Working Capital & Project

Appraisals of SONA Industries: At

MPFC

PROJECT REPORT
Batch (2009-11)

SUBMITTED TO SUBMITTED BY
PROF. VISHAL SOOD PALLAVI BHANDARI
MBA (FA) II SEM
 MADHYA PRADESH FINANCIAL CORPORATION
(Incorporated under State Financial Corporations Act, 1951)
(No. LXIII of 1954)

[ISO 9001:2000 CERTIFIED CORPORATION]

Head Office Zonal Office
Finance House, Indore Zone-I,
A. B. Road, Opp. St. Paul Primary
School,
Indore – 452 001 Navratan Bagh, Indore
Phone : 2522921,2580500 Phone :
2493490/2494180
Fax : 2580505 Fax : 2495695
Email: finance@mpfc.org Email : mpfcznl@dataone.in

A C K N O W L E D G E M E N T

The most awaited moment of successful completion of an endeavor is always a result of

persons involved explicitly or implicitly there in and it is impossible without the help and
guidance of the people around.

I take the opportunity to express my sincere gratitude to each and every person who gave
me the guidance and help for preparing the report.

With the sense of gratitude, I owe my regards to Mr. Sanjeev Verma, Dy. General
Manager, MPFC Zone I, Indore for his guidance, support & valuable advice and for
giving me chance to proceed with the study.

I extend my heartily thanks to all the staff members, especially DR. Pankaj Rathore and
Mr. Sunil Chandran of MPFC Zone I, Indore for their co-operation and support,
without which study would not have been completed.

Last but not the least, my heartfelt gratitude to all those people who knowingly &
unknowingly supported me for boosted my morale to make this project a reality.

My strength and inspiration are the blessings of my parents and my friends. I owe all my
success and achievements to them.

PALLAVI BHANDARI

CONTENT
• Introduction
• Objectives
• Organization Structure
• Power Delegation
• Various Schemes Details
Term Loan
Working Capital
Short Term Loan
Electro-medical Equipments
Equipment Finance
Finance for Professionals
Loan Replenishment
Finance for Marketing Activities
Scheme for Medical Professionals
Scheme for Financing Miscellenous Fixed Assets
Liquid Fund Scheme
Composite Loan
Commercial complex
• Loan procedure
o Project Appraisal,
o Documentation
o Reschedulement
o Recovery, Follow up, Take over and Sale
o Comparison of MPFC with Banks
• Terms & conditions
• SWOT analysis
• Suggestion
• Case Study
• Finding from the Case
• Conclusion
• References
o Bibliography
 INTRODUCTION

A central finance corporation was set up under

the industrial finance act, 1948 in order to provide
medium and long term credit to industrial
undertaking, which fall outside the normal
activities of commercial banks.

State government also expressed, that the state

corporation be establish under special statute in
order to make it possible to incorporation in the
constitution necessary provision in regard to
majority controlled by the government, as
guaranteed by government.

Madhya Pradesh Financial

Corporation
 Madhya Pradesh Financial Corporation is the
premier institution of the state, engaged in
providing financial assistance and related
services to small to medium sized industries.
Also, it is registered as Category-I Merchant
Banker with Securities Exchange Board of India
and setup a separate merchant banking division
in the name of MPFC Capital Markets.

Incorporated in the year 1955,under the State

Financial Corporation Act, 1951 (No. LXIII of
1951), it works under the control of the Board of
Directors, consisting of representatives from
State Government, Small Industries
Development Bank of India, Reserve Bank of
India, Scheduled Banks, Insurance Companies,
Co-operative Banks and other shareholders.

MPFC is a well knit organisation with its head

quarters at Indore - the industrial hub of
Madhya Pradesh, and 20 offices at different
places.

Madhya Pradesh financial corporation (MPFC)

was incorporated under the state financial
corporation Act, 1951 in the year 1955. MPFC is
well set up organization having its head office in
Indore – the industrial hub of Madhya Pradesh
having 20 different offices at different places.
 MPFC is premier institution of the state
providing financial assistance to small scale
industries (SSI) & small sized industries. A
division of MPFC duly registered as category 1
merchant banker with securities exchange board
of India provides merchant banking & allied to
the corporate clients.

OBJECTIVES

• Studying the proceeding & functioning of

MPFC,
Which the organization adopts while
disbursing & recovering the amount.

• To acquire basic information working

guidance
about the various financial activities of the
corporation.

• To analyze the overall procedure of term

loan.

• To prepare & present the report

highlighting all the aspect.

• To assess the framework of financial

corporation along with execution of new
technique of viability & need based finance
so as to provide transparency & better
understanding.
 ORGANISATION STRUCTURE

Board of Director

Managing
Chairman Director Director

General Manager

Dept. General
Manager

Manager

Organization Structure for Zones

Zone-1&ll
 Dy. General
Manager

Technical
Finance manager Legal manager RRC Cell
Manager

In MPFC, there is one MD under which there are

three GM & under each GM there are three DGM i.e.
total theIre are nine DGM in the corporation. Under all
DGM there are manager, deputy manager, assistant
manager, subordinates & clerical staff.

Madhya Pradesh financial corporation is having

19 branches out of which 10 offices & 9 business
development center are located in following areas:

Organization Setup

Branch network and field offices structure

INDORE-l
SATNA INDORE-ll

RATLAM BHOPAL

FIELD
OFFICESS
UJJAIN DEWAS

GWALIOR JABALPUR
DELHI
 INDORE
URBAN-1
INDORE
REWA
URBAN-II

SHAHDOL HARDA
BUSINESS
CENTRE

KATANI KHANDWA

SAGAR SENDHWA

CAPITAL STRUCTURE

 Refinance from SIDBI

 Share Capital from Sate Government
 Loan in Lieu of Share Capital
 Subscription of Bonds to financial institution such as Nationalized Bank, LIC,
Co-operative Society, APEX Bank

Power Delegation
The Power Delegation of MPFC is as follows :-

Asst. Manager Committee up to 5 lakhs

Dy. Manager Committee up to 10 lakhs

Manger Committee up to 15 lakhs

Dy. General Manager Committee up to 30 lakhs

General Manager Committee up to 50 lakhs

Managing Director Committee up to 100 lakhs

H.O. Loan Committee up to 240 lakhs

Board Loan Committee Beyond 240 lakhs to 500 lakhs.

SCHEMES
Term Loan
Term loan is provided for the purpose of creation of fixed
assets(such as land, factory building, plant and machinery,
electricals etc.), for setting up of new unit and for
mordernisation, diversification, expansion, and/or replacement of
equipments in existing units.

Finance is provided to new industrial units. It is also provided to

Hotels, Service Industries, Transportation, R & D activities.

The maximum limit of assistance to non-corporate sector is Rs.

200.00 lacs and for corporate sector it is Rs. 500.00 lacs.

Period of assistance depends upon merits of the case ranging

between 5-8 years.

WORKING CAPITAL
Term Loan is provided under this scheme to part finance long
term/medium term working capital requirements of the industrial
units.

It is provided to industries having last 3 years profitable

operations and proven track record with institution/bank. MPFC
borrowers whose fixed assets are mortgaged with MPFC and
those who are not MPFC borrowers but intend to offer all their
existing fixed assets by way of mortgage as primary security can
also avail assistance under the scheme.
Minimum loan of Rs. 2.50 lacs and maximum loan of Rs. 500.00
lacs may be provided under this scheme.

Repayment should be done within 3-5 years.

SHORT TERM LOAN

This scheme has been designed to meet the short term
requirement of funds for working capital purposes due to peak
season needs or for fulfillment of specific order/job enhancement
of working capital limits pending upto Bank etc.

It is provided to concerns which are in the profit for the last 4

years, having working capital limits sanctioned by any other
commercial bank, having regular account with MPFC /Other
financial institution.

The minimum assistance under the scheme is Rs. 2.00 lacs and
maximum Rs. 100.00 lacs.

The debt equity ratio should not be more than 1:1 and current
ratio should not be less than 1.5:1.

Repayment should be done within 12 months.

Interest rate for the scheme will be 13.50%. A penalty @2% p.a.
is levied in case default for the period and amount of default.

ELECTRO-MEDICAL EQUIPMENTS
Financial assistance under this scheme is available for purchase
of new electro medical and other equipments.

It is provided to private practioners having MBBS or BDS or

physiotherapist or equivalent qualification.

Repayment should be done within 6 years.

EQUIPMENT FINANCE
Assistance is available for acquiring identifiable and new items of
plant & machinery, equipments etc.

It is available to industrial concerns in existance for atleast 4

years, earning profits/declaring dividend on its share for
preceding two years and are not in default to institutions/banks
in payment of their dues dues.

Maximum amount available is 77.5% of the cost of the machine -

restricted to Rs. 90.00 lacs per proposal.

