Financial Appraisal

STATE BANK OF INDIA

CONTENTS

SECTION I
Executive Summary 4-7
Industrial Profile 9 -12
SECTION II
Company Profile 13-21

SECTION III
Theoretical Background for the project work 22- 49
- Introduction to project financing
- Project financing risks
- Project Financial Appraisal
Project in Brief- SL flow controls 50- 53

SECTION IV
Financial Analysis 54-74
Measures taken by SBI when the repayment is not possible 75

SECTION V

Analysis 76
Findings 77 -78

Recommendations
Limitations
Conclusions
Bibliography 79

REVA UNIVERSITY BANGALORE (MBA)

1
Financial Appraisal
STATE BANK OF INDIA

Executive Summary

Title of the project

Financial Appraisal Of the Project Financed By SBI, Bidar

As a part of curriculum, every student studying MBA has to undertake a project on a

particular subject assigned to him/her. Accordingly I have been assigned the project
work on the study of project financing in Banking Sector.

As it is rightly said that finance is the life blood of every business so every business
need funds for smooth running of its activities and bank is the one of the source through
which the business get funds, before financing the bank appraise the projects and if the
projects meet the requirement of the bank rules than only they will finance.

Project financing is commonly used as a financing method in capital-intensive

industries for projects requiring large investments of funds, such as the construction of
power plants, pipelines, transportation systems, mining facilities, industrial facilities
and heavy manufacturing plants.

The core area of this project focuses on the financial appraisal of SL flow controls, who
has started Manufacturing of industrial valves which is financed by SBI
.
This project has been undertaken at State Bank of India, Bidar branch which is one of
the largest bank in India having vast domestic network of over 9000 branches. SBI
deals with all financial activities which involves all types of deposits, advances
including project financing, mutual funds etc

Financial appraisal which mainly leads to the feasibility study consisting of ratio
analysis and capital budgeting calculations.

REVA UNIVERSITY BANGALORE (MBA)

2
Financial Appraisal
STATE BANK OF INDIA

CHAPTER-1

INTRODUCTION

REVA UNIVERSITY BANGALORE (MBA)

3
Financial Appraisal
STATE BANK OF INDIA

INTRODUCTION-

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

MEANING-

Project financing involves non-recourse financing of the development and construction

of a particular project in which the lender looks principally to the revenues expected to
be generated by the project for the repayment of its loan and to the assets of the project
as collateral for its loan rather than to the general credit of the project sponsor.

RATIONALE-

Project financing is commonly used as a financing method in capital-intensive

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

REVA UNIVERSITY BANGALORE (MBA)

4
Financial Appraisal
STATE BANK OF INDIA

PRINCIPLE ADVANTAGE AND OBJECTIVES-

NON RECOURSE

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

Main Objective

Financial appraisal of project

Sub Objectives -
1. To know the projects financed by SBI.
2. To know the policies of SBI towards the project financing.
3. To know the risks involved in projects financing.
4. To appraise the projects using financial tools.
5. To know the measures taken by bank when the clients fail to repay the amount.

Limitation of the study:-

1. Some of the information are confidential in nature that could not divulged for
study.

2. The main limitation of the study was limited time for the study. The study was

not extensive due to the constrains.

REVA UNIVERSITY BANGALORE (MBA)

5
Financial Appraisal
STATE BANK OF INDIA

3. The study taken only i.e. 50 customers values so the findings may not be

generalized.

4. The accuracy of the of the report is dependent on the information elicited by me

from the bank and respondents.

5. Answers to most of the questions contained in the questionnaire have come

mainly from the memory of the respondents and it has its own limitations.

REVA UNIVERSITY BANGALORE (MBA)

6
Financial Appraisal
STATE BANK OF INDIA

CHAPTER-2

INDUSTRIAL PROFILE

REVA UNIVERSITY BANGALORE (MBA)

7
Financial Appraisal
STATE BANK OF INDIA

Industrial Profile

HISTORY OF BANKING IN INDIA

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

For the past three decades Indias banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main
reasons for Indias growth. The governments regular policy for Indian bank since 1969
has paid rich dividends with the nationalization of 14 major private banks of India.

