TO

CREDT APPRAISAL

Main aspects of Project Appraisal

Technicalfeasibility
Commercialviability
Financialviability
Managerialability
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Technical Appraisal
- Location
-Infrastructurefacilities
-Landandbuilding
-Plantandmachinery
-Licenses/permits
-Licenses/installedcapacity
-Balancingofmachinery
-Typeofproduct/item
-Manufacturingprocess
-Technicalknowhow
-Availabilityofrawmaterials
-Costingandprofitability
-Storagefacilities
-Manpower/Labour
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Technical Appraisal

Location:
Is it located in a convenient area?
Whether the climate/ weather suitable for the product?
Do the social, cultural aspects of the area suit the unit?
Are there any restrictions prevailing in the locality?
Do the local authorities consider it for allowing incentives
and concessions permissible to the concerned?
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Technical Appraisal

Infrastructure facilities:
Confirm that the needed infrastructure facilities are available in the area.
Is it covered by proper transportation like road/rail
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Technical Appraisal

Land and building:

Type of soil
Adequacy of land
Scope for future expansion
Building- is it a pucca constrn? Is it sufficient? inadequate or excess?
Labour /staff quarters covered?
Is the building well protected for local climate vagaries?
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Technical Appraisal

Plant / machinery:
Is it appropriate to the production process.
Indigenous or imported with all clearances.
Is it new or second hand?
Condition of machinery.
Check purchase invoices / bills
Are the machinery installed? on a temporary or permanent basis
Confirm that due arrangements are available for periodical service
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Technical Appraisal

Licenses/permits:

Are all the permits/licenses held are current & valid?

Any restrictions imposed, if so fulfilled or not?
Check with originals and obtain photocopies for records
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Technical Appraisal

Production capacity:

What is the licensed capacity?

What is the installed capacity?
If a running unit, what is the capacity actually reflected?
If any expansion undertaken, is the license modified?
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Technical Appraisal

Type of product:

What is the product?

Is it demand and in use? Is it perishable?
Is it locally consumed or to be exported?
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Technical Appraisal

Manufacturing process:

Is it simple or complicated?
What is the time of production cycle- is it too long?
Does it require shifts?
Can the flow chart be easily be understandable?
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Technical Appraisal

Technical know-how:

Is it indigenous or imported?
If imported any arrangements are already made?
Can it be explained easily or is it highly skill oriented?
How many people in the unit are aware of the technical know how?
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Technical Appraisal

Raw material:

What are the raw materials?

Are they locally available or to be imported?
Are they available easily?
Any permanent arrangements made if under quota or short supply?
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Technical Appraisal

Costing and profitability:

Is costing done by the unit?

Any specific accounting followed or is it on approximation?
Are the costs related to sale price of the units of production
Whether profitability is properly assessed; is it too optimistic?
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Storage facilities: -

Is the storage facilities properly assessed arranged?

Provision for future is arranged or not?
Are the storage facilities needed at factory site or at show room?
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Technical Appraisal

Management/Labour arrangements:

Who manages the affaires of employers?

Do they have the expertise needed?
Are they qualified?
Is it labour oriented?
Is labour available in plenty or in shortage/ any labour problems?
Is it accessible to labour unrest prevailing in the locality?
Can the labour problems be solved with out state intervention?
Whether any past labour problems still unresolved?
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Commercial Appraisal:

-Demand-Techniquesofforecastinglike
importsubstitution,pasttrendmethodetc.
-Supply-depthofcompetition
-Pricingpolicy
-Lifecycleoftheproduct
-Brandnameoftheproduct
-Distributionchannels
-Salespromotionlikesalesman,
advertisement,servicingetc.
-Sourcesofmarketinformation
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Financial Appraisal:

Thefinancialappraisalisbasedonthefollowing:

Capitalcostoftheproject&Sourcesoffinance
Financialprojections-profitabilityestimates,
cashflowestimates,projectedbalancesheets
DebtEquityRatio(DER)
DebtServiceCoverageRatio(DSCR)Casestudy
Break-EvenAnalysisBEPpptwithcase
InternalRateofReturnIRR.withex.ppt

SensitivityAnalysis
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Financial Appraisal

About the capital cost of project:

