Project Finance ( Banks vis NBFC )

Executive Summary

Considering the growing use of project finance, we undertook this project with an objective of understanding the salient features of project finance. It is a method of financing very large capital intensive projects, with long gestation period, where the lenders rely on the assets created for the project as security and the cash flow generated by the project as source of funds for repaying their dues.

As project financing is adopted by a majority of companies at least once in their lifetime, we decided to study this concept in detail. Banks as well as non-banking financial companies provide project financing.

Banks enjoy a major market share among the borrowers and the NBFC firms are lagging far behind and will slowly loose their market share if adequate steps are not taken. Banks are usually preferred over NBFC firms due to the security aspect and brand name. also the documentation process is one such aspect which the borrowers find lengthy and tiresome in both the banks and NBFC.

Awareness regarding the nationalized banks providing project finance is more than the NBFC firms providing the same. Also a borrower chooses a project finance provider mainly due reference and time frame within which the loan would be approved.

The NBFC firms need to take adequate steps to improve their position in the minds of the borrowers so as to stay in the market. The NBFC firms should try to inculcate in the minds of the borrowers that NBFC is as safe as any bank and should try and develop a feeling of security among borrowers with regard to NBFC.

Table of Contents

Introduction to proj ect finance.

Origins of project finance

Project financing is generally sought for infrastructure related projects. Its linkages to the economy are mutiple and complex, because it affects production and consumption directly, creates negative and positive externalities, and involves large flow of expenditure.

Prior to World War I, private entrepreneurs built major infrastructure projects all over the world. During the 19th century ambitious projects such as the suez canal and the Trans-Siberian Railway were constructed, financed and owned by private companies. However the private sector entrepreneur disappeared after world War I and as colonial powers lost control, new governments financed infrastructure projects through public sector borrowing. The state and the public utility organizations became the main clients in the commissioning of public works, which were then paid for out of general taxation. After World War II, most infrastructure projects in industrialized countries were built under the supervision of the state and were funded from the respective budgetary resources of sovereign borrowings.

This traditional approach of government in identifying needs, setting policy and procuring infrastructure was by and large followed by developing countries, with the public finance being supported by bond instruments or direct sovereign loans by such organizations as the world Bank, the Asian Development Bank: and the International Monetary Fund.

Development In the early 1980s

> The convergence of a number of factors by the early 1980s led to the search for alternative ways to develop and finance infrastructure projects around the world. These factors include:

> Continued population and economic growth meant that the need for additional infrastructure- roads, power plants, and water-treatment plants-continued to grow.

> The debt crisis meant that many countries had less borrowing capacity and fewer budgetary resources to finance badly needed projects; compelling them to look to the private sector for investors for projects which in the past would have been constructed and operated in the public sector

> Major international contracting firms, which in the mid-1970s had been kept busy, particularly in the oil rich Middle East, were, by the early 1980s, facing a significant downturn in business and looking for creative ways to promote additional projects.

> Competition for global markets among major equipment suppliers and operators led them to become promoters of projects to enable them to sell their products or services.

> Outright privatization was not acceptable in some countries or appropriate in some sectors for political or strategic reasons and governments were reluctant to relinquish total control of what maybe regarded as state assets.

During the 1980s, as a number of governments, as well as international lending institutions, became increasingly interested in promoting the development for the private sector, and the discipline imposed by its profit motive, to enhance the efficiency and productivity of what had previously been considered public sector services. It is now increasingly recognized that private sector can playa dynamic role in accelerating growth and development. Many countries are encouraging direct private sector involvement and making strong efforts to attract new money through new project financing techniques.

Such encouragement is not borne solely out of the need for additional financing, but it has been recognized that the private sector involvement can bring with it the ability to implement projects in a shorter time, the expectation of more efficient operation, better management and higher technical capability and, in some cases, the introduction of an element of competition into monopolistic structures.

However, the private sector, driven by commercial objectives, would not want to take up any project whose returns are not consumerate with the risks. Infrastructure projects typically have a long gestation period and returns are uncertain. What then are the incentives of private capital providers to participate in infrastructure projects, which are fraught with huge risks? Project finance provides satisfactory answers to these questions.

Definition of project finance

Project finance is typically defined as limited or non-recourse financing of a new project through separate incorporation of vehicle or Project Company. 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.

In other words the lenders finance the project looking at the creditworthiness of the project, not the creditworthiness of the borrowing party. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risk, design the financing mix, and raise the funds.

A knowledge base is required regarding the design of contractual arrangements to support project financing; issues fior the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the projects borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the projects feasibility.

Comparison between corporate finance and project finance

Traditional finance is corporate finance, where the primary source of repayment for investor and creditors is the sponsoring company, backed by its entire balance sheet, not the project alone. Although creditors will usually still seek to assure themselves of economic viability of the project being financed so that it is not a drain on the corporate sponsors existing pool of assets, an important influence on their credit decision is the overall strength of the sponsors balance sheet, as well as their business reputation. If the project fails, lenders do not necessarily suffer, as long as the company owning the project remains financially viable.

Corporate finance is often used for shorter, less capital-intensive projects that do not warrant outside financing. The company borrows funds to construct a new facility and guarantees to repay the lenders from its available operating income and its base of assets. However private companies avoid this option, as it strains their balance sheets and capacity, and limits their potential participation in future projects. Project financing is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan.

In project finance a team or consortium of private firms establishes a new project company to build, own and operate a separate infrastructure proj ect. The new proj ect company to build own and operate a separate infrastructure project. The new project company is capitalized with equity contributions from each of the sponsors. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. The project is not reflected in the sponsors' balance sheets.

Extent of recourse

Recourse refers to the right to claim a refund from another party, which has handled a bill at an earlier stage. The extent of recourse refers to the range of reliance on sponsors and other project participants for enhancement to protect against certain projects risks. In project financing there is limited or no recourse. Non-recourse project finance is an arrangement under which investors and credit financing the project do not have any direct recourse to the sponsors.

In other words, the lender is not permitted to request repayment from the parent company if borrower fails to meet its payment obligation. Although creditors security will include the assets being financed, lenders rely on the operating cash flow generated from those assets for repayment.

When the project has assured cash flows in the form of a reliable off taker and wellallocated construction and operating risks, the lenders are comfortable with nonrecourse financing. Lenders prefer limited recourse when the project has significantly higher risks. Limited recourse project finance permits creditors and investors some recourse to the sponsors.

This frequently takes the form of a precompletion guarantee during a projects construction period, or other assurance of some form of support for the project. In most developing market projects and in other projects with significant construction risk, project finance is generally of the limited recourse type.

Merits and Demerits of project financing

Project financing is continuously 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 ot obtain tr5aditional financing or unwilling to take the risk and assume the debt obligation associated with traditional financing. Project financing permits the risk associated with such projects to be allocated among number of parties at levels acceptable to each party. The advantages of project financing are as follows:

1. 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 s[ 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 principle and interest payable on the loan. This safeguards the assets of sponsors. The risks of new projects remain separate from the existing business.

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

3. Off balance sheet treatment: depending upon the structure of project financing the project sponsors 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 convenient and restrictions related to the

board. Borrowings funds contain in other indentures and credit agreements to which the sponsor is a party.

4. Maximizes tax benefits: project finance is generally structured to maximize tax benefit and to assure that all available tax benefit are used by the sponsors or transferred to the extent possible to another party through a partnership, lease or vehicle.

5. Diversifies risk: by allocating the risk and financing need of the projects among a group of interested parties or sponsors, project financing makes it possible to undertake project that would be too large or would pose too great a risk for one party ion its own.

Demerits

1. Complexity of risk allocation: project financing is complex transaction involving many participants with diverse interest. If a project is to be successful risk must be allocated among the participants in an economically efficient way. However, there is necessary tension between the participants. For e.g between the lender and the sponsor regarding the degree of recourse, between the sponsor and contractor regarding the nature of guarantees., etc which may slow down the realization of the project.

2. Increase transaction cost: it involves higher transaction costs compared to other types of transactions, because it requires an expensive and timeconsuming due diligence conducted by the lenders lawyer, the independent engineers etc., since the documentation is usually complex and lengthy.

3. higher interest rates and fees: the interest rates and fees charged in project financing are higher than on direct loan made to the project sponsor since the lender takes on more risk.

4. lender supervision: in accordance with a higher risk taken in project financing the lender imposes a greater supervion on the mangement and operation of the project to make sure that the project success is not impaired. The degree of lender supervision will usually result into higher costs which will typically have to be borne by the sponsor.

Importance of project finance

Whether expanding manufacturing facilities, implementing new processing capabilities, or leveraging existing assets in new markets, innovative financing is often at the core of long-term projects to transform a company's operations. Akin to the underlying corporate transformation, the challenge with innovative financial structures such as project finance is that the investment is made up front while the anticipated benefits of the initiative are realized years later.

There has been a rise in number of companies that need innovative financing to satisfy their capital needs, in a significant number of instances they have viable goals but find that traditional lenders are unable to understand their initiatives. And so the need emerged for project finance.

Project financing is a specialized form of financing that may offer some cost advantages when very large amounts of capital are involved It can be tricky to structure, and is usually limited to projects where a good cash flow is anticipated. Project finance can be defined as: financing of an industrial (or infrastructure) project with myriad capital

needs, usually based on non-recourse or limited recourse structures, where project debt and equity (and potentially leases) used to finance the project are paid back from the cash flow generated by the project, with the project's assets, rights and interests held as collateral. In other words, it's an incredibly flexible and comprehensive financing solution that demands a long-term lending approach not typical in today's market place.

Whether expanding manufacturing facilities, implementing new processing capabilities, or leveraging existing assets in new markets, innovative financing is often at the core of long-term projects to transform a company's operations. Akin to the underlying corporate transformation, the challenge with innovative financial structures such as project finance is that the investment is made up front while the anticipated benefits of the initiative are realized years later.

Infrastructure is the backbone of any economy and the key to achieving rapid sustainable rate of economic development and competitive advantage. Realizing its importance governments commit substantial portions of their resources for development of the infrastructure sector. As more projects emerge getting them financed will continue to require a balance between equity and debt. With infrastructure stocks and bonds being traded in the markets around the world, the traditionalist face change. A country on the crest of change is India. Unlike many developing countries India has developed judicial framework of trust laws, company laws and contract laws necessary for proj ect finance to flourish.

