View with images and charts An Evaluation of the Project Appraisal Report for Debenture Financing of S. Alam Power Generation Ltd. prepared by Investment Corporation of Bangladesh INVESTMENT CORPORATION OF BANGLADESH 1.1 HISTORICAL BACKGROUND The Investment Corporation of Bangladesh (ICB) was established on 1 October 1976, under "The Investment Corporation of Bangladesh Ordinance, 1976" (no. XL of 1976).The establishment of ICB was a major step in a series of measures undertaken by the Government to accelerate the pace of industrialization and to develop a well-organized and vibrant Capital Market particularly securities market in Bangladesh. ICB caters to the need of institutional support to meet the equity gap of the companies. In view of the national policy of accelerating the rate of savings and investment to foster self-reliant economy, ICB assumes an indispensable and pivotal role. Through the enactment of the Investment Corporation of Bangladesh (Amendment) Act, 2000 (no. 24 of 2000}, reforms in operational strategies and business policies have been implemented by establishing and operating subsidiary companies under ICB. Initially, the activities of ICB were limited to underwriting public issue of shares, bridge financing, debenture financing and opening/maintaining investors' accounts (Investors' Scheme). ICB had largely expanded its areas and scope of activities and now provides various types of investment and banking services. Added activities include providing debenture loans to companies and margin loans to investors, providing advances against ICB unit certificates, leasing of industrial equipment, managing unit fund and mutual funds, and participating in trading of securities. 2.1 OBJECTIVES
To encourage and broaden the base of investments To develop the capital market To mobilize savings To promote and establish subsidiary companies for business expansion To provide for matters ancillary thereto
2.2 BUSINESS POLICY To act on commercial consideration with due regard to the interest of industry, commerce, depositors, investors and to the public in general To provide financial assistance to projects subject to their economic and commercial viability To arrange equity and loans singly or through consortium of financial institutions including banks. To develop entrepreneurs and encourage them To diversify investments To inspire small and medium savers for investment in securities
To create employment opportunities To encourage more on investment in Agro-based and Information & Communication (ICT) sectors 2.3 FUNCTIONS Direct purchase of shares and debentures including placement and equity participation Participating in and financing of joint-venture companies Providing lease finance singly and through syndication Managing existing Investment Accounts Managing existing mutual funds and unit fund Managing Portfolios of existing businesses Providing advance against ICB Unit and Mutual Fund certificates and ICB AMCL Unit Fund Certificates Providing Consumer Credit Providing Bank Guarantee Acting as Trustee and Custodian Participating in and financing of joint-venture companies Providing investment counseling to investors Participating in Government Divestment Program Introducing new business products suited to market demand Supervising the activities of the subsidiary companies Dealing in other matters related to Capital Market Venture Capital Financing Managing Equity and Entrepreneurship Fund (EEF) 2.4 CAPITAL STRUCTURE Capital Structure as on 30 June 2009:
2.5 MILESTONES Date of Establishment/Commencement ICB Investors' Scheme ICB Chittagong Branch First ICB Mutual Fund ICB Unit Fund ICB Rajshahi Branch Second ICB Mutual Fund Third ICB Mutual Fund ICB Khulna Branch ICB Sylhet Branch Fourth ICB Mutual Fund Fifth ICB Mutual Fund Sixth ICB Mutual Fund ICB Barisal Branch Nomination as the country's Nodal DFI in SADF Seventh ICB Mutual Fund Eighth ICB Mutual Fund ICB Bogra Branch ICB Local Office, Dhaka Purchase of own Land & Building Participation in equity of SARF Advance against ICB Unit Certificates scheme Lease Financing Scheme The Investment Corporation of Bangladesh (Amendment) Act, 2000 Formation and Registration of three Subsidiary Companies Computer Training Programme Commencement of Operations of Subsidiaries: ICB Capital Management Ltd. ICB Asset Management Company Ltd. ICB Securities Trading Company Ltd. Registration as a Trustee with SEC Registration as a Custodian with SEC Bank Guarantee Scheme Advance against ICB Mutual Fund certificates scheme Consumer Credit Scheme Venture Capital Financing Scheme Purchase of own land (at Agargaon) Equity and Entrepreneurship Fund (EEF) management