The overall debt equity ratio (including the assistance under the
scheme) should not be more than 2:1.

FINANCE FOR PROFESSIONALS

Term loan is available for setting-up professional
practice/consultancy venture, for the first time or for acquiring
additional equipments in exisiting setup.
It is provided to professionals in the field of management,
accountancy, medicine, architecture, engineering etc.

The cost of project should not exceed Rs. 10.00 lacs, of which
land/building should not be over 50% of the total outlay.

Repayment should be done within 5 years.

ASSET CREDIT
Assistance under this scheme is available for purchase of
equipments for the purpose of expansion, modernization,
diversification and/or for the replacement of the equipments.
Medical equipments, energy saving systems, vehicles and other
equipments for manufacturing and service industry are also
eligible under the scheme.

This scheme is available to existing, concerns having at least two

years profitable operations.

Up to 100% of the cost of the equipment can be financed under

the scheme with a minimum of Rs 25.00 lacs and maximum of
Rs. 500.00 lacs.

The debt equity ratio (including the assistance under the

scheme) should be 1:1.

The assistance under the scheme is available for 3 to 5 years &

is repayable in monthly/quarterly installments.

LOAN REPLENISHMENT
Assistance under this scheme is available for the purpose of
purchase of further machineries and extension of factory building
for the existing line of activity.
It is provided only to MPFC's existing profit making borrowers
with good track record of repayment (at least thee due
installments of loan should have been paid in time).

The limit of assistance is up to the extent of loan already repaid

by them till the date of application. Minimum loan is Rs. 2.50 lacs
and maximum loan is Rs. 75.00 lacs. Repayment should be done
within 5 years.

FINANCE FOR MARKETING ACTIVITIES

Assistance is available for the purpose of

• meeting capital expenditure on marketing campaign

• acquiring mobile sales vans
• setting up/renovation of showroom, warehouse, marketing
office for industrial concerns
• acquiring ISI, ISO and/or other certification
• developing infrastructure like setting-up of permanent
exhibition centres, industrial complex etc.

It is provided to existing SSI/MSI profit making industries with

good track record with financial institutions/Banks.

Minimum amount of assistance under the scheme is Rs. 10.00

lacs with a maximum of Rs. 50.00 lacs.

Assistance under this scheme is available for 2-5 years.

SCHEME FOR MEDICAL PROFESSIONALS

Any medical professional is eligible for financial assistance under
this scheme who holds minimum qualification of MBBS/BDS.

Financial assistance shall be considered for the following

purposes to meet:-

• cost to purchase premises/chamber/flat to set up

clinics/consultation chambers, and/or
• cost of medical equipments, infrastructure/furnishing,
computers, office automation system, ambulance, car/van,
interior decoration etc.

The loan shall repayable within 2 to 6 years.

SCHEME FOR FINANCING

MISCELLANEOUS FIXED ASSETS
Assistance under this scheme is available for acquisition of
miscellaneous fixed assets (MFAs) as mentioned hereunder to
meet:-

• The cost of purchase of vehicles in the name of the company

• The cost of office automation equipments
• The cost of construction/ acquisition of the office
premises/guest house for the company

Assistance shall be provided to existing assisted

concerns/companies that have:-

• Availed minimum Rs.200 lacs from the Corporation.

• Repaid at least 25% of the total loan disbursed to them.
• Earned profits for last two years and having positive net
worth.
• Good track record with the Corporation.

The minimum loan amount under this scheme would be Rs. 5.00
lacs and maximum would be Rs. 50.00 lacs. The loan shall be
repayable in 3 to 8 years.
 LIQUID FUND SCHEME
The short term funds will be provided to meet the liquid funds
requirement for the project. All micro, small and medium scale
enterprises are eligible who:

• are in operation for last two years.

• are in profit for last two years.
• are regular with MPFC/Banks

Limit
Minimum Limit - 5.00 Lacs
Maximum Limit - 240.00 Lacs

Minimum security margin of 25% on primary assets.

Maximum period of 12 months.Rate of interest is 10.75% pa

(monthly rest) with a 4% penalty on delayed payments.

Repayment

Off
Installment -
Period
6
6 monthly -
months
OR
3 equal 9
-
monthly months

COMPOSITE LOAN
Assistance under the scheme is available for
procurement of equipments, or working capital, or both.

It is granted to artisans, village and cottage industries,

and small scale industries in the tiny sector (located in
areas other than metropolitan areas), involving
utilisation of locally available natural resources and/or
human skills.

Loan upto a maximum of Rs. 2.00 lacs in granted under

the scheme.

Repayment should be done within 10 years, with an

initial moratorium of 12-18 months (both for interest
and principal). No upfront fee is levied under the
scheme.
 COMMERCIAL COMPLEX
The scheme is for providing financial assistance for construction
of commercial complex including show rooms and sales outlets.

Loan will be given for purchase of land and construction of

commercial complex within the State of M.P.

Sale of shops, show room or any portion of complex shall be

permissible with the prior approval of the Corporation. The
proceeds shall be deposited in the loan account of the borrower
as per terms of agreement. The minimum cost of project should
be Rs 10.00 lacs.

The promoter is required to contribute 50% of total cost of

project. In case of companies, net worth should not exceed Rs.
10.00 Crores.

MPFC will hold the first charge by mortgaging assets i.e. land &
building, shop premises, saleable part of commercial complex.
The loan should be repaid in 5 years, including a maximum of 2
years moratorium.

Other Schemes

Term Loan Interest Rate Rebate Effective rate on

Schemes timely repayment

Infrastructure 16.75% 1.00% 15.75%

Development

Project
Working Capital 14.00% 1.00 % 13.00 %

Medium Term Loan

Short Term Loan 14.00 % 1.00 % 13.00%

Schemes For 13.00 % 0.5 % 12.50 %

Medical

Professionals
Schemes For Misc. 14.00 % 1.00 % 13.00 %

Fixed Assets.
 Terms & Conditions by MPFC
ELIGIBILITY
MPFC grants assistance to "Industrial Concerns" as defined in clause (c) of section 2 of
"State Financial Corporations Act 1951", which are located in the state of Madhya
Pradesh.
However fee based services can be extended to units located in any part of the country.
In the definition, almost every type of manufacturing and/or process activity and related
operations are covered. In addition to it, MPFC also provides assistance to activities in
the service sector, as approved by the Industrial Development Bank of India (IDBI).
As per the provisions of the "State Financial Corporation Act 1951", MPFC can grant
assistance to only those concerns whose paid-up capital and fee reserves taken together
do not exceed Rs. 20.00 crores. This limit is not applicable to non- fund based activities.
Subject to the limits prescribed under the various schemes, MPFC's total exposure to a
single concern under all the schemes taken together shall not exceed Rs. 200.00 lacs in
case of partnership and proprietary concerns, and Rs. 500.00 lacs in case of corporate
entities.

SECURITY
MPFC grants loan against security only.
The primary security for the loan is usually a first charge on land, building, plant and
machinery etc. acquired/proposed to be acquired. In case of loan under consortium
arrangements, Parri-passue charge is accepted along with the other participating
institutions.
Generally MPFC takes collateral security of land and/or building of the borrower or any
third party in addition to primary security.
MPFC also has a floating charge on all the remaining assets of the borrower, subject to
the charge in favour of the bankers for working capital.

MARGIN
Margin is the difference between the value of assets offered as prime security and the
amount of loan.
The margins prescribed for loans under various categories are as under:

Backward
Other
Category
Districts
Districts
Small Scale Industries 20% 25%
Medium Scale Industries 25% 40%
Hotel Industry 50% 50%
Tiny Sector 10% 15%
Composite Loan NIL NIL

PROMOTER'S CONTRIBUTION
The minimum promoter’s contribution envisaged in the project is worked out on the basis
of Debt-Equity norm and the security margin norm applicable at the time of sanction of
the loan. The debt equity ratio is the ratio of loan component and the equity contribution
in the total project cost. The maximum amount of assistance shall be lower of the two
amounts worked out on the basis of Debt-Equity norm and the security margin norm. The
normal lending norm for debt- equity is 1.5:1, however in some specific schemes this
norm may be flexible.
The entire promoter's contribution envisaged in the project is desired to be raised by way
of capital before first disbursement of the loan installment. However in case the
promoters are short of own capital, some amount may be raised as unsecured loans in the
form of quasi-capital. The quantum is ascertained during the appraisal of loan proposal.