Types of Project Finance

• Build operate transfer (BOT)

• Build own operate transfer (BOOT)

• Build own operate (BOO)

Build operate transfer

Build operate transfer is a project financing and operating approach that has found an application in recent years primarily in the area of infrastructure privatization in the developing countries. It enables direct private sector investment in large scale infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period. The public agency pays the contractor a fee, which may be a fixed sum, linked to output or, more likely, a combination of the two. The fee will cover the operators fixed and variable costs, including recovery of the capital invested by the contractor. In this case, ownership of the facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a public infrastructure project. The company then secures their own financing to construct the proj ect.

Operate - The private developer then operates, maintains, and manages the facility for a agreed concession period and recoups their investment through charges or tolls.

Transfer - After the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and operates and maintains it over a period, often as long as 20 or 30

years. This period is referred to as the "concession" period. In short, under a BOT structure, a government typically grants a concession to a project company under which the project company has the right to build and operate a facility. The project company borrows from the lending institutions in order to finance the construction of the facility. The loans are repaid from "tariffs" paid by the government under the off take agreement during the life of the concession. At the end of the concession period the facility is usually transferred back to the government.

Advantages

The Government gets the benefit of the private sector to mobilize finance and to use the best management skills in the construction, operation and maintenance of the project.

The private participation also ensures efficiency and quality by usmg the best equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency through performance-based contracts and output-oriented targets

The projects are conducted in a fully competitive bidding situation and are thus completed at the lowest possible cost.

The risks of the project are shared by the private sector

Disadvantages

There is a profit element in the equity portion of the financing, which is higher than the debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a BOT financing deal as it involves multiple entities and requires a relatively complicated legal and institutional framework. There the BOT may not be suitable for small projects

It may take time to develop the necessary institutional capacity to ensure that the full benefits of BOT are realized, such as development and enforcement of transparent and fair bidding and evaluation procedures and the resolution of potential disputes during implementation.

Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT provider) who designs, builds, funds, owns and operates the scheme for a defined period of time and then transfers this ownership across to a agreed party. BOOT projects are a way for governments to bundle together the design and construction, finance, operations and maintenance and potentially marketing and customer interface aspects of a project and let these as a package to a single private sector service provider. The asset is transferred back to the government after the concession period at little or no cost.

The Components of BOOT. B for build

The concession grants the promoter the right to design, construct, and finance the project. A construction contract will be required between the promoter and a contractor. The contract is often among the most difficult to negotiate in a BOOT project because of the conflict that increasingly arises between the promoter, the contractor responsible for building the facility and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the construction contract are reasonable and that the construction risk is placed as far as possible on the contractors. The contractor undertakes responsibility for constructing the asset and is expected to build the project on time, within budget and according to a clear specification and to warrant that the asset will perform its design function. Typically this is done by way of a lump-sum turnkey contract.

o for Own

The concession from the state provides concessionaire to own, or at least possess, the assets that are to be built and to operate them for a period of time: the life of the concession. The concession agreement between the state and the concessionaire will define the extent to which ownership, and its associated attributes of possession and control, of the assets lies with the concessionaire.

o for Operate

An operator assumes the responsibility for maintaining the facility's assets and the operating them on the basis that maximizes the profit or minimizes the cost on behalf of the concessionaire and, like the contractor undertaking construction and be a shareholder in the project company. The operator is s often an independent through the promoter company.

T for Transfer

This relates to a change in ownership of the assets that occurs at the end of the concession period, when the concession assets revert to the government grantor. The transfer may be at book value or no value and may occur earlier in the event of failure of concessionaire.

Stages of Boot Project Build

~ Design

~ Manage project implementation ~ Carry out procurement

~ Finance

~ Construct

Own

~ Hold in interest under concession

Operates

~ Mange and operate facility ~ Carry out maintenance

~ Deliver products/services

~ Receive payment for product! service

Transfer

~ Hand over project in operating condition at the end of concession period

Advantages

• The majority of construction and long term risk can be transferred onto the BOOT provider.

• The BOOT operator can claim depreciation on the facility constructed and depreciation being a tax-deductible expense shareholder returns are maximized.

• Using an output based purchasing model, the tender process will encourage maximum innovations allowing the most efficient designs to be explored for the scheme. This process may also be built into more traditional tendering processes.

• Accountability for the asset design, construction and service delivery is very high given that if the performance targets are not met, the operator stands to lose a portion of capital expenditure, capital profit, operating expenditure and operating profit.

• Boot operators are experienced with management and operation of infrastructure assets and bring these skills to scheme.

• Corporate structuring issues and costs are minimal within a BOOT model, as project funding, ownership and operation are the responsibility of the BOOT operator. These costs will however be built into the BOOT project pricing.

Disadvanta2es

• Boot is likely to result in higher cost of the product! service for the end user.

This is a result of the BOOT provider incurring the risks associated with 100 percnet financing of the scheme and the acceptance of the ongoing maintenance liabilities.

• Users may have a negative reaction to private sector involvement in the scheme, particularly if the private sector is an overseas owned company.

• Management and monitoring of the service level agreement with the BOOT operators can be time consuming and resource hungry. Procedures need to be in place to allow users to assess service performance and penalize the BOOT operator where necessary.

• A rigorous selection process is required when selecting a boot partner. Users need to be confident that the BOOT operator is financially secure and sufficiently committed to the market prior to considering their bid.

Build Own Operate

In BOO, the concessionaire constructs the facility and then operates it on behalf of the public agency. The initial operating period {over which the capital cost will be recovered} is defined. Legal title to the facility remains in the private sector, and there is no obligation for the public sector to purchase the facility or take title. The private sector partner owns the project outright and retains the operating revenue risk and all of the surplus operating revenue in perpetuity. As an alternative to transfer, a further operating contract {at a lower cost} may be negotiated.

Design Build Finance Operate (DBFO):

Under this approach, the responsibilities fro designing, building, financing and operating are bundled together and transferred to private sector partners. They are also often supplemented by public sector grants in the from of money or contributions in kind, such as right of way. In certain cases, private partners may be required to make equity investments as well. DBFO shifts a great deal of the responsibility for developing and operating to private sector partners, the public agency sponsoring a project would retain full ownership over the project.

Others:

-Build Transfer Operate (BTO)

The BTO model is similar to BOT model except that the transfer to the public owner takes place at the time that construction is completed, rather than at the end of the franchise period. The concessionary builds and transfers a facility to the owner but exclusively operates the facility on behalf of the owner by means of management

contract.

.Buy Build Operate (BBO)

A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing facility. The government sells the asset to the private sector entity, which then makes the improvements necessary to operate the facility in a profitable manner.

• Lease Own Operate (LOO)

This approach is similar to a BOO project but an existing asset is leased from the government for a specified time. the asset may require refurbishment or expansion .

• Build Lease Transfer (BLT)

The concessionaire builds a facility, lease out the operating portion of the contract, and on completion of the contract, returns the facility to the owner .

• Build Own Lease Transfer (BOLT)

BOLT is a financing scheme in which the asset is owned by the asset provider and is then leased to the public agency, during which the owner receives lease rentals. On completion of the contract the asset is transferred to the public agency.

• Build Lease Operate Transfer (BLOT)

The private sector designs finance and construct a new facility on public land under a

long term lease and operate the facility during the term of the lease. the private owner transfers the new facility to the public sector at the end of the lease term .

• Design Build (DB)

A DB is when the private partner provides both design and construction of a project to the public agency. This type of partnership can reduce time, save money, provide stronger guarantees and allocate additional project risk to the private sector. It also reduces conflict by having a single entity responsible to the public owner for the design and construction. The public sector partner owns the assets and has the responsibility for the operation and maintenance .

• Design Bid Build (DBB)

Design bid build is the traditional project delivery approach, which segregates design and construction responsibilities by awarding them to an independent private engineer and a separate private contractor. By doing so, design bid build separates the delivery process in to the three liner phases: Design, Bid and Construction. The public sector retains responsibility for financing, operating and maintaining infrastructure procured using the traditional design bid build approach .

• Design Build Maintain (DBM)

A DBM is similar to a DB except the maintenance of the facility for the some period of time becomes the responsibility of the private sector partner. The benefits are similar to the DB with maintenance risk being allocated to the private sector partner and the guarantee expanded to include maintenance. The public sector partner owns and operates the assets.

-Design Build Operate (DBO)

A single contract is awarded for the design, construction and operation of a capital improvement. Title to the facility remains with the public sector unless the project is a design\build\operate\transfer or design\build\own\operate project. The DBO method of contracting is contrary to the separated and sequential approach ordinarily used in the United States by both the public and private sectors. This method involves one contract for design with an architect or engineer, followed by a different contract with a builder for project construction, followed by the owner's taking over the project and operating it.

A simple design build approach credits a single point of responsibility for design and construction and can speed project completion by facilitating the overlap of the design and construction phases of the project. On a public project, the operations phase is normally handled by the public sector under a separate operations and maintenance agreement. Combining all three phases in to a DBO approach maintains the continuity of private sector involvement and can facilitate private sector financing of public projects supported by user fees generated during the operations phase.

-Lease Develop Operate (LDO) or Build Develop Operate (BDO)

Under these partnerships arrangements, the private party leases or buys an existing facility from a public agency invests its own capital to renovate modernize, and expand the facility, and then operates it under a contract with the public agency. A number of different types of municipal transit facilities have been leased and developed under LDO and BDO arrangements.

· ~Ezia:; 'State Bank 0' India

Project Finance Strategic Business Unit

A one-stop-shop of financial services for new projects as well as expansion, diversification and modernization of existing projects in infrastructure and non - infrastructure sectors

Since its inception in 1995 the Project Finance SBU has built-up a strong reputation for it's in-depth understanding of the infrastructure sector as well as non-infrastructure sector in India and they have the ability to provide tailor made financial solutions to meet the growing & diversified requirement for different levels of the project. The recent transactions undertaken by PF-SBU include a wide range of projects undertaken by the Indian Corporates. Wide branch network ensuring ease of disbursement.

Expertise

• Being India's largest bank and with the rich experience gained over generation, SBI brings considerable expertise in engineering financial packages that address complex financial requirements.

• Project Finance SBU is well equipped to provide a bouquet of structured financial solutions with the support of the largest Treasury in India (i.e. SBl's), International Division of SBI and SBI Capital Markets Limited.

• The global presence as also the well spread domestic branch network of SBI ensures that the delivery of your project specific financial needs are totally taken care of.

• Lead role in many projects

• Allied roles such as security agent, monitoringlTRA agent etc.

• Synergy with SBI caps (exchange ofleads, joint attempt in bidding for projects, joint syndication etc.). In a way, the two institutions are complimentary to each other.

