such technology provided, support for sourcing and
procurement of imported raw materials etc.
Raw materials/components
90
Availability, lead time, holding period and price trends etc.
Utilities
Power - Total electrical load of the unit. Comments on availability of power,

rate of power. Requirement of the Generator for the project etc.
Water - Requirement, availability, test report and treatment facilities
proposed, if required.
Fuel - Requirement in optimum year , availability / sources, whether
consents required for storage etc.,
Pollution Control
Before taking up the actual implementation of the project, a unit is required to
apply to the concerned State Pollution Control Board (SPCB) for permission to
start this work. On the basis of categorisation of the industry and depending upon
the degree of effluents generated, various SPCBs have formulated their own
guidelines with regard to the specific measures which are stipulated in the
certificate issued to a unit allowing it to take up the work on implementation of the
project. This certificate is known as Consent to Establish or No Objection
Certificate (NOC). In some States, SSI units in certain categories are exempt from
applying to the SPCB and acknowledgment of the application by the District
Industries Centre or other designated authority constitutes a valid NOC.
After the project is implemented or is in the final stages of implementation, an
inspection is carried out by the SPCB authorities to ensure that the equipments
required for control of pollution have been installed. In case the inspection findings
are satisfactory, the SPCB authorities issue a certificate called Consent to operate
or Final Clearance which permits the unit to commence commercial operations.
The Final Clearance once granted is subject to review and renewal at regular
intervals (generally on an annual basis) based on monitoring/ inspection by the
authorities to ensure that the unit is actually meeting the prescribed norms /
parameters. SPCBs have the powers to cancel this certificate and take punitive
action including enforcing the closure of a unit in case the norms are not adhered
to.
As a matter of guidance, following measures may be taken wherever necessary:
During appraisal of the project, the issue of pollution control should be given due
importance and it should be ensured that pollution control measures /
equipment(s) required are included in the project cost/report.
A pre-disbursement condition that the borrower shall obtain and furnish NOC
from the concerned authorities should be stipulated.
91
During disbursement stages / site visit / follow up, care may be exercised with
regard to installation / operation of necessary pollution control equipments, final
clearance and other such related matters.
Implementation schedule
Assessment of physical and financial progress already made e.g. how much
expenditure already incurred, how the same was financed and reasonableness of
the schedule. The implementation schedule for the project should be assessed on a
realistic basis, taking into account the various internal and external factors which
have a bearing on the implementation schedule. Some of these factors could be
past experience of promoters'; time required by promoters to mobilise their entire
contribution; nature and size of project; lead time required in supply of machinery
based upon the fact that whether the major part of the machinery is fabricated or
available off the shelf; envisaged duration for compliance with all the predisbursement conditions; status of government clearances such as land mutation/
conversion, power connection; time required for trial production, etc. In other
words, while working out the implementation schedule, major eventualities which
could delay the project should be considered and necessary slack built in the
projected implementation period. The implementation schedule so worked out
should be explicitly incorporated in the appraisal memorandum.
Market:
Any market survey conducted, market prospects, demand and supply positionpresent and projected, price trends-local and imported, principal customers, their
location, tie up if any made, major competitors in the field. Selling and distribution
arrangements, comments with reference to the industry practice. Off take
guarantee and tripartite agreement, in case of ancillary units.
92
Chapter 5
Project 1- MPPPL
A Brownfield Project
93
About The Project:

The project is an existing project hence is classified under the Brownfield project.
The borrowers have applied for a loan of Rs.90 lakh, Rs. 75 Lakh as Term loan
from SIDBI to be repaid in 6 years with a moratorium of 1 year. Rest Rs. 15 Lakh
have been applied under the CLCSS of SIDBI for buying latest technology and up
grading the processes.
The concern is located in Faridabad and is run by Father-son dual both have good
experience in the existing line of business. After the pre appraisal visit and a
favourable nod from the bankers the bank (SIDBI ) decided to go along with the
project.
Assumptions underlying the project
The unit has got 4 DG sets of varying capacity for carrying on uninterrupted
operations.
Additional Power requirement due to the expansion project also can be met by
DG Sets
Last three years there is an average growth of 54% in total income.
However, for projection purposes, a conservative increase of is assumed in
income for subsequent years.
Cost of Raw Materials 10% assumed
consumable and stores 10% assumed
Repairs & Maintenance showed an average increase of 43% in past years.
Increase of 5% assumed for future years
Selling, Administrative and General Expenses .Average increase of 5%
assumed for future years
Salaries & Wages Expenses have been assumed to increase by 5% per year
employee related expenses increased at average12% for last 2 years
Average annual increase assumed at 5% assumed for future years
Other Manufacturing Expenses increased at an average of 27% in last 2 years.
Increase of 5% assumed
Depreciation has been taken as per the rates prescribed in the companies act on
SLM basis for profitability while on WDV basis for taxation purpose
Taxation is taken into account because of the fact the company is not enjoying
any tax holidays or incentives.
Since covering under SME fund, Rate of Interest on the project has been taken
@ 9.50% per annum
94
Chapter 6
Project 2-ACPPL
A Greenfield Project
95
About The Project

The company is a newly formed private Limited Company promoted by the
promoters as well as Mr. AKB. Since it is an entirely new project the company so
formed has no financial background. The promoter is MD of the parent companyM/s. Veekay Polycoats Ltd.The company is incorporated for carrying on the
business of manufacturing Aluminum Composite panels which is a decorative
building ,material used extensively in city buildings, shopping malls, multiplexes,
sky scrapers, sub ways, airports, tunnels etc. And the usage has increased
tremendously in the recent past. The company has acquired an approved industrial
plot in Integrated Industrial Estate, Ranipur, Near Haridwar in the state of
Uttranchal from State Industrial Development Corporation of Uttranchal Ltd.
(SIDCUL) admeasuring 3825 sq. Meters. This industrial area enjoys the maximum
possible incentive and benefits are as possible from the state Govt. Of the newly
formed State of Uttranchal. The construction of the factory has already started and
an advance payment of $25,000 being 10% of the overall machinery cost has
already been made to the overseas supplier of the main plant & machinery. For the
balance $ 2,25,000 an import letter of Credit has to be opened.
The cost of the project is Rs. 571.56 Lakh which will be financed to the extent of
Rs. 296.56 Lakh from the above mentioned two promoters, their relatives and
certain companies promoted by them and the balance Rs. 275 Lakh Is proposed to
be sourced by availing term loan from SIDBI. In addition, the company is seeking
a working capital term loan of Rs. 125 Lakh from SIDBI. That makes the over all
term loan requirement of Rs. 400 Lakh. In addition to this the company seeks to
open the above mentioned import LC of $2,25,000 through SIDBI itself.
Assumptions Underlying the Analysis

Utilities :
1) POWER - Peak power requirement, which is also the connected load
500 KW
Optimum Load Factor at any given time on a day 60.00%
Rate of power per unit from UPCL
80.00%
Rs.1.9 per unit
Rate of power per unit from DG set
20.00%
Rs.7.0 per unit
Electricity expenses at full capacity
Rs. 42.05 lakh per year
2) Water charges have been taken at the rate of
lakh per year
Rs.0 per month

( BORE WELL)
Production envisaged :
Avg. production per shift of 8 hours
Installed capacity
Working days in an year
Duration of a shift
Operating in 2 shifts per day
2400
720000
300
8
Sq. M
Sq. M
days
hours
96
Calculation of requirement of raw materials per Sq. M production

Raw Material
Particulars
Consumption
/Sq. M incl.
wastage
Consumptio Rate per unit @10% (in
n/Sq. m
(Rs.)
Rupees)
Aluminium Coil PVDF (Unit/ Kg.)

