State Bank of India: Department of Commerce & Management Government Degree College, Gulbarga

State Bank of India
Department of Commerce & Management Government Degree College, Gulbarga 1
State Bank of India
INTRODUCTION
As a part of curriculum, every student studying has to undertake a project on a particular subject assigned to him/her. Accordingly I have been assigned the project work on the study of project financing in Banking Sector. As it is rightly said that finance is the life blood of every business so every business need funds for smooth running of its activities and bank is the one of the source through which the business get funds, before financing the bank appraise the projects and if the projects meet the requirement of the bank rules than only they will finance. Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants. The core area of this project focuses on the financial appraisal of SL flow controls, who has started Manufacturing of industrial valves which is financed by SBI . This project has been undertaken at State Bank of India, Gulbarga branch which is one of the largest bank in India having vast domestic network of over 9000 branches. SBI deals with all financial activities which involves all types of deposits, advances including project financing, mutual funds etc
Financial appraisal which mainly leads to the feasibility study consisting of ratio analysis and capital budgeting calculations.
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Main Objective
Financial appraisal of project

Sub Objectives
1. To know the projects financed by SBI. 2. To know the policies of SBI towards the project financing. 3. To know the risks involved in projects financing. 4. To appraise the projects using financial tools. 5. To know the measures taken by bank when the clients fail to repay the amount.
Methodology
Data collection method: The report will be prepared mainly using secondary data viz, Secondary data www.sbi.com. Company manuals. Commercial Banks Book. The techniques, which would be used for the study: 1. Discussions with Bank guide and customers. 2. By studying projects reports 3. Using Project Techniques:
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Analysis:This analysis part is related to the financial viability of the project SL Flow Controls: Through ratio analysis I analyzed that the liquidity position of the firm is good and it is maintaining the standard ratio.
Debt Equity ratio is in decreasing trend, it shows that the firm is reducing it liability
portion by paying the loan year on year so the financial risk less.
Profitability ratios related to sales and capital employed are in increasing trend, it shows
that the sales are increasing and the firm using its resource efficiently.
Debt Service Coverage Ratio is also in increasing trend, it shows that the firms ability to
make the loan repayments on time over the debt life of the project. The payback period is within the debt life of the project.
The net present value of the project is positive, The positive net present value will result
only if the project generates cash inflows at a rate higher than the opportunity cost of capital . Since the Net Present Value of the above project is positive, the proposal can be accepted.
The internal rate of the return is higher than what accepted so the project is accepted.
State Bank of India
State Bank of India
BANK PROFILE
HISTORY OF BANKING IN INDIA
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades Indias banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons for Indias growth. The governments regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India.
The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks. Nationalization of Indian Banks and up to 1991 prior to Indian. Banking sector Reforms. New phase of Indian Banking System with the advent of Indian. Financial & Banking Sector Reforms after 1991.
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Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly European shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking System. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and state government all over the country.Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19 July 1969, major
th
process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized.Second phase of
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nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1. 1949: Enactment of Banking Regulation Act. 2. 1955: Nationalisation of State Bank of India. 3. 1959: Nationalisation of SBI subsidiaries. 4. 1961: Insurance cover extended to deposits. 5. 1969: Nationalisation of 14 major banks. 6. 1971: Creation of credit guarantee corporation. 7. 1975: Creation of regional rural banks. 8. 1980: Nationalisation of seven banks with deposits over 200 crores. After the nationalization of banks, the branches of the public sector bank India raised to approximately 800% in deposits and advances took a huge jump by 11000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name, which worked for the Liberalization of Banking Practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all
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due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Banking in India originated in the first decade of 18th century with The General Bank Of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank Of India being established as The Bank Of Calcutta in Calcutta in June 1806. Couple of Decades later, foreign Banks like HSBC and Credit Lyonnais Started their Calcutta operations in 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of British Empire and due to which banking actively took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank set up in 1865. By 1900, the market expanded with the establishment of banks like Punjab National Bank in 1895 in Lahore; Bank of India in 1906 in Mumbai-both of which were founded under private ownership. Indian Banking Sector was formally regulated by Reserve Bank Of India from 1935. After Indias independence in 1947, the Reserve Bank was nationalised and given broader powers.
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SBI Group
The Bank of Bengal, which later became the State Bank of India. State Bank of India with its seven associate banks commands the largest banking resources in India. Nationalization The next significant milestone in Indian Banking happened in late 1960s when the then Indira Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks followed by nationalisation of 6 more commercial Indian banks in 1980. The stated reason for the nationalisation was more control of credit delivery. After this, until 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu growth of the Indian economy. After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19 nationalized banks in India.
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Banking in India
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Structure of Indian Banking

Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a mixture of Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are further spilt into old banks and new banks.
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Bank Overview
STATE BANK OF INDIA Not only many financial institution in the world today can claim the antiquity and majesty of the State Bank Of India founded nearly two centuries ago with primarily intent of imparting stability to the money market, the bank from its inception mobilized funds for supporting both the public credit of the companies governments in the three presidencies of British India and the private credit of the European and India merchants from about 1860s when the Indian economy book a significant leap forward under the impulse of quickened world communications and ingenious method of industrial and agricultural production the Bank became intimately in valued in the financing of practically and mining activity of the Sub- Continent Although large European and Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out numerous Central Banking functions. Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the post depression exe. For instance when business opportunities become extremely restricted, rules laid down in the book of instructions were relined to ensure that good business did not go post. Yet seldom did the bank contravenes its value as depart from sound banking principles to retain as expand its business. An innovative array of office, unknown to the world then, was devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and out students to exploit the opportunities of an expanding economy. New business strategy was also evaded way back in 1937 to render the best banking service through prompt and courteous attention to customers.
State Bank of India
ABOUT LOGO
THE PLACE TO SHARE THE NEWS ... SHARE THE VIEWS Togetherness is the theme of this corporate loge of SBI where the world of banking services meet the ever changing customers needs and establishes a link that is like a circle, it indicates complete services towards customers. The logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers. The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promising direction. The key hole indicates safety and security. MISSION STATEMENT: To retain the Banks position as premiere Indian Financial Service Group, with world class standards and significant global committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in expanding and diversifying financial service sectors while containing emphasis on its development banking rule.
VISION STATEMENT:
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Premier Indian Financial Service Group with prospective world-class Standards of efficiency and professionalism and institutional values Retain its position in the country as pioneers in Development banking. Maximize the shareholders value through high-sustained earnings per Share. An institution with cultural mutual care and commitment, satisfying and Good work environment and continues learning opportunities.
VALUES Excellence in customer service Profit orientation Belonging commitment to Bank Fairness in all dealings and relations Risk taking and innovative Team playing Learning and renewal Integrity Transparency and Discipline in policies and systems.
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FEASIBILITY STUDY
As one of the first steps in a project financing is hiring of a technical consultant and he will prepare a feasibility study showing the financial viability of the project. Frequently, a prospective lender will hire its own independent consultants to prepare an independent feasibility study before the lender will commit to lend funds for the project. Contents The feasibility study should analyze every technical, financial and other aspect of the project, including the time-frame for completion of the various phases of the project development, and should clearly set forth all of the financial and other assumptions upon which the conclusions of the study are based, Among the more important items contained in a feasibility study are: 1. Description of project 2. Description of sponsor(s). 3. Sponsors' Agreements. 4. Project site. 5. Governmental arrangements. 6. Source of funds. 7. Feedstock Agreements. 8. Off take Agreements. 9. Construction Contract. 10. Management of project. 11. Capital costs. 12. Working capital. 13. Equity sourcing. 14. Debt sourcing. 15. Financial projections. 16. Market study.
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Principal Agreements 1. Construction ContractSome of the more important terms of the construction contracts are Project Description- The construction contract should set forth a detailed
description of all the Work necessary to complete the project