• We have in house expertise (in appraising projects) in infrastructure sector as well as non-infrastructure sector. Some of the areas are as follows:

Infrastructure sector:

Infrastructure sector:

~ Road & urban infrastructure ~ Power and utilities

~ Oil & gas, other natural resources ~ Ports and airports

~ Telecommunications

Non-infrastructure sector:

~ Manufacturing: Cement, steel, mining, engineering, auto components, textiles, Pulp & papers, chemical & pharmaceuticals ...

~ Services: Tourism & hospitality, educational Institutions, health industry ...

Expertise

• Rupee term loan

• Foreign currency term loan/convertible bonds/GDRlADR

• Debt advisory service

• Loan syndication

• Loan underwriting

• Deferred payment guarantee

• Other customized products i.e. receivables securitization, etc.

Services offered

Single window solution

~ Appetite for large value loans.

~ Proven ability to arrange/syndicate loans. ~ Competitive pricing.

Professional team

~ Dedicated group with sector expertise ~ Panel of legal and technical experts.

Procedural ease

~ Standardized information requirements

~ Credit appraisal! delivery time period is minimized.

Eligibility

The infrastructure wing of PF SBU deals with projects wherein the project cost is more than Rs 100 Crores. The proposed share of SBI in the term loan is more than Rs.50 crores. In case of projects in Road sector alone, the cut off will be project cost ofRs.50 crores and SBI Term Loan Rs. 25 Crores, respectively.

The commercial wing ofPF SBU deals with projects wherein the minimum project cost is Rs. 200 crores (Rs. 100 crores in respect of Services sector). The minimum proposed term commitment is ofRs. 50 crores from SBI.

.,

\1/ICICI Bank

ICICI Bank is India's second-largest bank with total assets ofRs. 3,767.00 billion (US$ 96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalization.

The Bank has a network of about 955 branches and 3,687 ATMs in India and presence in 17 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Unites States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in Belgium.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

At ICICI Bank, they offer corporates a wide range of products and services, the technologies to leverage them anytime, anywhere and the expertise to customize them to client-specific requirements.

From cash management to corporate finance, from forex to acquisition financing, we provide you with end-to-end services for all your banking needs. The result is an overall financial solution for your company that helps you accomplish your objectives.

Corporate Services

• ICICI Bank can guide one through the universe of strategic alternatives - from identifying potential merger or acquisition targets to realigning your business' capital structure.

• ICICI Bank has been the foremost arrangers of acquisition finance for cross border transactions and is the preferred financer for acquisitions by Indian companies in overseas markets.

• The Bank has also developed Forex risk hedging products for clients after comprehensive research of the risks a corporate body is exposed to, e.g., Interest Rate, Forex, Commodity, Credit Risk, etc.

• They offer you global services through our correspondent banking relationship with 950 foreign banks and maintain a NOSTRO account in 19 currencies to service you better and have strong ties with our neighboring countries

• ICICI Bank is the leading collecting bankers to Public & Private Placement! Mutual Funds/ Capital Gains Bonds issues. Besides, we have products specially designed for the

They support international business by meeting working capital requirements of export and import financing. They also have a host of non-funded services for our clients • whatever the industry, size or financial requirements, ICICI Bank has the expertise and the solutions to partner all the way.

Transaction Banking

The Bank delivers world class banking services to financial sector clients. Their current roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed for customers convenience.

Our comprehensive collection and payment services span India's largest CMS network of over 4,500 branches. They provide correspondent banking tie-ups with foreign banks to assist them in their India-related businesses.

Loan Syndication

The FISG IS responsible for syndication of loans to corporate clients. They ensure the participation of banks and financial institution for the syndication of loans. Some of the products syndicated are

• Project Finance

• Corporate Term Loans

• Working Capital Loans

• Acquisition Finance, etc.

Sell Down

ICICI Bank is a market leader in the securitization and asset sell-down market. From its portfolio, the FISG offers different products to its clients in this segment. The products are:

• Asset-Backed Securities (ABS).

• Mortgage-Backed Securities (MBS).

• Corporate Loan Sell-down.

• Direct Loan Assignment.

Buyouts

As a part of a risk-diversification and portfolio-churning strategy, ICICI Bank offers buyouts of the assets of its financial sector clients.

Resources

The Bank also raises resources, from clients, for internal use by issuing a gamut of products, which run from Certificates of Deposit (CDs) to Term deposits to Term Loans.

· B'-d'al' Aao Soche1n -·a'~.,·-,

~ lOBI BANK

l:ndu~ Devehcpmef1t IBtmk 01 rndla Limited

IDBI was set up under an Act of Parliament as a wholly-owned subsidiary of Reserve Bank ofIndia in July 1964. In February 1976, the ownership ofIDBI was transferred to Government of India.

In January 1992, IDBI accessed domestic retail debt market for the first time with innovative Deep Discount Bonds and registered path-breaking success. In December 1993, IDBI set up IDBI Capital Market Services Ltd. as a wholly-owned subsidiary to offer a broad range of financial services, including Bond Trading, Equity Broking, Client Asset Management and Depository Services.

In September 1994, in response to RBI's policy of opening up domestic banking sector to private participation, IDBI in association with SIDBI set up IDBI Bank Ltd. Today, IDBI Bank has a network of 161 branches, 369 ATMs, and 8 Extension Counters spread over 95 cities.

It provides an array of services like:

Personal banking

~ Deposits ~ Loans

~ Payments ~ Insurance

~ Cards
~ 24 hours banking
~ Institutional banking
~ Other products
~ Preferred banking
~ NRI Services Corporate banking
~ Project Finance
~ Infrastructure finance
~ Advisory
~ Carbon credits Business
~ Working Capital
~ Cash Management Service
~ Trade Finance
~ Tax Payments
~ Derivates SME Finance

IDBI has been actively engaged in providing a major thrust to financing of SMEs. With a view to improving the credit delivery mechanism and shorten the Turn Around Time (TAT), IDBI has set up Centralized Loan Processing Cells (CLPCs) at major centers across the country. To strengthen the credit delivery process, the CART (Credit Appraisal & Rating Tool) Module developed by Small Industries Development Bank of India (SIDBI), which combines both rating and appraisal mechanism for loan proposals, was adopted by IDBI for faster processing of loan proposals. Recently, a number of products have been rolled out for the SME sector, which considerably expanded IDBI's offerings to its customers. Also, the German Technical Co-operation

and IDBI entered into an understanding for strengthening the growth and competitiveness of SMEs by providing better access to demand-oriented business development and financial services.

Agri Business

Agriculture continues to be the largest and the most dominant sector in India, contributing 22 % to the country's GDP. It provides a source of employment and livelihood to over 60 % of the population. Its linkages with industry are growing with increasing stress on food and agri processing industry on account of changing demand patterns for processed food by consumers. With this background Corporate India has started finding new opportunities in Agriculture.

The emergence of modem economic system has institutionalized agriculture sector on business models. Agribusiness is a broad term that encompasses a number of businesses in agriculture including food production, farming, agrochemicals, farm machinery, warehousing, wholesale and distribution, and processing, marketing and sale of food products.

The bank has launched several products catering to the rural and agri community.

Project Finance Scheme

Under the Project Finance scheme IDBI provides finance to the corp orates for projects. The Bank provides project finance in both rupee and foreign currencies for Greenfield projects as also for expansion, diversification and modernization. IDBI follows the Global Best Practices in project appraisal and monitoring and has a welldiversified industry portfolio. IDBI has signed a Memorandum of Understanding (MoU) with LIC in December 2006 for undertaking joint and take-out financing of long-gestation projects, including infrastructure projects

It has been a long and eventful journey of almost a century across 24 countries. Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre in Mumbai is a saga of vision, enterprise, financial prudence and corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in private capital, princely patronage and state ownership. It is a story of ordinary bankers and their extraordinary contribution in the ascent of Bank of Baroda to the formidable heights of corporate glory. It is a story that needs to be shared with all those millions of people - customers, stakeholders, employees & the public at large - who in ample measure, have contributed to the making of an institution.

Personal Banking Services

Bank of Baroda believes in the strength and integrity of relationships built with its customers like you. With over 90 years of experience in the banking industry and a wide network of over 2700 branches all over the country, we have always been active in extending financial support and adapting to your changing needs.

Their Deposit Products, Retail Loans, Credit Cards and Debit Cards help you with your growing financial needs. With facilities like Lockers we ensure that your valuables are safe with us.

Their countrywide branches offer you convenience and ease in operating your account wherever you are. Their 24-hour ATMs enable you to withdraw cash, check your account balance and request for a new chequebook even after banking hours.

Baroda Internet Banking / Baroda Mobile Banking, their latest Internet and Mobile banking initiatives enable you to operate your account just as you would in any of our branches. You can through the Internet check your balance, request for chequebooks and print account details.

Choose from other various products and services, that they sincerely feel will put a smile on your face; an investment we would like to bank on forever.

Business Operations

The small and medium business enterprise is one of the fastest growing sectors in the country. Bank of Baroda offers various products and services that meet the specific requirements of such enterprises and help them grow.

In addition to tailor-made products, you can depend on the strength of other nationwide network and facilities that will enable you to conduct your business smoothly, without geographical constraints.

Be it Deposits, Loans & Advances, Collection Services, Working Capital Finance, Term Finance, Non-Fund based Facilities, Trade Finance, Merchant Banking or other such aspects of banking, they have a solution to help your business run smoothly and efficiently.

Corporate Banking Services

As corporations grow they feel the need to expand and invest in new infrastructure. External finance is one of the most important sources for funding expansion plans.

With services ranging from Working Capital Finance, Short Term Corporate Loans, Project Finance to Cash Management and Merchant Banking, Bank of Baroda Corporate Banking offers various options that help fund and enable corporations in their investment and expansion plans. These products also offer merchant banking and cash management solutions.

Their global presence, large-scale operability, highly networked systems and local market penetration allow our customers to reap financial benefits to the maximum.

Loans & Advances

For immediate financial need in times, Bank of Baroda has a host of loan options for a corporate to choose from. These enable smooth functioning without monitory hassles.

Project Finance

Bank of Baroda provides its customers with the option of a loan to take care of the needs of an ongoing project, whether it is in Indian or foreign currency. This facility is available for project finance and also for project exports.

International Operations

Bank of Baroda started its overseas journey by opening its first branch way back in 1953 in Mombassa, Kenya. Since then the Bank has come a long way in expanding its international network to serve NRIslPIOs and locals. Today it has transformed into India's International Bank.

It has significant international presence with a network of 70 offices in 24 countries including 45 branches of the Bank, 21 branches of its eight Subsidiaries and four Representative Offices in Malaysia, China, Thailand, & Australia. The Bank also has one Joint Venture in Zambia with 9 branches.