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks.

Nationalization of Indian Banks and up to 1991 prior to Indian.

Banking sector Reforms.

New phase of Indian Banking System with the advent of Indian.

Financial & Banking Sector Reforms after 1991.

Phase I

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

REVA UNIVERSITY BANGALORE (MBA)

8
Financial Appraisal
STATE BANK OF INDIA

Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established which started as private shareholders banks, mostly European
shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and
1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

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

During those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

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

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19 th
July 1969, major process of nationalisation was carried out. It was the effort of the then
Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country

REVA UNIVERSITY BANGALORE (MBA)

9
Financial Appraisal
STATE BANK OF INDIA

were nationalized.Second phase of nationalisation Indian Banking Sector Reform was

carried out in 1980 with seven more banks. This step brought 80% of the banking
segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

1. 1949: Enactment of Banking Regulation Act.

2. 1955: Nationalisation of State Bank of India.

3. 1959: Nationalisation of SBI subsidiaries.

4. 1961: Insurance cover extended to deposits.

5. 1969: Nationalisation of 14 major banks.

6. 1971: Creation of credit guarantee corporation.

7. 1975: Creation of regional rural banks.

8. 1980: Nationalisation of seven banks with deposits over 200 crores.

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

Phase III

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

The country is flooded with foreign banks and their ATM stations. Efforts are being put
to give a satisfactory service to customers. Phone banking and net banking is

REVA UNIVERSITY BANGALORE (MBA)

10
Financial Appraisal
STATE BANK OF INDIA

introduced. The entire system became more convenient and swift. Time is given more
importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.

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

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

REVA UNIVERSITY BANGALORE (MBA)

11
Financial Appraisal
STATE BANK OF INDIA

SBI Group

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

Banking in India

1 Central Bank Reserve Bank of India

State Bank of India, Allahabad Bank, Andhra Bank,

Bank of Baroda, Bank of India, Bank of
Maharastra,Canara Bank, Central Bank of India,
2 Nationalised
Corporation Bank, Dena Bank, Indian Bank, Indian
Banks
overseas Bank,Oriental Bank of Commerce, Punjab and
Sind Bank, Punjab National Bank, Syndicate Bank,
Union Bank of India, United Bank of India, UCO
Bank,and Vijaya Bank.

REVA UNIVERSITY BANGALORE (MBA)

12
 Financial Appraisal
STATE BANK OF INDIA

Bank of Rajastan, Bharath overseas Bank, Catholic

Syrian Bank, Centurion Bank of Punjab, City Union
Bank, Development Credit Bank, Dhanalaxmi Bank,
3 Private Banks
Federal Bank, Ganesh Bank of Kurundwad, HDFC Bank,
ICICI Bank, IDBI, IndusInd Bank, ING Vysya Bank,
Jammu and Kashmir Bank, Karnataka Bank Limited,
Karur Vysya Bank, Kotek Mahindra Bank, Lakshmivilas
Bank, Lord Krishna Bank, Nainitak Bank, Ratnakar
Bank,Sangli Bank, SBI Commercial and International
Bank, South Indian Bank, Tamil Nadu Merchantile Bank
Ltd., United Western Bank, UTI Bank, YES Bank.

Structure of Indian Banking

Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a
mixture of Public sector, Private sector, Co-operative banks and foreign banks. The
private sector banks are further spilt into old banks and new banks.

