Chap 1: 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
Eurotunnel. 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 hydro-electric projects. Increasingly, project
financing is emerging as the preferred alternative to conventional methods of
financing infrastructure and other large-scale projects worldwide.
Project Financing discipline includes understanding the rationale for project
financing, how to prepare the financial plan, assess the risks, design the financing
mix, and raise the funds. In addition, one must understand the cogent analyses of
why some project financing plans have succeeded while others have failed. A
knowledge-base is required regarding the design of contractual arrangements to
support project financing; issues for the host government legislative provisions,
public/private infrastructure partnerships, public/private financing structures; credit
requirements of lenders, and how to determine the project's borrowing capacity; how
to analyze cash flow projections and use them to measure expected rates of return;
tax and accounting considerations; and analytical techniques to validate the project's
feasibility
Project finance is different from traditional forms of finance because the credit risk
associated with the borrower is not as important as in an ordinary loan transaction;
what is most important is the identification, analysis, allocation and management of
every risk associated with the project.

The purpose of this project is to explain, in a brief and general way, the manner in
which risks are approached by financiers in a project finance transaction. Such risk
minimization lies at the heart of project finance.
In a no recourse or limited recourse project financing, the risks for a financier are
great. Since the loan can only be repaid when the project is operational, if a major
part of the project fails, the financiers are likely to lose a substantial amount of
money. The assets that remain are usually highly specialized and possibly in a
remote location. If saleable, they may have little value outside the project.
Therefore, it is not surprising that financiers, and their advisers, go to substantial
efforts to ensure that the risks associated with the project are reduced or eliminated
as far as possible. It is also not surprising that because of the risks involved, the cost
of such finance is generally higher and it is more time consuming for such finance to
be provided.
Project finance is the financing of long-term infrastaructure and industrial projects
based upon a complex financial structure where project debt and equity are used to
finance the project. Usually, a project financing scheme involves a number of equity
investors, known as sponsors, as well as a syndicate of banks which provide loans to
the operation. The loans are most commonly non-recourse loans, which are secured
by the project itself and paid entirely from its cash flow, rather than from the general
assets or creditworthiness of the project sponsors. The financing is typically secured
by all of the project assets, including the revenue-producing contracts. Project
lenders are given a lien on all of these assets, and are able to assume control of a
project if the project company has difficulties complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding
other assets owned by a project sponsor from the detrimental effects of a project
failure. As a special purpose entity, the project company has no assets other than the
project. Capital contribution commitments by the owners of the project company are
sometimes necessary to ensure that the project is financially sound. Project finance
is often more complicated than alternative financing methods. It is most commonly
used in the mining, transportation, telecommunication and public utility industries.
Risk identification and allocation is a key component of project finance. A project
may be subject to a number of technical, environmental, economic and political
risks, particularly in developing countries and emerging markets. Financial
institutions and project sponsors may conclude that the risks inherent in project
development and operation are unacceptable (unfinanceable). To cope with these
risks, project sponsors in these industries (such as power plants or railway lines) are
generally completed by a number of specialist companies operating in a contractual
network with each other that allocates risk in a way that allows financing to take
place. The various patterns of implementation are sometimes referred to as "project
delivery methods." The financing of these projects must also be distributed among
multiple parties, so as to distribute the risk associated with the project while
simultaneously ensuring profits for each party involved.

Chap 2: AN OVERVIEW
2.1 Banking Sector
There have been major structural changes in the financial sector since banking sector
reforms were introduced in India in 1992. Since then Banks have been lending
aggressively providing funds towards infrastructure sector. Major policy measures
include phased reductions in statutory pre-emption like cash reserve and statutory
liquidity requirements and deregulation of interest rates on deposits and lending,
except for a select segment. The diversification of ownership of banking institutions
is yet another feature which has enabled private shareholding in the public sector
banks, through listing on the stock exchanges, arising from dilution of the
Government ownership. Foreign direct investment in the private sector banks is now
allowed up to 74 per cent.
The co-existence of the public sector, private sector and the foreign banks has
generated competition in the banking sector leading to a significant improvement in
efficiency and customer service. The share of private and foreign banks in total
assets increased to 31.5 per cent at end-March 2007 from 27.6 per cent at end-March
2006 and less than 10.0 per cent at the inception of reforms.

The nationalized banks have more branches than any other types of banks in
India. Now there are about 33,627 Branches in India, as on March 2005.

Investments of scheduled commercial banks (SCBs) also saw an increase

from Rs 8,04,199 crore in March 2005 to Rs 8,43,081 crore in the same
month of 2006.

