ACKNOWLEDGEMENT

It is an honor bestowed upon me to express my profound sense of

gratitude to the management of “Power Finance Corporation”
(PFC) for allowing me to undertake my summer training in this
esteemed organization.

This to place on record the invaluable help rendered by

Mr. Surendra Arora (Senior Manager – Recovery Department)
And Mr. Satish Kumar (Senior Accountant - my supervisor)
for their incessant guidance and constructive criticism
throughout in the past one month of training, which helped me
to put a better effort into the project.

During the course of preparation of this project report, I had an

opportunity to avail suggestions from many individuals who
helped me in reviewing the report also. I wish to thank all of
them for their kind help as and when needed by me.

Above all, I am thankful to almighty without whose blessings

anything would be done.
EXECUTIVE SUMMARY

Power Finance Corporation deals with the finance to the power

sector in India. PFC committed to complete the mission –
POWER TO ALL UPTO 2012. The process is prevalent in Power
Finance Corporation Limited right from its inception.

The project starts with an introduction and overview of the

power sector stating it’s dismal state of affairs, how the
government tried to counter the above problems by inviting the
IPP’s (Independent Power Projects) and relaxing the norms of
entry in the power sector. It further goes to state the overall
working capacity of Power Finance Corporation (PFC) and it’s
financial analysis. The project also undertakes a detailed
analysis of the process in the Recovery’s department and the
possible modes of changing the work from the function wise set
up to the process wise set up.
CONTENTS

• Overview On PFC.

• Important Procedures.

• Loan Recovery.

• Repayment Period of Loan.

• Financial Products.

• Drafting of a Demand Notice.

• Recommendations and Suggestions.

• Financial Report.

• Bibliography.
 OVERVIEW OF PFC

Government of India established” Power Finance

Corporation” (PFC) in July 1986, as a development
financial institution for the power sector. It endeavors to
operate as a commercial entity, earning an adequate return
on it’s capital, maintaining a healthy portfolio of loans and
has a strong financial base to enable it to borrow on
attractive terms.

In the initial years the focus was on the state utilities,

primarily to meet their financial needs and to bridge the
gap in the SEB’s capital plan outlays. PFC prioritized its
efforts into four main areas. Foremost on the list was
renovation and modernization of thermal power plants. The
second important area was transmission and distribution
wherein PFC started funding systems improvement schemes
such as transformers, distributors etc. Thirdly it financed
those generation projects, which are at the last stages of
completion and are languishing for want of funds. Then
most importantly, the institutional development of the
borrowers through the Operational and Financial Action
Plan (OFAP) that PFC jointly evolved with stage power
utilities and concerned state governments and also monitored
their implementation.
 MISSION
PFC’s mission is to endure as a pivotal development
financial institution in the power sector committed to
integrate development of power and its associated sectors by
channelising resources and providing financial, technological
and managerial services for enduring development of
economic, reliable and efficient systems and institutions

OBEJECTIVE
The initiative of the Ministry Of Power, Government of
India, to set up a developmental financial institution paid
off in form of PFC. The main reason behind setting up a
separate institution was the projects, which were earlier
funded by government of India, should be funded by a
separate institution which could raise its own money and
has its own obligations to pay the money back. PFC used
to fund projects coming under various schemes. To name a
few, they are: -

• Setting up of thermal and hydel generation plants.

• Helping the states in setting up a transmission network.
• Helping the states in going in for distribution.
• Initiating the renovation and modernization programmes
in the states.
• Helping the IPP’s to come up with new proposals.
• System improvement and energy conversation schemes.
• PFC provides long-term and short-term financial
assistance and tries to meet the divergent requirements
of its borrowers.

TYPES OF BORROWERS

PFC is mainly into giving services in form of loans and

advices to the following set of borrowers
• State Utilities and Electricity Department

• Municipal Run Power Utilities

• Center Sector Power Utilities with or without state

participation

• Joint Sector Organization

• Private Sector Organization

• Cooperative and Other Societies in power sector

 Important terms of Recovery:

Moratorium & Repayment Period:

The moratorium & repayment period would be determined keeping
in view the following factors:

1. Commissioning period and type of project.

2. Benefit to be derived from the project.
3. Overall repayment obligation of PFC in respect of
resourceamobilized.

Defaults:
If follower is not complying with the conditions of the loan
agreement or has not effectively utilized the assistance for the
purpose sanctioned or progress in implementation is not
satisfactory, PFC shall have absolute discretion to suspend the
disbursement or alter/cancel/call back the loan. It may also take
recourse to remedial action.

Institutional Development:
PFC recognizes the immediate need for efficient improvement in
area of operations of the state power utilities. It also desires to
have satisfactory implementation of Action Plans. It would like to
have institutional strengthening, reforms and restructuring of
state power sector in order to make it commercially viable.
MORATORIUM PERIOD:
Moratorium period for repayment of various categories of loans
would be six months after the scheduled date of commercial
operation of the project of schemes and for the payment of
interest would also de six months after the disbursement.

REPAYMENT PERIOD:
Repayment period shall be determined keeping in view payback
period and credit worthiness of the borrower and it will be
regulated as decided by the corporation from time to time.

UPFRONT FEE:
The central/state/municipal bodies shall pay to pfc upfront fee
of 1% of the loan amount sanction on or before the execution of
MOA. Private power utilities shall pay to PFC upfront fee of
1.05% of the loan amount sanctioned on or before the execution
of MOA.

