Appraisal of Loan Proposal in different Aspects and sanction thereof

Engr. Md. Abdullah Al MamunDeputy General Manager

HR planning,Deployment & operations DivisionAgrani bank limited

Head OfficeMotijheel, Dhaka-1000.

Meaning of Project and AppraisalMeaning of Project and AppraisalProject : Commitment of scarce resources to create tangible or intangible assets which are expected to yield a stream of return over a certain period of time. "Appraisal" means the pre-investment analysis that is done before a project is approved, funded, & executed. Appraisal activities are part of the project planning phase which analyse & describe the potentaial benefits & cost of the project Appraisal can be seen from two aspect : Enterprise profitability and Social Profitability.1.General definition of a "Project":According to Gittinger, a project is "the whole complex of activities involved in using resources to gain benefits."2.Concept/Meaning Definition of "Project appraisal.""Project appraisal", in simple terms, means pre-investment analysis of an investment project with a view to determining, its commercial and socio-economic feasibilities i.e. to examine as to whether a proposed project which is going to take up for implementation and finance isi) commercially profitable,ii) economically viable and at the same time,iii) socially desirable.

3.3.Distinction between "project Appraisal" and "Project EvaluationDistinction between "project Appraisal" and "Project Evaluation":":Very often we ignore the necessity of drawing a clear-cut distinction Very often we ignore the necessity of drawing a clear-cut distinction

between the terms "appraisal" and "evaluation" of projects. But as a matter of between the terms "appraisal" and "evaluation" of projects. But as a matter of fact "project appraisal" should be clearly distinguished from "Project fact "project appraisal" should be clearly distinguished from "Project Evaluation" as both of the exercises do not carry the same meaning. The former Evaluation" as both of the exercises do not carry the same meaning. The former means the pre-investment analysis which the latter shows the post-investment means the pre-investment analysis which the latter shows the post-investment achievement.achievement.

4.4.Needs for Project Appraisal in BanksNeeds for Project Appraisal in Banks::i)From the individual`s/borrower`s entrepreneur`s point of view.i)From the individual`s/borrower`s entrepreneur`s point of view.-- To ensure profitability.To ensure profitability.ii)From the lender`s/banker`s point of view :ii)From the lender`s/banker`s point of view :-- To ensure repayment of bank finance.To ensure repayment of bank finance.-- To replace the traditional method of providingTo replace the traditional method of providing"collateral or security orientee" loan by the "Project or purpose oriented" "collateral or security orientee" loan by the "Project or purpose oriented" loan.loan.-- To achieve organizational goals.To achieve organizational goals.

iii)iii)From national point of viewFrom national point of view : :-- Optimum utilization of resourcesOptimum utilization of resources-- Achievement of national objectives.Achievement of national objectives.

5. Different Aspects of Project Appraisal:

There are mainly two types of feasibility studites in broader sense, viz,i) commercial feasibility andii) socio-economic feasibility or simply economic feasibility.

(Which studying the commercial feasibility of an investment project profitability element is taken into consideration from the individual`s as well as the lender`s point of view) whereas in case of econimic feasibility the same is viewed from the society`s angle as a whole. Commercial feasibility study again comprises of five different aspects namely

a) Technical,b) Marketing,c) Financial,d)Manageriale)Economical andf)Environmental

ii) Marketing :

- Are there adequate possibilities for surviving the project in view of the consumer`s needs, production, distribution etc. of the produce(s)/ product(s) to be produced by the project?

- Has the demand for the produce(s)/product(s) of the project been duly assessed taking into consideration all the factors which affect the said damned both favourable as well as adversely?- Whether supply analysis of the produce(s)/product(s) of the project has been made properly?

- Have the size of the market for the produce(s)/product(s) of the project as well as the maximum share of those produce(s)/product(s) that might have in the said market been determined properly from the interaction of the demand for and supply of the produce(s)/product(s) of the project in question?

- Whether the size of the plant is enough to supply the required quantity to cope with the gap that exists in between the demand for and supply of the produce(s)/product(s) of the project.- Will there be any major risk for marketing the produce(s)/product(s)?

iii) Financial:- Are the cost estimates exhaustive and realistic?- How is the project proposed to be financed?- Is the proposed capital structure financially satisfactory?- Has adequate provision been made for meeting the working capital requirements?- Dose the proposed current asset structure ensure adequate liqudity?- Will the project generate sufficient cash flows to cover its debt servicing

liabilities?- Will the project earn sufficient profit for its owners or sponsors?

iv) Managerial:- Do the top managerial personnel possess sufficient experiences in the line of production in which the project falls?- Has the supervisiory staff been chosen with exclusive consideration of expertise and ability?- Has due balance been maintained in the employment of supervisory staff and production workers?:

- Has the organizational structure been devised in a way that inter-deprtmental co-ordination becomes easy?- Are the documents in respect of the organizational set up of the project proper?

v) Environmental : Environment Feasible , Not harmful for the environment , not pollute the environment .(Inputs used in a project,production process within a

plant ,use of the project’s output).