2.6 ORGANIZATIONAL STRUCTURE
1 October 1976 13 June 1977 1 April 1980 25 April 1980 10 April 1981 9 February 1984 17 June 1984 19 May 1985 10 September 1985 15 December 1985 6 June 1986 8 June 1987 16 May 1988 31 May 1988 7 May 1992 30 June 1995 23 July 1996 6 October 1996 15 April 1997 11 December 1997 16 January 1998 12 October 1998 22 April 1999 6 July 2000 5 December 2000 25 March 2001 1 July 2002 1 July 2002 13 August 2002 20 August 2002 20 August 2002 21 June 2003 21 June 2003 15 February 2004 26 April 2007 3 March 2008 1 June 2009
ICB includes 11 divisions under the operation wing and administration wing, which leads to 25 departments. Beyond these two wings ICB has 2 other divisions-Audit and methods divisions and secretary’s division. a. Operating Wing With a view to supporting industrialization and to developing a well-organized and vibrant capital market, ICB continued to provide financial assistance to companies in different forms. The divisions under operations wings are presented below:
Audit & Method Divisions Loan Appraisal Division Funds Division Merchandising Division MIS Division
b. Administrative Wing In order to accelerate the ICB’s operational activities the Administrative Wings has to work very hard and has to do a lot of works to maintain the good reputation in the capital market. The divisions under Administrative Wing are as follows:
Administrative Division Accounts and Finance Division Legal Affairs Division Implementation & Recovery Division Secretary’s Division Branch & Subsidiaries Division
2.6.1 Board of Directors The head office of the corporation as per the requirement of the ordinance of ICB is located at Dhaka. The general direction and superintendence, of the corporation operated in a board of directors, which consist of 11 persons including the chairman and managing director of ICB. The board of directors consists of the following directors:
The chairman to be appointed by the government. The directors to be appointed by the government from among persons serving under the government. One director to be nominated by Bangladesh Bank. The managing directors, Bangladesh Shilpa Bank. The managing directors, Bangladesh Shilpa Rin Sangstha. Four other directors to be elected by the shareholders other than the government, BB, BSB and BSRS. The managing director of ICB to be appointed by the government.
2.6.2 Shareholding Position The shareholding position as on 30 June 2009 was as follows:
2.7 ORGANOGRAM
Board of Directors Managering Director
MD’s Secretary Operations Wing
Administration Wing
GM Operation’s Secretariate
Audit & Appraisal Planning and Methods Division Research Division Division
Funds Division
GM Administration’s Secretariate
Merchnadising Depository Leasing and Computer Division Division Venture Capital Division Division
Audit Organization Planning Management Securities Dept. & Methods Dept. Research Information Analysis
Shares Dept.
Dematerialization Dept.
Appraisal Lien and Consumers Unit Repurchase Unit Registration Mutual Funds Dept. Credit Dept. Dept. & Procurement Dept. Dept.
Investors’ Securities Reconciliation Dept Dept
Venture Capital Dept
Administration Accounts&Finance Legal Affairs Implementation Trustee Division Division Division & Recovery Division Division
Personnel Establishment Human Dept. Dept. Resources Dept.
Branch& Secretaries Subsidiaries Division Division
Implementation Recovery Trustee Custodian &Followup Dept. Dept. Dept. Dept.
Central Fund Project Loan Branch Affairs Subsidiaries Accounts Dept. Management Dept. Accounts Dept. Dept. Affairs Dept.
Leasing Dept
Law Dept.
Documentation Dept. Public Issue Dept.
System Analysis Dept. Programming Dept. Data Management Dept. Chittagong Branch Rajshahi Branch Khulna Branch Sylhet Branch Barisal Branch Bogra Branch Local Office Dhaka
Secretary’s Dept.