Aluminium Acrylic Coating (Unit/
Kg)
LDP/SDP (Unit - Kg)
Adhesive Film (Unit - Kg.)
Protective Film (Unit - Sq. M)
Total
0.683
240
180.31
0.683
2.5
0.05
1
160
50
155
17.5
120.21
137.5
8.53
19.25
465.8
Repairs & Maintenance taken @ 2%of the cost of assets in 1st year and 5%
thereafter
Consumables & Stores @0.4% of raw materials consumed
Wages & Salaries expenses taken as Rs.
25.52 lakh for first year and
5% increase for subsequent years
Administrative Expenses Rs. 4.15 lakh for first year and 2% increase for
subsequent years
Selling Expenses @ 5% of sales income Rs 82.8 lakh for first year and 2%
increase for subsequent years
SLM basis. It has been taken for 6 months for the first year and for full year
thereafter.
Selling rates of Aluminium Composite Panels
575
The depreciation and other relevant rates are :

Depreciation rates
On building
On P&M
On MFA
SLM
WDV
3.39%
12.00%
12.00%
5.00%
13.91%
25.88%
Interest Rate
97
SIDBI Term Loan under PFS

WCTL from SIDBI
Tax incl. surcharge
9.50% p.a
11% p.a
36.00%
The following pages show the detailed project appraisal calculations.
98
Chapter 7
Project 3-CPL
A Greenfield Project
99
About the project:

The project involves setting up of a Pharmaceutical unit to produce different kinds
of allopathic drugs including tablets, capsules, liquids, injectibles, ointments, soft
gel capsules, etc. the company will be working on an 8 hr. single shift basis. No of
working days in an year are assumed to be 350.
The borrower will stand to gain from the various incentives provided for new
industrial investments by state of uttranchal. This will make the project
competitive in terms of pricing. Further, with the state of art manufacturing facility
being put into place, the company will be able to present its facility to prospective
importers in a better way. The borrower company has got an associate concern viz,
CP, a partnership concern with Shri. Rb and Smt. Lb as its partners. This firm is
also engaged in manufacture of Pharmaceutical formulations at Wazirpur
industrial area, New Delhi. Although the existing unit is doing well, the promoters
want to cash in the benefits offered for new industrial units/investments by state
government of Uttranchal by way of tax holidays and decided to start a new
manufacturing base.
Assumptions Underlying the Analysis

Recurring expenditure
Power
Peak power requirement
150 KV
Optimum load at any given point of time
60%
Rate of power per unit from UPCL
Rs.1.90 per unit
Rate of power per per unit from DG set
Rs. 7.00 per unit
Cost of Power at full capacity
Rs.7.36 lakh p.a. 7.31
Water
Rs. 0
Production Envisaged:
Sales realisation at full capacity
Working days in a year

350
Cost of raw materials at full capacity taking 75% of the full capacity (sales
realisation based on the past trends of the sister concern 75% ) Rs.1462.5
Lakh
Repairs & maintenance 1%of the cost of assets in the first year and increasing
5% thereafter
Consumable stores 1% of the raw materials consumed
Wages and salary Rs. 85.032 lakh for first year and an increase of 5%
thereafter
Administrative expenses 1% in first year and an increase of 3% there after
Rs. 1950 Lakh (Total)
100
Selling expenses @ 5% of the sales income and 5% increase thereafter
SLM basis. It has been taken for 6 months for the first year and for full year
thereafter.
Depreciation rates
On building
On P&M
On MFA
Interest Rate
SIDBI Term Loan under PFS
WCTL from SIDBI
Tax incl. surcharge
SLM
WDV
3.39%
12.00%
12.00%
5.00%
13.91%
25.88%
9.50%
11%
36.00%
Per annum
Per annum
Power and other utilities increase @ 20% after first year
INCOME
sales realisation at full capacity Rs.1950 Lakh.

Depreciation has been taken as per the rates prescribed in the companies act
Administrative cost:
Printing & Stationery

Telephone
Traveling Expenses
Legal Expenses
Insurance
Postage
Director's Remuneration
Miscellaneous
Total
in Rs. Lakh
1
1
20
0.3
2
0.4
4.5
1
30.2
101
CHAPTER 8
RISK RATING AT SIDBI
102
RISK RATING AT SIDBI

Risk is an inevitable part of project financing. Every time a project is financed or an
assistance is extended the risk element of non-repayment of loan creeps in no
matter how well any project is appraised or how good the repayment schedule is.
The important point is that not only Indian banks but the investment banks all
over the world have such NPAs lying in their balance sheets.
The first question which arises here is to identify the risk in any project and define
its intensity. This is important because its on the basis of the risk analysis the
interest rates are defined on any project. There are various parameters on which
the risk rating is done. This rating at SIDBI is done according to the amount of loan
applied for and the scheme. CART and RAM are the two basic models which SIDBI
uses to define the risk in any project. So, the areas on which risk is defined are:
1. Financial Risk
The main area included under this head are:
%age of Promoters Contribution (PC) by way of Equity Capital.

Average DSCR.
Capital Structure. Includes the debt-equity ratio
Cash Break Even (%age to Sales)
IRR (post Tax)
Revised DSCR after Sensitivity Analysis.
2. Construction Risk
Ability to execute a project

Gestation period of the project ( till commercial production)
Availability of infrastructure facilities
Credentials of main machinery suppliers.
Obtaining key clearance.
3. Funding Risk
Tie up of funds ( other than the Term Loan i.e. for all the balance loan
excluding the loan from SIDBI)
Financial flexibility
Project strength shown by the promoters like their Net Worth, educational
qualification and experience.
103
4. Industry risk
Sound supply scenario

Competition
Impact of government policies.
Environmental issues
Impact of change in technology
Impact of WTO
Input related risk
This way the project gets marks on a fixed scale for each of these heads. These
marks are added together to give the overall rating of the project.
The annexure 1 shows the CART model used at SIDBI.
So, how to get rid of such things. The best idea is to secure the loan so well that
even if the project fails, the bank has its money back if not with the interest at least
the principal amount is recovered. The same approach is applied in SIDBI also.
There are various methods by which the bank tries its best to keep out the worst
from happening. Some of the methods used are mentioned below:
The first thing the bank does is a pre-appraisal visit of the actual site of
construction. This, as already mentioned, includes detailed talks held with
the bankers of the borrower, market enquiries etc.
The next important step to minimize the risk element is to appraise the
project in a highly conservative manner so as to curb any inflated profits and
there is always an effort by the bank to include every single cost incurred or
to be incurred while appraising the project. For example, the bank includes
the tax to be deducted even if the company enjoys a tax concession or a tax
holiday because of its Locational or any such advantage. Similarly, the bank
also does not allow either to distribute the dividends to the shareholders at
all or to increase the percentage of dividends.
Apart from the above mentioned points the bank also calculates the primary
and overall security margins to safeguard its interest in the project. Also, the
bank takes collateral over any fixed asset of the borrower and extends its
first charge (Hypothecation) over the assets bought out of the assistance
extended to the borrow.
So, these are some of the various steps which the bank takes to secure its stake
in a project and minimize the risk.
104
Chapter 9
Analysis of the Projects
Appraised
105
To bring this project to a meaningful end, the following pages contain the
conclusion and recommendations of this project. These findings are based on the
projects appraised by me at SIDBI and are the project appraisal notes of the same.
These appraisal notes are used to figure out the prospects of extending an
assistance to the applicant or not. Also, these appraisal notes help the bank to
figure out the amount of loan to given to the applicant.
Project 1. MPPPL
Introductory, Promoters and Management
Particulars of the unit
Name of the unit
Constitution
Date of Incorporation
Existing business
MPPPL
Private Limited Company
9/02/79
Manufacturing
and
marketing
of
engineering goods
Backward/
Non-backward Not a backward area ( established in a well
area
connected industrial area with good
facilities on its disposal)Backward/ Nonbackward area :
Industry :
Engineering
Products Manufactured
Instrumentation Valves, flow meters,
orifice plates, venturi tubes etc.
No. of days and shifts per day
300 X 1
Promoters :
The company was started by Mr. KPC, Mrs. KPC and Mr. SB. In due course of time
Mr. SB retired and Mr. AC (Son of Mr. And Mrs. KPC) took over as another
director. All the three directors hold equal shares in the company and the company
has a paid up share capital of Rs. 3.47 Lakh.,
Brief introduction of all the three promoters :