REPAYMENT PERIOD
The period of repayment of loan is decided on the merits of each case, which generally
ranges between 5 to 8 years.
The principal amount of loan is payable normally in half yearly installments with an
initial moratorium period of 3 months/6 months to two years depending upon the size of
the project & stage of the implementation.
Interest is also normally charged on quarterly/half yearly basis and the months of
payment of interest & principal are kept different to even out the liability of the
borrowers depending upon project.
INSURANCE
The assets offered as a security of the loan should be kept insured for their full value
during the currency of the loan. The risk normally covered under the insurance are those
relating to fire, riots etc., and the specific risks attributable to a specific project which the
corporation may specify.
The insurance policy should be taken in the joint names of the corporation and the
borrower - with the usual mortgage clause. The first insurance policy and the subsequent
renewals of the same should be sent to MPFC as soon as they are affected. In case the
same is not sent in time. MPFC has a right to get the same insured on the cost & risk of
the borrower unit.

Other Condition
 Application for financial assistance duly filled-up and signed is submitted to
concerned field office of MPFC in the prescribed form along with all necessary
details and enclosures as specified in the said application form. Application is to
be made in duplicate/triplicate as may be required by the concerned field office.
 The proprietor/partners should not draw any remunerations, interest on capital, or
any other payment and in case of corporate bodies no dividend should be declared
till the project commences operations or any installment or interest is in default
towards the corporation.
 The capital and unsecured loans stipulated & raised as per the terms and
conditions of sanction should not be withdrawn during the currency of the loan.
 An undertaking should be given by the promoters that in case of any short fall in
the resources due to 'over-run' in the project cost or for any other reasons like non-
receipt or delay in receipt of capital subsidy etc. the same shall be met by them
from their own sources.
 The promoters of the concern should give a declaration that no inquiry has been
instituted against them/him and/or is pending against them/him or any of them for
economic offenses by the Central or State Govt. and they/be shall under take no to
do any thing which may constitute such an economic offense.
 In case the documentation is not done within one year from the date of sanction
letter, the sanction loan is automatically canceled.
 In case full sanctioned amount is not availed within a period of 18 months from
the date of sanction, the balance loan is automatically cancelled
 FEES BY MPFC
APPLICATION FEE
0.25 % of the Term Loan applied for, subject to minimum of Rs.1000

Application fee has to be deposited along with the application form.

UP-FRONT FEE
Term Loan (excluding Short Term) 1.00 % of the sanctioned loan amount
Short Term Loan 0.25 % of the sanctioned loan amount
Small Loan Scheme 0.10 % of the sanctioned loan amount

Note: Application fee and upfront fee are not refundable in any

Loan Procedure

There are 3 main stages for approval of loan to the borrower.

 Sanction
 Legal
 Disbursement

I) SANCTION PART-
This organization has certain steps to follow before sanctioning loan to borrower. These
steps are as follows :-
1) Loan Application Form
As per the norms of every organization firstly for every request of any thing the
applicant has to fill the form for the same. This organization gives loan to SSI & MSI
units and for that the company/firm has to give the request in form of application form.
MPFC entertains the loan application from different constituencies such as Partnership,
Proprietorships, Private Ltd or Public Ltd Co. and HUF’s. This application forms may
be in the nature of small scales or medium scales industry or they may also be related to
services sector or manufacturing sector.
In this form, all the basic information that the MPFC needed is mention by the borrower
along with the appendix 3III. The form must be filled and duly sign by the borrower,
along with the documents which are given in the check list. The form is submitted by the
borrower along with application fees for registration of there case for e.g. copy of
Partnership Deed, Memorandum of Association, Estimation of Civil/Technical Engineer.
2) Registration of Loan Case
In every organization there are certain rules and regulation or norms which the staff has
to follow for doing their regular works. In this organization there are certain procedure
prescribed by higher authority which staff has to follow.
In this part the concerned authorities go through the rules & regulations / procedure
prescribed and request of the borrower & registered the request as a case.

MPFC has a checklist by which it confirms that all the documents are properly given by
the borrower with application form & after that the request of borrower is considered in
MPFC as a LOAN CASE.
3) Bank Opinion
Every organization goes through the application form to know credit worthy state of
borrower and to check the every aspect of the borrower before giving a loan to him. At
the beginning of the loan procedure followed by MPFC, it thinks very necessary to know
about the banking status of borrower. MPFC issues a confidential letter to the bank for
the opinion from the concerning bank of the borrower as well guarantor.

4) Verification of Property/Search of Property

In this part MPFC evaluates/verifies the property/registry which the borrower mortgage
to the organization is true & exists in reality or the registry is fake. Scrutiny of security
offered by the borrower is performed in the form of confidential search by the registrar
through which MPFC finds out the charges created over the / not be in the favor of
borrower. This search shows any encumbrances or other charge created in favour of other
institute.

5) Title Report
In this part MPFC gives all the documents which are submitted by the borrower to the
advocate for the clarification of title/ the property which the borrower wants to submit
has a clear title or not. After the verification the advocate issues the letter to MPFC in
which he clears the history of the submitted property to the organization in simple
language. This letter is known as The TITILE REPORT from the advocate.

6) Scrutiny of I.T.Returns/Audit Report of Company

After verifying the property mortgaged by the borrower, the MPFC scrutinize the
financial data given by the borrower (i.e. the audit repots, I.T returns etc). The company
has to be in profit for the last 3 years & it should have been paying the I.T Returns
properly.

7) Dues from MPEB / DIC Etc.

The borrower should not have any dues with the MPEB / DIC. If any, they should be
cleared in order to receive the loan.
8) Project Appraisal

Financial Institution appraises a project from the Marketing, Technical, Economical and
Financial/Managerial aspects. They would like to be reasonably sure that the project
would be yield sufficient returns so that the assistance sanctioned/ disbursed would be
repaid in the time and the promoter, would have enough retained profits to declare
reasonable dividends.

Future, the institution is definitely placed in a better position to check the validity of
assumption used while fixing the cost if the projects include the margin money. The
institutions can also advice on the fixation of the means of financing. They can also help
in assessing the working capital requirement, fix repayment schedule of the term loans
and realistic basis and evaluate Break Even Point, Internal Rate of Return on the basis if
the various financial statements prepare on the basis of assumption supplied by the
entrepreneurs and dully modified in the case of need by this institutions. Above all these
statements provide the institution a basis for the future reference for the comparison of
the actual working results. A variance analysis may be carried out by the institution if the
projected statements as submitted differ considerably from the projections.

The principal issues consider and criteria employed in such appraisal are discussed
below:-

(a) TECHNICAL APPRAISAL

As the name suggests this appraisal is done to ensure all technical aspects relevant to the
successful commissioning, if the project have been taken care of. The important issue
considered in the appraisal are :

 Past track record of the company i.e. sales and working results etc.
 Current and future marketing aspect of the project already in the
production.
 Promoter’s background and their past dealings with the DFI’s.
 The existing infrastructure facilities like availability of sufficient land, water,
power etc.
 The sufficient building and civil work to accommodate the future plant and
machinery.
 The existing set of plant and machinery together with installed capacity
product mix – wise and preferably with cycle – wise.
 The existing and future power need and availability.
 The critical area of the operations i.e. pivotal points of the process by which
major deciding output is based.
 The combination of the existing plant and machinery process – wise if
related to installed capacity or capacity utilization.
 Whether proposed plant and machinery to be acquired is used for boosting
quality of product mix.
 The enhancement of installed capacity, capacity utilization or quality of
product shall generate sufficient incremented benefit to cover the debt sought
for independently. In other word the proposed set of equipments is self
continued or not.
 The type of modernization equipment wise with respect to investment and
specification is to be ensured. The association of any technical consultant,
collaboration etc. to be specified or the promoter’s competency is sufficient
to take care the modernization in the area for dealing.
 The replacement if equipment with respect to existing process wise and
balancing section wise is to be ensured.
 The standard and reputed supplier/ manufacture is to be ensured.
  Whenever, there is fabrication item the detail drawing design and
specification together with cast estimated component wise to be ascertained.
 In case if diversification, the relation of the existing product mix and markets
etc. is to be ensured.
 The selling prices constituents a major rate with addition shall also be
critically examined.

(b) ECONOMICAL APPRIASAL

This appraisal is done to adjudge whether the project is desirable from the social
point of view. Some of the issues considered in the analysis are
 Impact of the project or the distribution of income in the society.
 Impact of the project on the level of saving and investment in the society.
 Contribution of the project towards socially desirable objective like self
sufficiency, employment etc.

(C) MARKET APPRAISAL

The next step in any project analysis process is estimation of the market potential of
proposed , to get an idea of acceptability of the product in the market which will help in
formulating strategies for the development of the product.
Basically the market analysis is concerned with two broad issues.
1. What is the likely aggregate demand of the product?
2. What will be the share of the propose product?

The market study process to carried out to find out the present situation of the product
in the market and on the basis of the estimation of the product future earning capacity
is measured.
In the market studied process different steps are taken

Situation analysis

The first and the most important step in market study process is this situation
analysis of the proposed product, which give an insight into the different factor
which would affect the product like price fluctuation , customer preference
competitor , product substitution which will affect the product growth at different
levels .