MOBILIZATION OF RESOURCES:
PFC will mobilize its resources from various sources and in a cost
effective manner. The sources of funds for PFC can include
equity, debt issue or public deposit.
BY PROCESSES:- These are the process, which are carried along
with the main process of disbursement and recoveries. They are underlined
as follows:-

• Rescheduling of loan:- Rescheduling of loan is

undertaken at he request of the borrower as he may feel it would for
him to carry on with the current cycle. The rescheduling of loan will
help in fixing up the equated monthly installments. The defaults asking
for such rescheduling of loan may generally be called as chronic
defaulter. The process is given below:

1. Receiving requests.
2. Rescheduling model finalization.
3. Making calculations.
4. Loan balance fixation.
5. Getting approval.
6. Making correspondence
7. Reaching an agreement.
8 .Implementation.

• Delayed payment:- There is a peculiar process to be

undertaken in case of delayed payments where the borrower delays
his payments. Delayed payments include the penal interest calculation
with the interest rate currently. If a defaulter has defaulted foe
more than 60 days then a warning note is sent and if exceeds 90 days
then a suspension notice is being sent to him. Due follow up are
undertaken in form of making telephones, sending faxes and circulars.
The step by step process undertaken is as follows-

1. Calculation of dues liabilities as per terms and condition.

2. Follow up activity.
 • Premature payments:- The borrower who wants to
make payments before the schedule often undertakes such payments.
For premature payments a formal request from the borrower is must
and calculation has to be done as per the factor. The process is as
follows:-
1. Request from borrower and approval request to competent authority.
2. Calculations and its approval
3. Communication to the borrower
4. Borrower acceptance and payments.
5. Updating of loan balances.

• Interest subsidy:- It is given in case of borrower of

SEB and AG&SP. The process is as follows:-
1. Preparation of claim for ministry of power approval.
2. Follow up for receipt of subsidy.
3. Refund of interest subsidy to borrowers.
4. Preparation of quarterly interest subsidy account report.
5. Accounting of interest subsidy account report.
6. Accounting of interest subsidy utilization.
7. Finalization of yearly interest subsidy account.
8. Raising of interest tax demand, if any on subsidy portion.

• Report generation:- Is also an important task to be

undertaken by disbursement and recoveries. Such reports are
necessary it helps in knowing the exact status as on a particular date.
Reports are mainly generated under 4 broad heads-
1. Monthly disbursement report----scheme wise.
2. Corporate planning report.
3. Default report.
4. Exposure report.
 • Other important task:- These are some of the task
to be fulfilled along with the above process though on a timely basis-
1. Loan balance conformation from the borrower:-It is done on a yearly basis
when the balances are confirmed with the borrower.
2. Advance tax details:-are prepared and forwarded to the account
department whenever installments are due.
3. Interaction for auditing confirmation regarding the journal and trial
balance verification.
4. Maintenance of loan ledger.

LOAN RECOVERY

PROCESS IN RECOVERIES

The process to be undertaken in the recoveries department

is as follows:-

DATA ENTRY AND PROCESSING

 It takes into account all the data entries to be
made into the system and undertaking the
processing activities. This has already been taken
care of earlier at the time of sanctions and
executions. The only part left out is the taking out
the projection statement borrower-wise.

• PREPARING AND SENDING DEMAND NOTES

After taking into account the above details demand

notes are prepared and sent to the borrowers as
formal note and reminding the borrower that his
installment is due (copy attached).

• DEMAND AMOUNT RECEIVED

At this stage the demanded amount is received and

in case there is an excess payment. It is the first
communicated and then sent back and a data entry
is made for the same.

• APPROPRIATION OF AMOUNT PAID BY

THE BORROWER
The money paid by the Borrower shall be appropriated
in the following order:

o Costs, charges, expenses, losses, applicable taxes,

statutory duties and other moneys.

o Interest on costs, charges, expenses, losses, applicable

taxes, statutory duties and other moneys

o Penal Interest.
 o Commitment Charges.

o Interest/Interest Tax

o Repayment of principal in the order of the occurrence

of the dues, and lastly,

o Prepayment of principal.

OTHER TASK
These are the processes which are carried on along with
the main process of disbursements and recoveries. They are
underlined as follows:-

• REARRANGEMENT PLAN FOR PAYMENT

OF DEFAULTED DUES
The process in rescheduling of loans is undertaken at
the requests of the borrowers as he may feel it would be
difficult for him to carry on with the current cycle. The
reschedulement of loan will help in fixing up the equated
monthly installments (E.M.I.). The defaulters asking for
such reschedulement of loan may generally be called as
chronic defaulter. The process is given below-

o On the basis of request from borrow, rearrangement

plan for payment of defaulted dues are planned.
 o This involves upto date calculation of all amounts due
including penal interest/interest on penal interest.

o Preparing a plan for monthly liquidation of the dues

over a period.

o Insisting for Escrow Account security to avoid defaults

of payments under re-arrangement plan.

• DELAYED PAYMENT
There is a peculiar process to be undertaken in case of
delayed payment, where the borrower delays his payment.
Delayed payment includes the penal interest calculation
with the interest rate of 2.00% currently. If the borrower
makes the default in making the payment of penal
interest, then he will be charged with interest on penal
interest.
The penal interest charged from Borrowers shall be
subject to the rebate of different rates, provided the
repayment of dues is received in the following manner:

1. In case the payment is received within one

month of the date on which the repayments
become due, 50% of the penal interest due
from the date of default till the date of
receipt, shall be allowed as rebate.
 2. In case the payment is received within two
months of the date on which the repayments
become due, 30% of the penal interest due
from the date of default till the date of
receipt shall be allowed as rebate.

3. In case the payment is received within three

months of the date on which the repayments
become due, 10% of the penal interest due
from the date of default till the date of
receipt, shall be allowed as rebate. AND,

4. No rebate shall be given in penal interest in

case of default of over three months.