The Bank has presence in world's major financial centers i.e. New York, London, Dubai, Hong Kong, Brussels and Singapore.

The "round the clock around the globe", Bank of Baroda is further in the process of identifying/opening more overseas centers for increasing its global presence to serve its 29 million global customers in still better way.

The Bank has recently upgraded its operations in Hong Kong on 2nd April 2007 and now offers full banking service through its two branches at Central and Tsim Sha Tsui. It would also be upgrading its operations to full banking service in China and through N in Malaysia shortly.

It is also in process of establishing offices in Canada, New Zealand, Qatar, Bahrain, Saudi Arabia, Mozambique, Russia etc. Besides this, it has plans to extend its reach in existing countries of operations in US and UAB.

Treasury operations

In the changing economic environment of the country in particular and the globe in general, Bank of Baroda was the premier public sector bank in India to set up a Specialized Integrated Treasury Branch (SITB) in Mumbai and the integrated approach initiated by the Bank in its treasury operations is now being emulated by other peer banks.

Bank of Baroda has consciously adopted a focused approach towards improving efficiency and profitability by successfully integrating the operations of different

financial markets, VIZ. Domestic Money, Investments, Foreign Exchange and Derivatives and has made its mark as an important player in the market-place.

The SITB at Mumbai, equipped with the State-of-the-art technology, with modem communication facilities, handles all types of financial transactions, both for managing its resources and deployments and effective compliance of regulatory requirements.

Rural Operations

Rural India contributes a major chunk to the economy every year. To give this sector a stronghold on finance and to enable economic independence, Bank of Baroda has special offerings that extend credit facilities to small and marginal farmers, agricultural labourers and cottage industry entrepreneurs.

With the objective of developing rural economy through promotion of agriculture, trade, commerce, industry and extending credit facilities particularly to small and marginal farmers, agricultural labourers and small entrepreneurs, Bank of Baroda, over the years, has reached out to larger part of rural India. They extend loans for agricultural activities and a host of services for farmers well tuned to the rural market, and aim to make a Self Reliant Rural India.

AXIS, BANK

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. and other four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent ofRs. 357.48 crore with the public holding (other than promoters) at 57.03%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. Presently, the Bank has a very wide network of more than 608 branch offices and Extension Counters. The Bank has a network of over 2595 ATMs providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country.

The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. It provides an array of services like Personal Banking, Corporate Services, NRI services and Priority Banking.

In personal Banking it offers different accounts like EasyAccess Account Senior Citizen's Account Prime Savings Account Women's Account Salary Power etc .. It also offers deposits services like Fixed Deposit, Recurring Deposit, and Tax Saving Fixed Deposits. It provides an array of loan services like Home Loan, Car Loan, Personal Loan, Study Loan, Mortgage etc.

In Corporate Services it offers the option of different accounts like Normal Current Account Business Advantage Account Current Account for Govt. Organizations Business Classic Account Current Account for Banks Business Privilege Account TrustJNGO Savings Account, further it also offers Credit Facility like Structured Finance, Microfinance Commodity Power, Microfinance project Finance. It also offers Capital Market Services in the form of Debt Solutions Advisory Services Private Equity, Mergers & Acquisitions Capital Market Funding Trusteeship Services eDepository Services

It also provides Cash Management Services as in today's competitive market place, effectively managing cash flow can make the difference between success and failure. Axis Bank offers a wide range of collection and payment services to meet your complex cash management needs. Payments received from your buyers and made to your suppliers are efficiently processed to optimize your cash flow position and to ensure the effective management of your business' operating funds.

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalized banks.

The Bank has 2644 branches in India spread over all statesl union territories including 93 specialized branches. These branches are controlled through 48 Zonal Offices There are 24 branchesl offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997. Total number of shareholders as on 30/09/2006 is 2, 25,704.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modem infrastructure. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989.

The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 23 branches (including three representative office) at key banking and financial centres viz. London, Newyork,Paris,Tokyo,Hong-Kong,and Singapore. The international business accounts for around 20.10% of Bank's total business.

Apart from personal banking services it offers different products like Insurance Products:

~ Tie-up for Life Insurance: ICICI Prudential Life Insurance Co Ltd.

~ Tie-up for General Insurance ( Non-life) National Insurance Co Ltd. (NICL)

~ Mutual Funds Products:

It also offers credit facility like Personal Loan, Bullion Banking, Kisan Credit Card, Agriculture Loan, Bill Finance, Bank Guarantee, export Finance, Interest Rates, Channel Credit etc. It also offers deposit services like Safe Deposit Vaults, fixed Deposits, Term Deposits, Tax Saving Deposits etc. It also offers corporate services like Bonds, Loans, and Project Finance Etc.

NBFC - The Future

OVER the last decade or so, the Reserve Bank of India has been blowing hot and cold about non-banking finance companies (NBFCs). The RBI reacted to a series of defaults and misdemeanors by a few NBFCs, restricting their ability to take public deposits.

This unfortunately led to a collapse of many NBFCs which depended on a continuous inflow of deposits to meet redemption obligations. Subsequently, there seems to have been a better realization of the role of NBFCs in financing the small-scale industry, particularly the transport sector.

The RBI in its latest monetary policy statement has cautioned that NBFCs should be encouraged to exit from public deposits, in essence saying NBFCs should not take public deposits. This is, indeed, extraordinary. The reasons given are that nowhere in the world are private financial institutions allowed to accept public deposits.

The fact is that non-bank finance institutions are active in other economies. They accept deposits in developed countries as well as in some developing countries, like Malaysia. The existence of thrift societies in the US and housing societies in the UK is wellknown.

Thrift and savings associations are almost omnipresent in the US. Credit unions of employees are, in effect, self-help groups, present in every organization. So are housing societies in the UK. They perform a useful role in garnering public savings and extending credit to those in need. The same is the situation with non-bank finance companies in Malaysia.

The position in the US is that as against deposits of $4,391 billion held by commercial banks, thrift institutions and finance companies hold $1,247 billion. These non-banks as a whole hold 28.4 per cent of the deposits of banks. In India, however, public deposits ofNBFCs are only 0.003 per cent of banks in India.

Non-bank finance institutions in the US are even covered by deposit insurance even as they are subject to supervision by a special office of thrift supervision. These institutions handle a substantial channel of local savings and transfer them as loans to deserving borrowers, besides small and medium-scale industries, as well as housing needs. These institutions are also liberally allowed to access the capital market, where banks subscribe to bonds issued by them.

The situation in UK is broadly similar. Building Societies in the UK have a big share of business compared to their analogues in India, which hold deposits amounting to 18 per cent of total retail deposit balances.

They also are entitled to receive compensation from the Financial Services Compensation Scheme in the event of failure in the business of deposit-taking, among others. In Malaysia, non-bank finance companies' deposits as a percentage of bank deposits amount to 21 per cent. It is, therefore, wrong to argue that non-bank finance companies cannot access public deposits in other countries.

Again, the new-fangled notion of Grameen banks and self-help groups is nothing but thrift societies in another form. Traditionally in India, chit funds have performed the role of collecting deposits from savers and lending money to those who are in need. Constrained as they are by numerous restrictions, they still perform a signal service in funding small and medium business, trade and transport

The fact is that NBFCs in India have played a useful role in financing various sectors of the economy, particularly those that have been underserved by the banks. No business flourishes unless there is a need for it and it fulfils the need efficiently.

The success of NBFCs bears testimony to its role. Anywhere in India, the small entrepreneur goes first to an NBFC for funds even before he approaches banks in view of the former's easy access, freedom from red-tape and quick response. The large

expansion of the consumer durable business in India in the last few years would not have taken place ifNBFCs had not entered the trade.

Similarly, housing activity has also been encouraged by NBFCs. The role of NBFCs in funding transport activities is well-known. Latterly, some NBFCs have been active in funding infrastructure quite successfully using the securitization of obligations.

NBFCs in India have played a useful role in financing various sectors of the economy, particularly those that have been underserved by the banks. The tendency of regulators to deny access to these institutions to public deposit is a confession of inability to see the economic reality, which calls for a flexible and customer-friendly financial intermediary, which is what NBFCs and chit funds are.

The tendency of regulators to deny access to these institutions to public deposit is a confession of inability to see the economic reality, which calls for a flexible and customer-friendly financial intermediary, which is what NBFCs and chit funds are.

In fact, many banks are forming NBFCs to take advantage of their greater flexibility in dealing with customers. The fact that some NBFCs were found abusing their position in the 1990s seems to have scared the regulator out of its wits. The answer lay in better regulation, supervision and prudential norms.

The RBI has now strengthened its machinery of registration and supervision and extended prudential norms to NBFCs. Denying access to deposits would seem a case of throwing the baby out with the bathwater. On the contrary, the RBI should apply its mind to strengthening the functioning of NBFCs, if necessary, facilitating better access to the capital market.

It is, however, interesting to note that the RBI is thinking of using in some form an instrumentality like the NBFC to extend its credit reach. Observations in recent RBI reports show that the central bank would prefer to use micro finance credit agencies dedicated to serving SME clusters.

The RBI's Report on Trend and Progress of Banking in India 2004 mentions that "banks should extend wholesale financial assistance to non-governmental organizations/micro finance intermediaries and work as innovative models for securitisation of MFIs' receivable portfolios. Such micro-credit institutions can take the form of NBFCs funded by individuals or a group of banks, but not permitted to take public deposits".

A strange requirement, indeed, of exclusion from public deposits! The recommendation of setting up an institution in the form of NBFC is significant, although excluding such institutions from deposit-taking is not correct.

NBFCs have, indeed, served a useful purpose as instruments for extending outreach of credit in the Indian countryside. To ignore them but recreate them in the form of micro finance institutions or NGOs of the same kind is being ritualistic.

After all, let us recognise that NBFCs have a set of characteristics that have made them an effective form of financial intermediation. It is these characteristics that the RBI wants to incorporate in its version of micro finance groups. The path of wisdom is to incorporate NBFCs as such into India's financial structure rather than reinventing them in another form.

There are, of course, some persistent problems for NBFCs, apart from deposit-taking. These relate to flexible handling of their capital issues. Both SEBI and the RBI need to revisit their case for relaxations with sympathy, especially since they are rated and supervised. These specific relaxations are more a matter of confidence-building. The requests made by NBFCs deserve sympathetic treatment by both the securities market regulator and the central bank.