1. Collection of secondary information

To further carry on the situational analysis process primary and secondary

information is collected which has a bearing with the performance of the product.
Secondary information is the information is that has been gathered is some other
contest and is already available like plan reports, economic survey, annual survey
of industries etc.

Primary information on the other hand represent information that is collected for
the first time to meet the specific purpose on hand .conducting of market survey is
the most popularly adopted technique for gathering primary information .
The various sources of general information are :-
• Census of India
• National sample survey reports
• Plan report
• Statistical abstract t of
• Statistical year book
• Economical survey
 • Guidelines to industries
• Annual survey of industries
• Annual reports of development wings, ministry of commerce and industries
• Annual bulleting of statistics of exports and imports
• Techno Economic survey
• Industry potential survey
• Stock exchange diary
• Monthly studies of production of selected industries
• Publications of advertising agencies
• Monthly bulletin of reserve bank of India
• Other publication

2. Conduct of Market Survey

Although the secondary information is useful; but it often does not provide a
comprehensive basis for the market and demand analysis. It needs to be supplemented
with primary information gathered through the market survey specific to the product
being appraised.

The information which is often expected out of the survey is the following:-
 Total demand and rate of the growth of demand.

 Demand in the different5 segment of the market.

 Income and price elasticity of demand.

 Motives for buying.

 Satisfaction with existing products.

 Unsatisfied needs.

 Attitude towards various products.

4. Steps in Sample Survey

Commonly, a sample survey consists of the following steps :
i. Define the Target Population

In defining the target population the important items should be carefully and
clearly defined. The target population may be divided into various segments
which may have different characteristics.
ii. Sample Size

The sample size, other things being, has a bearing on the reliability of the
estimates, the larger the sample size the greater the reliability.
iii. Developing the Questionnaire

The questionnaire is the principal instrument for extracting information from the
sample of the respondents. The effectiveness of the questionnaire as a means for
extracting the desired information depends on its length, t6he type of questions,
and the wording of questions.
iv. Analysis and interpretation of the information

Information gathered in the survey needs to be analyzed and interpreted very

carefully. After tabulating it as a pen of plan of analysis, suitable statistical
investigation may be conducted, wherever possible and necessary.

(d) FINANCIAL APPRISAL

Financial Appraisal is concerned with assessing the feasibility of a new proposed for
investment for setting up a new feasibility of a new project or expansion of existing
productive facilities.

The financial appraisal seeks to assess the following :

1. Reasonableness of the estimate of capital cost.

2. Reasonableness of the estimate of capital cost.
3. Adequacy of the rate of return and
4. Appropriateness of the financial pattern.

1. Reasonableness of the estimate of capital cost :

While assessing the capital cost estimates efforts are made to ensure that :
1. Padding or under estimate of cost is avoided.
2. Specification of machinery is proper.
3. Proper quotations are obtained from potential suppliers.
4. Contingencies are provided.
5. Inflation factors are considered.

2. Reasonableness of the estimate of working result :

The estimate of working result is sought to be based on

1. A realistic market demand forecast
2. Price computations for inputs and outputs that are based on current
quotations are inflationary factors.
3. An appropriate time schedule for capacity utilization.
4. Cost projections that distinguish between fixed and variable cost.

3. Adequacy of the Rate of Return:

The general norms for financial desirability are as follows :

1. Internal rate of return 15 percent
2. Return of investment 20-25 percent
3. Debt – service ratio 1.5-2.0

In applying these norms, however a certain degree of flexibility is shown on the basis of
the nature of the project, the risks inherent in the project and the status of promotion.

4. Appropriateness of the financial pattern :

The institution considered the following in assessing the financial pattern

1. A general debt-equity ratio norm of 1.5 : 1.0.
2. A requirement that promoter should contributes 12.5% to 22.5% of the project
cost.
3. Stock exchange listing requirements.
4. The means of the promoters and his capacity to contribute.

(e) FINANANCIAL ANALYSIS

An integral aspect of financial appraisal which takes into accounts the financial features
of a project, especially source of financing. Financial analysis helps to determine smooth
operations of the project over its entire life cycle. The key financial indications used by
financial institution, while evaluating project are the:

1. Internal Rate of Return

The internal rate of return method is a discounted cash flow technique which takes
account of the magnitude and timing of cash flow. Other terms used to describe the IRR
method are yield on an investment, marginal efficiency of capital, rate of return over cost,
time-adjusted rate of internal return and so on. Internal rate of return for an investment is
proposed is the discounted rate that expects the present value of expected cash outflows
with the present value of expected cash inflow. Internal rate of return is represented by
the ‘r’ such that :
At -I =0
(1+ r)n

Where At is the cash flow for period‘t’

‘n’ is the last period in which cash flow is expected.

The accept or reject rule, arising the IRR method is to accept the project if its internal rate
of return is higher than the opportunity cost of capital (denoted by K). This K is also
known as required rate of return or the cutoff or the huddle rate. Thus the IRR acceptance
rules are
Accept if r > K
Reject if r < K
May accept if r = k

Merits

1. Consider all cash flows.

2. True measure of profitability.
3. Based on the concept of time value of money.
4. Generally, consistent with wealth maximization principle.

Demerits

1. Requires estimates of cash flows which is a tedious task.

2. Does not hold the value – activity principle (i.e. IRRs of two or more project do
not add).
3. At times fails to indicate correct choice between mutually exclusive projects.
4. At times yields multiple rates.
5. Relatively difficult to compute.

2. Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio is defined as

Profit after tax + depreciation + other non – cash charges interest on term loan
Interest on term loan + Repayment of term loan

Financial institution calculates the average DSCR for the period during which the term
loan is repayable. Normally, a DSCR of 1.5 to 2.0 is reasonable satisfactory.
3. Break Even Point

The profitability projection or estimates of working results discussed above are based on
the assumption that the project would operate at given levels of capacity utilization in
future. In addition to knowing what the projected profits would be at certain level of
capacity utilization, it is also helpful to know the level of operation should be avoiding
losses. For this purpose the break even point which refers to the level of operation at
which the project neither makes profit nor incurs losses is calculated.

As first step in computing the break even point the costs are divided into two broad
categories: fixed cost and variable cost.
Fixed cost is the cost which remains constants irrespective of charges in the volume of
output and variable cost are the cost vary directly with output.

In case if anew project where the capacity utilization level is expected to rise gradually
over a period of 3-4 years. Fixed casts are normally planned in such a way that they are
stepped up as and when necessary to meet the projected increases in capacity utilization.
Hence, the calculation of break even point for a new project must be with reference to
fixed costs expected to be incurred in the third year or forth year when the project is
supposed to reach the rated capacity utilization level. Three measure of break even point
are

Break Even Point = Fixed cost X Expected

Production
In terms of volume of production % Contribution in the year

Break even point = Fixed cost X Expected Capacity

in terms of % of installed capacity Contribution utilization in the year

Break even point in terms of = Fixed cost X Expected Sales

Amount of sales Contribution realization in the year
OTHER INDICATION

Financial institution look at the following indicator too :

# Profit margin on sales = Net profit after tax

Sales

# Return on owners equity = Net profit after tax

Promoter contribution +Soft loan

# Fixed assets coverage ratio = Net fixed assets

Term loan

# Debt equity ratio = Long term debt

Equity

# Current ratio = Current asset

Current liabilities

# Quick ratio = Current assets - Inventory

Current liabilities

# Interest coverage ratio = Net profit before taxes + interest

Interest

# Inventory turnover ratio = Sales

Inventory

# Debtors turnover ratio = Sales

Debtors

# Assets turnover ratio = Sales

Net Assets

# Working capital turnover = Sales

Working Capital

# PBDIT ratio = PBDIT

Sales

Ratios are employed while financial analysis which revel existing strength and weakness
of the project.

9) Issue of sanction letter

After all the procedures are completed by MPFC, it gives sanction letter to the borrower.
This letter contains the loan amount sanctioned, schedule of repayment of loan, and terms
and condition of MPFC.

II) LEGAL PART

There are some legal formalities or paper work to be done before giving the loan to the
borrower by every financial institution. Like wise, here in MPFC the same procedure is
performed known as “LEGAL PART”.

Here, the borrower has to submit original papers of property/ assets as a mortgage and
some other paper work with MPFC as per the requirements.

There are two types of mortgage done by MPFC :

i) Equitable Mortgage
ii) English Mortgage
I) EQITABLE MORTGAGE
There is a specified format for this mortgage according to MPFC. The borrower has to
submit all the documents to MPFC along with the original documents of registry of
property offered in the proposal.

II) ENGLISH MORTGAGE

This type of mortgage is done, when there is a case of lost of registry by the borrower.
For that the MPFC has a specified procedure to deal with these types of mortgage cases.
1. The MPFC wants Power of Attorney by the borrower of the property which he
offered in the proposal.
2. Some affidavits like A, B, D is to be filled by the borrower.
3. Deed of Guarantee duly notarized by the public notary.
4. If the loan is against machinery then deed of hypothecation is needed and duly
notarized by notary.