Name of the Promoter
Age
Educational Qualifications
Relationships to Main Promoter
Experience- in what capacity/
106
industry/ Years
Net Worth
IT/WT status
* Information concealed because of the confidentiality norms of the bank.
Brief financial position of MPPPL
Financial
Indicators
Paid
up
capital
Net worth
Total income
Gross profit
Depreciation
Interest
Net profit
DE ratio
Current ratio
FY 2004
FY2005
FY2006
FY2007
(Provisional
up to
30.4.2006)
3.47
3.47
3.47
3.47
175.04
373.20
72.71
3.32
1.65
53.07
0.01
3.32
195.00
460.23
92.51
4.02
3.22
63.97
0.00
2.77
209.96
872.28
186.96
3.69
4.71
116.72
0.26
2.69
277.68
451.33
109.72
4.52
NA
67.72
0.24
3.14
Opinion on the promoters/ associate concerns as per:

1. Bankers Report: the promoters are right now dealing with the Canara Bank
and on inquiring about their relationship with the promoters the bank had
given a positive response. Even, the bank has extended their loan in the FY
2007. It shows the quality of asset.
2. Independent/Market inquiries made : the company is in the same line of
business for the past 26 years and has names like HPCL, GAIL, BHEL on its
customers list from a long time. The company is a well established company in
the domestic as well as in the international market and enjoys a good
reputation in the market and the independent inquiries made by SIDBI about
the company are satisfactory.
Brief history of the concern:

The company is in existence since Nov 1979 and has is engaged in the manufacture
and trading of engineering components like instrumentation valves, valve
manifolds, differential pressure flow elements, I.E. orifice plates, flow nozzles,
107
venturi tubes, flange unions etc. & other accessories for the engineering industry
which varies with the component to be manufactured. The company has its market
spread in India as well as outside India.
Particulars of previous assistance from institutions/ banks :

As per the audited report of the FY 2006, the company has got an outstanding loan
of Rs. 4.50 Lakh from Canara Bank being the only loan so far taken by the
company. The promoters have a good reputation with the bank and because of
which the bank has extended the loan and now there is an outstanding amount of
Rs. 17.5 Lakh as on date.
Arrears of statutory dues :

No statutory dues are pending against the company as on date.
Going through all this its concluded that the applicant is eligible to avail a loan
under the Direct Credit Scheme (DCCS) of SIDBI.
Management and Shareholding Pattern Present

and Future
1. Executive Management: The company is headed by Mr. KPC as its
director with his wife Mrs. KPC and son Mr. AC as co-directors. Mr. KPC looks
after all the general management of the company, Mr. AC looks at the
marketing and the financial aspects of the company assisted by various
professionals. All the three directors equally hold the shares of the company
( 33.3 % each of issued and paid up capital of Rs. 3.47 lakh)
2. In future also the company wishes to retain the same shareholding pattern, if
possible.
Technical Aspects
a. Scope of the project
The project essentially comprises expansion and up gradation of the existing
facility. The objective is to introduce new CNC based machines along with ancillary
machines costing Rs. 121 Lakh. According to the promoters, the proposed
machinery shall enable them to carry out some operations in-house which will
result in reduction of manufacturing cost, maintenance of better quality standards
and cost effectiveness.
b. Others
108
Name
Particulars
Comment
Situated in an Industrial
area in Haryana.
Obtained from near by
areas
The area has good facilities for

working of the concern.
Has got the advantage of well
connected industrial area, all
the supply lines are well
connected.
The power supply is erratic so
the company is dependant
upon its internal generation of
power which costs it more
than what the SEB could have
supplied hence, making power
a big component in the cost of
operations.
Needed
for
Human
consumption only.
The sky-rocketing prices of
diesel is a concern for the
company
Though the company is a nonpolluting unit even then it has
obtained an NOC from HSPCB
and in process to renew the
same.
Being labour intensive in
nature
the
company
is
expected to employ more
people in coming years aided
by
this
expansion
and
modernisation project
The company can be given
thumbs up on its quality
control supported by the
reputation it enjoys among its
customers from a long period.
Location
Raw material
Power
No
regular
power
connection
Has got 4 DG sets Power
tariff @Rs.5 per unit
Water
Municipal supply
Fuel
High speed diesel from

near by markets
Effluent
Disposal
The company is a nonpolluting unit
Man Power
The
company
is
presently employing 25
people.
Quality
control
The company is an ISO

9001:2000 company and
has its own in house lab
Implementation
a. Some of the machinery included in the project has already been purchased and
the company is negotiating with the suppliers for the others. The machinery
installation is supposed to be complete by the March 2007
b. Commencement the project: the project is expected to commence from mid
March 2007 and will become fully functional in the succeeding two years.
109
As on date the promoters do not feature in the CIBIL List/ RBIs willful defaulters
list.
PROJECT COST
Particulars
Cost
( in Rs. Lakh)
Plant & Machinery

Miscellaneous fixed assets
Pre operative expenses
Total
Round off to
118.65
1.53
0.99
121.17
121.00
MEANS OF FINANCE
Particulars
(Rs. Lakh)
Internal cash accruals

SIDBI Term loan ( Including
CLCS of Rs. 15 Lakh)
Total
31.00
90.00
121.00
The details of all the project cost is supplied in the Annexure titled Project cost.
Sticking to the conservative approach only those items are included which
necessarily fall in the definition of Plant and machinery otherwise its included in
the MFA or are not included at all.
The project as can be seen is part financed by the internal accruals of Rs. 31 Lakh
and is part financed by the long term loan from SIDBI. This term loan includes Rs.
15 Lakh as Credit Linked Capital Subsidy (CLCS). According to this the CNC
machines involved in the project are eligible for 15% of its cost as CLC Subsidy as
per the Revised Guidelines of LCS Scheme ( page no.35; (xxvi) 1 General
Engineering Works). The CLCS portion is being treated as loan till the time
Subsidy is released.
Financial And Other Parameters

Particulars
Promoters
contribution
Details
Rs. 31 Lakh ( 25.62 %)
Comments
Though the promoters
contribution is low, the
project is acceptable looking
at the past track records of the
110
DER
Primary
security
Collateral
Security
2.90:1 ( for the project)