Public Relations Dept
2.8 PRODUCTS OF ICB 1.
Private Placements
ICB is authorized to act as an agent of the issuers and investors for private placements of securities. Under this arrangement, ICB places securities to individuals/institutions on behalf of the issuer for which it charges fees. ICB also acquires shares/securities for its own portfolio both in pre-IPO placement and equity investment. 2. Custodian and Banker to the issues
To act as the custodian to the public issue of open-end & closed-end mutual funds, ICB provides professional services. It also acts as banker to the issues and provides similar services through the network of its branches. Fees in this regard are negotiable.
3. Venture Capital Financing
As part of business diversification and to encourage rapid industrialization of non-traditional, risky but potential industries in the country ICB has launched Venture Capital Financing Scheme during the year.
4. Lease Financing ICB Provides lease finance mainly for procurement of industrial machinery, equipment and transport. ICB provides professional advice and financial assistance to the intending clients. The period of lease, rental, charges, and other terms and conditions are determined on the basis of type of assets and the extent of assistance required by the applicants. Since introduction of this scheme in 1999, good responses have been received from the intending lessees. 5. Consumer Credit Scheme As part of business diversification programme, ICB has introduced "Consumers Credit Scheme" in 2003-04 considering at the need of various household commodities of different employees of govt., semi-govt., autonomous bodies and some established private sector organizations. Under this scheme one can enjoy minimum Tk 1.0 lakh but maximum 5 lakh credit facilities. The rate of interest on the loan is reasonable and competitive which is fixed by the board of directors of ICB considering the bank rate and with the guidelines of Bangladesh Bank. 6. ICB Mutual Fund It is a recognized principle that diversification of investment reduces risk. An individual may not have the time, expertise and resources to undertake such diversification. Here arises the advantage of a Mutual Fund. Mutual Funds pool the savings of a great number of investors and make investments in a wide array of securities. In Bangladesh ICB has pioneered Mutual
Funds for the sake of investors and of the capital market. Mutual Funds are also known as close ended Mutual Funds. The issued capital of a Mutual Fund is limited, that is, a Mutual Fund offers a limited number of certificates for sale to the public. The amount of capital and the number of certificates of each Mutual Fund remains unchanged. ICB Mutual Funds are independent of one another. A Mutual Fund being listed is traded on the Stock Exchanges. Price of Mutual Fund certificates after IPO is determined on the Stock Exchanges through interaction of supply and demand. The market price of a Mutual Fund certificates is available in Stock exchange quotations and in newspapers. 7. Investors Scheme The Investors' Scheme was introduced in 1977 with the objective of broadening the base of equity investment through mobilizing savings of small and medium size savers for investment in the securities market. In addition to Head Office, Investment Accounts are also operated at the 7 branch offices of ICB located at Dhaka, Chittagong, Rajshahi, Khulna, Barisal, Sylhet, and Bogra. However in view of strategic changes in policy reform, from 01 July 2002 ‘ICB Capital Management Ltd.' started opening and managing investment accounts. ICB will continue to provide services to its existing accounts only. Further steps were undertaken to enhance the quality and speedy service under the scheme like computerization of all activities and installation of merchandizing operation management software. This enables the management to offer better and quick service to the investors including instant supply of the financial statement, portfolio, balance of the accounts, etc. Installation of telephone banking system in Investors' Account enabling investors to collect information and operate their account over telephone was at the final stage of operations. Besides, installation of Electronic display system of DSE online trading on the floor of ICB was in progress. 8. Advance against Mutual Fund certificates Scheme Advance against ICB Mutual Fund certificates Scheme was introduced in 2003, designed for the ICB Mutual Fund Certificate-holders to meet their emergency fund requirement. One can borrow maximum of 50% value of last one year's weighted average market price of certificates at the time of borrowing by depositing his/her certificates under lien arrangement from any of the ICB offices. The rate of interest on the loan is reasonable and also competitive. 