Reserve Bank of India

Scheduled Banks

Scheduled Commercial Scheduled Co-operative

Banks Banks

REVA UNIVERSITY BANGALORE (MBA)

13
 Financial Appraisal
STATE BANK OF INDIA

Public Sector Private Sector Foreign Regional

Banks Banks Banks Rural Banks

Nationalized SBI & its Scheduled Urban Scheduled State co-

Banks Associates cooperative operative Banks
Bank

Old private sector New private sector

Banks Banks

CHAPTER-3

COMPANY PROFILE

REVA UNIVERSITY BANGALORE (MBA)

14
Financial Appraisal
STATE BANK OF INDIA

COMPANY PROFILE

STATE BANK OF INDIA

Not only many financial institution in the world today can claim the antiquity and
majesty of the State Bank Of India founded nearly two centuries ago with primarily
intent of imparting stability to the money market, the bank from its inception mobilized
funds for supporting both the public credit of the companies governments in the three
presidencies of British India and the private credit of the European and India merchants
from about 1860s when the Indian economy book a significant leap forward under the
impulse of quickened world communications and ingenious method of industrial and
agricultural production the Bank became intimately in valued in the financing of
practically and mining activity of the Sub- Continent Although large European and
Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the
small man never ignored loans as low as Rs.100 were disbursed in agricultural districts
against glad ornaments. Added to these the bank till the creation of the Reserve Bank in
1935 carried out numerous Central Banking functions.

REVA UNIVERSITY BANGALORE (MBA)

15
Financial Appraisal
STATE BANK OF INDIA

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

A highly efficient and experienced management functioning in a well defined

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

Modern day management techniques were also very much evident in the good old days
years before corporate governance had become a puzzled the banks bound functioned
with a high degree of responsibility and concerns for the shareholders. An unbroken
records of profits and a fairly high rate of profit and fairly high rate of dividend all
through ensured satisfaction, prudential management and asset liability management
not only protected the interests of the Bank but also ensured that the obligations to
customers were not met.

The traditions of the past continued to be upheld even to this day as the State Bank
years itself to meet the emerging challenges of the millennium.

ABOUT LOGO

REVA UNIVERSITY BANGALORE (MBA)

16
Financial Appraisal
STATE BANK OF INDIA

THE PLACE TO SHARE THE NEWS ...

SHARE THE VIEWS

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

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

MISSION STATEMENT:

To retain the Banks position as premiere Indian Financial Service Group, with world
class standards and significant global committed to excellence in customer, shareholder
and employee satisfaction and to play a leading role in expanding and diversifying
financial service sectors while containing emphasis on its development banking rule.

VISION STATEMENT:

Premier Indian Financial Service Group with prospective world-class

Standards of efficiency and professionalism and institutional values
Retain its position in the country as pioneers in Development banking.

Maximize the shareholders value through high-sustained earnings per Share.

An institution with cultural mutual care and commitment, satisfying and

REVA UNIVERSITY BANGALORE (MBA)

17
Financial Appraisal
STATE BANK OF INDIA

Good work environment and continues learning opportunities.

VALUES

Excellence in customer service

Profit orientation

Belonging commitment to Bank

Fairness in all dealings and relations

Risk taking and innovative

Team playing

Learning and renewal

Integrity

Transparency and Discipline in policies and systems.

Organization Structure

MANAGING DIRECTOR

CHIEF GENERAL MANAGER

G. M G.M G. M G.M G.M

(Operations) (C&B) (F&S) (I) & CVO (P&D)

REVA UNIVERSITY BANGALORE (MBA)

18
Financial Appraisal
STATE BANK OF INDIA

Zonal off Functional Heads

Regional officers

Theoretical Background for the project work

Project Financing

MAXIMIZE LEVERAGE

In a project financing, the sponsor typically seeks to finance the costs of

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

REVA UNIVERSITY BANGALORE (MBA)

19
Financial Appraisal
STATE BANK OF INDIA

OFF-BALANCESHEET TREATMENT

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

MAXIMIZE TAX-BENEFITS

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

DISADVANTAGES-

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

PROCESS OF PROJECT FINANCING

Feasibility Study

REVA UNIVERSITY BANGALORE (MBA)