-Have all the physical elements been taken into account for the purpose of
computing project cost?
-Has the basis of estimates of individual components of project costs been
examined in detail?
-Are the estimates reasonable- neither under-estimated nor over-estimated
-How does the estimated cost compare with the cost of similar projects?
-Check the project implementation schedule, to ascertain whether the
production will commence as scheduled?
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Financial Appraisal
Cost of project: Means of financing:

Land and site development Own funds-equity

Construction of building Unsecured long term loans from

Plant & Machinery friends & relatives

Engineering & Consultancy fee Term loans from banks & FI

Preliminary and Secured debentures

Pre-operative expenses DPGs

Intangibles like goodwill Lease finance

Margin for working capital Subsidies from government if any

Provision for contingency Retained earnings

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Financial Appraisal

Analysis of cost of project & sources of finance:

Land:
How land is acquired? (own funds or leased/rented)
Generally from own sources; if loan is sought, margin is 25%
Is it adequate for the project or in excess?
Is it planned for future expansion?
Is it valued reasonably?
Is it developed or to be developed?
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Financial Appraisal

Buildings:-

Are the buildings needed for actual production and justified?

Are there any unnecessary constructions like guest houses?
Are the estimates drawn by an authorised architect?
Does the cost assessed is reasonable and justified?
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Financial Appraisal
Plant & machinery:

Are these really needed for actual production?

Are they brand new or second hand?

Are all quotations are latest & relevant?

If second hand, whether any competent authority assessed

the value? - What is the residual life of the machinery?

Whether all the items can be taken as security under

hypothecation?

Are the prices are reasonable & comparable with similar

types?
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Financial Appraisal

Miscellaneous assets:

What are included in misc. assets?

Do these assets are required for future contingencies?
Whether all the items can be taken as security under hypothecation?
Are quotations given or these assessed approximately?
Are the electrical fittings & fixtures supported with relevant quotations?
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Financial Appraisal

Preliminary / pre-operative expenses:

What are they?

Are they properly classified?
Whether all these are justified?
Is interest cost during construction period
arranged for by borrower?
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Financial Appraisal

Margin for working capital:

Is it properly assessed?
Is there enough NWC in the system as on date and
on projected basis? What are their sources?
Whether they are really on long term basis or short
term basis?
Whether any undertaking is to be obtained, if
arranged from friends/relatives?
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Financial Appraisal
Sources of finance:

Capital - is it properly arrived?

Whether personal balance sheet obtained to know actual capital
contribution?
In case of Ltd. Co, is the share application money converted as paid
up capital?
Are the subsidies arranged for? If not, how is it going to be financed?
Are the unsecured loans properly planned and arranged for?
Whether they are on long a term basis?
Are the term loans from term lending institutions are properly
arranged for? (Sanction advice/ and process note if available)
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Financial Appraisal
Profitability and cash flow estimates:

Check whether the projections are realistic?

Projections are generally for the loan period.

Ensure all the expenses are taken into account from manufacturing to selling &
administrative expenses.

Study the assumptions underlying the projections since false assumptions

might change the whole scenario?

Normally assume only 40-50% of installed capacity as production in the first

year with 10-15% increase from second year onwards?

Check sale price with market price

Cash flow estimates are prepared to ensure that the unit will have necessary
cash with it and it will not face any problem to pay interest and installments and
their liquidity position is also comfortable.
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Financial Appraisal

Debt Equity Ratio - Indicates position of stake of the

borrower vis a vis Long term Borrowing, which s
represented by the following ratio:

Long Term Debt

= ------------------------
Equity

DER of less than 2.5 :1 is desired and 3:1 may be accepted

for SME borrowers.
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Financial Appraisal

Sensitivity Analysis:

The BEP is based upon anticipated cost and sales. Therefore, the actuals
are bound to vary from the projections. The Bank should know the likely
effect of a certain percentage change (say, 10%) in the basic data like
fixed cost, variable cost and sales on the BEP.

Even after subjecting the profitability statements to sensitivity analysis, if

the BEP & DSCR continue to be reasonable & acceptable, then the project
can be considered as viable.
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Management Appraisal:

-Honesty&Integrity
-Competence
-Risktakingcapacity
-Self-confidence
-Drive&Energy
-CompositionoftheBoard&organizationalstructure.