9. Advance against Unit Certificates Scheme Advance against ICB Unit Certificates Scheme was introduced in 1998, especially designed for the ICB unit- holders to meet their emergency fund requirements. One can borrow maximum Tk. 85 per unit by depositing his/her unit certificates under lien arrangement from any of the ICB offices where from such unit certificates were issued. The rate of interest on the loan is reasonable and competitive. 10. Bank Guarantee scheme ICB introduced Bank Guarantee scheme in 2002-03. ICB provides (i) Bid Bond for enabling the business people to participate in any tender or bidding; (ii) Performance Bond for helping the business community to continue their business smoothly by fulfilling their obligations promised by them to their clients; and (iii) Customs Guarantee for solving different disagreements between the customs authority and the business classes at the initial stage. The maximum limit of guarantee is Tk. 2.00 crore and would be issued against at least 20% cash
and 80% easily en-cashable securities or against 100% cash margin. Re-guarantee from other financial institution is required for guarantee against the amount exceeding Tk. 2.00 crore. 11. ICB Unit Fund Sponsored by the Government of Bangladesh, ICB Unit Fund was established on April 10, 1981. Its main objective is to mobilize savings through sale of its units to small investors and invest these funds in marketable securities. The schemes provides a potential source of equity and debt to industrial and commercial concerns and thus contribute to the industrial development of the country. Unit fund is an open ended Mutual Fund. It provides an opportunity to the unit holders to invest their funds in a well managed and diversified portfolio with a high degree of security of capital and reasonable yearly returns. However, under the ICB’s restructuring program new unit certificates are being sold by ICB’s subsidiary company, the ICB Asset Management Company Ltd. 12. Mergers and Acquisitions Companies willing to expand their business through mergers or acquisitions or to divest projects that no longer viable into present capacity of operation can contact the Corporation. ICB provides professional services & advices in respect of shaping up the cost and financial structures to ensure best possible operational results. Besides, in case of divestment, the corporation, through network and established business relationship, bring buyers and sellers together, help them to negotiate final agreement and advice on the emerging corporate structure. 13. Corporate Financial Advice Government enterprises and Companies intending to go public issue often seek professional & financial advice on corporate restructuring & reengineering. ICB through its expertise provide such services through its expertise. 14. Trustee to the debenture and Securities assets ICB is acting as trustee to the debenture issues and asset-backed securitized bonds. ICB acted as trustee to the issues of 17 companies of which 7 companies have been redeemed successfully. 2.9 FUNCTIONS OF DIFFERENT DEPARTMENTS The functions of the various departments are given below: Personnel Department:
Recruitment of officials and staffs. Handling all personal matters including confirmation, posting, transfer, leaves etc. Processing of all promotion and retirement Dealing retirement benefits i,e gratuity, pension, provident fund etc. Controlling of attendance. Processing of Annual Confidential Report. Maintaining all types of disciplinary action. Arrange training for the employee both in home and abroad. Maintaining liaison with ICB employees unions.
Secretary's Department:
Arranging meeting of Board of Directors, Executive Committee and other Committee. Placing working papers to the Board of Directors. Maintaining attendance register of directors. Obtaining signature of the chairman on the minutes book. Collect and send any action needed to approve or implement. Maintaining register of shareholders of the company. Send minutes of the meeting to the Board and Government of Bangladesh. Making payments of dividend to the shareholders. Arranging Annual General Meeting. Arrange transfer splitting of shares and issuance of duplicate certificates.
Investors Department:
Opening and maintenance of investors account Sanction loans against deposit in investment accounts provide account loan margin at 1:2 ratio subject to ceiling of Tk. 3 Laces at a rate of interest of 13.5% Buy and sell shares on behalf of the investors both from the primary & secondary market. Counsel investors in respect of building up their portfolios. Withdraw funds and shares from investment accounts. Issue income tax certificates, portfolio statement accounts statement etc. Receive direct applications against public issue of shares. Receive allotment letters from the companies. Collect commission as banker to the Issue and brokerage commission from the companies. Processing of withdrawal of funds. Calculate quarterly interest of all investors account.