0.69: 1 ( for the company
as a whole)
Amount : Rs. 120.01 Lakh
Margin : 25.11%
Pledge of fixed deposits of
face value of Rs. 20 Lakh
Overall Security
Margin
35.80 %
Asset Coverage
Ratio
1.56
DSCR
2.72 (Min.)
8.46 ( Max.)
8.42 ( Avg)
BEP
46.15%
Cash BEP
43.02%
promoters.
The DER is well above the
required threshold ( 2: 1) for
the project however, the
equity base of the company is
low and its advised to expand
the same.
The Primary security margin
It comprises of both Primary

and Collateral security. The
margin is suitable enough to
over any contingency
resulting in the nonrepayment of the loan.
Acceptable
The DSCR is also well above
the required rate its because
of this reason the bank is
advised to consider this
project
The high level of BEP is
because of the reason the
capacities are still not fully
utilised and also to the fact
that the bank is following a
conservative approach.
-do-
A detailed study of the financial parameters show a satisfactory track record

of the company along with the strong backing by the promoters. Most of the
required parameters are placed well above the thresholds so, its advised that
the bank should consider the project further.
The primary security is the exclusive charge by way of hypothecation in
favour of SIDBI on all the movable assets of the company acquired/to be
acquired under the assistance scheme pertaining to the project including
Plant and Machinery, equipment etc.
Collateral security includes the FDs pledged by the promoters of face value
Rs. 20 Lakh.
111
Marketing and Selling Arrangements

Particulars
Details
Market
Markets include the domestic as well as the

international markets of Korea, China, Australia etc.
The major competitors are from the organized and
unorganized sectors both. The company has an edge
because of its long standing in the same field.
For. Example, GAIL, HPCL, BHEL, Precision Flow,
Inc. etc.
The company is engaged in direct selling doing
institutional sales. This is the reason why it has no
showrooms or sales depot.
Competitors
Major Customers
Mode of selling
One of the major problem the company is facing now is the nature and strength of
competition from both organised and unorganised sector. Also, the products are
not reserved exclusively for the SSI sector, which may attract new companies to
join hence increasing the competition.
112
Sensitivity Analysis
The results of the sensitivity analysis in terms of DSCR, Net Cash Accruals and
Operating Profit are as following:
Parameters
Revenue
reduced by 10%
Operations cost
increased by
10%
Under normal
operations
DSCR average
4.62%
5.33%
8.39%
Net
Profit
Rs. 55.80
Rs. 67.69 Lakh
Rs.123.59 Lakh
( First full year)
Internal
Cash (Rs. 43.53 Lakh)
(Rs. 31.64 Lakh)
Rs. 24.26 Lakh
Accruals
As can be seen from the above the project has an inherent capacity to sustain
fluctuations in the revenue and cost of operations.
This is also proven by long resilience periods.
Only Net Cash Accruals show a negative figure otherwise all other Parameters
are well above the required threshold.
113
Project 2. ACPPL
Type: Greenfield project because of the following facts:
1. The company is a newly formed private Limited Company promoted
by the promoters as well as Mr. AKB.
2. Since it is an entirely new project the company so formed has no
financial background.
3. The promoter is MD of the parent company- M/s. Veekay Polycoats
Ltd.
4. The company is incorporated for carrying on the business of
manufacturing Aluminum Composite panels which is a decorative
building ,material used extensively in city buildings, shopping malls,
multiplexes, sky scrapers, sub ways, airports, tunnels etc. And the
usage has increased tremendously in the recent past.
5. The company has acquired an approved industrial plot in Integrated
Industrial Estate, Ranipur, Near Haridwar in the state of Uttranchal
from State Industrial Development Corporation of Uttranchal Ltd.
(SIDCUL) admeasuring 3825 sq. Meters. This industrial area enjoys
the maximum possible incentive and benefits are as possible from the
state Govt. Of the newly formed State of Uttranchal. The construction
of the factory has already started and an advance payment of
$25,000 being 10% of the overall machinery cost has already been
made to the overseas supplier of the main plant & machinery. For the
balance $ 2,25,000 an import letter of Credit has to be opened.
6. The cost of the project is Rs. 571.56 Lakh which will be financed to
the extent of Rs. 296.56 Lakh from the above mentioned two
promoters, their relatives and certain companies promoted by them
and the balance Rs. 275 Lakh Is proposed to be sourced by availing
term loan from SIDBI.
7. In addition, the company is seeking a working capital term loan of Rs.
125 Lakh from SIDBI. That makes the over all term loan requirement
of Rs. 400 Lakh.
8. In addition to this the company seeks to open the above mentioned
import LC of $2,25,000 through SIDBI itself.
114
Project details :
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Name of the unit

Constitution
Date of incorporation
SSI registration
Registered office
Administrative office
Existing business
Proposed factory
Backward area
Distance from NDBO
Industry
Product manufactured
Installed capacity
End use
ACPPL
Private Limited company
NA, being a medium sector enterprise
NA being a new unit
Haridwar
Not applicable
220 km ( approx)
Construction
Aluminum composite panels
1,20,000 sq. Mts.
As construction material for external
facades.
Promoters' details in the following area:

Educational qualifications
Experience ( in what capacity/industry (in no. Of years)
IT/WT status/ PAN
relationship to the chief promoter
Net worth
Other concerns interested in what capacity/financial
stake( Rs. Lakh)
Brief financial position/

associate concern
working
results
of
the
Veekay Polycoats was promoted in sep, 1995 which was assisted by SIDBI for its
project for setting up an unit for the manufacture of PVC leather Cloth, PVC
flooring/sheetings etc. At Gurgaon. The unit is doing well, whose corporate
guarantee ( net worth of Rs. 7.09 crore) is being offered for the present loan.
The company was visited and was found performing satisfactorily and
flourishing.
Opinion on the promoters/associate concerns as per:
115
Bankers' report on promoters/associate concerns:

satisfactory- no bank credit is involved.
The promoters are resourceful and have good market standing
and reputation.
Independent/market inquiries made: as the unit assisted by
SIDBI had gone out of SSI limit, the promoter had to approach
others banks like SBI, HSIDC etc. For further assistance.
Market inquiries about the promoter continues to be good as
M/s. Veekay Polycoats is doing well.
Brief history of the concern: ACPPL was established in Dec 2004 as a
private limited company with an authorised capital of Rs. 2 cr. And a paid
up capital of Rs.1 Lakh by the main promoters. although the borrower has
indicated that both the promoters will be the promoters for the present
project also, subsequently, it has been intimated to us that Mr. AB although
a shareholder, need not be treated as a promoter, instead the family who
controls the major share of the company may be treated as the promoters.
However, existing marketing network of shri AB, who continues to have a
stake in the ACPPL, will be made use by the borrower. The borrower
company was floated for the implementation of the present project. Since
the infrastructure was not in place at Integrated Industrial Estate, Ranipur
in time, the company had delayed the projects' implementation. The
company has not carried out any activity since its inception and has
remained dormant.
Particulars of previous assistance from institutions/bank : none
Any statutory dues: none
Eligibility for assistance as per SIDBI norms.