In short, NBFCs are vitally needed to give the Indian economy a much-needed boost by enabling easier access to credit. As it is, public and private sector banks are finding it difficult to extend their reach for various reasons. It behooves the RBI and the Government to look at the problems faced by NBFCs with sympathy rather than with a recollection of the past follies of a few institutions.

The time has come for the RBI to "make" peace with NBFCs as a class. They are proven instruments of efficient and customer-friendly outreach in the credit space - not only for consumer durables, but also housing and transport, besides infrastructure.

These are also critical areas in which the Government is vitally interested as part of boosting economic growth. I hope the regulators will not forget that their role is not only to regulate but to spur the growth of the economy. The NBFCs' request to be allowed to continue to accept public deposits deserves to be nurtured, not restricted.

Over the years, in its developmental role, the RBI has been attempting to expand credit by exhortation. But public sector banks have proved that even with their best efforts they are able to reach only a limited extent of credit expansion.

The experiment of Regional Rural Banks, Urban Cooperative Banks and Kisan Credit Cards has also been a mixture of success and failure. It is in this background that the proven successful record of credit growth, exemplified by the NBFCs, deserves to be replicated at least in respect of their better features by the banking system.

Commercial banks by their very nature cannot take on all the features of NBFCs, but they can collaborate with NBFCs by extending credit and participation in the securitisation.

While the flow of bank finance will help, it will be more important to remember that NBFCs started by accessing public deposits. These can be an additional window for savings. All this would of course require a change of mindset on the part of both our regulators and policy-makers.

The government is planning to treat mortgage guarantee Companies as non-banking finance Companies (NBFCs). This would enable foreign firms to set up wholly owned subsidiaries in India as there is no foreign direct investment (FDI) cap for NBFCs. The rules governing this are expected to be unveiled soon, according to sources.

The finance ministry favoured the inclusion of mortgage guarantee Companies in the relatively relaxed NBFC norms rather than the stricter insurance sector guidelines.

The move would help overseas Companies like Genworth Financial, PMI Group, Mortgage Guaranty Insurance Corporation and Radian set up wholly owned mortgage guarantee subsidiaries in India. It will also allow joint ventures such as India Mortgage Guarantee Company Ltd and ICICI Lombard General Insurance start local operations.

Though mortgage guarantee Companies usually fall under the non-life insurance sector overseas, in India they want to be governed by rules similar to NBFCs, an industry insider said requesting anonymity. This is because only 26% FDI is allowed in the insurance sector.

Commercial Banks and non-banking finance companies are not subject to uniform regulation although for both the principal regulator is the Reserve Bank of India.

The dichotomy has many practical implications. While the two undertake many common functions, there are also certain spheres in which they do not compete. For instance, certain typical NBFC activities such as hire purchase and leasing, IPO funding, small ticket loans and venture capital are financial services that mainline banks in India have traditionally kept away from or placed much less emphasis.

On their part, banks alone provide working capital by way of cash credits and mobilize demand deposits (savings bank and current accounts).

As a category, NBFCs are heterogeneous in their ownership patterns (such as foreign or domestic) and in the nature of activities undertaken. Hence regulation impacts unevenly even within this broad category. Hence there is no level playing field not only between banks and NBFCs but among NBFCs themselves.

Banks, by definition, are the most regulated, being subject to prudential norms, capital adequacy stipulations, CRR/SLR requirements, priority sector lending limits and so on.

While deposit taking NBFCs have been brought under regulation, non-deposit taking companies (NBFC- NDs) are, for all practical purposes, still out of it. "Even in the former case, regulation is less rigorous than for banks. This gives NBFCs as a category and the minimally regulated non-deposit taking ones among them in particular an opportunity to exploit the "regulatory arbitrage."

An outstanding example is the enormous capacity of NBFC-NDs to leverage their balance sheets to raise funds. There is practically no regulation to constrain them. As pointed out, only deposit taking NBFCs have been brought under regulation and even they have fewer norms than banks.

Banks and NBFCs complement as well as compete with one another. This should on the whole lead to a widening of the financial sector and benefit the customer. For instance, ownership of an NBFC by a bank gives the former a status and an assurance that its well-regulated owner will ensure its solvency.

At the same time the relatively easy regulatory norms have made it easier to set up NBFCs. (Many foreign banks have used the NBFC route to expand or even enter India). Naturally the cost of conducting similar businesses should be lower with NBFCs.

In 2006 the RBI laid down a number of guidelines to fine-tune the existing financial linkages between banks and NBFCs, the objective being to protect the interests of bank depositors.

In the normal course, NBFCs are more advantageously placed than banks. Likewise there are norms covering the structural linkages between the two. However, there are still several grey areas. The RBI identified the following key principles that should guide a revised framework for NBFCs.

(1) While as a rule any financial service provider should be regulated, as a first step all "systemically relevant entities" should be covered. What is systemically relevant will be covered from time to time.

(2) To avoid regulatory arbitrage, regulation and supervision should be centered on activities and not be institution centric, as it is now.

(3) New norms should be made applicable to NBFCs that are less regulated now, the objective being to enhance their governance.

(4) Ownership of an NBFC should not be the criterion for deciding on the products it offers.

(5) Foreign entities now gain a foothold in the Indian financial sector by investing in an NBFC through the automatic route available for FDI. Certain checks and balances must be prescribed to monitor their movements into other fields without undergoing an authorisation process.

(6) Banks should not use an NBFC as a vehicle for creating arbitrage opportunities. Under no circumstances should the NBFC route be used for undermining existing regulations.

Some of these have been put into practice already. For now, all NBFC-NDs with an asset size ofRs. 100 crore and more will be considered systemically important.

They cannot raise borrowings more than ten times their net owned funds. These will have to follow new capital adequacy norms. Other restrictions such as those laid down under group exposure limits will have to be complied with.

Among the other new guidelines, the one that has received wide publicity relates to ownership and governance ofNBFCs.

The RBI has laid down that banks including foreign banks operating in India shall not hold more than 10 per cent of the paid up capital of a deposit taking NBFC. Housing finance companies have been excluded from this stipulation.

Some of these new regulatory norms have had a far-reaching impact on the NBFCs.

Procedural aspects of project financing in banks as well as NBFCs

Development operations financed by follow a procedure cycle, which is almost identical for all kinds of projects whose technical, economic, and financial feasibility has been established. These projects must have a reasonable economic rate of return and should be intended to promote development in the beneficiary country. The procedure consists of the following

1) Identification of the project:

The project's idea is introduced to providers by various sources: a request from the government concerned or financials identification missions may identify a proposal from other financiers, or it. Applications for financing are then sorted out and classified: projects to be financed are selected from amongst projects which have top priority in the development plans of the beneficiary countries and which meet the requirements established by the rules for financing set out by the providers and agreed upon by the government concerned. In all cases, an official request from the government should be submitted to financials before it decides to participate in the financing.

2) Desk review and determination of the project's scope:

Experts, each in his field of specialization, study all the documents available on the project and examine its components, its estimated local and foreign costs, the preliminary financing plan, the position of the other sources of financing, the current economic situation and the development policy of the beneficiary country and, generally, review all elements which may help in making the project a success.

3) Preliminary approval:

The findings of the project's review are set out in a report prepared by financials experts and submitted to Board of Directors for preliminary approval for undertaking further studies on the said project with the intention of considering the possibility of organization's participation in its financing.

4) Project appraisal and submission to the Board:

After the project has been granted preliminary approval, organizations usually dispatches an appraisal mission to the project's site. The appraisal stage is considered to be one of the key stages of the procedure in this stage the project's objectives, components, cost, financing plan, justification and all its economic, technical and legal aspects are determined. The project's implementation schedule, the methods of procurement of goods and services, the economic and financial analysis and the implementing and operating agencies are also examined at this stage. Based on the results of the appraisal mission, an appraisal report is prepared, as well as a Director General's report which is submitted to the Board of Directors for final approvaL

5) Consultations with other co financiers:

Consultations are considered to be one of the important stages in the procedure. It is during this stage that agreement is reached regarding the financing plan, the type of financing, and distribution of the components of the project so as to ensure the smooth flow of disbursements during execution of the various components of the project. This coordination should continue throughout the project implementation period to ensure the fulfillment of its objectives.

6) Negotiations and signature of the loan agreement:

After the beneficiary government is informed of the Board of Directors' decision to extend the loan according to the terms agreed upon during the appraisal of the project, the loan agreement is prepared and negotiated, and eventually signed with the government concerned.

7) Declaration of effectiveness of the loan agreement:

A loan agreement is declared effective after continuous contacts with the government concerned and the other co-financiers and after fulfillment of all conditions precedent to effectiveness stipulated in the loan agreement.

8) Project implementation and disbursement from the loan:

After the declaration of effectiveness of the loan agreement, the project's implementation and, consequently, the disbursements from the loan funds start according to the plan agreed upon during the appraisal process and in line with the rules and provisions of the loan agreement signed between the two parties.

9) Supervision and follow-up:

Financials undertakes the follow-up of the project's implementation through its field missions sent to the project's site or through the periodic reports which it requires the beneficiary country to provide on a quarterly basis. These reports enable them to advise the government concerned on the best ways to implement the project.

10) Current status reports:

Whenever necessary, experts prepare status reports which include the most recent information and developments on the project's implementation. These reports are submitted to the Board of Directors for information and approval of any possible amendments, which may be required for implementation. This is done in coordination and agreement with the government concerned and the other co- financiers.

11) Project completion report:

This report is prepared at the project's site and in the office as well, after completion of the project. This report enables organizations to make use of the experience gained from the completed project, when implementing similar projects in future. In addition, it may help in identifying a new project in the same sector.

Risk involved in project financing

Each of these risks, along with their possible mitigates, is discussed in the following sections.

~ Completion Risk

Completion risk refers to the inability of a project to commence commercial operations on time and within the stated cost. Given that project financiers are often reluctant to underwrite the completion risk associated with a project, project structures usually incorporate recourse to the sponsors during the construction stage. However, this link gets severed once the project starts generating its own cash flows. Hence, during the construction period, risk perception is significantly influenced by the credit worthiness and track record of the sponsors and their ability and willingness to support the project via contingent equity/subordinated debt for funding cost and time over-runs, if any.

The risks are also dependent on the complexity of construction, as greater the complexity (for instance, in the case of a petrochemical facility), higher the risks arising on this count. In addition, for projects with strong vertical linkages, the non-availability of upstream and downstream infrastructure is an important source of completion risk.

Typical examples of such projects would be liquefied natural gas (LNG), natural gas, and toll road projects. In certain types of projects, such as ports and roads, project completion is also a function of the permitting risks associated with obtaining the necessary Rights of Way (ROW), environmental clearances and Government approvals.