Price:- Most project financing construction contracts are fixed price contracts
although some projects may be built on a cost plus basis. If the contract is not fixedprice, additional debt or equity contributions may be necessary to complete the project, and the project agreements should clearly indicate the party or parties responsible for such contributions.
Payment- Payments typically are made on a "milestone" or "completed work"
basis, with a retain age. This payment procedure provides an incentive for the contractor to keep on schedule and useful monitoring points for the owner and the lender.
Completion Date- The construction completion date, together with any time
extensions resulting from an event of force majeure, must be consistent with the parties' obligations under the other project documents. If construction is not finished by the completion date, the contractor typically is required to pay liquidated damages to cover debt service for each day until the project is completed. If construction is completed early, the contractor frequently is entitled to an early completion bonus.
Performance Guarantees- The contractor typically will guarantee that the project
will be able to meet certain performance standards when completed. Such standards must be set at levels to assure that the project will generate sufficient revenues for debt service, operating costs and a return on equity. Such guarantees are measured by performance tests conducted by the contractor at the end of construction. If the project does not meet the guaranteed levels of performance, the contractor typically is required to make liquidated damages payments to the sponsor. If project performance exceeds the guaranteed minimum levels, the contractor may be entitled to bonus payments.
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2. Feedstock Supply Agreements. The project company will enter into one or more feedstock supply agreements for the supply of raw materials, energy or other resources over the life of the project. Frequently, feedstock supply agreements are structured on a "put-or-pay" basis, which means that the supplier must either supply the feedstock or pay the project company the difference in costs incurred in obtaining the feedstock from another source. The price provisions of feedstock supply agreements must assure that the cost of the feedstock is fixed within an acceptable range and consistent with the financial projections of the project. 3. Product off take Agreements. In a project financing, the product off take agreements represent the source of revenue for the project .Such agreements must be structured in a manner to provide the project company with sufficient revenue to pay its project debt obligations and all other costs of operating, maintaining and owning the project .Frequently,offtake agreements are structured on a "take-or-pay" basis, which means that the offtaker is obligated to pay for product on a regular basis whether or not the offtaker actually takes the product unless the product is unavailable due to a default by the project company. Like feedstock supply arrangements, offtake agreements frequently are on a fixed or scheduled price basis during the term of the project debt financing. 4. Operations and Maintenance Agreement The project company typically will enter into a long-term agreement for the day-to-day operation and maintenance of the project facilities with a company having the technical and financial expertise to operate the project in accordance with the cost and production specifications for the project. The operator may be an independent company, or it may be one of the sponsors . The operator typically will be paid a fixed compensation and may be entitled to bonus payments for extraordinary project performance and be required to pay liquidated damages for project performance below specified levels.
5. Loan and Security Agreement.
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The borrower in a project financing typically is the project company formed by the sponsor(s) to own the project. The loan agreement will set forth the basic terms of the loan and will contain general provisions relating to maturity, interest rate and fees. The typical project financing loan agreement also will contain provisions such as1. Disbursement Controls. These frequently take the form of conditions precedent to each drawdown, requiring the borrower to present invoices, builders certificates or other evidence as to the need for and use of the funds. 2. Progress Reports.:- The lender may require periodic reports certified byan independent consultant on the status of construction progress. 3. Covenants Not to Amend:- The borrower will covenant not to amend or waive any of its rights under the construction, feedstock, off take, operations and maintenance, or other principal agreements without the consent of the lender. 4. Completion Covenants:-These require the borrower to complete the project in accordance with project plans and specifications and prohibit the borrower from materially altering the project plans without the consent of the lender. 5. Dividend Restrictions. These covenants place restrictions on the payment of dividends or other distributions by the borrower until debt service obligations are satisfied. 6. Debt and Guarantee Restrictions. The borrower may be prohibited from incurring additional debt or from guaranteeing other obligations 7. Financial Covenants. Such covenants require the maintenance of working capital and liquidity ratios, debt service coverage ratios, debt service reserves and other financial ratios to protect the credit of the borrower. 8. Subordination. Lenders typically require other participants in the project to enter into a subordination agreement under which certain payments to such participants from the borrower under project agreements are restricted (either absolutely or partially) and made subordinate to the payment of debt service. 9. Security. The project loan typically will be secured by multiple forms of collateral, including:---o Mortgage on the project facilities and real property. o Assignment of operating revenues. o Pledge of bank deposits o Assignment of any letters of credit or performance or completion bonds relating to the project. o Project under which borrower is the beneficiary. o Liens on the borrower's personal property o Assignment of insurance proceeds. o Assignment of all project agreements o Pledge of stock in project company or assignment of partnership interests.
6 Site Lease Agreement.
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The project company typically enters into longterm lease for the life of the project relating to the real property on which the project is to be located. Rental payments may be set in advance at a fixed rate or may be tied to project performance. 7.Insurance. The general categories of insurance available in connection with project financings are: 1. Standard Insurance- The following types of insurance typically are obtained for all project financings and cover the most common types of losses that a project may suffer.
Property Damage, including transportation, fire and extended casualty.
Boiler and Machinery. Comprehensive General Liability. Worker's Compensation. Automobile Liability and Physical Damage. Excess Liability.
2. Optional Insurance. The following types of insurance often are obtained in connection with a project financing. Coverages such as these are more expensive than standard insurance and require more tailoring to meet the specific needs of the project Business Interruption. Performance Bonds. Cost Overrun/Delayed Opening. Design Errors and Omissions System Performance (Efficiency). Pollution Liability.
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InterpretationReturn on assets employed is favorable. That means the firm is in a position to employ its assets in an efficient manner.
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Return on Capital EmployedIt is similar to ROI except in one respect. Here the profits are related to the total capital employed. The term capital employed refers to long term funds supplied by the lenders and owners of the firm. It is given by the formula-
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Interpretation:The capital employed basis provides a test of profitability related to the source of long term funds. The higher the ratio, the more efficient is the use of capital employed. From the above table we can say that the ROCE is quite high. Compared to previous years ratio. It is good for the company.
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Repayment Period and debt service coverage A) Projections of performance and profitability
B) Projected Cash Flow Statement