Shares Department & Reconciliation cell:
To avoid complexity the function of the department is divided into four sections. 1. 2. 3. 4.
Funds Portfolio Section Investors Portfolio Section Sale and Withdrawal Section Dividend Collection/Allocation Section
Funds Portfolio Section:
Receiving of IPO share, making arrangement of filling up of 117 forms and splitting up shares information market. Receiving of securities from the securities from the companies after registration, splitting up and arrangement for safe preservation. Receiving of sales order from the securities purchase & sale committee and providing information to the transaction department. Delivering of sold securities to the transaction department. Receiving of bonus and right share and allocates properly.
Investors Portfolio Section:
The purchase of shares in the investors accounts. Receives shares from the transaction department for preservation Send shares and debentures at the time of book closure for making registration in the name of the particular investors. Receives shares and debentures from the companies after registration. Collect bonus or right shares and allocate to accounts accordingly.
Sale and Withdrawal Section:
Receive sale and withdrawal order from the investors department Examine the actual existence of securities and to get out of the same from the volt Give information to the computer department about salability of the securities Making arrangement for the signature of attorney & filling up of 117 form Send the securities to the investors department in case of withdrawal
Dividend Collection Section:
Procurement of dividend and interest declared by the different companies Update the statements related to book closure, AGM, rate of dividend, rate of bonus/right share. Collect dividend and interest Distribute dividend and interest among the investors account and different portfolios.
Unit Sales Department:
Act as manager of unit fund Sell and issue unit certificate to the applicants Repurchase unit certificate Co-ordinate activities of Bank Branches in respect of unit sale and repurchase Determine sale and repurchase prices of unit certificate it to Bank Branches and ICB Branches. Split and consolidate unit certificates as requested by unit holders. Issues and distribute Cumulative Investment Plan (CIP) certificates.
Unit registration and procurement department:
Register and transfer unit certificates. Maintain separate register for unit holder CIP Verify signature of transfer deed Issuance dividend warrants and CIP certificates to the holders. Evolve various prescribe forms and registers, print them and distribute them among ICB Branches and Bank Branches as per requirement. Co-ordinate all activities relating to procurement and issue of unit certificates.
Mutual Funds Department:
Act as manager of all mutual funds Prepare prospectus in connection with the floatation of mutual funds Receive applications from the general public in respect of new issues of mutual fund Scrutinize the applications for allotment of shares against applications made Arrange for lottery if necessary for allotment
Issue allotment letters/share certificates. Arrange refund of excess application money. Effect transfer and registration of certificates. Issue dividend warrants to the holders of the certificates Make correspondences with the branches of the Corporation, Banks and Certificate holders. Central Accounts Department:
Identify the source of fund and manages funds of the Corporation Preparation of salary statements, overtime statements. Maintaining liaison with commercial audit and external audit Preparation of annual budget and revise it as per requirement Preparation of financial statement of the corporation Arranging call loan & term deposit.
Loan Appraisal Department:
Receiving application from the entrepreneurs Appraise the proposed project Submit the appraisal report to the board and consortium Visit the project and make a feasibility study on the proposed project.
Project Implementation Department:
Disbursement of loan as per sanctioned Monitor the progress of the project Provide counseling for solution of any dispute and problems Recommend for more loan if project need thereafter
Recovery & Follow-up Department:
Measures operational performance Meet the sponsors as the recovery would be smooth Identifying the sick project and restructure them Assist law department in case of default
Project loan Accounts Department:
Maintaining loan ledger, calculate interest and making repayment schedule Making adjustment of accounts in case of interest wave as per authority decided Adjustment of accounts as per recovery Making interest suspense account.