• PREMATURE PAYMENTS
Such payments are often undertaken by the borrower
who wants to make payment before the schedule. For
premature payments a formal request from the borrower
is must and calculation has to be undertaken as per the
factor. The process is as followed.

• Request from borrower and approval, Request to

Competent Authority.
• Calculation and its Approval.
• Communication to the borrower.
• Borrower acceptance and payment.
• Revised calculation if payment after due date.
• Updating of Loan Balances.

• INTEREST SUBSIDY
It is given in case of borrowers of the SEB undertaking
the various reforms as given by Government of India
and the scheme is called as Accelerated Generation and
Supply Programme (A.G.S.P.). The process followed
under this case is as follows:-

• Preparations of monthly claim to Ministry Of Power.

• Follow-up for Receipt of Subsidy.
• Refund of Interest Subsidy to Borrowers.
• Preparation of quarterly Interest Subsidy Account
report.
• Accounting to Interest Subsidy utilization.
• Finalization of yearly Interest Subsidy account.
• Raising of Interest Tax Demand on Subsidy portion.

OTHER IMPORTANT TASKS

These are some of the task to be fulfilled along with the
above processes though on a timely basis. These are:-

• Loan Balance Confirmation for the Borrower. It

is done on a yearly basis when the balances are
confirmed with the borrower.
• Advance Tax Details. These are prepared and
forwarded to the accounts department whenever the
installment is due.
 • Interaction for auditing regarding the journal
and trial balance verification.
• Maintenance of Loan Ledger.

After looking at the process currently being undertaken

in PFC. The organization structure shows that projects and
I.D.A. departments are divided regionally while Loan
Disbursements and Recoveries department is divided
functionally in form of disbursements and recoveries
although when it is dealing with the same set of customers
as being dealt by projects and I.D.A.. Thus this type of
organization structure does not result in cross-divisional
talks as far as Loan Disbursements and Recoveries are
concerned.

FINANCIAL CHARGES

Financial charges such as interest and other charges

including upfront fee, penal interest, etc. shall be levied as
applicable to other term loans. The option of payment of
commitment charges shall not be applicable for refinancing.
Similarly, management fee and other charges as applicable
to existing guarantees may be recovered from the
borrowers. However, the processing fee may not be charged
in such cases.

Besides, the borrower shall be liable to pay other charges,

if any, levied on PFC by nay statutory authority upon
sanction of its loan.

Interest Rates On All Disbursements

(I) The Corporation has revised

interest rates on all disbursements
made/to be made on
or
After 03.03.2007 as follows:
a) Interest Rates with 3 / 10 year reset provision for RTL
have been revised
upward by 75 bps across the board from their existing level.

b) Short Term Loan (STL) Rate has been revised upward by

225 bps from its
existing level. The STL interest shall be paid on monthly
basis.

The applicable interest rates w.e.f. 03.03.2007 for various

categories/schemes are given
at Annexure - I.