Completion risks are usually mitigated through strong fixed price; date certain, turnkey contracts with credit-worthy contractors, along with the provision of adequate liquidated damages for delays in construction, which need to be seen in relation to debt service commitments.

While assessing completion risk, adequate attention is also paid to the experience of the engineering, procurement & construction (EPe) contractor and its track record in constructing similar projects, on time and within the cost budgets. Further, it looks at the reasonableness of the time available for project completion, and an aggressive schedule for project completion, which does not provide for adequate contingency provisions, is often viewed negatively.

~ Funding and Financing Risks

A project company's financial structure and its ability to tie up the requisite finances are the focus of analysis here. The financing structure is usually reviewed for the capital structure of a project, which is evaluated to assess whether the debt-equity ratio is in line with the underlying business risks and that of other projects of similar size and complexity.

The protections provided to bondholders such as minimum coverage ratios that must be met before shareholder distributions are made, and the availability of substantial debt reserves to meet unforeseen circumstances. The matching of project cash flows (under various sensitivity scenarios) with the debt service payouts and the potential for cash flow mismatches.

The pricing structure adopted for debt and the exposure of the debt to interest rate and currency risks. Such risks are particularly significant where the project raises variable rate debt or liabilities in a currency other than the one in which its revenues would be denominated. The presence of an experienced trustee to control cash flows and monitor proj ect performance on behalf of the bondholders.

Limitations on the ability of the project company to take on new debt. The average cost of debt, given that the cost of financing is increasingly becoming a key determinant of project viability, in view of the fact that differences in technical and operating abilities have virtually become indistinguishable among front-runners.

Usually, most projects have a high leverage, and while equity is arranged privately from sponsors, the project would be dependent on financial institutions and banks for arranging the debt component. In assessing the funding risk, the extent to which the funding is already in place and the likelihood of the balance funding being available in time is considered, so that the project's progress is not delayed.

> Operating and Technology Risks

Operating and technology risks refer to a project's inability to function at the desired production levels and within the design parameters on a sustainable basis. Such risks usually arise in projects using complex technology (power plants or refinery projects, for instance); for projects in the roads, ports, and airport sectors, such risks are usually of a lower order. Technology risk usually arises because of the newness of technology or the possibility of its obsolescence, most often seen in telecom projects.

Where technology is well established, the focus of analysis is usually on determining its reliability and the sustainability of the technology platform over the tenure of debt. The Independent Engineer's Report (IER) is used to review and assesses whether the engineer's findings support the views of the sponsors and the EPC contractor .. Technology risks, where imminent, are usually mitigated through performance guarantees/warranties from the manufacturer, contractor or operator, and the availability of adequate debt reserves to allow for operating disruptions.

The sponsors would conduct a due diligence to establish the credit-worthiness of the technology suppliers/operators and the ability of these participants to compensate the project for failure of the technology adopted. The risks associated with disruptions in

operations due to mechanical failure of equipment are usually mitigated through Operations and Maintenance (O&M) contracts.

Here again, sponsors evaluates the quality/experience of the O&M contractor, the familiarity of the O&M contractor with the technology being used, and the adequacy of the performance guarantees from the O&M contractor.

~ Market Risks

Market risks usually anse because of insufficient demand for products/services, changing industry structures, or pricing volatility (for input and also output). Given the long-term nature of project financing, a considerable source of market risk is the possibility of dramatic changes in demand patterns for the product, either because of product obsolescence or sudden and large capacity creations, which could severely affect the economics of the project under consideration.

For analytical convenience, one can group projects into two categories: one, which produces commodities (e.g. LNG projects, refinery projects, and power projects), and two, where certain natural monopolies exist (e.g. roads, ports, airports, power or gas transmission projects). While the first category of projects is exposed to most of the risks identified above, the market risks for the latter type of projects are more demand related, with the pricing usually being subject to regulatory or political controls.

Until recently, the implementation of some of these "commodity" projects, such as power and LNG projects, in the international markets was supported by long-term offtake contracts, which provided considerable comfort to project financiers. However, with the development of a spot market for these commodities, customers of such projects are not willing to commit themselves to such long-term contracts; this has considerably increased the market risks associated with such projects.

Under the circumstances, cost competitiveness and the nature (regional or global) and adequacy of demand have emerged as critical determinants of a project's long-term viability.

For instance, even III India, despite power projects being backed by off-take commitments and adequate payment security mechanisms, there are numerous instances where cost competitiveness has emerged as the principal mitigant against the rather well documented market risks associated with India's power sector. Thus the point of focus, while assessing market risks for projects producing a commodity, is usually the cost structure of a project, which is a function of the capital costs incurred to set it up, the input costs and also the costs required to operate and maintain the asset.

One usually benchmarks the capital cost of a project with those of recently commissioned facilities across the world to ascertain the global cost competitiveness of the project; this is a key determinant of the project's long-term economic viability. On the input side, ICRA looks at issues related to certainty of supply, ability of the supplier to meet contractual commitments over the life of the project, the pricing structure of such supplies, and the ability of the project to pass on variations in input costs.

In situations where the primary input is scarce or is not actively traded, one attempts to evaluate the cost implications for replenishing shortfalls in supply and the availability of liquidated damages in the supply contracts for compensating the project for such costs. For the second category of projects, the primary focus is on evaluating the adequacy of existing demand, the potential for growth in demand and the possibility of alternative assets being created, which could undermine demand for the project being financed.

Assessing demand patterns for such projects, particularly road projects, is often a daunting task since in most cases, the demand is highly price elastic and a function of the pattern of socioeconomic development in the service area of the road.

One refers to "independently" conducted traffic/demand studies by reputed agencies to establish the veracity of the demand estimations prepared by the project sponsors.

~ Counter-party Risks

As discussed earlier, a project involves a number of counter-parties who are bound to it by the contractual structure. Therefore, an evaluation of the strength and reliability of such participants assumes considerable importance in ascertaining the credit strength of the project. Counter-parties to projects usually include feedstock/raw material suppliers, principal off takers, and EPC contractors.

Even a sponsor could become a source of counter-party risk, as it needs to provide equity during the construction stage. Because projects have inherently complex structures, a counter-party's failure can put a project's viability at risk. The counterparty risks are usually addressed through performance guarantees, letters of credit and payment security mechanisms (such as escrows), most commonly seen in the case of power projects.

However, it has been observed that such contractual risk mitigants, however strong, may not be effective in insulating a project from this risk, unless the project is fundamentally cost competitive and makes commercial sense for all the project participants.

~ Regulatory and Political Risks

Political and regulatory risks continue to play an important role in the development of the project finance business in India. Most project financing transactions carry an element of political risk by virtue of the fact that they are often related to capitalintensive infrastructure development and the resultant goods/services are consumed by the masses, directly or indirectly.

Political and regulatory risks could manifest themselves in vanous forms, and significantly impact the economics of the project under evaluation. For instance, such risks may take the form of: Lack of transparency and predictability in the functioning of the regulatory commissions which are typically involved in granting licences, specifying the terms and conditions for use of infrastructure on a "common carrier" basis and fixing tariffs.

For instance, some of the stand-alone LNG projects being set up in the country require a change in regulatory policy for allowing them to use the available gas evacuation infrastructure on a common carrier basis. Resistance to increases in user charges for common utilities such as water charges, toll tax rates, and energy charges, despite such tariff increases being envisioned in the project documents. Changes in environmental norms, which could impact power plants and refinery projects by requiring them to invest substantially in meeting such norms.

Problems in acquisition of land, which are typical in the case of road projects. As is apparent from the preceding discussion, regulatory and political risks are often difficult to quantify and also mitigate. While assessing such risks, an attempt is often made to understand the vulnerability of the project to such risks and also the nature of the relationship between the local/central Government and the project under review.

~ Force Majeure Risks

Project financed transactions, which are different from corporate or structured finance because of their dependence on a single asset for generating cash flows, are potentially vulnerable to force majeure risks. The legal doctrine of force majeure excuses the performance of parties when they are confronted by unanticipated events beyond their control. A careful analysis of force majeure events is critical in project financing because such events, if not properly recompensed, can severely disrupt the careful allocation of risk on which project financing depends.

Natural disasters, such as floods and earthquakes, civil disturbances, and strikes can potentially disrupt a project's operations and hence its cash flow. In addition, catastrophic mechanical failure, due to either human error or material failure can be a form of force majeure that may excuse a project from its contractual obligations. Projects are usually not able to cope with force majeure events as well as large corporations, which have a diversified portfolio of assets.

It is therefore important thatforce majeure events be tightly defined, and that such risks be allocated away from the project through suitable insurance covers taken from financially strong insurance companies. One usually studies the nature, coverage and appropriateness of the insurance policies taken and also evaluates the adequacy of debt reserves for meeting debt service commitments in force majeure circumstances.

Types of Project Finance

1) Build operate transfer (BOT)

2) Build own operate transfer (BOOT)

3) Build own operate (BOO)

~ Build operate transfer

Build operate transfer is a project financing and operating approach that has found an application in recent years primarily in the area of infrastructure privatization in the developing countries. It enables direct private sector investment in large scale infrastructure projects.

In BOT the private contractor constructs and operates the facility for a specified period. The public agency pays the contractor a fee, which may be a fixed sum, linked to output or, more likely, a combination of the two. The fee will cover the operators fixed and variable costs, including recovery of the capital invested by the contractor. In this case, ownership of the facility rests with the public agency.

The theory of BOT is as follows:-

BUILD - A private company (or consortium) agrees with a government to invest in a public infrastructure project. The company then secures their own financing to construct the proj ect.

Operate - The private developer then operates, maintains, and manages the facility for a agreed concession period and recoups their investment through charges or tolls.

Transfer - After the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.

In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and operates and maintains it over a period, often as long as 20 or 30

years. This period is referred to as the "concession" period. In short, under a BOT structure, a government typically grants a concession to a project company under which the project company has the right to build and operate a facility. The project company borrows from the lending institutions in order to finance the construction of the facility. The loans are repaid from "tariffs" paid by the government under the off take agreement during the life of the concession. At the end of the concession period the facility is usually transferred back to the government.

Advantages.

The Government gets the benefit of the private sector to mobilize finance and to use the best management skills in the construction, operation and maintenance of the project.

The private participation also ensures efficiency and quality by usmg the best equipment.

BOT provides a mechanism and incentives for enterprises to improve efficiency through performance-based contracts and output-oriented targets

The projects are conducted in a fully competitive bidding situation and are thus completed at the lowest possible cost.