Public Issue Department:
Analyzing financial statements of sponsor and projects Assistance to prepare prospectus Arrange the legal permission of different authorities for floatation Collecting No object certificate from main banker. Collect IPO Proceedings as Banker to the Issue
Economic & Business Research Department; MIS Cell:
Sales and purchase of holding of Ten (10) Portfolios. Consider market trend and related companies position to take necessary steps to diversify portfolio risk. It fixes budget for branches and department in the shadow of overall budget, analyze their performance and finalize consolidated EBR report to the management. Finalize annual report of ICB and Fund subject to the approval of the Board. Prepare five year performance appraisal reports of the listed companies. Prepare MIS report that contains updated business and administrative performance. Convey EBR's decision directly or through computers department to the necessary department. Prepare Board memo regarding declaration of dividends on ICB's own portfolio, unit and mutual funds. Analysis securities and categorize them. Maintain information related to DSE, dividend/right/bonus declared by different companies’ public issue half yearly accounts of listed companies etc. Maintain liaison with Ministry of Finance, Bangladesh Bank, and Foreign Investors and provide ICB related information to interest parties. Arrange of offloading of government portion of shares in different companies and public corporations as per privatization decision.
3.1 PROJECT: A DEFINITION A project is a temporary endeavor, having a defined beginning and end (usually constrained by date), undertaken to meet particular goals and objectives, usually to bring about beneficial change or added value. Unique means that the product or service created by the project is in some distinguishing way from all similar products or services. According to Gittinger a project is “The whole complex of activities involved in using resources to gain benefits.” Differently a project can be defined as any scheme or part of scheme for investing resources which can reasonably be analyzed and evaluated (on the basis cost and benefit) as an independent unit. The term “PROJECT” can be broken-down like P-Product, R-Resources, O-Organization, J-Judgment, E-Economic, C-Commercial and T-Time bound.
3.2 TYPES OF PROJECTS •
Projects can be divided into two types: a. Quantifiable Projects: Quantifiable projects are those in which a plausible quantitative assessment of benefits can be made. Projects like industrial development, agricultural development, power generation etc. fall in this category.
b. Non-Quantifiable Projects :
Non-Quantifiable Projects are those where such an assessment is not possible. Projects involving health, education, defense etc. fall in this category. •
Projects can again be divided as:
a. New Project: A new project is the one, which is undertaken to create a unique service or product distinguishable from any other existing project.
b. BMRE: The abbreviation BMRE refers to Balancing, Modernisation, Renovation and Expansion activities. Generally sick industries go under such activities to improve their performances.
•
Bangladesh Planning Commission however, has classified projects under the following three categories:
Category “X”: Self financing projects i.e. projects which will earn revenue through the sale of their output. Category “Y”: Productive but non-revenue earning projects i.e. projects which will give rise to tangible output, benefits of which do not accrue directly to the projects themselves but to other parties. Category “Z”: Service sector projects i.e. projects which do not give rise to tangible output but provide service benefits to the community.
3.3 PROJECT FINANCING CONCEPT Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. Project Financing is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as
in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project. Thus, understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds are the main disciplines of project financing. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. The major participants of a project are: •
Sponsor
•
Project Vehicle (The newly organized firm)
•
Construction Contractor
•
Lender
•
Insurance Providers
•
Off-takers
•
Third-Party Operator
•
Resource Suppliers
•
Government
3.4 PROJECT APPRAISAL Project Appraisal is a formal assessment of the viability of a proposed undertaking and the robustness and predictability of revenue generation. It involves critically examining an investment project with a view to determining its market, technical and financial feasibility, economic viability and social desirability before funding. The term “Project Evaluation� is used in ex-post assessment of the performance of a funded project. Effective project appraisal offers significant benefits. A good appraisal justifies spending money on a project. It is an important tool in decision making and lays the foundation for delivery and evaluation.