(II) Notes to above rates :-

1. As per PFC’s policy, the interest rate prevailing on the
date of disbursement shall be applicable. The revised interest
rates as indicated at Para (I) above will be applicable on all
disbursement made on or after 3rd March 2007 irrespective
of date of sanction of loans.
2. The revised interest rates for Category ‘C’ State Sector
Borrowers and Non-Reforming State Sector Borrowers shall
continue to be higher by 0.50% than those of Reforming
State Sector Borrowers as notified at Annexure-I.
3. Interest rates for Transmission, Distribution and R&M
Schemes under ADB Loan II to State Sector Utilities shall
continue to be 0.25% lower than the applicable interest rates.
4. The above rates (except the interest rates indicated for
private sector borrowers for project rupee term loans & for
lease finance scheme, and for all borrowers under Direct
discounting of bills) are effective interest rates after
rebate/incentive of 0.25% (presently applicable) for timely
payment of dues, unless indicated or intimated otherwise.
5. Interest rates for Private Sector Discoms under grade ‘A’
shall be same as that of Reforming State Sector Discoms in
case they provide Escrow coverage.
6. In case of interest rate with reset after 3 / 10 years,
the Corporation shall have the right of interest reset after
3 / 10 years beginning with the date of first disbursement.
Interest reset, if exercised by the Corporation, shall apply
from the standard due date immediately following the end of
3rd / 10th year period.
7. The Large Loans are defined as under:
(i) For State/Central Sector Borrowers : - Loans for
Conventional Generation Projects where the sanction amount is
Rs.700 crores & above.
(ii) For Private Sector Borrowers: - Loans for Conventional
Generation Projects where the sanction amount is Rs.500
crores & above.
The sanction amount shall include both fund and non-fund
based support by PFC and both RTL & FCL. However, the
special rates shall apply only for RTL.
8. (a) In case of State/Central Sector Borrowers, a further
0.25% reduction in interest rate on project rupee term loans
for generation projects (other than Large Loans) and
infrastructure projects with forward/backward linkage will be
allowed on all disbursement made/to be made on or after
13.05.2004, from the date of commissioning of the first unit
for generation projects.
(b) In case of Private Sector Borrowers, a further 0.25% /
0.50% (as applicable) reduction in applicable interest rate will
be allowed for existing and new project Rupee Term Loans
(both stand alone and consortium loans) for generation
projects (other than Large Loans) and infrastructure projects
with forward/backward linkage on outstanding loan
amount/disbursement to be made, from the standard due date
immediately following the date of COD or 13.05.2004,
whichever is later.
This benefit shall be given irrespective of extent of
disbursement under the loan at that point of time.
(c) In case of Large Loans (both State/Central sector and
Private sector borrowers), a reduction in interest rate by
0.25% / 0.50% (as applicable) shall be allowed on all
disbursement made/to be made on or after 13.05.2004 or
from the date of commissioning of first unit of generation
(for State/Central Sector) or C.O.D of project (for Private
Sector), as the case
may be, whichever is later. Further, the reduction in rate
(where the reduction is due to commissioning/COD of project)
shall be
made from the date of receipt of intimation in PFC in regard
to commissioning (for State/Central Sector Borrowers) or COD
(for Private Sector Borrowers) of project or the actual date
of commissioning/COD of project, whichever is later; provided
that if intimation is received within 5 (FIVE) working days
from actual commissioning /COD of the project,
the reduction shall be given w.e.f. the date of commissioning
or COD, as the case may be. In all the above cases the
reduction shall be applicable from the date, the existing
payment-default, if any, under any facility extended by PFC,
are cleared by the borrower or the eligibility dates as given
above, whichever is later.
9. In case of Direct Discounting of Bills for Seller, the
existing policy of the Corporation to charge 0.5% interest
over and above the normal rates indicated above, if the Bills
are not co-accepted/guaranteed by banks and where the
purchase of equipment is by any SEBs/SGCs/Central
Generating or Transmission company or govt. undertaking upto
an aggregate disbursement amount of Rs. 50 crores on
security of escrow account, is
continued. Since in case of Direct Discounting of Bills for
Seller, the line of credit is available to the seller, the
applicable rate of interest shall be determined on the basis of
category of seller of equipment/materials. Similarly in the
case of Direct Discounting of Bills for Buyers, the line of
credit being available to the buyer, the applicable rate of
interest shall be determined on the basis of category of
buyer of equipment/materials.
10. A volume discount of 25 bps on applicable interest rate
can be offered in case of loans for Distribution and
Transmission schemes on future sanctions, if the disbursement
under these schemes reaches the target amount within the
specified period. The minimum disbursement amount to be
considered for offering this discount is Rs. 700 crores in case
of Discoms and Transco and Rs. 1,000 crores for an
integrated SEB for the combined disbursement for
Distribution and Transmission Schemes. For this purpose
borrowers shall be required to sign a MoU with PFC,
committing to draw required amount within a period of 2 years
from the date of signing of MoU. The Transmission /
Distribution loans sanctioned after the signing of MoU with
PFC would be eligible for the benefit under this policy. The
discount shall be passed on to the borrowers only on the
interest due on or after drawal of Rs. 700 crores / 1000
crores as applicable. The total disbursement made during the
specified period shall be eligible for discount of 25 bps from
the applicable rate till it is repaid. In case of Distribution
Schemes to be covered
under the scheme, one of the following security options shall
be considered:-
First Charge on a separate identified circle / First pari-passu
charge on total assets of a Discom / Pledge of Equity Shares.
11. Identified CPSUs are NTPC, NLC, DVC, NHPC, NPCIL,
PGCIL, SJVNL or any other entity as identified by the
Corporation from time to time.
12. All interest rates (except STL rate) are on quarterly
basis. In case of EMI, the interest rates shall be applicable
for the purpose of calculation of interest under EMI
installment.
13. In case of STL, the interest shall be paid on monthly
basis.

Guarantee AND SECURITY

The loan shall be guaranteed fully, unconditionally and

irrevocably either by the State Government or by the State
Bank of India, or any of its subsidiaries or the
Nationalized Banks in respect of repayment of principal,
payment of interest/service charges, and payment of
commitment of charges, penal interest, if any. The State
Government or any of the Banks, as aforesaid, shall
execute the Guarantee Deed, Guarantee Bond in the form
prescribed by the Corporation for the purpose.

The Borrower shall procure irrevocable and unconditional

personal guarantees, inferior of lender for the due
repayment of the Loans and the payment of all interest and
other monies by the Borrower in the form prescribed by
the Lender and to be delivered to the Lender before any
part of the Loan is advanced. The Borrower shall not pay
any guarantee commission to said Guarantors.

CHARGE ON ASSETS
The loan together with all interest (including penal
interest), costs, expenses, and other monies whatsoever
stipulated in the Memorandum of Agreement shall be
secured by:

• Way of mortgage in favour of the Corporation in a form

satisfactory to the same of all the Borrower’s immovable
properties or other assets, as per details enclosed
regarding both present and future.
The Borrower shall make out good marketable title to its
properties to the satisfaction of the Corporation and comply
with all such formalities as may be necessary or required
for the said purpose.

• Way of hypothecation in favour of the Corporation of all

the Borrower’s movable assets (save and except book
depts.), including movable machinery, it’s spares, tools
and accessories, fuel stock, spares and material at project
 site, present and future, save prior charges created and/or
to be created:-

--- in favor of the Borrower’s Banker, on

the Borrower’s stocks of raw materials,
semi-finished and finished goods
consumable stores and such other movable
as may be agreed to by the Corporation for
securing the borrowings for working capital
requirements in the ordinary course of
business, and

--- on specific items of machinery as

permitted by the Corporation purchased or
to be purchased by the Borrower under the
deferred payments facilities granted to the
Borrower to the extent of Rs. --- decided
by the Corporation.

CREATION OF ADDITIONAL SECURITY

The borrower undertakes that if, at any time during the

subsistence of this agreement, the Corporation is of the
 opinion that the security provided by the Borrower has
become inadequate to cover the balance of the Loans
then the Borrower shall provide and furnish to the
Corporation to cover such deficiency.