20
Financial Appraisal
STATE BANK OF INDIA

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

Contents

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

1. Description of project
2. Description of sponsor(s).

3. Sponsors' Agreements.

4. Project site.

5. Governmental arrangements.

6. Source of funds.

7. Feedstock Agreements.

8. Off take Agreements.

9. Construction Contract.

10. Management of project.

11. Capital costs.

12. Working capital.

REVA UNIVERSITY BANGALORE (MBA)

21
Financial Appraisal
STATE BANK OF INDIA

13. Equity sourcing.

14. Debt sourcing.

15. Financial projections.

16. Market study.

17. Assumptions.

THE PROJECT COMPANY

Legal Form

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

The amount of equity required for the project

The concern with management of the project

The availability of tax benefits associated with the project

The need to allocate tax benefits in a specific manner among the project
company investors.

The three basic forms for ownership of a project are:

REVA UNIVERSITY BANGALORE (MBA)

22
Financial Appraisal
STATE BANK OF INDIA

1. Corporations-

This is the simplest form for ownership of a project. A special purpose

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

2. General Partnerships-

The sponsors may form a general partnership. In most jurisdictions, a

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

3. Limited Partnerships-

A limited partnership has similar characteristics to a general partnership

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

REVA UNIVERSITY BANGALORE (MBA)

23
Financial Appraisal
STATE BANK OF INDIA

CHAPTER-4

COMPETITIVE ANALYSIS

4.1 SWOT Analysis:-

REVA UNIVERSITY BANGALORE (MBA)

24
 Financial Appraisal
STATE BANK OF INDIA

1. SBI is the biggest bank in India with more than 14000 branches
2. State Bank Of India (SBI) has a separate act for itself. Thus, a special
privilege for the bank
3. Biggest branch network in the country means good reach
Strengths 4. First public sector to move to CBS
5. SBI has close to 300,000 people employed with it
6. Backing of the Govt of India gives a huge boost to the bank
7. State Bank Of India offers services like consumer banking, enterprise
banking, insurance etc

1. Immense competition means limited market share growth for SBI

2. International presence is less as compared to global banks
Weaknesses

1. Pool in talent to replace the going top management to serve the next
generation
2. State Bank Of India (SBI) can make better use of CRM, technology and
Opportunities online space
3. Expansion into rural areas too boost its business
4. With focus on India going cashless, the bank can dominate the market
with its extensive reach

1. Consolidation among private banks can reduce market share for SBI
2. New bank licenses by RBI can affect operations
3. Foreign banks that have sophisticated products
Threats
4. SBI operations are often disrupted by slow government decisions and
red tapism

REVA UNIVERSITY BANGALORE (MBA)

25
Financial Appraisal
STATE BANK OF INDIA

THE MCKINSEY 7S FRAMEWORK

The 7-S model is better known as McKinsey 7-S model. This is because the two
persons who developed this model, Tom Peters and Robert Waterman, have been
consultants at McKinsey & co. at that time. They published their 7-S model in their
article Structure is not organization (1980) and in their books The art of Japanese
management (1981) and In search of excellence (1982).
The model starts on the premise that an organization is not just structure, but consists of
seven elements:

STRATEGY: The direction and scope of the company over the long term.
STRUCTURE: The basic organization of the company, its departments, reporting
lines, areas of expertise and responsibility.
SYSTEMS: Formal and Informal procedures that govern everyday activity, covering
everything from management information systems, through to the systems at the point
of contact with the customer (retail systems, call centre, systems, online systems, etc).
SKILL: The capabilities and competencies that exist within the company. What it does
best.
SHARED VALUES: The values and beliefs of the company. Ultimately they guide
employees towards valued behavior.
STAFF: the Companys people resources and how they are developed, trained and
motivated.
STYLE: The leadership approach of top management and the companys overall
operating approach.