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State Bank of India
INTERPRETATION
The higher the ratio, the better it is, A ratio of less than one may be taken as a sign of long term solvency problem as it indicates that the firm does not generate enough cash internally to service debt. in general, lending financial institution consider 2:1 as satisfactory ratio. In this project DSCR is in increasing trend it shows that firm is able to meet its debt obligation.
Capital investment evaluation methods

Successful completion of a project mainly depends on the selection criteria adopted while choosing the project in the initial phases itself and the choice of a project must be based on a sound financial assessment and not based on impressions. Among the several criteria available for financial assessment of projects, Discounted Cash Flow (DCF) techniques are being widely used in both public and private sectors. Usually the basic criterion used in project appraisal is Internal Rate of Returns (IRR), which is the most popular DCF technique used in the country. However, in most of the projects of the projects , the actual returns are vastly different from the expected returns based on IRR, necessitating looking for alternative project appraisal criteria. Therefore, an attempt is made to analyse other alternative project appraisal methods available for catering to the
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requirements of vivid circumstances. Emphasis is given for DCF techniques as they were proved to be the best techniques for project appraisal all over the world. 1) Pay Back Period (PBP) Method: Pay back period is the minimum period required to cover the initial cost and a project with minimum PBP is acceptable in this model. This is a very useful tool to decide rapidly if it is worth to do a small investment by a local manager and also helps to reduce the risk of bad choices. But the basic economic principles involved in PBP method are not as reliable as the other methods like NPV etc. The most important drawback of PWP method is, it is insensitive to changes in timing with in the payback period and ignores the cash flows beyond the PBP. This method also lacks a natural bench mark against which comparisons can be made among various projects. The recovery of the investment is in the 3rd year and 0.64 month. InterpretationThe Pay back period is a measure of liquidity of investments rather than their profitability. Since the period within which the total cost of the period is less than the completion period, the project can be accepted. It means that the firm will be able to pay the dues out of their inflows. Therefore the project is said to be feasible.
2. Average Rate of ReturnThe average rate of return (ARR) method of evaluating proposed capital expenditure is also known as the accounting rate of return method. It is also known as Return on Investment, as it uses the information revealed by financial statements, to measure the profitability of an investment. The accounting rate of return can be found out by dividing the average after-tax profit by the average investment. It is given by the formula-
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InterpretationHere the ARR is more consistent as the ARR is quite higher ( more than average) and the project can be accepted.
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FINDINGS These are related to bank in general

State bank of India is strictly following the guidelines of RBI on Project Financing Sanctioning for the projects is approved by RASMECC (Retailed Assets Small and The bank finances the projects only through term loans. Interest rates are fixed depending upon the projects which is known as State Bank advance When the clients fail to pay the interest, 3 months from the due date the term loan granted If the interest is due further 3 more months then it will be treated as doubtful assets and Again for further 3 months it goes as loss assets and the bank write off the account. Every firm starting up a new project should make an insurance policy with the same bank
Medium Enterprises Credit Cell).

rate. will be treated as Non Performing Assets. interest rates becomes zero.
itself.
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RECOMMENDATIONS
Bank check only financial, technical and commercial feasibility of the project and it should not consider sensitivity analysis and social cost benefit analysis of the project so bank should consider this because these are also important from the point of view of risk and economy growth.
Bank should be caution about the availability of security and ensure honesty of both borrower and guarantor so as to avoid the account becoming the loss assets.
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CONCLUSION
The project undertaken has helped a lot in understanding the concept of project financing in nationalized bank with reference to state bank of India. The project financing is an important aspect which helps in increasing the profit of the banks. Project financing is a vast subject and it is very difficult to apply all the aspect in all type of project when bank want to finance, and it is very difficult to cover all aspect in this project.
To sum up it would not be out of way to mention here that the state bank of India has given a special impetus on Project Financing .the concerted efforts of the management and staff of state bank of India has helped the bank in achieving remarkable progress in almost all important aspects.
Finally the success of project financing would mostly depend on the proper analysis of the projects before financing.
State Bank of India
Bibliography
The data is collected from the list of books and web site given below ww.sbi.com. w www.Google.com Company manuals. Commercial Banks Book. Project financing by Machiraju Financial management by Khan and Jain.

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State Bank of India

Department of Commerce & Management Government Degree College, Gulbarga 1