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Tests Carried Out By Banks For Project Financing

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Tests Carried Out By Banks For Project Financing, An important area for professional practice is that of Project Financing. Project Financing is basically getting the required funds realized for your clients. A very common mode of project financing is through bank/ financial institutional loan.

But Banks/ Financial Institutions also carry out a large number of tests and only after satisfactorily qualifying in these tests, a bank/ FI moves towards sanctioning of the loan. So, knowledge about these tests is a must for every professional practicing in this area. Now check more details about “Tests Carried Out By Banks For Project Financing” from below….

Tests Carried Out By Banks For Project Financing

Tests Carried Out By Banks For Project Financing

The following will give you a brief idea of the appraisals carried out by banks:

Technical Aspects of Project Appraisal:

This involves studying the feasibility of selected technical processes and its suitability under home conditions, location of the project, plant layout, appropriateness of the chosen equipment, machinery and technology, availability of raw material, power and other inputs, appropriateness of technology chosen from social point of view, availability of infrastructure for the project, the techno economic assumptions and parameters used for analyzing costs and benefits and viability provision for treatment of effluents, training of manpower, legal requirement on documentation, license and registration.

The Financial Aspects of Project Appraisal:

The primary aim of financial analysis is to determine whether the project satisfies the investment criteria of generating acceptable level of profitability. The project should be able to service the debt and ensure expected returns to the investor. The important aspects which are examined while conducting financial appraisal are investment outlay, means of financing, projected financial statements, viability and profitability, break-even point analysis, sensitivity analysis and risk analysis.

Economic Appraisal:

The objective of economic appraisal is to examine the project from the entire economy’s point of view to determine whether the project will improve the economic welfare of the country. Economic appraisal is traditionally not conducted in banks or financial institutions. It is generally conducted by agencies like the World Bank and the development agencies of the Government for the projects having huge investment and profound implication for the economy. Examples of the projects where economic analysis is conducted are big dams, forestry projects and big industrial projects.

Social/Distributive Appraisal:

For an analysis of a project to be complete, it should include not only the financial and economic but also social appraisal. The social analysis consists of two parts: measurement of the distribution of the income due to the project and identification of the impact on the basic needs objectives of the society.

The steps involved in social appraisal are: conducting financial analysis, economic analysis and appraisal of distributional effect of the net benefits (externalities) of the project. After social and distributive analysis it may emerge that a project is financially unviable but socially and economically is viable. In such situations the decisions to undertake the project would depend upon the goals of the Government. If the Government believes that the positive externalities are worth the negative financial cash flow, it may decide to implement the project.

Environmental Aspects:

Nowadays huge importance is being attached to the environmental aspects in the projects and most of the banks and financial institutions insist on Environmental Impact Assessment (EIA). The essence of EIA is a prediction of the consequences to the natural environment from development projects. The emphasis in EIA is on those consequences of the projects which are relatively well known and whose magnitudes can be easily estimated. Conditional, uncertain or probabilistic aspects of the impacts are not considered. Another elaborate analysis called Environmental risk Assessment (ERA) is used to differentiate a new and additional analysis in which the probabilistic element is explicitly addressed.

Organizational and Managerial Aspects:

The organizational and managerial aspects evaluate the managerial capacity of the organization or the entrepreneur, responsible for implementing the project. Even if very good technology is chosen for the project, it may fail due to lack of or inadequate managerial capability. In small agricultural and other projects the entrepreneur is responsible for taking care of all these aspects. It is important for the banker to judge the borrower’s managerial capability and also his financial capability (worth). In case of cost escalation he should be in a position to meet the additional financial requirements for the project.

Commercial Aspects Including Marketing:

Commercial aspects of a project include arrangement for supply of inputs for the initiation and operation of the project and marketing of outputs. Some experts prefer to have a separate marketing module and would treat it as the most important aspect of appraisal.

Understanding of these aspects will lead to better performance of the professionals in the field of Project Financing.

If you have any query regarding “Tests Carried Out By Banks For Project Financing” then please tell us via below comment box….

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About CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at [email protected]

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