REGISTRATION OF CHARGE

The Borrower shall have the particulars of charges

registered with the Registrar of Companies (ROC) as per
the Companies Act with in stipulated time, and shall submit
a certificate from the ROC certifying the registration of
charge.

The Borrower shall have the particulars of charge

registered with the Sub-registrar of assurances in case of
English Mortgage wherever executed.

The Borrower shall enhance/open an escrow account for

the entire pendency of the loan to the satisfaction of PFC.

SECURITY
1. The Loans together with all interest, liquidated
damages, front end fee, premia on payment or on
redemption, costs, expenses and other monies including
any increase as a result of devaluation revaluation
function in the foreign currencies involved payment
whatsoever stipulated in this agreement shall be
secured by,
 A first mortgage and charge in favor of the
Security Trustee in a form satisfactory to the
Lender of all the Borrower’s immovable properties
both present and future.
 A first registered mortgage and charge in favor
of the Security Trustee on all its immovable
properties in Maharashtra, and all its intangible
assets both present and future and a charge over
all project contracts, insurance proceeds and bank
accounts, and
 A first charge by way of hypothecation in favor
of the Security Trustee of all the Borrower’s
movables, (save and all except book depts.)
including movable machinery, its spares, tools and
accessories, present and future, subject to prior
charges created and/or to be created in favor of
the working capital Lenders of the Borrowers
stock of raw materials, semi-finished goods,
consumable stores, book depts. and such other
movables as may be agreed by the Lead
Institution.

2. The Borrower shall make out a good and marketable

title to its properties to the satisfaction of the Lender
and comply with all such formalities as may be
necessary or required for the said purpose.
 LOAN RECOVERY

PROCESS IN RECOVERIES

The process to be undertaken in the recoveries department

is as follows:-

DATA ENTRY AND PROCESSING

It takes into account all the data entries to be

made into the system and undertaking the
processing activities. This has already been taken
care of earlier at the time of sanctions and
executions. The only part left out is the taking out
the projection statement borrower-wise.

• PREPARING AND SENDING DEMAND NOTES

After taking into account the above details demand

notes are prepared and sent to the borrowers as
formal note and reminding the borrower that his
installment is due (copy attached).

• DEMAND AMOUNT RECEIVED

At this stage the demanded amount is received and

in case there is an excess payment. It is the first
communicated and then sent back and a data entry
is made for the same.

BY PROCESSES
These are the processes which are carried on along with
the main process of disbursements and recoveries. They are
underlined as follows:-

• REARRANGEMENT PLAN FOR PAYMENT

OF DEFAULTED DUES
The process in rescheduling of loans is undertaken at
the requests of the borrowers as he may feel it would be
difficult for him to carry on with the current cycle. The
reschedulement of loan will help in fixing up the equated
monthly installments (E.M.I.). The defaulters asking for
such reschedulement of loan may generally be called as
chronic defaulter. The process is given below-

o On the basis of request from borrow, rearrangement

plan for payment of defaulted dues are planned.

o This involves upto date calculation of all amounts due

including penal interest/interest on penal interest.

o Preparing a plan for monthly liquidation of the dues

over a period.

o Insisting for Escrow Account security to avoid defaults

of payments under re-arrangement plan.
• DELAYED PAYMENT
There is a peculiar process to be undertaken in case of
delayed payment, where the borrower delays his payment.
Delayed payment includes the penal interest calculation
with the interest rate of 2.00% currently. If the borrower
makes the default in making the payment of penal
interest, then he will be charged with interest on penal
interest.
The penal interest charged from Borrowers shall be
subject to the rebate of different rates, provided the
repayment of dues is received in the following manner:

5. In case the payment is received within one

month of the date on which the repayments
become due, 50% of the penal interest due
from the date of default till the date of
receipt, shall be allowed as rebate.

6. In case the payment is received within two

months of the date on which the repayments
become due, 30% of the penal interest due
from the date of default till the date of
receipt shall be allowed as rebate.

7. In case the payment is received within three

months of the date on which the repayments
become due, 10% of the penal interest due
from the date of default till the date of
receipt, shall be allowed as rebate. AND,

8. No rebate shall be given in penal interest in

case of default of over three months.
• PREMATURE PAYMENTS
Such payments are often undertaken by the borrower
who wants to make payment before the schedule. For
premature payments a formal request from the borrower
is must and calculation has to be undertaken as per the
factor. The process is as followed.

• Request from borrower and approval, Request to

Competent Authority.
• Calculation and its Approval.
• Communication to the borrower.
• Borrower acceptance and payment.
• Revised calculation if payment after due date.
• Updating of Loan Balances.

• INTEREST SUBSIDY
It is given in case of borrowers of the SEB undertaking
the various reforms as given by Government of India
and the scheme is called as Accelerated Generation and
Supply Programme (A.G.S.P.). The process followed
under this case is as follows:-

• Preparations of monthly claim to Ministry Of Power.

• Follow-up for Receipt of Subsidy.
• Refund of Interest Subsidy to Borrowers.
• Preparation of quarterly Interest Subsidy Account
report.
• Accounting to Interest Subsidy utilization.
• Finalization of yearly Interest Subsidy account.
• Raising of Interest Tax Demand on Subsidy portion.
• APPROPRIATION OF AMOUNT PAID BY
THE BORROWER
The money paid by the Borrower shall be appropriated
in the following order:

o Costs, charges, expenses, losses, applicable taxes,

statutory duties and other moneys.

o Interest on costs, charges, expenses, losses, applicable

taxes, statutory duties and other moneys

o Penal Interest.

o Commitment Charges.

o Interest/Interest Tax

o Repayment of principal in the order of the occurrence

of the dues, and lastly,

o Prepayment of principal.
• OTHER IMPORTANT TASKS
These are some of the task to be fulfilled along with the
above processes though on a timely basis. These are:-

• Loan Balance Confirmation for the Borrower. It

is done on a yearly basis when the balances are
confirmed with the borrower.
• Advance Tax Details. The are prepared and
forwarded to the accounts department whenever the
installment is due.
• Interaction for auditing regarding the journal
and trial balance verification.
• Maintenance of Loan Ledger.