India's retail-banking assets are expected to grow at the rate of 18% a year
over the next four years (2006-2010).

Retail loan to drive the growth of retail banking in future. Housing loan
account for major chunk of retail loan.

2.2 An Overview on Union Bank Of India

Union Bank of India was inaugurated by the father of the nation Mohandas
Karamchand Gandhi. It commenced operations in the year 1920.
Union Bank has offered vast and varied services to its entire valuable clientele
taking care of their needs. Today, with its efficient customer service, consistent
profitability & growth, adoption of new technologies and value added services,
Union Bank truly lives up to the image of, Good People to bank with.
Anticipative banking is an integral ingredient of value-based services. This ability to
gauge the customer's needs long before he realizes, best reduces the gap between
expectance and deliverance
Manpower is the key factor for the success of any organization. Union Bank has a
dedicated family of about 26,000 qualified / skilled employees who will and always
will be delighted to extend their services to the customers with heartfelt efforts
The Bank is a Public Sector Unit with 55.43% Share Capital held by the
Government of India. The Bank came out with its Initial Public Offer (IPO) in

August 20, 2002 and Follow on Public Offer in February 2006. Presently 44.57 % of
Share Capital is presently held by Institutions, Individuals and Others.
The Bank has over the years earned the reputation of being a techno-savvy Bank and
is one of the front runners amongst public sector bank in the field of technology. It is
one of the pioneer public sector banks, which launched Core Banking Solution in
2002. As of September 2005, more than 719 branches/extension counters of Bank
are networked under Core Banking Solution, powered with the centralized
technology platform, the Bank has launched multiple Electronic Delivery Channels
and has installed nearly 469 networked ATMs. Online Tele banking facility is
available to all its Core Banking customers. The multi facility versatile Internet
Banking Solution provides extensive information in addition to the on line
transaction facility to both individuals and corporate banking with the Core Banking
branches of the Bank. In addition to regular banking facilities, today customer can
also avail variety of value added services like cash management service, insurance,
mutual funds, Demat from the bank. Today there are more than 26,000 employees in
Union Bank of India.
UBI has been ranked at 5th position among the nationalized bank in India.
Overview on banks deposits and advances
Items

2003-04

2004-05

Deposits
Investments

Advances

2.2.1 Rationale for the study

2005-06

2006-07 2007-08

Offering credit is an operation fraught with risk. Before offering credit to an

organization, its financial health must be analyzed. Credit should be disbursed only
after ascertaining satisfactory financial performance. Based on the financial health of
an organization, banks assign credit ratings. These credit ratings are used to fix the
interest rate and quantum of installment.

This study aims to analyze the credit health of organizations that approach Union
Bank of India for foreign exchange credit facilities. After analyzing credit health, the
credit rating is determined. On the basis of credit rating, the interest rate guidelines
circular is consulted to fix a price for the credit facilities i.e. determine the interest
rate.

2.2.2 Credit disbursement at Union Bank of India

This project was undertaken at the Industrial Finance Branch of Union Bank of
India, at the Credit Department. Financial requirements for Project Finance and
Working Capital purposes are taken care of at the Credit Department. Companies
that intend to seek credit facilities approach the bank. Primarily, credit is required
for following purposes:1. Working capital finance
2. Term loan for mega projects
3. non fund based Limits Like Letter of Guarantee, Letter of Credit
Companies present audited balance sheets of the current and previous years. These
are used to determine the financial health, turnover trends and rise and fall of
profitability. Then credit rating is done.

The financial health and credit rating are theoretical methods for determining the
right interest rate. However, in practice, banks consider other factors such as history
with client, market reputation and future benefits with clients. Thus, a difference
exists between theory and practice.

2.2.3

Objectives of the project

To assess the financial health of organizations that approach Union Bank of India
for credit for import export purposes. This would entail undertaking of the
following procedures:

Analysis of past and present financial statements

Analysis of Balance Sheet

Analysis of Cash Flow Statements

Examination of Profitability statements

Examination of projected financial statements

Examination of CMA data

To assess the suitability of the company for disbursement of credit. This would
involve the following actions:

Use of credit rating charts

Evaluation of management risk

Evaluation of financial risk

Evaluation of market-industry risk

Evaluation of the facility

Evaluation of compliance of sanction terms

Calculation of credit rating

Determination of interest rate: This would entail the following sequence of actions.

Collect data regarding financial health evaluation

Noting down of credit rating

Referencing the banks interest rate guidelines circular

Choosing the interest rate from the circular on the basis of financial health and
credit rating