REVA UNIVERSITY BANGALORE (MBA)

26
Financial Appraisal
STATE BANK OF INDIA

Financial analysis

Ratio Analysis:-

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

The two major aspects of financial analysis are liquidity analysis and capital
structure. For this purpose ratios are employed which reveal existing strengths and
weakness of the project.

1) Liquidity ratios- Liquidity ratio or solvency ratios measure a projects

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

The current ratio is defined as the ratio of total current assets to total current
liabilities. It is computed by,

Current assets

Current ratio

Current liabilities

Particulars 2004 2005 2006 2007 2008

Current assets 91.47 101.72 112.76 128.7 145.25

REVA UNIVERSITY
Current BANGALORE
liabilities 144.32 127.66 (MBA)
121.59 96.05 80.09
27
Current ratio 0.634 0.767 0.927 1.339 1.8134
Financial Appraisal
STATE BANK OF INDIA

Interpretation-

It is an indicator of the extent to which short term creditors are covered

by assets that are expected to be converted to cash in a period corresponding to the
maturity of claims. The ideal current ratio is 2:1. The firm current ratio indicate that the
firm is in a position to meet its short term obligation because the ratio is in increasing
trend , by observing the above table we can say that though the firm does not maintain
ideal current ratio, it is still in a position to meet its current obligations. After clearing
all the dues the firm is still in a position to maintain liquidity.

b) Acid test or quick ratio-

REVA UNIVERSITY BANGALORE (MBA)

28
Financial Appraisal
STATE BANK OF INDIA

It is a measure of liquidity calculated dividing current assets minus

inventory and prepaid expenses by current liabilities. Since inventories among current
assets are not quite liquid (means not quickly converted into cash), the quick ratio
excludes it. The quick ratio includes only assets, which can be readily converted into
cash and constitutes a better test of liquidity. It is often called as quick quick ratio
because it is a measurement of a firms ability to convert its assets quickly into cash in
order to meet its current liabilities.

Particulars 2004 2005 2006 2007 2008

Quick assets 60.47 67.65 75.28 87.47 99.9

Current liabilities 144.32 127.66 121.59 96.05 80.09

Current ratio 0.534 0.53 0.62 0.911 1.247

Interpretation-

REVA UNIVERSITY BANGALORE (MBA)

29
Financial Appraisal
STATE BANK OF INDIA

Acid test ratio is a rigorous measure of firms ability to service short term liabilities.
The usefulness of the ratio lies in the fact that it is widely accepted as the best available
test of liquidity position of a firm. Generally an acid test ratio of 1:1 is considered
satisfactory as a firm can easily meet all its current claims. In the case of the above firm
the quick ratio is in increasing trend by year on. So it shows that firm is capable of
paying its quick short term obligations

2. Capital structure ratio

The long-term lenders/creditors would judge the soundness of a firm on the basis of the
long term financial strength measured in terms of its ability to pay the interest regularly
as well as repay the installment of the principal on due dates or in one lump sum at the
time of maturity. The long term solvency of firm can be examined by using leverage or
capital structure ratios. The leverage or capital structure ratios may be defined as
financial ratios which throw light on the long term solvency of a firm as reflected in its
ability to assure the long term lenders with regard to (i) periodic payment of interest
during the period of the loan and (ii) repayment of the principal on maturity or in
predetermined installments at due dates.

a) Debt equity ratio- This ratio measures the long term or total debt to
shareholders equity. This ratio reflects claims of creditors and
shareholders against the assets of the firm. Debt Equity Ratio is given
by:

Long term debt

Debt Equity Ratio =

Shareholders equity

Particulars 2004 2005 2006 2007 2008

Debt 82.00 61.50 41.00 20.05 0.00

Equity(Promoter contribution) 56.38 54.07 56.88 68.94 84.49

REVA UNIVERSITY BANGALORE (MBA)
Debt equity ratio 1.454 1.14 0.721 0.291 0.00 30
Financial Appraisal
STATE BANK OF INDIA

Interpretation-

The debt equity ratio is an important tool of financial analysis to appraise the financial
structure of the firm. The ratio reflects the relative contribution of creditors and owners
of the business in its financing. A high ratio shows a large share of financing by the
creditors of the firm; a low ratio implies the a smaller claim of the creditors. Debt
Equity ratio indicates the margin of safety to the creditors. The debt-equity ratio is in
decreasing and in 2008 it become nil, which implies that the owners are putting up
relatively more money of their own.