After looking at the process currently being undertaken

in PFC. The organization structure shows that projects and
I.D.A. departments are divided regionally while Loan
Disbursements and Recoveries department is divided
functionally in form of disbursements and recoveries
although when it is dealing with the same set of customers
as being dealt by projects and I.D.A.. Thus this type of
organization structure does not result in cross-divisional
talks as far as Loan Disbursements and Recoveries are
concerned.
 REBATE
As per PFC policy for rebate, the borrowers who pay their
dues on respective due dates are charged interest @ 0.25%
lower than the applicable rate. Further, even if a borrower
remits the full due amount on or before the respective due
date, in case there outstanding dues from the same
borrower on account of an earlier due date in any of the
facilities such as STL, RTL, FCL etc. then the borrower
will not be eligible for 0.25% rebate in respect of current
timely payment.

LOAN RECOVERY

Loan recovery is made on stipulated dates as per the terms

and conditions of agreement of respective loans.

RECOVERY INVOLVES
• Preparation, checking and issuing demand notices along
with outstanding dues in advance to borrowers including
penal interest and interest on interest.

• Monitoring receipts against the notices.

• Preparing Bank Receipt Vouchers for all the receipts.

• Follow-up with defaulters for realizing the dues.

• Activate the remedial steps for realizing the dues.

REMEDIAL STEPS INVOLVE:
If the defaulter has defaulted by more than 60 days then
a warning notice is sent to him and if it exceeds to 90
days then a suspension notice is being sent to him. Due
follow ups are undertaken in form of making telephones,
sending faxes and circulars.

• Issue of letter of warning of suspension of loan

disbursement and sanctions.
• Suspension of loan disbursement and sanction till
the defaulted dues are realized.
• Invocation of Escrow Account -
• Initiating legal action in case of default. This
involves :
o Invocation of State Government Guarantee
o Issue of Legal Notices
• Approaching Ministry of Power for appropriation
from Central Plan Allocation.

REARRANGEMENT PLAN FOR PAYMENT OF

DEFAULTED DUES

• On the basis of request from borrower,

rearrangement plan for payment of defaulted dues
are planned.
• This involves upto date calculation of all amounts
due including penal interest/interest on penal
interest.
• Preparing a plan for monthly liquidation of the
dues over a period.
 • Insisting for Escrow Account security to avoid
defaults of payments under re-arrangement plan.

IMPORTANT DOCUMENTS INVOLVED IN

LOAN ACCOUNTING AND RECOVERY
1. Loan sanction letter, loan documents and loan drawl
schedule accepted in the document.
2. Loan subsidiary ledger.
3. Bank Payment Vouchers.
4. Bank Receipt Vouchers.
5. Demand Notice for Principal, Interest, Other
Charges and Interest Tax.
6. Demand Notices for Penal Interest and Interest on
Interest.
7. Recovery Register.
8. Receipt advices of monies (given by Banking
Department).
9. Notice of Warning of suspension.
10. Notice of deferment of warning of suspension.
11. Notice of suspension.
12. Notice of Invocation under Escrow Account.

REPORTS

• Statement of monthly realization and cumulative

realizations (required by Corporate Planning
Department).

• Monthly report on outstanding dues (Popularly

known as Monthly Default Report).
 • Monthly Statement of Income accrued but not due
(required by Account Department for Balance Sheet
purpose).

CONFIRMATION OF BALANCES

Loan Account-wise balance is drawn up and the statement

is sent to every borrower for confirmation of balances as
on that date on yearly basis.

FUTURE PROJECTION OF RAEALIZATION

With the data base with us, it is possible to project

realizations (Principal, Interest and Other charges) on
different matrices like:

• Loan Account-wise for a given period.

• Borrower-wise for a given period.
• Due-date-wise for a given period.

These projections are useful for Budget Section for preparing

Annual Action Plan and other long term plans.

These projections are useful for Project Division and Loan

Execution Division for determining amounts required for
establishing Escrow Account.
RECOVERY UNIT:
A. scope of work:
(a) Executives:
1. Follow up for the recovery of dues.
2. Correspondence with the borrowers, ministers/state
govts.etc.
3. Handling the cases of the respective borrowers who fall in
defaults in terms of the respective loan agreement and
process the other action for the recovery of dues and to
protect the interest of the corporation.
4. Corporation with all the auditors like statutory auditors,
govt.auditors, non current auditors and others.
5. Prepration of replies to queries raisd by various auditors.
6. Development in the existing computer system.
7. Intiate action for warning /suspension as per loan
agreement.
8. Interest restruction of the loan.
9. Processing the loan for premature payments.
10. Reschedulement of loans.
11. Prepration of agenda notes.
12. Prepration of information for parliament question.
13. Co-ordinate the policy issue relating to recovery.
14. Compilation of information relating to classificaton of
assessts as per the prudential norms.
15. Prepration of details for MIS purpose.
16. Bifurcation of loan liabilities on restructuring of the SEB
 under reform process.
17. Compilation of foreign currency loan statement.
18. Finalisation of accounts on monthly basis including passing
of accounts closing enteries.i.e, accural enteries on
monthly basis,notes to account,income<5years etc.