The risks of the project are shared by the private sector

Disadvantages

There is a profit element in the equity portion of the financing, which is higher than the debt cost. This is the price paid for passing of the risk to the private sector

It may take a long time and considerable up front expenses to prepare and close a BOT financing deal as it involves multiple entities and requires a relatively complicated legal and institutional framework. There the BOT may not be suitable for small projects

It may take time to develop the necessary institutional capacity to ensure that the full benefits of BOT are realized, such as development and enforcement of transparent and fair bidding and evaluation procedures and the resolution of potential disputes during implementation.

> Build Own Operate Transfer (BOOT)

A BOOT funding model involves a single organization, or consortium (BOOT provider) who designs, builds, funds, owns and operates the scheme for a defined period of time and then transfers this ownership across to a agreed party. BOOT projects are a way for governments to bundle together the design and construction, finance, operations and maintenance and potentially marketing and customer interface aspects of a project and let these as a package to a single private sector service provider. The asset is transferred back to the government after the concession period at little or no cost.

The Components of BOOT. B for build

The concession grants the promoter the right to design, construct, and finance the proj ect. A construction contract will be required between the promoter and a contractor. The contract is often among the most difficult to negotiate in a BOOT project because of the conflict that increasingly arises between the promoter, the contractor responsible for building the facility and those financing its construction.

Banks and other providers of funds want to be sure that the commercial terms of the construction contract are reasonable and that the construction risk is placed as far as possible on the contractors. The contractor undertakes responsibility for constructing the asset and is expected to build the project on time, within budget and according to a clear specification and to warrant that the asset will perform its design function. Typically this is done by way of a lump-sum turnkey contract.

o for Own

The concession from the state provides concessionaire to own, or at least possess, the assets that are to be built and to operate them for a period of time: the life of the concession. The concession agreement between the state and the concessionaire will define the extent to which ownership, and its associated attributes of possession and control, of the assets lies with the concessionaire.

o for Operate

An operator assumes the responsibility for maintaining the facility's assets and the operating them on the basis that maximizes the profit or minimizes the cost on behalf of the concessionaire and, like the contractor undertaking construction and be a shareholder in the project company. The operator is s often an independent through the promoter company.

T for Transfer

This relates to a change in ownership of the ass sets that occurs at the ent of the concession period, when the concession asets revert to the government grantor. The transfer may be at book value or no value and may occur earlier in the event of failure oof concessionaire.

Stages of Boot Project Build

~ Design

~ Manage project implementation ~ Carry out procurement

~ Finance

~ Construct

Own

~ Hold in interest under concession

Operates

~ Mange and operate facility ~ Carry out maintenance

~ Deliver products/services

~ Receive payment for product! service

Transfer

~ Hand over project in operating condition at the end of concession period

Advanta2es

• The majority of construction and long term risk can be transferred onto the BOOT provider.

• The BOOT operator can claim depreciation on the facility constructed and depreciation being a tax-deductible expense shareholder returns are maximized.

• Using an output based purchasing model, the tender process will encourage maximum innovations allowing the most efficient designs to be explored for the scheme. This process may also be built into more traditional tendering processes.

• Accountability for the asset design, construction and service delivery is very high given that if the performance targets are not met, the operator stands to lose a portion of capital expenditure, capital profit, operating expenditure and operating profit.

• Boot operators are experienced with management and operation of infrastructure assets and bring these skills to scheme.

• Corporate structuring issues and costs are minimal within a BOOT model, as project funding, ownership and operation are the responsibility of the BOOT operator. These costs will however be built into the BOOT project pricing.

Disadvantages

• Boot is likely to result in higher cost of the product! service for the end user.

This is a result of the BOOT provider incurring the risks associated with 100 percnet financing of the scheme and the acceptance of the ongoing maintenance liabilities.

• Users may have a negative reaction to private sector involvement in the scheme, particularly if the private sector is an overseas owned company.

• Management and monitoring of the service level agreement with the BOOT operators can be time consuming and resource hungry. Procedures need to be in place to allow users to assess service performance and penalize the BOOT operator where necessary.

• A rigorous selection process is required when selecting a boot partner. Users need to be confident that the BOOT operator is financially secure and sufficiently committed to the market prior to considering their bid.

Swot analysis of banks

Strengths

Over the years both private sector and public sector banks have developed to a great extent and are a major factor for the flow of money in the economy. Banks are using latest technologies to cater to the needs of the people. The number of branches that a bank opens, the ATM facility, other services like payment of bills etc. is proof to the fact that customer satisfaction is the objective of any bank. Retail Banking, Business Banking, Merchant Establishment Services (EDC Machine), Personal loans & Car loans, Demat Services with E- Broking, Mutual Fund, Insurance, and Housing Loans. Keeping the need of the consumers in mind, banks all over are offering an array of services.

Weakness

The rural market is still waiting to be tapped. There is latent demand for the same, only awareness is to be created. If the organized urban financial sector can somehow connect to its rural counterpart, it can accelerate the growth of the rural financial sector. With the help of latest technologies this feat could be achieved. Banks currently provide overdrafts against property. While the younger population believes in looking at future cash flows to spend today, senior citizens often have their investments locked in not-soliquid securities. This could lead to a problem in future for the banks. Affluent investors typically overlook banks as a source for personal financial advice. Wealthy clients tend to consult financial advisers and accountants for personal financial advice before they speak with banks.

Opportunity

The Budget provides for increased medical insurance coverage through more insurance companies of the GIC group. There is perhaps an opportunity here for banks to look at bundling insurance with liability products. Income from rural insurance is around Rs 2,700 crore and is estimated to grow to Rs 8,000 crore in three years. Banks could easily exploit this opportunity. Even after the Reserve Bank of India having okayed institutional lending to the film industry, very few banks have even done a study of financing films. The film industry could provide banks with good business opportunities, at a time when the credit offtake is poor.

Threats

With distribution of financial services in the rural areas being touted as the next big wave, there could be more competition for banks and NBFCs (non-banking financial companies) operating in the hinterland. The regional rural banks would be given charge of rural areas hence increasing competition. Exploiting the impressive growth of ecommerce and the desire of many merchants to provide their customers with more online payment options at a lower cost, nonblank players like PayPal and BillMeLater are carving out a niche in the Internet payments business. At the same time, the e-check is emerging as an attractive payments alternative for merchants tired of paying high credit card interchange fees. The e-check is essentially a debit against the customer's checking account that travels over the Automated Clearing House network.

These and other technologies threaten to wrest more payments revenues from banks, which still rely on the credit card as their primary online payments product.

Swot analysis of NBFC

Strengths

The core strengths of NBFCs lie in their strong customer relationships, good understanding of regional dynamics, service orientation, and ability to reach out to customers who would otherwise have been ignored by banks. Because of their niche strengths, local knowledge, and presence in remote topographies, these NBFCs are able to appraise and service non-bankable customer profiles and ticket sizes. They are thus able to service segments of the population whose only other source of funding would be moneylenders, often charging usurious rates of interest

Weakness

With the onset of retail financing, NBFCs are loosing ground to banks. Also the profitability of NBFCs has also come under pressure due to the competitive dynamics in the Indian financial system. Under these circumstances, NBFCs have begun to look at high-yield segments such as personal loans of small ticket sizes, home equity, loans against shares, and public issue (IPO) financing, to boost profitability. To benefit from access to funding at lower costs, among other reasons, some leading NBFCs have also metamorphosed into banks: Ashok Leyland Finance Ltd, for instance, merged into IndusInd Bank Ltd, and Kotak Mahindra Finance Ltd converted into Kotak Mahindra Bank Ltd.

Opportunity

Virgin business segments are likely to have NBFCs as innovators. The NBFCs will leverage their first mover advantage to make reasonable profits in these segments. NBFCs will play the role of innovators, going forward, with some doubling up as partners to banks. As innovators, they will help identify new businesses, or new ways of

doing traditional businesses; they will build business models that will attain a measure of stability over time, before the banks step in.

When that happens, it will be difficult for some NBFCs to hold their own against the competition, and some will move out; others will enter into partnerships with banks, resulting in a win-win relationship for both. Partnerships with banks can take a variety of forms. Some NBFCs will become originating agents working for a fee, like DSAs, but others are likely to have more substantial partnerships with banks. Such a partnership could, for instance, involve the NBFC performing credit appraisals, and sharing credit risk on assets that it has originated and sold to its partner bank. The success of this business model will depend critically on the NBFCs ability to assess the risks involved in the exposures it originates.

Threats

Factors such as ability to sustain good asset quality, provide prompt and customized services, enter into franchises or tie up arrangements with manufacturers and dealers, and build large networks to reach out to customers, are vital for success on the business front; so are strong collection and recovery capabilities. NBFC lack such facilities. On the financial side, competitive cost of funds and the ability to capitalize at regular intervals, in line with growth requirements, are key requirements for maintaining competitive positions. Slowly and steadily NBFC is loosing ground to banks and it only way out is go for partnership with banks.

Analysis

Q.l Have you obtained project financing previously?

First time takers Taken previously Not aware

11 69 20

o fitst time takers

o taken pre\liously

o not aware

69%

Of the 100 respondents, 11 were first time takers of project financing, 20 had never taken project financing and most of them had not heard of the same, 69 of the respondents had taken project financing previously.

Q.2 If yes, how many times?

lt03 4t06 7t09 >10

60 6 1 2

70,---~------------------------------- 60 50 40 30 20 10

o

1to3

4to6

7to9

>10

Of the 100 respondents, 20 have never taken project financing, 11 are first time takers, 60 fall in the category of having taken project financing Ito 3 times previously, 6 who have taken project finance 4 to 6 times, one respondent falls in the category of having taken project finance 7 to 9 times and 2 who have taken project financing more than 10 times.

We can see that majority of the respondents have taken project finance 1 t03 times and only 2 respondents have taken project finance more than 10 times. This shows that project finance is not such a favorable option of finance among the borrowers. This is be due to the fact that documentation process involved in financing a project is very lengthy and also that approval time for funding is long. Also the borrowers have other options like loan from banks, deposits, loan from relatives, investment in bonds etc.

Q.3 Please name the lenders from whom you have obtained project financing in past.

SBI ICICI DENA Others

21 16 10 22

o8BI

olCICI

• DENA

• Others

29% of the respondents had taken project financing from State Bank of India, 22% from ICICI Bank and 14% from Dena Bank and 35% have taken project finance from other banks.

None of the respondents had taken project finance from NBFCs, all of them had opted for Banks as there is more security and also it is backed by strong brand name. Further of all the banks, nationalized banks have more market share than private banks in terms of popularity. Majority of the respondents have taken project financing from SBI, followed by ICICI and Dena Bank.