3. Profitability ratios related to sales-

REVA UNIVERSITY BANGALORE (MBA)

31
Financial Appraisal
STATE BANK OF INDIA

These ratios are based on the premise that a firm should earn sufficient profit on each
rupee of sales. If adequate profits are not earned on sales, there will be difficulty in
meeting the operating expenses and no returns will be available to the owners.

A. Net profit margin-

It is also known as net margin. This measures the relationship between the net
profits and sales of a firm. Depending on the concept of net profit employed. , this
ratio can be computed as follows-

Earnings after tax

Net Profit ratio = 100

Net sales

Particulars 2004 2005 2006 2007 2008

Earnings after tax 10.68 17.82 27.05 35.56 43.75

Net sales 265.49 292.04 321.24 353.36 388.7

Net profit margin 4.023% 6.102% 8.420% 10.06% 11.25%

Interpretation

The net profit margin is indicative of managements ability to operate the business with
sufficient success not only to recover from revenues of the period, the cost of services,
the operating expenses and the cost of borrowed funds, but also to leave a margin of
reasonable compensation to the owners for providing their capital at risk. A high profit
margin would ensure the adequate return to the owners as well as enable the firm to
withstand adverse economic conditions. A low net profit margin has the opposite
implications. With respect to the above firm the net profit margin is increasing trend so
it will show that the company is in good condition and the demand for the product is
increasing.

REVA UNIVERSITY BANGALORE (MBA)

32
Financial Appraisal
STATE BANK OF INDIA

4 . Profitability ratios related to Investments-

Return on Investments-

Return on investments measures the overall effectiveness of management in

generating profits with its available assets. There are three different concepts of
investments in financial literature: assets, capital employed and shareholders
equity. Based on each of them, there are three broad categories of ROIs. They are

I. Return on assets,
II. Return on total capital employed.

Return on assets-

The profitability ratio is measured in terms of relationship between net profits and
assets. The ROA may also be called profit-to-asset ratio. It can be computed as follows-

Net profit after tax

Return on Assets = 100

Average total assets

Particulars 2004 2005 2006 2007 2008

Earnings after tax 10.68 17.82 27.05 35.56 43.75

Average total assets 208.39 199.54 195.9 200.54 208.34

ROA 5.125% 8.93% 13.81% 17.73% 20.99%

REVA UNIVERSITY BANGALORE (MBA)

33
Financial Appraisal
STATE BANK OF INDIA

Interpretation-

Return on assets employed is favorable. That means the firm is in a position to employ
its assets in an efficient manner.

Return on Capital Employed-

It is similar to ROI except in one respect. Here the profits are related to the total capital
employed. The term capital employed refers to long term funds supplied by the lenders
and owners of the firm. It is given by the formula-

EBIT

Return on Capital employed = 100

Average total capital employed

Particulars 2004 2005 2006 2007 2008

EBIT 34.82 42.24 52.66 62.04 70.99

total capital employed 203.39 199.54 195.90 200.54 208.34

ROCE 17.2% 21.16% 28.92% 30.9% 34.07%

REVA UNIVERSITY BANGALORE (MBA)

34
Financial Appraisal
STATE BANK OF INDIA

Interpretation:-

The capital employed basis provides a test of profitability related to the source of long
term funds. The higher the ratio, the more efficient is the use of capital employed. From
the above table we can say that the ROCE is quite high. Compared to previous years
ratio. It is good for the company.