3.5 ASPECTS OF PROJECT APPRAISAL A project proposal should be evaluated taking into account the following aspects: Market/Commercial Aspects
Potential Market Market Share
Technical Aspects
Technical Viability Sensible Choices
Financial Aspects
Risk Return
Economic Aspects
Benefits and Costs in Shadow Prices Other Impacts
Ecological Aspects
Environmental Damage Restoration Measures Organizational Structure
Managerial Aspects
Competency of Management Control over Management
4.1 PROJECT DESCRIPTION S. Alam Power Generation Ltd. was established in April 09, 2009 as a private limited company under the company’s Act 1994. It is a concern of S. Alam Group. The company was formed to take an opportune decision to ensure power supply to the industrial production area of the country. The authorized capital of the company is Tk. 100.00 crore and paid-up capital of the company is Tk. 20 lakhs. The corporate office of the company is located in Asadgonj, Chittagong. It generates an annual turnover of Tk. 18 million and the current manpower of the company is 84. The company was established to cater the the power need of S. Alam Cold Rolled Steels Limited for 15 years which is a sister concern of S. Alam Group. The project is located at Ichanagar, Banglabazar, Chittagong. It produces a heavy fuel oil (Furnace Oil) and is estimated to produce 15 MW/hr of electrical energy output, of which the power need of 8 MW/hr of S. Alam Cold Rolled Steels Limited will be fulfilled and the balance will be sold to REB (rural electrification board). The estimated total project cost by the company was Tk. 145.94 crore of which 87.00 crore was to be financed through debenture issue, 0.44 crore was to be financed by directors’ loan and the rest was to be financed through equity. The above debt financing was envisaged to accommodate by issuing a 13.50% redeemable, non-convertible, non-cumulative, non-participative debenture worth of Tk. 87 Crore, which was likely to be mainly subscribed by the Investment Corporation of Bangladesh (ICB) and other institutions under the leadership of ICB. The debenture would have been redeemable in 10 semiannual equal installments having a moratorium period of 1year. The debenture was to be secured by the way of creating first charge over the project land, plant to the equivalent amount of debenture value.
4.2 PROJECT SUMMARY 1. Name of the Company:
S. ALAM POWER GENERATION LTD.
2. Location of the Project:
The project will be located at Ichanagar, Banglabazar, Chittagong (The project site is enjoying every facility like electricity, gas, water, skilled labor and good road communication.)
3. Head Office
S. ALAM BHABAN, CHITTAGONG
2119,
ASADGONJ,
4. Brief Description of the The proposed project will set up a 15 MW/hr Project: Thermal Power Plant (Based Load Type, Furnace Oil) 5. Type of the Project:
A Private Limited Company
6. Capital Structure of the company: Date of Registration with Register of Joint Stock Company Registration number Authorized Capital Paid-up Capital Number of Outstanding Shares Face Value of Share
09/04/2009 CH-6951 (297) of 2009 Tk. 100.00 Crore Tk. 20 Lakhs 20,000 Tk. 100.00
7. Product Mix and Production Capacity: Daily Shift Duration of each shift Working Days in a Year Name of the product Annual Production Capacity
8. Investment :
3 8 hrs 330 days Electricity 15 MW
The cost of the project is estimated at Tk 145.94 crore. Project will be set up by sponsor’s contribution and debt raised through bank loan.
Appraisal Report of S. Alam Power Generation Ltd. (as appraised by ICB) The assigned topic of this report is the evaluation of the appraisal procedure of ICB. For describing the whole procedure, an appraisal report as appraised by ICB has been taken for evaluation and description. As a case study, the case of debenture financing by ICB for S. Alam Power Generation Limited has been considered. For evaluating this report at first the appraisal report summary of the company is presented in this section.
5.1 APPRAISAL PROCEDURE FOLLOWED BY ICB: When a project proposal is submitted, generally ICB follows the steps below for evaluating the project: 1. Application for financial assistance should be placed to the Project Appraisal Committee (PAC) of ICB with the required information as below: I. II.
The project profile need to be submitted In case of existing company, audited financial statement for the last 3 years need to
be submitted with application for assistance; III.
The audited financial statements/information/TIN related information of the subsidiary companies of the concerned company need to be submitted;
IV.