# Security mortgage should be 80% of the loan amount.

# Agriculture land is not in consideration for mortgage by MPFC.

RECOVERY & FOLLOW UP, TAKEOVER & SALE

Revival of in case, assisted units turnout to be sick, and the promoters
are very keen and ready to revive the unit, the corporation extends a
helping hand for revival of such units - strictly on merits of each case,
and if the corporation feels that the operations of such a unit can still
be made viable.

The benefits, which may be passed on in such cases, generally include

reschedulement of loan accounts, funding of overdue interest, grant of
loan for balancing equipments, approval for change in the
management, recommendation to other financial institutions,
Bank,Govt. etc.

Defaulting borrowers are reviewed by the corporation both at field

offices and at Head Office.

Default review committee (DRC) at Zonal level considers the cases for
reschedulement of loan account, granting of rebate, issue of legal
notice, take over of the unit, change in management, disposal of units,
etc.

The zonal level DRC considers cases having sanction amount less than
Rs. 20.00 lacs, while those having a higher sanction amount are dealt
with by H.O.

INSTALLMENT
In general the installments of interest & principal fall due for
payment on quarterly basis. The months of payments of interest
& principal are normally kept separate to avoid burden on the
borrower. The due dates of payments are specified in the loan
documents.
The payments made by the borrowers are appropriated in the
following order: firstly towards other charges, followed by arrears
of interest, and lastly towards principal. In case of multiple loan,
the amount received shall be appropriated first towards loan
overdue having lower rate of interest.

REPAYMENT
The borrowers are expected to be well aware about the due
dates for payment of instalments. However, to facilitate them. It
is a usual practice of the corporation to issue demands for such
payments well in advance.

In case due to postal delay or any other reason, the demand is

not received by the borrowers, they should contact the
concerned field office and deposit the amount well in time to
avoid penal interest and other consequences of default.

It may be noted that non-receipt of demand notice cannot be

taken as an excuse for default.

The payment of the dues can be made at the field office, or at

head office but as far as possible the payment should be made at
the concerned field office only.

RESCHEDULEMENT
In case the party fails to pay the dues to the corporation in time,
due to some genuine reason, the related facts & circumstances
should be informed to the field office with full details.

Depending upon merits of the case, postponement of some

particular dues, for some period, may be allowed; or the facility
of the reschedulement of the entire outstanding may be
granted.However, grant of such facilities is solely at the
discretion of the corporation. It is necessary that the borrower
should remain in regular touch and continue to keep the field
office informed of the progress and working of the concern at
regular intervals.
 SICK UNITS

In case, assisted units turnout to be sick, and the

promoters are very keen and ready to revive the
unit, the corporation extends a helping hand for
revival of such units - strictly on merits of each
case, and if the corporation feels that the
operations of such a unit can still be made viable.

The benefits, which may be passed on in such cases,

generally include reschedulement of loan accounts,
funding of overdue interest, grant of loan for balancing
equipments, approval for change in the management,
recommendation to other financial institutions, Bank,Gov

PENALTY
Penal interest is charged in case of default. This
interest is over and above the contracted rate.In
case the default becomes a chronic & persisting feature or the
corporation feels that the dues are willfully not being paid, or the
management is unable to run the units, the corporation is
constrained to take painful decision acquiring the assets U/S 29 of
the SFC'S Act,1951 and dispose them off by auction/sale to
recover the outstanding dues.In case the sale proceeds of the
assets are less as compared to the outstanding, the
corporation is free to initiate legal proceeding to recover
the balance amount from promoters/guarantors
personally.

Recently the Government of Madhya Pradesh has also

conferred the powers of Tahsildar on the Dy.General
Managers of MPFC.Pradesh Lok Dhan (Shodhya
Rashiyon Ki Vasuli) Adhiniyam, 1987. RRC's are also
being issued in favour of officers at Collectorate and
Collectorate Officers are recovering the MPFC dues - as
dues of Land Revenue, from the defaulting borrowers
and their guarantors.
 CHANGE IN MANAGEMENT
It is one of the usual conditions for grant of loan
that the change in the constitution and or
management should not be done by the concern.

However if it becomes necessary in the interest of the

project, a written request should be made to the
concerned field office and the desired change may be
affected only if the approval of the request is granted in
writing.

SECOND CHARGE
On the request of the regular borrowers, the
corporation usually permits second

DEFAULT REVIEW COMMITTEE

Defaulting borrowers are reviewed by the
corporation both at field offices and at Head
Office.

Default review committee (DRC) at Zonal level

considers the cases for reschedulement of loan
account, granting of rebate, issue of legal notice, take
over of the unit, change in management, disposal of
units, etc.The zonal level DRC considers cases having
sanction amount less than Rs. 20.00 lacs, while those
having a higher sanction amount are dealt with by H.O.

STANDING COMMITTEE
Cases of disposal of taken over units where assistance
originally sanctioned is above Rs5.00 lacs, are
considered by the standing committee (SC), and
constituted in the Head Office of the corporation The
units are disposed off after giving news papers
advertisement, calling offers from intending purchasers
and subsequent negotiations.

Comparison of MPFC with Banks

MPFC
1)Quarterly based interest is charged
2)Repayment time is longer
3)It can excise takeover power where in the
defaulter’s mortgage assets rights are
takeover by MPFC.
4)They have privilege to use RRC act &
DRT act in case of default.
5)MPFC is governed by SFC
Banks
!)Monthly based charged
2)Repayment time is shorter then MPFC
3)They don’t have takeover rights.
4)Only use DRT act in case of default
5)Governed by RBI
6)Raise Money from SIDBI 6)Raise loan from RBI
7) MPFC and rating agencies assign grades 7) Bank assigns rating on the basis of
on the basis of downside scenario and even borrowers current condition and most likely
consider current scenario. outlook.

Documentation:
(Documents required before sanction)

(Along with the Application Form)

Application form.
Partnership Deed/Memorandum & Articles Or Association of the company.
Registration/Permission/Licenses etc.:
 DIC/SIA or any other registration/license.
 Registration/Incorporation Certificates of Firm/Company.
 Permission/NOC/Opinion form:
 Drug Controller.
 Director of Tourism.
 SEBI.
 Pollution Board etc.
 Any other requisite license/Permission as per project.

Project Report with supplementary information

 Certified copy of Lease deed/Sale deed/Rent agreement.
 Blue print & Estimates for building. Building map approved by competent
authority.
 Quotations for Plant & Machinery (from 2 to 3 reputed suppliers for each item).
 Quotation for Electric motor. Transformer, Generators etc.
 Quotation for other major capital items (from 3 reputed suppliers).
 Details regarding Bio-Data,Experience,Property, Bank Accounts and Income
details in specified proforma and appendix III with latest self attested passport
size photograph in case of Proprietor/Partners/Directors/ Guarantors etc.
 Experience Certificate.
 Audited Balance sheet, Profit & Loss A/c.,Trading Account etc. of
Application/Associate/Family/Sister Concern for the last three years with brief
specifying sales, purchase, profit & losses etc.
 Source of Finance for own contribution.
 Trial balance showing investment, if project is under implementation.
 Assurance/Sanction/Letters.
 For power from M.P.Electricity Board.
 For water from PHE/Municipal Corporation.
 For raw material from bulk suppliers, specifying rates, terms & conditions etc.
 For finished goods from bulk buyers.
 For working capital loan from Bank.
 For unsecured loans from relatives etc.

Specific Requirements in Case of a Company:

 List of Shareholder-Existing as well as proposed with their share holding.
 Resolution for making the loan application.

DOCUMENTS REQUIRED AFTER SANCTION

(For Availing Disbursement)

In Case of Free hold Property

 Original title deed of the land, where the unit is proposed to be set up. Originals of
all the title deeds of predecessors, by whom title is passed on to the seller. If more
holding/properties are comprised and only part of it is sold or purchased then
certified copies of such title deeds.
 Title deeds should be in favour of the party (concern) availing the loan.
 Search certificate from sub-register of the district/sub- district with in whose
jurisdiction the property is situated, for the last 13 years showing all particulars,
transactions including mortgage/ transfer, but if the transaction is prior to 13 year,
then search from the said date/year of the transaction be obtained. The search may
be carried out by application through his advocate of later from Zone/ Branch be
obtained for search to be carried out by the sub-register concerned.
 Certified copies of Khasra records for the last 13 years, but if the transaction is
prior to 13 years, then from the year in which the said transaction took place.
 Diversion order from SDO in respect of the land diverted for the purpose of
industry and if it is found that area diverted does not have clear access to the land
from public road, such portion should be got diverted.
 Aksh - Naksh (field - map) issued by revenue officer showing the clear access to
the land and demarking the diverted portion of land and its surroundings.
 Diversion premium paid receipt or certificate from revenue officer to this effect.
 Rin-Pustika original Part I may be retained and Part II be returned back to the
borrower after retaining photocopy of the same. This is to be returned only after
documentation.
 While scrutiny of the title, if it is found that the Khasra records for the last 20
years are required to establish the clear title, then only in such cases the same are
required to be furnished.
 If title deed in favour of the borrower or in favour of the predecessor bears the
security mark of magistrate against bail of any accused, the same be got cancelled
first.
 SWOT ANALYSIS

S-Strengths:
• Autonomous body.
• Product features.
• Marketing arrangement of the firm.
• Brand position.