1. Management and shareholding pattern:
(a)
Management: the management comprises of the promoters family, the
promoter being the MD.
(b) Executive Management : by the sons of the main promoters. Are MBAs from
Cardiff University, UK
Stake Holding Pattern At ACPPL

VKG
NG
RG
Mg
MG
VG
SG
RCG
9.81%
5.88%
5.88%
5.88
5.88
3.92
7.85
5.88
25.00
15.00
15
15
15
10
20
15
116
Friend, relatives and holding companies

Total
49.02
100.00
125
255.00
Technical Aspects:
1.
The project envisages setting up of a unit to produce Aluminum composite

panels with an installed capacity of 7.20 Lakh sq. Mtrs., Which is a low density,
high rigidity, climate resistance item application both interior as well as exterior
decoration.
2. Manufacturing process: Aluminum composite panel is composed of 3 layers,
the upper and lower layers are high strength Aluminum alloy and the middle
layer is non toxic polyethylene board. The production process is not
complicated and involves the preparation of a core with LDPE and HDPE
granules after blending with colour pigment in the first stage. Dry air is passed
through the mixture to remove any moisture. The dried granules are then
melted and passed through an extruder, from which the molten polyethylene
comes out in the form of sheets.
The sheets thus formed is then passed through chrome calendar rolls wherein
water is passed as coolant to the upper and lower surfaces of the polyethylene
sheet. Painted Aluminum coil along with adhesive film are passed through
pressure rubber rolls, which will get affixed on the top and bottom portions of
the polyethylene sheet, thus forming a composite unit. The ACP thus formed is
taken through a series of guide rolls where layers of protective painting coating
will be applied on the metal surface to protect the sheet from dust and scratch
at the time of transport and installation. The sheet is then cut into required size
with the help of cutter and is passed on to unloading platform for final
inspection and quality check.
Technical Details:
S.No. Particulars
Details and Comments
Location
4.
The project is coming at Haridwar. Basic utilities like

rail, road, water, power etc. Are already available. Being
notified under the Central Excise Act, the location will
be getting various financial incentives available for
industrial units making investments in the state of
Uttranchal.
Raw material The company intends to import the entire raw material
and
from China. Besides, raw material is available locally
consumables: also.
117
5.
Utilities:
Connected load : 500 KW from UPCL for the project.

Application has already been filed.
Water is required in the production process for cooling

and for drinking purposes. A bore well is already sunk
in the factory premises
Iii.
Fuel
Iv.
Effluent
Disposal
V.
Manpower
Diesel for running the generator is available from local

market.
The process does not guarantee any effluent. However,
the borrower has obtained clearance from the state
pollution control authority.
Copy already submitted.
Total employment : 56 .
Implementation Schedule:
S. No.
(a)
(b)
Particulars
Comments
Land
Already acquired
Building
Building construction is currently under way and

is expected to get finished by Oct 2006
(c)
P&M
Main machinery is to be imported from

China and is reportedly ready.
Other ancillary machinery will be procured

from domestic market.
Installation of machinery is expected to

complete by mid of Nov.
For import purposes, the borrower intends

118
to open an LC account through SIDBI..
(d)
Trial runs
Dec 2006
(e)
Commencemen
t of commercial Jan 2007
production
During the visit carried out by SIDBI officials in May 2006

it was found that the building construction work up to the foundation level was
complete. It is reported that the civil works are in progress now and it is felt that
the company can stick to the above schedule.
WHHETHER IN THE CAUTION/WILLFUL DEFAULTER'S LIST OF

RBI:
Neither the company nor its any concerned associate company(s)
Along with the promoters fall in the RBIs Willful Defaulters List.
Project cost:
Particulars
1.
Land and Site Development
2.
Building & Civil works
3.
P&M
4.
MFA
[Rs. In Lakh]
25.44
97.3
3
121.55
118.95
5.
Contingencies
16.89
119
6.
POP
7.
MM for WC
18.13
Total
108.54
506.83
Project Cost rounded off to:
507.00
Means of Finance:
1.
2.
Particulars
Share capital
SIDBI term Loan
Total
( Rs. Lakh)
252.00
255.00
507.00
The promoters will raise Rs. 252 Lakh by way of equity share capital for funding
the project.. The details have already been mentioned in the appraisal note.
120
FINANCIAL AND OTHER PARAMETRES

Particulars
(Rs. Lakh)
Proposed Plan
Promoters contribution
255
49.07%
DER
1.01:1
Employment
56 nos.
Primary Security Margin
380.16
32.92%
Collateral Security
82.60
(Commercial property at Nabi Karim, Jhandewalan road, New Delhi-55,
consisting of 5 floors in an area of 92 sq. Yards. Approx.)
Overall security margin
462.76
44.92%
Margin
DSCR
Min
1.70
Max.
3.86
Avg.
2.78
BEP
16.24%
IRR( Post Tax)
20%
IRR (Pre tax)
29%
Repayment of loan
The term loan is proposed to be
disbursed between OCT. 2006 and
Nov. 2006. Repayment of the loan will
be in 26 quarterly installments with
first 25 installments of 9.81 Lakh each
and the last installment of 9.75 Lakh.
Principal repayments will commence
after an initial moratorium of 12
months from the date of first
disbursement.
Market and Selling Arrangements:

The product's use is basically in construction industry. These panels are used
extensively in mals, multiplexes, airports, skyscrapers, advertisement boards etc.
Many old buildings are being given a new look using the ACP.n presently the ACP
being used in India is by way of imports mainly. There are only a handful of units
in India for producing the product, which will be cost effective compared to the
imports. The borrower is easily in touch with the leading architects and builders in
India as well as abroad, who have shown interest in the project. The borrower will
be will be employing market piercing strategy by pricing the product very
competitively and thus wishes to capture the market. With the trust given by the
121
central as well as state governments for construction infrastructure, the demand

for the product is expected to be there. Further phenomenal growth forecast is
there with the boom in the construction industry. One of the stake holders Mr. AB
has strong marketing networks which will be exploited by the promoters for the
sale of the product.
The borrowers also have an additional advantage of nearly 20% due to the
location of the plant because of the incentives provided by the state government.
Financial and Economic Viability.

The unit is expected to go into commercial production by Fourth week of Nov
2006. In the first year of operation, its expected to achieve a capacity utilisation of
15% with a working of 4 months. In the first full year of operation its expected to
achieve a capacity utilisation of 40%, next year 50% and subsequent year 60%.
Projections for capacity utilisation are assumed conservatively.
Post tax IRR
20%
DSCR (Average)
BEP at
2.78
16.22%
The statements showing estimates of profitability, cash flow and also projected
balance sheet for 7 years are given at the end. The assumptions underlying these
calculations are in the Annexure I.
Inter Firm Comparison:

The broad parameters of the project have been compared with a similar project,
assisted by DNBO, viz. Alex panels, which has been sanctioned by NZSC recently.
The comparisons are as follows:
Parameter
1.
2.
3.
4.
5.
6.
7.
Project Cost
Installed Capacity
DER
Promoter's
contribution
Average DSCR
BEP
Post Tax IRR
Alex Panels
ACPPL
504 Lakh
69 Lakh sq. m p.a.
1.60:1
38.49%
507 Lakh
72 Lakh sq. m p.a.
1.01:1
49.70%
2.28
31.02%
22.43%
2.78
16.22%
21.91%
122
So, it can be seen that the projects are more or less comparable, with ACPPL
slightly bigger in operations.
SENSITIVITY ANALYSIS:
The sensitivity of the project was analysed vis-a-vis the DSCR, net profit and net
cash accruals after reducing the revenue receipt by 5% and also increasing the cost
of operation by 5%.
(Rs. Lakh)
Parameters
1.
DSCR
with
with
under
reduced
increase in normal
revenue
raw
operations
by5%
material
prices by 5%
1.65
1.67
2.78
18
2. Net Profit
3. Net
Accruals
19.72
Cash
.92
51.88
46.32 (first full

year)
51.0
78.78 (first
full year)
As mentioned earlier, the borrower is adopting a penetrating strategy in pricing the

product to capture maximum market. Hence the margins are very thin and drop in
the income or rise in the price of the raw materials will be unfavourable to the
company's financial health at the current assumed capacity utilisation, which is
only adopted on a conservative basis. However, the borrower is expected to achieve
better capacities thereby improving the margins.
X. Status of the government approvals

i.
ii.
iii.
iv.
Consent from pollution control boardPower connection

Registration with secretariat of Industrial
Assistance
Sales tax registration
Taken
Expected shortly
Applied for
Obtained
123
SWOT Analysis Of the Project