(b) Accountants/Sr.Accountants:

1. Prepration and sending demand notes for all the loan

facilities including the guarantee and facilities to be
introduced in future.It includes taking the rates from the
other banks and the currency rates.
2. Passing on rebate for timely payments as per the policy of
the corporation and dealing with all the matters related to
rebate of borrowers.
3. Calculations of penal interest/liquidated damages etc. as
per the terms of the agreement and policy of the
corporation.
4. Financial an loan accounting related to recovery
transaction. It includes prepration of vouchers,
reconcillation of account as per the integrated loan
accounting system with financial accounting.
5. Prepration of calculation of advance tax.
6. Prepration of default report.
7. Prepration of recovery report.
8. Verification of trial balance on monthly basis.
9. Passing of account closing enteries i.e.accural enteries on
monthly basis.
10.keeping the regester as regard to the followings:
(i) Guarantrr issued by the corporation:
(a) Amount & scope of guarantee.
(b) Date of issue.
 (c) Issuing authority
(d) Dae of expiry.
(e) Major conditions, if any.
(f) Maturity schedule.
(ii) Details of major securities.
(iii) Status of limitation period.

RECOVERY MECHANISM:-

Our recovery mechanism is characterized by the following

features that ensure timely and efficient recovery from our
borrowers:

 Long standing and well established

relationship with the borrowers;
 Intensive follow up;
 Timely payments rebate; and
 Suspension of further disbursement and
sanction in case of default.

The timely payment rebate is allowed to state sector and

central sector borrowers. The above measures ensures that
client pay our dues on time. In spite of the above, if there is
default error account in case of state sector borrowers and
access reserve in the trust and retention account in case of
private sector borrowers, we look to recover on the securities
granted over the loan.

The effect of the strong recovery mechanism is reflected in

the following table, which outlines the amount of loan
installments, including interest, which were overdue as of
March 31 for the last five fiscal years:
REPAYMENT PERIOD OF LOAN

The borrower shall repay the loan amount within the

balance repayment period available. However, the maximum
repayment period allowed for PFC loan shall be regulated
as per OPS. For projects which are already fully
commissioned, the repayment of loan shall start immediately
on the next standard due date from the date of
disbursement i.e. no moratorium for repayment for loan
shall be given in these cases. For partially completed
projects, moratorium will be as per applicable PFC policy.
However even in the latter case, if the repayment of the
earlier loan had already begun, PFC repayment shall also
begin on the next standard due date without any
moratorium.

The interest payment/guarantee fee would begin immediately

on the next standard due date after disbursement of loan
amount/issue of guarantees. The standard due dates shall
be on quarterly basis as applicable for term loan/guarantee.

However, in case of consortium financing wherein a certain

moratorium period and first repayment date has already
been agreed upon between consortium members, PFC may
agree for the same after reviewing the situation in totality.
Revised policy on calculation of
premium on premature repayment
and debt restructuring of rupee
term loan.

Eligibility: -
This policy shall be applicable for rupee term loans sanctioned to all the
borrowers of the corporation unless the term of loan provide otherwise.
Where the loans are sanctioned under consortium the provision of
respective loan agreements shall prevail.

Procedure for calculation of premium: -

The corporation shall charge a premium from the borrowers who opt for
premature payment of loan. The premium shall be determined as under:

(a) For pre-mature repayments after 5

years from the date of first disbursement
under the loan:
“The amount of premium shall be the present discounted value of cash
flow (half yearly or quarterly) of the differential interest between the
interest to be earned (after rebate) in the absence of repayment
request and the interest amount calculated at the current interest rate
(after rebate) applicable to corresponding category of scheme over the
balance period of loan maturity. The differential interest shall be
discounted at the minimum interest rate applicable to state sector
borrowers for non-thermal scheme without 10(23g) benefit but after
 rebate for timely payments of dues (at present 10.5%p.a.). However, for
differential interest calculation the benefit of 10(23g) will be
considered, as applicable, along with timely payment rebate.

(b) For pre-mature repayments in less

than 5 years from the date of first
disbursement under the loan: -

“The amount of premium shall be the present discounted value of cash

flow(half yearly or quarterly) of the differential interest between the
interest to be earned(after rebate) in the absence of repayment request
and the interest amount calculated at the current interest rate (after
rebate) applicable to corresponding category of scheme over the balance
period of loan maturity. The differential interest shall be discounted at
the minimum interest rate applicable to state sector borrowers for non-
thermal scheme without 10(23G) benefit but after rebate for timely
payments of dues (at present 10.5%p.a). However, for differential
calculation the benefit of 10(23G) will be considered, as applicable, along
with the timely rebate.

The premium so calculated shall be increased by the actual amount of

benefit already passed on to the borrower by PFC by way of reduction in
interest rate for covering the project u/s 10(23G) of Income –Tax Act,
1961.

Where the corporation has agreed to the pre-payment of loan amount and a
demand is raised (by LRD unit) to the borrowers for payment of outstanding
amount including premium as payable under this policy, borrower shall have
to clear all the dues within stipulated period Till the dues are cleared the
corporation shall continue to raise the demands on due date as per loan
agreement.Where the borrow remits the amount without intimating and
consent, the corporation shall appropriate such receipts as per loan
agreements.
On the receipts of proposal of pre-mature payments of loan from the
borrower, the corporation shall not consider any further disbursement
under the relevant loan till the proposal is accepted. On accepting the pre-
mature closure of loans the balance undisbursed loan amount, if any, shall
stand cancelled automatically.

In no case the loans covered under AG&SP may be accepted for premature
repayments of loan due to implications of subsidy involved in such cases.
Pre-payment of a part of loan may not be accepted.

