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Next breakup of cost of project and means of finance should be given in the loan proposal so the sanctioning authority can understand that what are the components that makes up this project and how this project has been funded alongside of the proposed term loans let’s see breakup of cost of every items this makes the cost of project okay it is not necessary
That all these items should come in all the projects no if there is land i mean if the project involves purchase of land then that cost if it involves constructing building or buying building okay acquiring building that cost should come purchase of planted missionary and this should be ideally divided into indigenous and imported okay or say domestic i’ll make
It as domestic and imported so that sanctioning authority can get a view of the forex risk involved here then what is the interest during construction period because interest during construction period can be capitalized by generally accepted accounting practices and that can also be loaded as part of cost of the project then what is the working capital margin
Required here let’s say when you take up this project okay let’s say this is your new project and if you start this project you will start making sales okay but for making the sales you have to purchase raw material okay you have to invest on labor you have to invest on other cost only if you invest on all this you will be able to achieve the sales but for all
This you need capital okay you need capital we call that as working capital okay but uh of this working capital requirement the bank will be financing only around 75 percent it means remaining 25 percent should come from the borrower fine but borrower already he is asking loan for starting this project he is asking loan for purchasing this land building plant
And missionary interest during construction then he is actually not in a position to bring this 25 percent gap so this 25 percent gap that is working capital margin can also be considered as part of cost of the project okay if that project is going to result in additional working capital or creating new working capital requirement then that working capital margin
Can also be loaded as part of cost of the project okay and this practice vary from bank to bank public sector bank they insist on adding this working apple margin under total cost of project because they appreciate that if this working capital margin is not given he will not be able to get the 75 percent from the bank and if that is not availed then they cannot
Invest on these items if they cannot invest on these items they cannot make sales if they cannot make sales there is no profit if there is no profit then the term loan what they have be given will become non-performing asset okay so understanding this link banks are very particular nowadays that working capital margin should be loaded as part of cost of project and
That should be funded okay next preliminary and pre-operative expenses that should also be included and contingencies so all this makes total cost okay so this is the breakup and there can be some additions or some deletions on case to case basis okay so here we are capturing cost then we should also give the breakup of source of finance okay because here we said
This is the cost how that cost is going to be made through financing right so this is the amount which is coming in let me give some imaginary numbers let’s say 100 million is the cost it means this entire 100 million have to be financed fine it has been financed but how this 100 million had come into picture or how this 100 million is going to come into picture
It is going to come from let’s say one two three four sources it is going to come from term loan let me say around 70 million okay then share capital around 10 million internal accruals let’s say 15 million unsecured loan 5 million so how it looks like it looks like 70 million is the loan and 30 okay 10 20 30 30 million is from owners but in three different
Forms and here techno economic viability team will have their opinion on this on this they may say that they are not going to accept those they are not going to accept this because if this unsecured loan comes with a higher interest rate okay then even though it is coming from promoters this is also creating an obligation okay and it will also have impact on what
Is known as dser debt service coverage ratio or if this unsecured loan can be treated as qasi equity then it is fine then it is fine okay so how this project is going to be funded what is the source of finance what is the split up that should be given and by looking at this sanctioning authority will be able to frame the soundness of capital structure in addition
To what is discussed in technoeconomic viability report you
Transcribed from video
Cost of Project and Means of Finance under Term Loan Appraisal | Credit Analysis By CA Raja Classes