W-Weakness:
• Scarcity of raw material.
• Dependence on limited resources.

O-Opportunities:
• Change in government policies.
• Market export opening up.
T-Threats:
• Competition.
• Political uncertainty.
• International market scenario.
• Economic policies.
 STRENGTHS
• Autonomous Body: MPFC is independent financial
institutions which provides financial assistance to various
financial assistance to various SSI & to service sector units
also & perform the activities under the provision of SFC’s
Act 1951.

• Features of its products: the features of the product

i.e. financial assistance provided by MPFC is unique in
itself & has a long term standing.

• Marketing arrangement of the firm: MPFC has less

but a wide market capturing capable marketing
arrangement which helps customer to satisfy their
financial needs & give him what he want in the better
ways.

• Brand position of MPFC: MPFC has a well established

brand name & brand position in Madhya Pradesh.

WEAKNESSES

• Scarcity of raw material: MPFC has limited resources,

provided by the government, by the means of which it
tries to satisfy the customer’s financial needs, by acting
within the framework of SFC’s act 1951.

• Dependence on limited customers: MPFC has a

limited number of customers, upon which it existence is
growing & this limited number of customer are not always
loyal to the brand name of MPFC, in term of taking loan in
the future.

OPPORTUNITIES
• Change in Government policies: change in
government policies of various taxes, duties, rebates,
credit policies, rate of interest etc.. are always
opportunities to various private & public financial
institutions, as any change (decrease) in the above
economic matters, do affect the customer & the nature of
customer’s response depends upon the type of financial
assistance provided & recovered by the firm. Likewise, it
also affect as an opportunity to MPFC.

• Market export opening up: as the large scale

construction of malls, big hospitals & hotels, multiplexes
etc.. is going on within the area of operation of MPFC, it
proves to be a good opportunity for MPFC to be present
there to provide financial assistance to various such
project.
 THREATS
• Competition: MPFC has a tough competition with
other bank & financial institution & due to large rate of
interests provide along with its assistance, MPFC is not
lading the market competition.

• Political uncertainty: MPFC also suffer the

disadvantages of political uncertainty & due to this
misbalance in politics, MPFC has number of customers.

• International market scenario: As various

international project are building up in India & now esp.in
Madhya Pradesh which are being financed by various
other banks, proves fatal or MPFC’s growth.

• Economic policies: The economic policy set by the

government of India has a great impact on MPFC’s
working since its establishment.

SUGGESTIONS
1. MPFC is having competition with banks which has reduced
the yearly turnover of the organization.

2. As compared to other financial institution MPFC is having

high rate of interest for various types of loans, which deviates
customer from the corporation.

3. Processing time of sanctioning loan is very large because

MPFC wants all paper formalities to be completed.

4. Unlike other financial institution, MPFC does not have the

sound marketing strategies. Awareness through the field
representatives will definitely help MPFC to enhance the number of
customers.

5. The concept of the collateral security comes into the scenario

in few years ago in MPFC. This has created reluctance among the
customer to take loan from MPFC.
 THE CASE STUDY
THE CASE

To consider the sanction of a Term Loan of Rs. 46.00 Lacs and WCMTL of Rs. 15.00
Lacs (composite Rs. 61.00 Lacs) to M/s Sona Industries for the expansion of their
existing unit for Manufacturing of BOPP Self Adhesive Tapes at Plot no. D-2, Sector –D,
IND. Area, Sanwar road, Indore(M.P).

Factory Location : Plot no. D-2, Sector –D, IND. Area, Sanwar road, Indore(M.P).

Registered Office : Plot no. D-2, Sector –D, IND. Area, Sanwar road, Indore(M.P).

Constitution : A Proprietorship Concern

[Rs. In lacs.]
Application Information Appraisal Loan Loan For Board
Received on completed Completed applied Apprised Consideration
Date Date Date Rs. Rs. Rs.

Products Units Capacity Production Utilization Sale Price/Box

being Based on [Rs.]
Installed double shift &
working
300 days in a
year
BOPP Self Boxes of 25,000 I year 40% 60% in the 1500/-
Adhesive 72 rolls of Boxes II Year III Year
Tapes 2’’ per box 50% Onwards
III Year
60%

The Project is :-

1. A new project.
2. The Proprietor is first time seeking financial assistance from MPFC.
3. The products are well established the market.
4. S.S.I Unit
5. The additional security worth Rs. 15.00 lacs in the form of fixed assets/FDR
offered.
6. Adequate built in security.
The total cost of the project:-

Items Rs (in lakhs )

Land factory shed 50.00
Site development &repairs 2.50
Plant and machinery 21.25
Misc. Fixed Assets 0.50
Provision for contingency 4.42
Pre-operative expenses 4.20
Working capital 25.13

Total 108.01

Means of Finance-

Items Rs (in lakhs )

Proprietors capital 25.00
Term loan from MPFC 46.00
WCTML from MPFC 15.00
Unsecured loans 22.01

Total 108.01

Consultants : - M/S Pramod P Chopra and Associates

Architect : - M/S Reliable Associates

Main plant suppliers : - M/S Jangir and Company, Delhi

1. Introductory

M/S Sona Industries Indore is proprietorship concern of Shri Rajesh Maheshwari

engaged in manufacturing of BOPP (Bi Oriented poly Propelyne) self adhesive tape at
Indore for the last 5 Year. The unit has been working in a rented premise and after
witnessing market growth, the proprietor decided to expand the unit in its owned
premises. In this respect the concern has purchased an industrial property which is
located at plot no D-2, Sector –d, Industrial Area, Sanwer Road, Indore.

2. Proposal in Brief

The concern has moved existing set up to newly purchased industrial premises and
proposes to expand the capacity for manufacturing of BOPP self adhesive tape from to
2500 boxes per annum. Total cost of scheme is estimated at Rs 28.00 lacs, U/S loan Rs.
13.50 lacs and financial assistance of Rs. 61.00 lacs sought from the corporation under
‘Single Window Scheme’.
3. Promoter and Management

The proprietor Shri Rajesh Maheshwari S/o Shri Maheshchandra Maheshwari aged
about 36 year is commerce graduate and hails from Vidisha . He belongs to agriculturist
Family and has been engaged in BOPP self adhesive tape business since the year 2002.
Subsequently in the year 2004 he acquired an ongoing tape unit situated in a rented
premises and managed it successfully. His financial worth is 34.08 lacs. He is income tax
payee and returns have been filed up to 2008-09.

The other detail about the proprietor is as under:-

S.NO Name Age Adress Father’s/Husba Qualificat-- FA(lacs )

nd ‘s Name ion

1. Shri Rajesh 36 16/1, South Shri Mahesh Graduate 34.08

Maheshwari Tukoganj, Chandra
Indore Maheshwari

4. Guarantors

A condition is stipulated to offer personal guarantee from a financially sound person.

5. Details about the Project

Not Applicable

Past Performance

2007-08 : Turnover was 83.35 lacs

2006-07 : Turnover was 50.58 lacs
2005-06 : Turnover was 8.66 lacs

6. Project Cost

(a) Land & Building

The concern has purchased an industrial property situated on a leasehold land at Plot No.
D-2, Sector ‘’D’’, Industrial Area, Sanwer Road, Indore admeasuring 41250 Sq. ft. There
are two ready built sheds admeasuring 7384 Sq. ft. With Sheet Roof & 3675 Sq. ft. RCC
Shed. The proprietor has purchased the above property at a price consideration of Rs.
50.00 lacs through a registered sale deed and accordingly Lease Seed transferred by DIC
in the name of the Concern, after imposing land premium amounting to Rs. 1.20 lacs.
Further an expenditure of 2.00 lacs envisaged for repair & renovation of existing sheds.

(b)Plant and Machinery

The main plant & machinery required are tape coating machine, slitting machine, core
cutting machines etc. proprietor has sifted existing plant and machineries to the newly
acquired premises and commenced production. Further, it is proposes to purchase another
set of machinery i.e. BOPP Tape coating machine, slitting machines etc towards
expansion. The total cost of plant & machinery including taxes, erection installation and
electrical envisaged at Rs. 20.50 lacs.