Strengths:
The promoter is already assisted by SIDBI through another company and

dealings were satisfactory.
The promoters are experienced businessmen and resourceful.
Borrower will have the Locational advantage due to the incentives provided by
the state government.
Backing of a financially sound company with its corporate guarantee.
High promoters contribution showing the level of confidence and ommitment
of the project towards the project.
Weakness:
Raw material need to be imported
124
Project 3. CPL
-
Constitution
Public Limited Company
Date of incorporation Feb. 02, 1989
SSI registration
Address
Registered office
Administrative office
Existing business
Not applicable as its a Greenfield project.
However, the promoters are running a similar business in Delhi.
Proposed factory Dehradun
Backward/non-backward area non-backward area
Distance from NDBO- 300 km
Industry
Pharmaceutical
products
Products
manufactured
Installed capacity
Tablets,
capsules,
injections,
liquids,
injectibles, ointments,
soft gel capsules
Tablets600mn/annum
Capsules-156
Liquid-1500kl
injectibles90kl/ann
Ointments-500
kg/annum
Soft gel capsules2 mn/annum
End use : Human consumption

Promoters : the company is being promoted by Shri. RB and Smt. LB.
Brief particulars are given below:

Name of the promoter
Age
Educational qualifications
Relationship to the chief promoter
Experience- in what capacity/ industry/concern
Net worth as on
IT/WT status
Other
concerns
interested
in
what
125
capacity/financial stkes (no. of shares and in Rs.

Lakh)
Brief financial position / working result of associate concerns:
The borrower company has got an associate concern viz, CP, a partnership concern
with Shri. Rb and Smt. Lb as its partners. This firm is also engaged in manufacture
of Pharmaceutical formulations at Wazirpur industrial area, New Delhi. Although
the existing unit is doing well, the promoters want to cash in the benefits offered
for new industrial units/investments by state government of Uttranchal by way of
tax holidays and decided to start a new manufacturing base. Financial position and
working results of associate concern is given below:
Associate
concern
Financial
parameter
CP
Sales
Net profit
Capital
FY 2004
676.66
46.50
103.56
FY2005
796.3
43.19
117.44
FY2006
910.69
41.98
131.88
It can be seen that the sales of the unit is increasing steadily. The drop in profits
are due to the reason as the additional changes done according to the central
governments new drug policy. Once the new project is in place, the promoters aim
to shift the operations gradually to the new unit from the existing unit.
Opinion on the promoters/associate concerns as per:
- Bankers report on the associate concern
The associate concern of the borrower has got cash credit account with PNB and a
car loan account with ABN Amro Bank, as per audited balance sheet of the
FY2005-06. the car loan is reportedly fully paid off in the current year. As regards
the cash credit account, the PNB terms the conduct of the account as
SATISFACTORY.
- Independent/market enquiries made
Discrete enquiries were made about the promoters through businessmen
dealing with the same products. Market reports on the promoters are
POSITIVE.
Branch office perception of the promoters:
The main promoter Mr. RB is a Pharmacy graduate and has got more than 33
years of experience in the field. The promoters are successfully running a
126
similar concern in Wazirpur Industrial Area, Delhi, which is exporting its

products to various countries apart from domestic sales. The promoters are
experienced and resourceful. The promoters hold a good reputation in the
market and the President of the Pharmaceutical manufacturers Association,
Mr. RKJ also gave a good opinion about them.
The borrower unit was floated in Feb 1989 as a private Limited Company and
was converted into Public Limited Company in 1995. the company was dormant
since its inception.
Particulars of previous assistance from Banks/Financial Institutions
: None
Arrears of Statutory Dues ( if any): none
Eligibility for assistance as per SIDBI norms:
The borrower is a public limited company in the medium sector having
acknowledgement no 3008/SIA/IMO/2003 dated 20/10/03 from secretariat
for industrial assistance. The project involving production of Pharmaceutical
preprations is suitable under SIDBIs DCS scheme.
Management and shareholding pattern (existing and proposed)
The board of directors consists of two directors Mr. RB and Mrs. LB, who
combined hold 96.9% of the total shares of the companys paid up capital.
Executive management:
The day to day management of the companys operation will be dealt by Mr. RB,
Mrs. LB and Mr. AB who is a CA. they will be assisted by a team of
professionals. The total staff strength will be 127 inclusive of various functional
staff.
Stake of each promoter in the project is tabulated below:
S.No.
1
2.
3.
Name of the Promoter

RB
LB
Friends and Relatives
Total
Stake (in %)
48.84
48.06
3.10
100.00
Stake (in Rs.

Lakh)
3.15
3.10
.20
6.45
127
Technical Aspect:
Scope of the project
The project involves setting up of a Pharmaceutical unit to produce different
kinds of allopathic drugs including tablets, capsules, liquids, injectibles,
ointments, soft gel capsules, etc. the company will be working on an 8 hr. single
shift basis. No of working days in an year are assumed to be 350.
The borrower will stand to gain from the various incentives provided for new
industrial investments by state of uttranchal. This will make the project
competitive in terms of pricing. Further, with the state of art manufacturing
facility being put into place, the company will be able to present its facility to
prospective importers in a better way.
Aspect
1
Location
Raw material
Power
Water
5.
Fuel
6.
Effluent
Disposal
Particulars
Comment
Selaqui
Basic infrastructure like rail,
Industrial Area, roads, power
are already
Dehradun
available.
Promoters have an upper hand
since they are in this line for a
Available from long period. Due to already
markets of Delhi available
infrastructure,
and Mumbai
procuring should not be a
problem though transportation
cost may increase as compared to
the sister concern situated in
Delhi.
Required 150 Since Uttranchal is a power
KV
surplus state, power supply is
continuous and uninterrupted.
Required
A bore well is dug into the
8000KL/day for compound along with a water
factory
treatment plant.
operations
Though there seems to be no
Diesel needed need for DG sets even then the
for
running company has bought DG sets to
generator
ensure smooth operations in case
of a power cut.
The
unit
is The company has set up an ETP
being
and the NOC has been obtained
discharged as a from the UEPPCB.
ZERO
liquid
effluent disposal
plant.
128
7.
Manpower
Total 127
Implementation Schedule
.
1
2
Particulars
3
4
5
P& M
Trial runs
Commercial
production
Land
Building
Status
Already purchased
Cons. under way. Is supposed to be completed
by Mar 2007
By mid April 2007
First week of May
The company and any of its promoters are not on the Caution List/ Willful
defaulters list.
The Summary of the Project Cost and the Means of Finance is Given as following:
129
Project Cost & Means of Finance :
Project Cost
Particulars
Site development
Building and civil works
Plant and machinery
Contingencies
Preliminary and PoP
Total
In Rs. Lakh
Means of Finance
In Rs. Lakh
Particulars
3.00 Share capital
125.74 Interest free unsecured
loans
287.72 SIDBI Term Loan
20.62
16.81
450.00 Total
100.00
50.00
300.00
450.00
Comments :
-
The land on which the project is coming up is registered on the joint names
of the two main promoters hence, the cost of the land is not taken into
consideration while calculating the project cost.
The cost of building construction is included and the rest any other
cost incurred will be borne by the promoters.
The machinery is segregated in various types and sections according to

their nature and use. The promoter has agreed to bear the cost of the
Laboratory equipments hence, the cost of the lab equipment is not
included in the cost of the project.
The promoters have also agreed to fund the Working capital from their
own sources so, Margin Money for working capital is also not included in
the cost of the project.
130
Financial and other parameters

