Lending procedures of development banks

Development banks follow a procedure for evaluating a proposal for a project. The basic objective is to check whether the applicant fulfils various conditions prescribed by the lending institution and the project is viable. The acceptance of a wrong proposal will result in the wastage of scarce resources. These banks adopt the following procedure for lending:

1. Project Appraisal and Eligibility of Applicant

Every financial institution serves a particular area of activity or there are certain limits prescribed beyond which they cannot go. Before processing the application, it is important to find out whether the applicant is eligible under the norms of the institution or not. The second aspect which is looked into is to determine whether the enterprise has fulfilled various conditions prescribed by the government. In case some license is required from the government. It should have been taken or an assurance is received from the licensing authority. After satisfying these preliminary issues the project is appraised by a team of technical financial and economic officers of the institutions from various discussions with the promoters and clarifications sought on various points. The bank institution considers financial assistance in the light of;

(I) Guidelines for assistance to industries issued by the government or others concerned from time to time

(ii) Guidelines issued by the bank

(iii) Policy decisions of the Board of Directors of the bank.

2. Technical Appraisal

A technical appraisal involves the study of:

  1. Feasibility and suitability of technical process in Indian conditions.
  2. Location, of the project in relation to the availability of raw materials, power: water. labour, fuel, transport, communication facilities and market for finished products.
  3. The scale of operations and its suitability for the planned project.
  4. The technical soundness of the projects.
  5. Sources of purchasing plant and machinery and the reputation of suppliers. etc.
  6. Arrangement for the disposal of factory affluent and use of bye products, if any.
  7. The estimated cost of the project and probable selling price of the product.
  8. The programmer for completing the project.

3. Economic Viability

The economic appraisal will consider the national and industrial priorities of the project export potential of the product employment potential, study of market.

4. Assessing Commercial Aspects

The examination of commercial aspects relates to the arrangements for the purchase of raw materials and sale of finished products. If the concern has some arrangement for sale then the position of the party should be assessed.

5. Financial Feasibility

The financial feasibility of a new and an existing concern will be assessed differently. The assessment for a new concern will involve:

  1. The needs for fixed assets, working capital and preliminary expenses will be estimated to find out its needs.
  2. The financing plans will be studied in relation to capital structure, promoters’ contribution, debt-equity ratio.
  3. Projected cash flow statements both during the construction and .operation periods
  4. Projected profitability and the like dividend in near future.

6. Managerial Competence

The success of a concern depends up on the competence of management. Proper application of various policies will determine the Success of an enterprise. A lending institution would see the background, qualifications, business experience of promoters and other persons associated with management.

7. National Contribution

Besides commercial profitability, national contribution .of the project is also taken into account. The role of the project in the national economy and its benefits to the society in the form of good quality products, reasonable prices, employment generation, helpful in social infrastructure etc. should be assessed. Development banks aim at the over all welfare of the society.

8. Balancing of Various Factors

Various factors should be balanced against each other. The circumstances of the individual project will help in weighing various factors. Some factors may be strong as their in-depth analysis should be avoided. In case a project is profitable, there will be no need to assess cash flow. Weaknesses located in certain areas may be off set by the good points in the other. An experienced management and sound economic outlook may compensate some weakness in financial positions. The responsibility of lending bank lies in balancing judiciously different considerations for arriving at a consensus.

9. Loan Sanction

After the appraisal report on the project is prepared by the bank’s officers, it is placed before the advisory committee consisting of experts drawn from various fields of the particular industry. If the advisory committee is satisfied tile proposal then it recommends the case to the Managing Director or board of Directors along with its own report. When the assistance is sanctioned hen a letter to this effect is issued to the pay giving details of conditions.

10. Loan Disbursement

The loan is disbursed after the execution of loan agreement. The execution of documents of security or guarantee etc. should precede the disbursement of loan. In case some property is pledged to the bank then title deeds of such property are properly scrutinized. The fulfillment of various conditions proceeding to disbursement will determine the time of paying the money to the party.

11. Follow up

The job of a lending bank does noted by disbursing the assistance. It has first to see whether the construction .of the project is as per schedule decided earlier. In case some delay is taking place in executing the plans then the reasons for it should be determined. Later during operations, the result should be properly followed. It should be seen whether the revenue earned by the concern will be sufficient to meet its obligations or not so a proper follow up by the bank will enable it to follow the progress of the unit.