(c) Pre-Operative Expenses

A provision of Rs. 2.50 lacs has been made towards pre-operative expenses to take care
of interest during implementation period and expenditure on legal documentation, stamp
duty etc.
 (d) Provision for Contingencies

Rs. 1.00 lacs have been provided for the purpose of contingencies towards cost
escalation.

(e) Working Capital

The total requirement of working capital on the basis of second year of its working has
been estimated at Rs. 24.80 lacs. The detailed calculations of working capital requirement
of the proposed scheme are given below :-

Particulars Period Margin Total

(%) [Rs. In Lacs]
Raw Material 20days 25% 9.30
Finished Goods 15 days 25% 7.70
Sundry Debtors 20 days 25% 12.50
Working Expenses
TOTAL 12.50
Less : Sundry Creditors 10 (4.70)
Other Current Liabilities (-)
NET WORKING CAPITAL 24.80

7. Details about the Product

The Self Adhesive Bopp (Biaxial Oriented Polypropelene) tapes are available in
transparent, brown and various colors. The (BOPP) films are coated with acrylic based
adhesive in different micron (gsm) coating thickness. BOPP tape is used in carton box
sealing, gift wrapping, strapping and for stationary purpose. It has superb strong grip &
stick on all types of surfaces viz. paper, plastic, wood, glass, metal etc. printing of single
and multiple color is also possible with logo or customized design. The unit is equipped
with quality processing equipments for consistent quality output ensuring marked tape
length, longer shelf life, peak performance even under extreme conditions of pressure &
temperature.

Dimensions:-

Width size: 12, 18, 24, 30, 36, 48, 60, 42, 96, 144, & 288mm
Length: 40, 50, 65, 650, 1000 meters
Thickness: 40, 45, 50, 55 & 60 microns

The concern is already engaged in manufacturing of adhesive tapes and now proposes to
expand capacity of the plant . These tapes are used as packaging material and insulations
tapes. The promoter of the unit is in this line of business since long and having direct
contact with buyers. In this regard a list of their regular clients submitted by the proprietor
is on record. Keeping in view of the encouraging response the proprietor shifted from
rented premises to newly purchased in the line , marketing is not a problem for the concern.
There exists enough market potential for the product of the concern and no problem is
anticipated in this regard.
8. Selling price

The products are manufactured by ensuring its Durability, Dimensional accuracy,

finishing, Easy installation, Tensile strength. The price is fixed on various parameters viz
width , micron , color , printing matter etc, however an average selling price per box of 72
rolls 2’ tape width is considered at rs 1500/-

9. Profitability Estimates

The concern has estimated following turnover and profit for first five years of its working
after providing interest depreciation and taxes.
[Rs in lacs]
Particulars I II III IV V
Capacity Utilization 40% 50% 60% 60% 60%
Turnover 150.00 187.50 225.0 225.00 225.00
0
Profit before Depriciation, 34 24.77 28.59 27.29 26.63
Interest and tax
Interest 8.37 7.80 8.58 5.40 4.14
Depreciation 4.30 4.30 4.30 4.30 4.30
Profit after tax 8.81 12.67 15.71 17.59 18.19
Cash Profit 13.11 16.97 20.01 21.89 22.49

Detailed profitability estimates together with cash flow statements are appended
with memorandum as Annexure “C”& “D”

10. Repayment

Keeping in view the liquidity position based on the estimated profit & projected cash
flow, the proposed loan is to be repaid in eight years in 28 quarterly installments with six
months off period as per schedule given below:
[Rs in lacs]
First installment of rs 1,00,000/- 1.00
Next 03 installment of rs 2,00,000/- 6.00
Next 24 installment of rs 2,25,000/- 54.00
Total 61.00

11. Implementation Schedule & Present Status of the Project:-

The unit is already in operation. The proposed machinery will be purchased shortly.

12. MPFC’S Prior Experience

The corporation’s experience of financing in packaging industries in general is

satisfactory.
 THE FINANCIAL ANALYSIS
OF THE CASE

1. List of Plant and Machinery

Amt. in Lakhs

S.No. Particulars Amount

1 BOPP Tale Coating Machine capacity 975 mm 5,65,000.00
One meter length
2 Sliting Machine 3,70,000.00
3 Sliting Machine (small) (gitti) 53000.00
4 Core Cutting Machine 20000.00
5 Hot Arigun Machine 10000.00
6 Leth Machine 12 feet 1,35,000.00
7 Leth Machine 7 feet 1,05,000.00
8 Drill Machine 21500.00
9 Grinder 3200.00
10 Welding Machine 1+2 phase 12500.00
11 D.G. Set 40 KVA Kirloskar Make 3,95,000.00
12 Storage, Rack, Table 55000.00
13 Electronic Weighing Machine 1000 kg 25500.00
17,70,700.00

ADD: Taxes, Installation etc @20% 3,54,140.00

TOTAL 21,24,840.00
 2. Calculation of Working Capital Requirement

Amt. in Lakhs

Particulars Holding Margin First Second Third

Period Year Year Year
(in days)
(A) Current Assets
Raw Material 20 25% 7.47 9.33 11.20
Work in Process 0 25% 0.00 0.00 0.00
Sundry creditors 20 30% 10.00 12.50 15.00
Consumables 0 25% 0.00 0.00 0.00
Finished Goods 14 25% 5.79 7.24 8.68
Sundry Expenses 1 25% 0.41 0.52 0.62

TOTAL (A) 23.66 24.59 35.50

(B) Current
Liabilities
Sundry Creditors 10 30% 3.98 4.73 5.66

TOTAL (B) 3.98 4.73 5.66

TOTAL (A-B) 19.49 24.86 29.84

3. Calculation of Probable Profitability Statement

Amt. in Lakhs

Particulars Unit I II III IV V VI VII VIII

(Boxes
in
Installed Capacity Lakhs) 300 300 300 300 300 300 300 300
Capacity utilization - 40% 50% 60% 60% 60% 60% 60% 60%
No. of Shifts No 2 2 2 2 2 2 2 2
Working days - 300 300 300 300 300 300 300 300

(A) Sales & job work receipts 150.00 187.50 225.00 225.00 225.00 225.00 225.00 225.00
Increase/Decrease in Stock 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(B) Less:- cost of production 124.14 155.10 186.06 186.06 186.06 186.06 186.06 186.06

a) Raw Material 112.00 140.00 168.00 168.00 168.00 168.00 168.00 168.00
b) Power & fuel 2.18 2.72 3.27 3.27 3.27 3.27 3.27 3.27
c) Wages & Salary 7.13 8.91 10.69 10.69 10.69 10.69 10.69 10.69
d) Direct Expenses 2.24 2.80 3.36 3.36 3.36 3.36 3.36 3.36
e) Repairs & Maintaince 0.42 0.46 0.49 0.49 0.49 0.49 0.49 0.49
f) Consumables 0.17 0.21 0.25 0.25 0.25 0.25 0.25 0.25

(C)GROSS PROFIT (A-B) 25.86 32.40 38.94 38.94 38.94 38.94 38.94 38.94

(D) Less: Admin. Expensese 7.50 8.30 9.10 9.10 9.10 9.10 9.10 9.10
a) Admin. Salary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
b) Admin. Expenses 3.20 4.00 4.80 4.80 4.80 4.80 4.80 4.80
c) Depriciation 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30

(E) Financial Expenses 7.30 6.89 6.02 5.06 4.01 2.71 1.68 1.25
a) Interest on Term loan 5.52 5.40 4.89 4.29 3.60 2.64 1.68 1.25
b) Interest on WCTML 1.78 1.49 1.13 0.77 0.41 0.07 0.00 0.00

(F) Net Profit Before Tax [C-(D+E)] 11.06 17.21 23.82 24.78 25.83 27.13 28.16 28.59

(G) Income Tax 1.50 4.22 6.31 6.95 7.54 8.16 8.65 8.93

Net Profit After Tax (F-G) 9.56 12.99 17.51 17.83 18.29 18.97 19.51 19.66

4. Calculation of Depreciation on Fixed Assets (W.D.V Method)

Particulars Amount Dep. Up to Net Block Dep. Rate

(Gross) Last Year For W.D.V %

Building 50.00 0.00 50.00 10.00

Plant & Machinery 21.25 0.00 21.25 20.00
Furniture & Fixture 0.50 0.00 0.50 10.00

Year Building Plant & Machinery Furniture & Fixture Total

10% 20% 10% of Dep.
W.D.V Dep. W.D.V Dep. W.D.V Dep.