Debt Service Coverage Ratio:(DSCR)

It is considered a more comprehensive and apt measure to compute debt service

capacity of firm. It provides the value in terms of the number of times the total debt
service obligations consisting of interest and repayment of principal in installments are
covered by the operating funds available after the payment of tax : earnings after taxes,
EAT+interest+Depreciation+Other non cash expenditure like amortization.

EAT+interest+Depreciation+Other Non cash expenditure

DSCR =

Installments

REVA UNIVERSITY BANGALORE (MBA)

35
Financial Appraisal
STATE BANK OF INDIA

year Net profit for the year Interest on term loan Repayment of term loan

2004 35.66 19.55 20.5

2005 36.92 16.78 20.5

2006 41.72 14.01 20.5

2007 46.86 Particulars 11.252004 2005 2006

20.5 2007 2008

2008 52.50 Net Cash Accruals

8.4835.66 36.92 41.72
20.5 46.86 52.50

Instalment 20.5 20.5 20.5 20.5 20.5

DSCR 1.74 1.80 2.03 2.29 2.56

REVA UNIVERSITY BANGALORE (MBA)

36
Financial Appraisal
STATE BANK OF INDIA

Interpretation:-

The higher the ratio, the better it is, A ratio of less than one may be taken as a sign of
long term solvency problem as it indicates that the firm does not generate enough cash
internally to service debt. in general, lending financial institution consider 2:1 as
satisfactory ratio.

In this project DSCR is in increasing trend it shows that firm is able to meet its debt
obligation.

REVA UNIVERSITY BANGALORE (MBA)

37
Financial Appraisal
STATE BANK OF INDIA

CHAPTER-5

SUMMARY OF FINDINGS

REVA UNIVERSITY BANGALORE (MBA)

38
Financial Appraisal
STATE BANK OF INDIA

Findings :- These are related to bank in general

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

Financing
Sanctioning for the projects is approved by RASMECC (Retailed Assets
Small And Medium Enterprises Credit Cell).

The bank finances the projects only through term loans.

Interest rates are fixed depending upon the projects which is known as State
Bank advance rate.

When the clients fail to pay the interest, 3 months from the due date the term
loan granted will be treated as Non Performing Assets.

If the interest is due further 3 more months then it will be treated as doubtful
assets and interest rates becomes zero.

Again for further 3 months it goes as loss assets and the bank write off the
account.

Every firm starting up a new project should make an insurance policy with
the same bank itself.

REVA UNIVERSITY BANGALORE (MBA)

39
Financial Appraisal
STATE BANK OF INDIA

CHAPTER-6

RECOMMENDATIONS CONCLUSION

REVA UNIVERSITY BANGALORE (MBA)

40
Financial Appraisal
STATE BANK OF INDIA

Recommendations:-

Bank check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost benefit
analysis of the project so bank should consider this because these are also
important from the point of view of risk and economy growth.
Bank should be caution about the availability of security and ensure
honesty of both borrower and guarantor so as to avoid the account
becoming the loss assets.

Conclusion:-

The project undertaken has helped a lot in understanding the concept of project
financing in nationalized bank with reference to state bank of India. The project
financing is an important aspect which helps in increasing the profit of the banks.

Project financing is a vast subject and it is very difficult to apply all the aspect in all
type of project when bank want to finance, and it is very difficult to cover all aspect in
this project.

To sum up it would not be out of way to mention here that the state bank of India has
given a special impetus on Project Financing .the concerted efforts of the
management and staff of state bank of India has helped the bank in achieving
remarkable progress in almost all important aspects.

Finally the success of project financing would mostly depend on the proper analysis of
the projects before financing.