Q4 Please describe your experience with the lender in terms of the following criteria

(A) Accessibility of officers:

Very satisfied 26

Satisfied 40

Neither satisfied nor

dissatisfied 14

Dissatisfied 0

Fullydissatisfied 0

45 40 35 30 25 20 15 10

5 o

40


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u.. 26 respondents were very satisfied in terms of the accessibility of officers, 40 were satisfied in terms of accessibility of officers, 14 respondents were neutral on this aspect and none were dissatisfied or dissatisfied.

It can be observed that majority of the respondents are very satisfied or near to satisfied with regard to accessibility of the officers. The lenders have taken care to see that the borrowers can easily access the officers. Majority of the respondents had taken project fiance from SBI and are very satisfied in terms of accessibility of officers. This is the starting point for any prospective borrower and lenders should take care to see that their officers are easily accessible because many a times bad response in terms of accessibility repulses the prospective lender.

Q 4 (B) Speed of dealing: (documentation and formalities)

Particulars No.

Very satisfied 10

Satisfied 42

Neither satisfied nor

dissatisfied 19

Dissatisfied 7

Fully dissatisfied 2

45 40 35 30 25 20 15 10

5 o

42
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LL Only 10 of the respondents were very satisfied with the speed of dealing with regard to documentation process, 42 were satisfied with the speed of dealing, 19 were neutral on this aspect, 7 dissatisfied and 2 fully dissatisfied with the speed of dealing.

Those that were very satisfied with the documentation process had taken project finance from ICICI and also the customers of Dena Bank were satisfied with documentation process. This shows that ICICI and Dena Bank Have taken due care in

finishing the paper work quickly so that the borrowers can start with the project as soon as possible.

It has been observed that the documentation process in terms of SBI is the lengthiest. Many a times due to this factor SBI is not preferred by the borrowers as the approval time is more and the borrowers cannot afford this delay.

Q4(C) Quality of interaction:

Particulars No.

Very satisfied 15

Satisfied 45

Neither satisfied nor

dissatisfied 19

Dissatisfied 1

Fully dissatisfied 0

50 45 40 35

~~

20 15 10

5 o

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LL From the above chart we can see that 15% of the respondents were very satisfied with the quality of interaction, 45% were satisfied with the interaction, and 19% were neutral on this aspect, 1 % dissatisfied with the quality of interaction.

It can be observed that the above graph more or less depicts the graph of accessibility of officers. It means that those who felt that officers were easily accessible also felt that quality of interaction was also good.

All the lenders are taking care to see that the prospective borrowers feel at ease with the officers and that it results in a project finance deal. This is also an important aspect that the lenders should consider as the quality of interaction would determine whether the project would be financed or not.

Q5 What was/were the reasonls fro selecting this particular project financing company?

Particulars Reference

Time frame Documentation process Others

6%

17%

No. 54 14 10 5

o Reference

o lime frame

o Documentation process

o Others

From the above chart we can see that 65% of the respondents choose a particular firm because of reference, i.e. either they had a bank account there or someone recommended the firm, for 17% time frame was the deciding factor, 12% of the respondents gave importance to documentation process and 6% gave importance to other factors like security, brand name etc.

The lenders should promote project finance facility to all its existing customers as we can see that 65% of respondents choose a particular firm because of reference. The

lenders should take care to see that the time needed for approval of project should also be shortened as this one of the factors which gives advantage to the competitor.

The lenders should also try and reduce the number of documents that a borrower is expected to present. This is also one deciding factor for the borrowers as in the case of SBI there is stringent checking of documents and the approval of finance takes more than 1 month usually.

Q6 Which other source of finance would you prefer for financing projects?

Particulars No.

Loan from banks 62

Loan from relatives 17

Deposits 14

Investments in bonds 3

Others 0

70,-~~-------------------------------- 60 50 40 30 20 10

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From the above chart we can see that 62 respondents would take loans from banks to finance their projects, 17 would have taken loan from relatives, 14 would use their deposits to finance their projects and 3 respondents would use their investments in bonds for the same.

Apart from taking project finance to finance their project, there are vanous other avenues from where the borrowers can finance their project. The major competitor of

project finance is the loans provided by the banks, we can say this as this is the most favored option of the respondents. Better promotional strategies should be adopted by the lenders so as to meet the competition.

The lenders should try and educate the customers regarding the benefits of taking project finance over other options like loan, deposits etc. in order to meet competition. Also the NBFCs should market themselves as the easiest option available for entrepreneurs and this is the only way they can sustain the competition.

Q7 What are/were your reasons for obtaining project finance?

Particulars No.

Equipment purchase 24

New unit setup 31

Further investment 26

Ongoing project 6

Other 0

35 30 25 20 15 10

5 o

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UJ c. .!: From the above chart we can see that out of the 80 respondents who had taken project financing 24 had taken it for purchase of equipment, 31 for new unit setup, 26 for further investment and 6 for ongoing project.

We can observe that project finance is usually preferred for new unit set up. This is because such project usually requires more capital for initialization and also as the finance is provided on the merits of the project, approval time is less. Close to new unit setup, the next is further investment in business for which project finance is taken. As loan is provided on the credit of the project the borrowers would not have a problem in getting the finance.

Q8 Are you aware of the factors considered by the lender before providing you project financing?

Particulars Yes

No

No. 64 16

From the above chart

r= ~

we can see

that 80% of the

respondents

were aware

of the factors considered by the lender before financing the project, but most of them are not aware of all the factors. 20% of the respondents were unaware of the factors considered by the lender.

Only 16 respondents were unaware about the factors considered by the lender before providing finance, they not aware about all the factors considered. These respondents were about some factors like feasibility of the project, credit worthiness, financial soundness and availability of documents. They were not aware that the lenders also consider the current government policies, market scenario, macro economic factors and also sole lendership.

Those who knew about the factors considered were aware of most of the factors considered by the lender. They were aware regarding what all documents would be expected by them and would keep them ready before meeting the lenders so that the process is completed quickly. Also that agriculture related projects got easy clearance.

Q 9 Which of the following do you think are factors that your lender might have considered before giving you project fmancing?

Particulars No.

Previous projects 54

Present business 53

Market scenario 38

Government policy 17

Macro economic factors 6

Agriculture related 10

Sole lender 8

60 50 40 30 20 10

o +-~~~~~~~~~~~~~~~~~~~~-,

54

53

54 respondents felt that previous projects was a deciding factor for the lenders before financing the project, 53 respondents felt that their current business conditions was a deciding factor, for 38 respondents market scenario was a deciding factor for the lenders, 17 felt government policy affected the decision of the lenders,

10 respondents thought that agriculture related project got faster approval and 8 respondents felt sole lendership was given importance by the lender.

According to the lenders before giving finance to any project, the feasibility of the project, credit worthiness of the project and availability of documents are given foremost importance. They also consider the government policies like which sector has been given subsidies or tax holiday, also the current market scenario as to which sector is growing or is expected to grow, macro economic factors. The lender also preferred that it be the only lender to the project and that no other lender had a claim on the cash flows of the project.

Majority of the respondents were aware of the foremost three factors i.e. feasibility of project, credit worthiness and availability of documents. So we can say that there is considerable awareness regarding the same among the borrowers.

Q10 In which of the flowing range does your debt/equity ratio lies?

Particulars 0.25-0.5 0.50-1.00 1.00-1.50 1.25-2.00

>2.00

No. 17 7 37

13 o

0.25-0.5 0.50-1.00 1.00-1.50 1.25-2.00 >2.00

40 35 30 25 20 15 10

5 o

~z
-


17
r--- 13
1-
7 ,--
I- e----
1- ~ e----
v Out of the 80 respondents who had taken project financing, 4 did not want to disclose their debt equity ratio, the debt equity ratio of firms of the respondents lied between 0.25-0.5, 44 firms had their debt equity ratio between 0.50-1, 10 firms had their debt equity ratio between 1.00-1.50 and 5 firms had their equity ratio between 1.25-2.00

Majority of the respondents hesitated in giving this ratio. It shows that majority of the respondents have debt equity ratio between 1-1.5 it shows that they have taken loans from the market.

Q 11 Which type of Repayment schedule do you prefer?

Particulars Bullet Installment

No. 7 73

9%

o Bullet

o Instalment

91%

91 % of the respondents were more comfortable with the installment repayment system, and 9% with the bullet repayment system.

Q12 Out of these how many project financing providers are you aware of?

Particulars No.
SBI 61
IDBI 52
BOB 37
Other Banks 70
GSFS 27
GLF 27
Sundaram 10 80.----------------+&----------------. 70 +-~--------------r_~--------------__1

60 +-I---,-----V.'-------1 50 40 30 20 10

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Banks have a majority of mind share among the respondents, it can be clearly seen that SBI is very well know among the respondents, 52 respondents were aware that IDBI also provides project finance, 37 respondents were aware about Bank of Baroda giving the same service. The awareness regarding the NBFCs in this field is very low. Of all the respondents only 27 were aware about Gujarat State Financial Services and Gujarat Lease Finance Ltd providing project finance and that is due to the fact that they are state run firms.

NBFC firms need to invest more in marketing their products to stay in competition. The awareness regarding NBFCs is very less among all the respondents, they should try and market themselves as the lender for new entrepreneur as project finance deals with the merits of the product. Also they should try to inculcate in the minds of the borrowers that NBFC is as safe as any bank and should try and develop a feeling of security among borrowers with regard to NBFC.

Q13 How would you prefer risk to be managed?

Particulars No.

Lenders 53

Third party 17

Allocate between two 10

14%

21%

o Third party

o Lenders

o Allocate between two

65% of the respondents preferred risk to be managed by the lenders, 21 % wanted third party to absorb the risk and 14% felt that risk should be allocated equally between the lenders and the respondents.

Q14 For future projects from whom would you prefer to take project financing?

Particulars Banks NBFCs

No. 100 o

0%

o Banks

o NBFCs

100%

All the respondents opted for banks rather than NBFC for project financing for their future projects. The Banks have majority of mind share among the borrowers. Also the lenders feel that if they borrow from banks they will not face any problem regarding availability of finance and also that the banks will keep upto their word, in short the will not face a problem with regard to working capital when it comes to banks. But the same they do not feel regarding the NBFC.

Further the borrowers are not aware about various NBFC existing within the city, this shows that the marketing efforts carried on by these firms is not enough. As a result they are loosing out to the banks. Also they need to improve upon their image regarding the NBFC being not a safe option.