1 50.00 5.00 21.25 4.25 0.50 0.05 9.30

2 45.00 4.50 15.94 3.19 0.45 0.05 7.73
3 40.50 4.05 11.95 2.39 0.41 0.04 6.48
4 36.45 3.65 8.96 1.79 0.36 0.04 5.47
5 32.81 3.28 6.72 1.34 0.33 0.03 4.66
6 29.52 2.95 5.04 1.01 0.30 0.03 3.99
7 26.57 2.66 3.78 0.76 0.27 0.03 3.44
8 23.91 2.39 2.84 0.57 0.24 0.02 2.98

Calculation of Depreciation by Straight Line Method

Particular Amount Rate of Dep. Amt. of Dep.

 Building 50.00 3.39% 1.70
Plant & Machinery 21.25 12% 2.55
Furniture & Fixture 0.50 12% 0.06

TOTAL 71.75 4.31

5. Calculation of Depreciation on Fixed Assets (W.D.V Method)

Particulars Amount Dep. Rate Rate for

(Gross) For W.D.V % S.L.M. 25%

Building 50.00 10.00 3.39

Plant & Machinery 21.25 20.00 12.00
Furniture & Fixture 0.50 10.00 12.00

Year Building Plant & Machinery Furniture & Fixture Total

10% 25% 10% of Dep.
W.D.V Dep. W.D.V Dep. W.D.V Dep.

1 50.00 5.00 100.00 25.00 0.50 0.05 30.05

2 45.00 4.50 75.00 18.75 0.45 0.05 23.30
3 40.50 4.05 56.25 14.06 0.41 0.04 18.15
4 36.45 3.65 42.19 10.55 0.36 0.04 14.23
5 32.81 3.28 31.64 7.91 0.33 0.03 11.22
6 29.52 2.95 23.73 5.93 0.30 0.03 8.91
7 26.57 2.66 17.80 4.45 0.27 0.03 7.13
8 23.91 2.39 13.35 3.34 0.24 0.02 5.75

Calculation of Depreciation by Straight Line Method

Particular Amount Rate of Dep. Amt. of Dep.

Building 50.00 3.39% 1.70

Plant & Machinery 21.25 12% 2.55
Furniture & Fixture 0.50 12% 0.06

TOTAL 71.75 4.31

6. Calculation of Income Tax @ 40%

Amt. in Lakhs

S.No. Particulars I II III IV V VI VII VIII

11.0 17.2 23.8 24.7 25.8 27.1 28.1

1 Net Profit Before Tax 6 1 2 8 3 3 6 28.58

2 Add: Dep. SLM 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30
 10.3
3 Less: Dep. WDV 6 8.53 7.08 5.92 4.99 4.24 3.63 3.12

12.9 21.0 23.1 25.1 27.1 28.8

4 Adjusted Profit 5.00 8 4 6 4 9 3 29.76

17.9 21.0 23.1 25.1 27.1 28.8

5 Cumilative Total 5.00 8 4 6 4 9 3 29.76

17.9 21.0 23.1 25.1 27.1 28.8

6 Taxable profit 5.00 8 4 6 4 9 3 29.76

7 Less: Deduction U/s 80-I 1.25 4.50 5.26 5.79 6.29 6.80 7.21 7.44

13.4 15.7 17.3 18.8 20.3 21.6

8 Profit After Deduction 3.75 8 8 7 5 9 2 22.32

11.0 17.2 23.8 24.7 25.8 27.1 28.1

9 Book Profit 6 1 2 8 3 3 6 28.58

10 Income Tax on Profit 1.50 4.22 6.31 6.95 7.54 8.16 8.65 8.93

11 Income Tax as Per MAT 1.16 1.81 2.50 2.60 2.71 2.85 2.96 8.93

12 Tax Liability 10 or 11 1.50 4.22 6.31 6.95 7.54 8.16 8.65 8.93
Which is Higher

7. Calculation of Debt Service Coverage Ratio

Amt. in Lakhs

Particulars I II III IV V VI VII VIII

Profit After Tax 9.56 12.99 17.5 17.83 18.29 18.97 19.51 19.65

Interest on Term loan 5.52 5.40 4.89 4.29 3.60 2.64 1.68 1.26

Interest on WCTML 1.78 1.49 1.13 0.77 0.41 0.07 0.00 0.00

Depriciation 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30

TOTAL (A) 21.16 24.18 27.82 27.19 26.60 25.98 25.49 25.21

Interest on Term loan 5.52 5.40 4.89 4.29 3.60 2.64 1.68 1.26

Interest on WCTML 1.78 1.49 1.13 0.77 0.41 0.07 0.00 0.00

Installment of Term Loan & 1.50 7.00 8.00 8.00 11.00 9.50 8.00 8.00
WCMTL

TOTAL (B) 8.80 13.89 14.02 13.06 15.01 12.21 9.68 9.26

D.S.C.R (A/B) 2.40 1.74 1.98 2.08 1.77 2.13 2.63 2.72

Average DSCR 2.18

8. Calculation of Break Even Point

 S.No Particular Amount
Rs. In Lakhs
I Job Work Reciept 225.00

II Total Variable Cost

1. Raw Material 168.00
2. Power 3.27
3. Wages 10.69
4. Direct Expenses 3.36
5. Consumables 0.25
6. Interest on WCMTL 1.13
7. Depriciation 4.30
191.00

III Net Surplus (I - II) 34.00

IV Total Fixed Cost

1. Admin. & Comm. Salary 0.00
2. Admin. Overhead 4.80
3. Interest onTerm Loan 4.89
9.69

V Break Even Point 28.50%

for Installed Capacity

VI Break Even Point 17.10%

for Capacity Utilization

9. Statement of Cash Flow

Amt. in Lakhs

S.No. Particulars I II III IV V VI VII VIII

SOURCES OF FUNDS

24.0 29.8 29.8 29.8 29.8 29.8

1 Profit before tax & interest 18.35 9 3 4 4 4 4 29.84
added back
2 Depericiation 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30
3 Term Loan 46.00 - - - - - - -
4 WCMTL 15.00 - - - - - - -
5 Unsecured Loan 22.01 - - - - - - -
6 Share Capital 25.00 - - - - - - -

130.6 28.3 34.1 34.1 34.1 34.1 34.1

TOTAL (A) 6 9 3 4 4 4 4 34.14

DISPOSITION OF FUNDS

112.2
7 Capital Expenditure 0 - - - - - - -
8 Preliminary & Preoperative 4.20 - - - - - - -
Expenses
9 Repayment of Loan - 4.00 5.00 5.00 8.00 8.00 8.00 8.00
10 Interest On Term Loan 5.52 5.40 4.89 4.29 3.60 2.64 1.68 1.26
11 Taxation 1.50 4.22 6.31 6.95 7.54 8.16 8.65 8.93
 12 Interest On Working Capital 1.78 1.49 1.13 0.77 0.41 0.07 0.00 0.00

TOTAL (B) 125.20 15.11 17.33 17.01 19.55 18.87 18.33 18.19

Opening Balance - 5.47 18.77 35.67 52.71 67.30 82.58 98.39

Net Surplus 5.47 13.30 16.81 17.14 14.59 15.28 15.81 15.95
Closing Balance 5.47 18.77 35.57 52.71 67.30 82.58 98.39 114.34

FINDINGS OF THE CASE

1. Findings from the case

The findings from the case are as follows :-

a) The company is well established and has direct contacts with buyers.

b) As this is a case of expansion, the proprietor has a good marketing experience,

which results in better selling of product.

c) Utilization of Installed Capacity is increased gradually from 40% to 60% and

constantly 60% from 3rd years.

d) Increased in utilization of installed capacity resulted in increased production from

124.14 lakhs to 186.00 Lakhs and gradually from 3rd year it will become constant
at 186.00 lakhs.

e) There is enough market potential for the product of the concern and no problem is
anticipated in this regard.

f) They have purchased machinery worth Rs. 56.06 lakhs, which is imported to meet
the production target with high speed. For this the company offered additional
security, valued by manager worth Rs. 10.03 lakhs.

g) The product price is Rs. 1500 (per box), which is a high price for the profit
orientation.

h) The total working capital used in the project is 24.80 lakhs (margin from promoter
5.95 lakhs and bank borrowing 18.85 lakhs) and the total estimated sale for the
first year is 150 lakhs that means their circulating working capital is almost 1/6 of
the sales which is a very difficult task.

i) The company does not consider short sell of products.

j) The company in the project has not mentioned about the loss of production due to
some management or labour problems.

k) In this project the transportation cost, loading and unloading cost are not included.

2. Conclusion
On the basis of above arguments, we recommend to sanction the Term Loan as well
as WCMTL, considering the proprietor experience, having a good market potential of
the product and the probable profitability statement. The sanction amount ranges from
45 lakhs to 48 lakhs.

3. Bibliography

I. www.MPFC.org
II. SFC Act 1951 (book)
III. Audit Report of MPFC 2008-09
IV. Data provided by MPFC
V. On conversation with Staff members of MPFC
VI. MPFC training report