Particulars
Proposed plan
Promoters contribution
DER
Employment
Overall security margin ( taking land value as Rs.
300 lakh)
DSCR
Maximum
1.9
Minimum
1.21
Average
1.70
BEP
IRR (pre tax)
(Post tax)
Rs. 150 Lakh

33.33%
2:1
127 nos.
40.73%
17.78%
13.27%
Critical Analysis of Viability of the project

Marketing and Selling Arrangements
The promoters are well established and known in the market. The
companys sister concern M/s. CP is right now not only selling goods in
India but is also exporting its products. The company is selling its products
directly through the medical practitioners. A group concern, Dynamic Labs
Ltd. Which is currently marketing the products of CP will also market the
products of CP Ltd.
Financial and Economic Viability
The unit is expected to go in commercial productions by may 2007 with a

turnover of Rs. 975 lakh in the first year with a capacity utilisation of 50% .
in the first three years of its operation it is expected to have a capacity
utilisation of 50%,60% and 70%.
With the post tax IRR of the project is coming out to be 13.27%,
Average DSCR of 2.73
Break Even Point of 40.73%, the project seems to be satisfactory.
131
Apart from this the calculations done are on the most conservative nature.
In real life situations the project is supposed to do better with all the tax
incentives, increasing opportunities of marketing the product and with a
better capacity utilisation the company is expected to produce better results
than the above mentioned ones.
132
Inter firm comparison:

The broad parameters of the project are compared with the other similar projects
viz, Jocund India Ltd.( assisted by NDBO) and Suncare Formulations Pvt. Ltd
( supported by DNBO). The results are given below:
Paramete
r
Jocund
India Ltd.
Suncare
CP Ltd.
Formulatio
ns Pvt. Ltd
1 Project cost
Rs. 559 lakh
Rs.389 lakh
Rs.450
lakh
2 Avg. DSCR
2.18
2.37
2.73
3 BEP
21.03%
20.40%
40.73%
Comment
The project is
placed between
these
two
projects
in
terms of project
cost.
The avg. DSCR
is
maximum
showing better
balance
between
the
generation and
usage of funds
The high BEP
shown
is
a
characteristic of
this
industry
owing to high
initial cost and
avg. cost of
operations.
4 Avg. cost of Rs. 3768 per Rs. 4180 per Rs.

3371
construction sq. m
sq.m
per sq.m
133
Sensitivity analysis:
The sensitivity of the project was analysed viz.-a-viz. DSCR, Net profit and Net cash
accruals in these three different scenarios:
1. Decreasing the revenues by 10%
2. Increasing the cost of operations by 10%
3. Increasing the cost of operations and decreasing the revenues by 10% each.
* For I full year of operation
Parameters
PAT ( in lakh)
Net Cash Accruals
(in Lakh)
Reserves & Surplus
DSCR average
II
III
Under
normal
conditions
26.78
65.54
26.78
65.54
26.78
65.54
26.78
65.54
26.78
1.69
26.78
1.62
26.78
1.63
26.78
1.72
SWOT analysis of the Project

Strengths
-
The promoters are well established and experienced in this field with a
strong financial arm to take care of this project.
The project is coming up in the state of uttranchal which is offering all the
infrastructure facilities like access to rails, roads, power, communications
and access to near by markets along with a long tax holiday.
The companys marketing will be taken care by dynamic labs, a group
concern which is already taking care of the marketing aspects of the sister
concern CP successfully.
Weakness
-
The high cost of operations can prove to be a bit problematic for the
company if not controlled under strictly.
The biggest inherent weakness of the project is that it does neither has
an R&D facility of its own or trained staff for the same purpose which
can take the project to the dooms in the times of the product patent
being allowed.
134
Opportunities
Reduction in the custom duties and new regimes of WTO its easier for the company
to expand its area of marketing and lower down the cost.
Threats
-
The biggest threat posing the project is the Patents Act according to which
the company wont be able to manufacture any drug under the disguise of
different process but will have to incur substantial amount on the R& D to
bring out new products. The project does not mention any thing about the
cost incurred on R&D a major cost component in all the pharma companies
through out the world
So even if the company is intended to engage itself in the job work done for
the big companies it will have to ensure that the business continues to come
in which seems to be difficult as the big companies also are trying to
manufacture their own products even in case of generic drugs.
There is again a short term threat regarding the VAT issue which may again
escalate the cost of operations.
Again, the pharmaceutical industry is a low investment industry so the
threat of potential entrants is also there which can eat up the companys
share in the highly fragmented market.
The company has also not included the cost of legal expenses which are
common in the industry. Pharmaceutical giant like Ranbaxy alone lost
considerable amount in the last financial year owing to the Patent
Litigations.
135
Porters Five Cs Model

For the project CP Ltd.
New Entrants
As the Pharma industry is filled with lots of small companies trying to hit the
jackpot, the barriers to entry other than the start up costs this industry are not
enough to scare away them. However, Pharma firms require huge amounts of
funding to finance their large R&D budgets so, having ample cash becomes one of
the biggest barriers in the later stage of the project which is enough to scare away
all but the serious companies.
Barriers to entry
Pharma industry is one of the most easily accessible industries for an

entrepreneur in India. The capital requirement for the industry is very low,
creating a regional distribution network is easy, since the point of sales is
restricted in this industry in India.
However, creating brand awareness and franchisee amongst doctors is the

key for long-term survival. Also, quality regulations by the government may
put some hindrance for establishing new manufacturing operations.
Going forward, the impending new patent regime will raise the barriers to
entry. But it is unlikely to discourage new entrants, as market for generics
will be as huge and this is precisely the sector the borrower company is
coming up. However, because of the high returns spread in the sector, it will
have to fight the stiff competition to ensure its survival.
Bargaining Power of Suppliers

Companies are unique because most of their value is driven from intellectual
property. Nature of their business does not force to rely on suppliers. Then,
marketing alliances have often proven to be problematic. Small Pharma firms don't
have the distribution capabilities and are forced to license their drugs to other
suppliers.
The pharma industry depends upon several organic chemicals. The chemical
industry is again very competitive and fragmented. The chemicals used in the
pharma industry are largely a commodity.
The suppliers have very low bargaining power and the companies in the
pharma industry can switch from their suppliers without incurring a very high
cost.
136
Bargaining Power of Buyers

There are thousands of individuals as customers . so the companies need to worry
too much about a buyer revolt. Pharma firms sell highly specialized products to
governments and hospitals these large organizations have a lot more bargaining
power with companies.
The unique feature of pharma industry is that the end user of the product is
different from the influencer (doctor). The consumer has no choice but to buy
what doctor says. However, when we look at the buyer's power, we look at the
influence they have on the prices of the product.
In pharma industry, the buyers are scattered and they as such does not wield
much power in the pricing of the products. However, government with its
policies, plays an important role in regulating pricing through the NPPA
(National Pharmaceutical Pricing Authority).
Availability of Substitutes
Patent protection might stop the threat of alternative drugs and chemicals for
a period of time
There will be a company that can produce a similar product at a cheaper price
Company which spends millions of dollars on the creation of a new drug
.Then along comes a generic drug maker who simply copies the formula and
sells it for a fraction of the cost
Industry Competitors
Apart from the local drugs manufacturers the company will have to face these
giants to ensure its survival
MNC presence in India

GlaxoSmithKline
Pfizer
Astra Zeneca
Aventis
Leads in 6 of the 10 therapeutic categories.