(b) Economic appraisal:- Whether social cost of the project is <private cost?- Whether social benefit is > private benefit?- Whether social cost is < social benefit of the project?- Whether the project generates more external economies than what it internalizes

Technical Aspect on Project Appraisal :The technical aspects of an industrial project are appraised to determine whether

the project is sound with regard to every engineering and technological consideration, including product specification, prosess, size, internal balance, suitability and availability of physical facilities, designs and layouts of equipment and buildings etc.Technical Aspect on Project Appraisal is concerned with :* Raw Material * Structure & Civil Works* Utilities * Project Chart and Layout* Infrastructure * Work Schedule* Manufacturing Process * Quality Control* Technology * Repair and maintenance* Product Mix * Stock and Spare* Plant Capacity * Safety Provision* Location & Sites * Technical Managerial Personnel* Machineries & Equipment * Project cost estimation

1) RAW MATERIALIn case of Raw Materials the following aspect to be considered :

* Source of Raw Materials i. Local, ii. Foreign

* Requirement Volume* Quality* Price i. Past trend, ii. Present trend, iii. Future trend

* Auxiliary Materials2) UTILITIES

* Power Supply* Gas Supply* Water Supply* Fuel and Lubricates* Generator for electricity/gas

3) INFRASTRUCTURE* Power* Transportation* Water* Communication

4) MANUFACTURING PROCESS* Select Process of Manufacturing

5) TECHNOLOGY :To choice of the technology the under-noted things should be considered:* Plant Capacity* Principal Input* Investment Outlay & Production Cost* Use by other units* Product Mix* Latest Development* Ease of Absorption

6) PLANT CAPACITY* Technological requirement* Input Constraints* Investment Cost* Market Condition* Resource of the firm* Government Policy

7) PRODUCT MIX* The choice of product mix is guided by market requirement. In the production of most of items variation in size and quality are aimed at satisfying a broad range of customers.* The flexibility with respect in product mix should be considered while planning the production facilities of a firm.

8) LOCATION & SITESTo choice the location of a project must be considered :* Proximity of raw materials and market* A vailability of Infrastructure* Government Policy* Other Factors i) Environmental Pollution ii) Labor Situation iii) Climate Condition iv) General Living ConditionsTo choice the site of a project must be considered :* Cost of land* Cost of development of the site

9) MACHINERIES & EQUIPMENTSThe requirement of machineries and equipment is dependent on production

technology and Plant capacity. So to determine the requirement of machineries and equipment’s the following procedure may be followed :

* Estimate the likely level of production overtime* Define the various machining and various operation* Calculate the machine hour required* Select Machineries & Equipments for each function

10) STRUCTURES & CIVIL WORKSStructures & Civil Works may be divided into three categories:

i) Site preparation and Developmentii) Building and structureiii) Out door works

11) PROJECT COST ESTIMATIONCost computation has concerned under different subheads namely:

* Cost of land including registration* Land Development* Building and other civil works* Imported Machinery* Local Machinery* Duty and other Charges* Internal Freight* Furniture and Fixture* Erection, Installation & Security Deposit for electric power & Gas* Development Costi) Interest during construction periodii) Preliminary and Start-up Expenses* Contingencies i) For Machinery ii) For Building

12) PROJECT CHARTS AND LAYOUTOnce data is available on the principal dimensions of the project market size,

plant capacity, production technology, machineries and equipments, building and civil works, conditions obtaining plant site and supply of inputs to the project, project chart and lay out may be prepared.The important Charts and Layout drawing are brielly described below :

* General functional layout* Material flow diagram* Prodution line diagram* Transport layout* Utility consumption layout* Communication layout* Organizational layout* Plant layout

13) WORK SCHEDULEThe purpose of work schedule is :

* To anticipate problems likely to be arise during installation* To establish the phasing of investments* To develop a plan of operations covering the initial period

14) Investment CostThe relationship between plant capacity and investment cost is important which

may be expressed as follows :

12) PROJECT CHARTS AND LAYOUTOnce data is available on the principal dimensions of the project market size, plant capacity,

production technology, machineries and equipments, building and civil works, conditions obtaining plant site and supply of inputs to the project, project chart and lay out may be prepared.The important Charts and Layout drawing are brielly described below :

* General functional layout* Material flow diagram* Prodution line diagram* Transport layout* Utility consumption layout* Communication layout* Organizational layout* Plant layout

13) WORK SCHEDULEThe purpose of work schedule is :

* To anticipate problems likely to be arise during installation* To establish the phasing of investments* To develop a plan of operations covering the initial period

14) INVESTMENT COSTThe relationship between plant capacity and investment cost is important which may be expressed

as follows : C1 = C2 { Q1} u

Q2Where C1 = Derived cost for Q1 units of capacity

C2 = Known cost for Q2 units of capacity

u = Factor reflecting capacity cost relationship