REVA UNIVERSITY BANGALORE (MBA)

41
 Financial Appraisal
STATE BANK OF INDIA

ANNEXURE
BALANCE SHEETS OF SBI
Schedule
Particulars 2011-2012 2012-2013 /2013-2014 2014-2015 2015-2016
No.
CAPITAL AND LIABILITIES:
Capital 1 1000000 50000 50000.00 50000.00 636656
Share Capital Deposit 1A 187577000 586656 586656.00 586656.00 0
Reserves and Surplus 2 1528026444 7225635 8272631.00 8878194.00 9947723
Deposits 3 14011880542 72724666 87114850.00 101048128.00 122783305
Borrowings 4 2129358827 9728616 14543807.00 13435607.00 16779397
Other Liabilities and Previous 5 107862550 3755971 8641191.00 4512401.00 4050154
Deferred tax liability -- 177 -- --
Total Rs. 1832101687 94071721 119209135.00 128510986.0 154197235
6 0
ASSETS:
Cash and Balance with 6 885228995 4067077 4882838.00 6599061.00 8206268
Reserve Bank of India
Balance with Banks and 7 889907544 4067077 6573472.00 1626573.00 1748581
Money at Call and Short
Notice
Investments 8 3019312315 17262490 29755647.00 31058803.00 35200797
Advances 9 13055266861 65003284 68096876.00 83997411.00 103621292
Fixed Assets 10 70311799 422408 437669.00 555301.00 53795
Other Assets 11 290989362 3160458 9462633.00 4673837.00 5242802
Total Rs 1832101687 94071721 119209135.00 128510986.0 154197235
6 0
Contingent Liabilities 12 83915647 120399 141177.00 546052.00 692631
Bills for collection 407410 554329.00 1297212.00 1433686
Significant accounting policies 17
Notes on accounts 18
(Source: Annual Report of SBI)

REVA UNIVERSITY BANGALORE (MBA)

42
 Financial Appraisal
STATE BANK OF INDIA

PROFIT & LOSS ACCOUNT OF SBI

Schedul 2012- 2015-2016
Particulars 2011-2012 /2013-2014 2014-2015
e No. 2013
INCOME:
Interest Earned 13 1676890451 8535877 9719116.00 11845492.00 13842656
Other Income 14 86368654 532271 601316.00 589040.00 1061108
Deferred tax -- 118500 -- --
Total Rs. 176325910 9186648 10320432.0 12434532.0 14903764
5 0 0
EXPENDITURE:
Interest Expended 15 1054318540 5245238 5875919.00 7443969.00 8954609
Operating Expenses 16 460009716 2314732 2575402.00 3066675.00 3506470
Provision & 16A 127445696 837390 822115.00 1313086.00 1405269
Contingencies
Total Rs. 164177395 8397360 9273436.00 11823730.0 13866348
2 0
Net profit after tax 121485152 789288 1046996.00 610802.00 1037416
Amount withdrawn 254
from Investment
fluctuation reserve
Net Profit for the year
Profit Brought
Forward
Total Surplus 1037670
available for
appropriation
APPROPRIATIONS
:
To Statutory Reserve 121485152 305122 265000.00 122160.00 207534
To Reserve for Long 121485152 60000 120000.00 120000.00 1000000
Term Finance
To Floating Reserve 121485152 80000
Towards Investment
Transfer to Govt./

REVA UNIVERSITY BANGALORE (MBA)

43
 Financial Appraisal
STATE BANK OF INDIA

Schedul 2012- 2015-2016

Particulars 2011-2012 /2013-2014 2014-2015
e No. 2013
Proposed Dividend
To Floating Reserve 35603914 16000 250000.00 250000.00 50000
Towards NPA
To General Reserve -- 184000 259390.00 117000.00 679700
Balance of Profit 166 906.00 1642.00 436
carried over to
Balance sheet
Total 35603914 789288 1046996.00 610802.00 1037670
(Source: Annual Report of SBI)

Bibliography

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

REVA UNIVERSITY BANGALORE (MBA)

44