Debt restructuring with PFC:

PFC shall also consider the cases where the borrower requests PFC to
restructure the high interest rate loans by paying the premium to PFC in
these loans and thereafter continuing with PFC at current applicable rate of
interest in the same category of projects. In such cases the premium will be
calculated and discount of 50% will be allowed on the amount so calculated.
Once the premium is paid by the borrower upto a cut off date, an
amendment to the sanction letter will be issued for continuation of loan at
the current applicable rate of interest from this cut off date.

In such cases, the corporation may consider further disbursement under the
relevant loan.

The loan covered under AG&SP may be considered.

Restructuring of part of the loan may be considered.

Where the borrower prepays loans due to non-acceptance of reset higher

interest rate after the interval of 5 years from the first disbursement of
loan, no premium shall be recovered from the borrower.

Any other fresh amount etc. payable by the corporation to any third party
including Tax Authorities as the result of premature repayment of loan shall
be recovered from the borrower. However, any tax liability arisen on amount
of withdrawal of benefit u/s 36(1)(8) of Income Tax Act, 1961 shall be
borne by the corporation.
 Maximum ceiling on acceptance of debt
restructuring in a financial year (per borrower)

Where borrower has only one Rs.100.00 crs.

loan.

Other loan above. For debt restructuring: 20% of the outstanding

rupee term loans of concerned borrower.

The rupee loan outstanding amount shall be seen

in the beginning of the month in which the
application for debt restructuring is received.

In order to regulate the quantum, the debt restructuring of rupees term

loans shall be accepted as under:

Where the borrower requests to PFC prepayments of loans, which have

already been restructured, the corporation may agree to accept prepayment
of such earlier restructured term loans provided the borrower agree to
refund the amount of rebate given by the corporation on debt restructuring
of such loans.

This revised policy supersedes the earlier policy on ‘premature repayment of

loan’ approved by the board.
Range of Financial Products

Fund Based
Project Term Loan (Rupee and Foreign Currency)
Short Term Loan
Short/Medium Term Loan to Equipment Manufacturers
Direct Discounting of Bills Scheme - For Buyers
Direct Discounting of Bills Scheme - For Sellers
Lease Financing Scheme
Buyer's Line of Credit
Debt Refinancing Scheme
Asset acquisition Scheme
Project Rupee Bridge Loan Scheme
Line of Credit for Import of Coal
Assistance for Studies/Consultancies/Training

Non-fund Based
Guarantee
 Lending Operations
Sanctions & Disbursements for the respective years are as under:
(Rs. in Millions)

Financial Year
2002-03 2003-04 2004-05 2005-06 2006-07
Sanctions 140,019 164,719 185,728 225,018 311,457
Disbursement 73,406 89,742 94,091 116,809 140,550
 Statements of profits:

The statements of restarted profits of our company for the

financial years ended March 31,2002,2003,2004,2005 and 2006.
Are set out below.

(Rs. in
million)
Year ended 31st March
2002 2003 2004 2005 2006

INCOME:
Operating income 21,046.8 26,408.7 28,220.7 28,377.4 30,205.10
3 3 9 7
Other income. 25.61 131.89 38.39 69.98 20.26

Total income. 21,072.4 26,540.6 28,259.1 28,447.4 30225.36

4 2 8 5

Expenditure:
Interest and other charges. 10141.28 12,404.5 14219.89 16032.35 18,648.97
6
Upfront fees and issue expenses 52.51 63.84 13.99 72.00 76.75

Personal and administration 277.04 383.55 372.76 446.27 485.20

expenses
Depreciation 415.21 414.93 409.12 13..51 13.94

Amortization charges-Intangible 0.00 0.00 0.13 0.24 0.25

assets.
Provision for contingencies. 351.82 (223.00) 5.65 228.20 (144.02)

Provision for decline in value of 0.00 0.00 0.00 3.30 1.81

investments.

Total expenditure 11,237.8 13043.88 15021.54 16795.87 19082.90

6

Profits before tax and extra ordinary 983,4.58 134,96.7 13,237.6 11,651.5 11,142.46
items 4 4 8

Less: Provision for taxation 1,879.16 2,570.64 2,661.02 2,091.30 1,923.34

Less: Deferred tax liability 954.83 168,5.10 1,575.91 1,799.52 714.82

Less: Provision for fringe benefit 0.00 0.00 0.00 0.00 8.09
tax.

Profits after tax &before extra 7,000.59 9,241.00 9,000.71 7,760.76 8,496.21
ordinary items-(A)
Extra ordinary items:

Interest restructuring premium 0.00 1,291.99 1,882.91 2117.83 1,050.51

Exchange loss (-)/gain (458.00) 56.55 (401.08) 252.09 470.09

Total extra ordinary items. (458.00) 1,348.54 1,481.83 2,369.92 1,520.60

Less: Taxes on extra ordinary items. (87.51) 256.85 297.88 425.37 262.48

Extra ordinary items.(net of taxes)- (370.49) 1,091.69 1,183.95 1,944.55 1,258.12

(B)
Profits after tax available for 6,630.10 10,332.6 10,184.6 9,705.31 9,754.33
appropriation- (A)+(B) 9 6
RECOMMANDATIONS AND SUGGESTIONS

100% recovery is not possible for any institution due to

many factors which are beyond the control of the
institution. However, at the time of appraisal of schemes
every care should be taken to see the viability of the
project finance by PFC. Because this will ultimately
determine the recovery rate of the PFC.
BIBLIOGRAPHY
• Annual Report 2005-2006

• Internet sites:

1. www.pfcindia.com

2. www.rbi.com