Owns the two largest selling brands in India
Involved in cardiovascular, respiratory, mental healthcare
& pain control and anesthesia.
Indian manufacturing sites identified as potential global
sourcing units by global parent company
Merck
Novartis
Wyeth
Sanofi-Synthelabo
Roche
137
138
MNC Activity in India
Novartis AG seeking tie-ups with Indian companies

Bristol-Myers to enter India again
Aventiss Goa unit to be sourcing hub
Pfizer India doubles research investment in India
AstraZeneca, Glaxo to make India R&D hub
Chiron to make India its Asian hub
Bayer AG to make India sourcing hub
Eli Lilly to make India sourcing hub
German major Boehringer Ingelheim to enter India
India to be Roche's global hub for bulk drugs
Threat of substitutes
This is one of the great advantages of the pharma industry. Whatever

happens, demand for pharma products continues and the industry thrives.
One of the key reasons for high competitiveness in the industry is that as an
on going concern, pharma industry seems to have an infinite future.
However, in recent times, the advances made in the field of biotechnology,

can prove to be a threat to the synthetic pharma industry.
Industry competition
Pharma industry is one of the most competitive industries in the country

with as many as 10,000 different players fighting for the same pie. The
rivalry in the industry can be gauged from the fact that the top player in the
country has only 6% market share, and the top five players together have
about 18% market.
Thus, the concentration ratio for this industry is very low. High growth
prospects make it attractive for new players to enter in the industry.
Another major factor that adds to the industry rivalry is the fact that the
entry barriers to pharma industry are very low. The fixed cost requirement is
low but the need for working capital is high.
The fixed asset turnover, which is one of the gauges of fixed cost
requirements, tells us that in bigger companies this ratio is in the range of
3.5 to 4 times. For smaller companies, it would be even higher.
139
Many smaller players that are focused on a particular region, have a better
hang of the distribution channel, making it easier to succeed, albeit in a
limited way.
An important fact is that pharma is a stable market and its growth rate
generally tracks the economic growth of the country with some multiple (1.2
times average in India). Though volume growth has been consistent over a
period of time, value growth has not followed in tandem.
The product differentiation is one key factor, which gives competitive

advantage to the firms in any industry. However, in pharma industry
product differentiation is not possible since India has followed process
patents till date, with laws favoring imitators.
Consequently, product differentiation is not the driver, cost competitiveness

is. However, companies like Pfizer and Glaxo have created big brands in
over the years, which act as product differentiation tools. This will enhance
over the long term, as product patents came into play from 2005.
The barriers to entry will increase going forward. The change in the patent
regime, will see new proprietary products coming up, making imitation
difficult. The players with huge capacity will be able to influence substantial
power on the fringe players by their aggressive pricing which will create
hindrance for the smaller players.
Economies of scale will play an important part too. Last but not the least, in
a vast country of India's size, government too will have bigger role to play.
140
Chapter 8
Recommendations
141
Following are the recommendations for the projects appraised at SIDBI:

1. MPPPL may be granted a term loan of Rs. 75 Lakh @9.50 % per annum
and a Credit Linked Capital Subsidy of Rs. 15 Lakh. Details of repayment
and interest may be consulted as per the appraisal.
2. ACPPL may be granted a Term Loan of Rs. 255 Lakh @9.50 % per
annum. Details of repayment and interest may be consulted as per the
appraisal.
3. CPL may be granted a loan of Rs. 300 Lakh @ 9.50 % per annum. Details
of repayment and interest may be consulted as per the appraisal.
Apart from these recommendations, following are some other recommendations:
1. The bank should consider appraising projects with different production
set ups for each product as separate small projects and should appraise
them accordingly. This will give better picture of the project in terms of
risks associated with individual products. And the bank will be able to
pin point the possible strengths and weakness of the entire project.
Projects like CPL which have entirely different product lines
with different sales and cost of production for each line the appraisal
should be done for each product line. This way the picture of the project
will be better in terms of risk.
2. The bank should consider lowering the threshold limit of the Promoters
Contribution from the present 33.33%. The bank may consider a trade
off between the Promoters Contribution and the Primary margin i.e. the
bank can consider a project with low Promoters Contribution and high
Primary Margin (if the collateral offered is very high) and vice- versa.
This will bring more business to the bank.
142
Chapter 9
Limitations of the
Project
143
Despite my best efforts to bring this report to its present form there were some
limitations of the project of details and time constraints. Some of the limitations
are mentioned below:
Due to the constraint of time the post appraisal note of any project
appraised my me is not attached in the project.
Similarly, the project does not contain the official CART or RAM ratings of
any of the project as they are strictly for internal use. The rating card which
is provided at the end is also the very first rating card of SIDBI which has
been upgraded recently.
The names of the projects have been changed to ensure the confidentiality of
the bank procedures.
144

SIDBI Project-Detailed Appraisal

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SIDBI Project-Detailed Appraisal

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Acknowledgement

This project would have been a babbling effort and a bumpy

Introduction to the project

Objectives of the project

Detailed project appraisal process

Analysis of the projects

Conclusion and Recommendations

CREDIT - THE LIFELINE OF BUSINESS

The Comprehensive Policy Package announced on 30 th August 2000 took this

Credit to SSI Sector From Public Sector Banks

Net Bank Credit

At the At the At the At the At the At the At the At the At the

10273.1 8837.47 22,742*

* Refers to units with investment in P&M up

Assistance to SSIs by SFCs

SANCTIONS (Rs Crores)

Improving the Credit Flow

Seven Point Action Plan (1995-96)

As a follow up of Nayak Committee recommendations, the Union Finance Minister

Adequate delegation of powers at branch and regional levels;

Conducting sample surveys of their performing SSI accounts by banks

Sanction of composite loans as far as poSSIble;

Regular meeting with SSI entrepreneurs;

Sensitization of bank managers towards working of SSI Sector; and

Simplification of procedural formalities by banks.

Kapur Committee (1997-98)

To make suggestions for simplification and improvement in system and

Delinking of SIDBI from IDBI.

Interest rate band of 2% above and below PLR:

Following are the objectives of this summer training report:

Principal Development Financial Institution for :

--Financing and Development of Industries in the small scale sector and

Business Domain of SIDBI

SIDBI Among Top 30 Development Banks of the World

SIDBI is committed to developing a strong, vibrant and responsive small scale

Enhancement in the flow of financial assistance to SSIs and

Composite Loan Scheme

improvement, environmental management, marketing (domestic and

Human Resource Development

Environmental and quality management

Information Dissemination and

Lack of Appropriate Infrastructure and

Lack of Marketing Network

Co-ordination and Understanding

SIDBI has entered into Memoranda of Understanding with many banks,

Small Industries Development

Direct Finance Schemes

Vendor Development Scheme (VDS)

Technology Development and Modernisation Fund Scheme (TDMFS)

Tannery Modernisation Scheme (TMS)

Technology Up gradation Fund Scheme for Textile Industries (TUFS)

10. Working Capital Term Loan (WCTL)

expansion / modernisation / diversification. Term loans granted by the PLIs for

Other Co-operative Banks

Refinance business of SIDBI is carried on under various Lines of Businesses which

Automatic Refinance Scheme (ARS):

Schemes covered under ARS

Relief Refinance Scheme (RRS), National Equity Scheme (NEF)

Scheduled Commercial Banks

Normal Refinance Scheme (NRS):

NRS is available to all eligible banks.

Line of Credit (LOC):

Short Term Loan (STL):

8. National Equity Fund Scheme (NEF)