The national ID card, individual wealth statement, bank account related information and income tax statement of the directors of the company need to be submitted;
V.
Other information should be submitted by the company upon request by ICB;
2. If the project proposal seems to be satisfactory by the ICB’s management, then the concerned company is asked to apply in the prescribed form of ICB for financial assistance with project examination fee of minimum of Tk. 50,000; 3. Information from different banks and other financial institutions about financial strength and transaction activities of the company will be collected by ICB; 4. ICB will visit the project and a project visit report will be provided to the committee; 5. Based on the collected information, visit report, sound CIB report and acceptable credit rating report, the project appraisal report will be made by ICB by estimating project cost from information related to the project; 6. Memorandum is prepared for the project appraisal committee/managing director/ directors of the company’ 7. The project appraisal report with the memorandum is presented to the project appraisal committee; 8. The recommended project by the project appraisal committee is submitted to the General Manager/Managering director/ICB execution committee/ ICB Board of Directors according to the financing size of the project and then the project evaluation report is finalized; 9. If the project proposal is granted by the Board of Directors, the company will be provided with Sanction Letter. The Subject Company for this Assignment is M/S. S. Alam Power Generation Limited, the above stated steps have been followed, which are discussed one by one in the following paragraphs. 5.2 FINANCIAL STATEMENTS As per the application of the company for financial assistance through debenture financing mode of Tk. 87 crore, ICB evaluated the project proposal from different aspects. For getting started with the evaluation process, the first requirement is to submit the audited financial statement of the concerned company for the last 3 years. But the company is a new venture and accordingly ICB considered the performance of its main customer S. Alam Cold Rolled Steels Ltd. as the performance of the company will depend upon its customer’s sound financial position.
Financial Statement
S. Alam Cold Rolled Steels Ltd. (In thousands) Particulars Assets Fixed Assets( After depreciation) Investment Preliminary Expenses Total Fixed Assets Net Current Assets Total less: Deferred Income Tax Total Assets Liabilities and Equity Shareholders' Equity: Paid-up Capital Retained Earnings Total equity and reserve Long term Liabilities: Loan from Bank Loan from subsidiary companies Total Liabilities Total liabilities and Equity
2008
2007
1,381,375 4227 149 1,385,751 261,347 1,647,098 106,032 1,541,066
1,437,114 6341 298 1,443,753 185,881 1,629,634 70,004 1,559,630
533,448 52,524 585,972
533,448 21,252 554,700
800,100 154,994 955,094 1,541,066
788,289 216,641 1,004,930 1,559,630
Income Statement S. Alam Cold Rolled Steels Ltd. (In thousands) Particulars Turnover Profit After Tax Price per share
2008 1,508,149 1,121,959 22.87
2007 1,339,096 715,689 13.42
5.3 ORGANIZATIONAL STRUCTURE: The next requirement is providing with personal information related to the board of directors and their share holding patterns. Board of Directors & their Shareholdings The name of the shareholders and their designation are provided below: Sl. No.
Names of Board of Directors
Status
Share Holding Share Holding (No. of Shares) (%)
1.
Alhaz Md. Saiful Alam
Chairman
4000
20%
2.
Alhaz Md. Abdus Samad
Managing Director
2000
10%
3.
S. Alam Cold Rolled Steels Ltd. Represented hereto by Alhaz Md. Shahidul Alam Total
Director
14,000
70%
20,000
100%
Directors Profile 1.
2.
Alhaz Md. Saiful Alam Mr. Alhaz Md. Saiful Alam is the chairman of the company. He is a graduate of science by education. He is 45 years old and he is the founder of S. Alam group. S. Alam group is one of the renowned groups of our country. The company has been contributing in the industrialization, foreign remittance and production of import substitute products. He has succeeded in establishing a number of industries in a short period of time. Apart from these, he has been actively associated with social and humanitarian organization for establishing schools, colleges and Madrasa in the country. Alhaz Md. Abdus Mr. Alhaz Md. Abdus Samad is the Managing Director of Samad the company. He is a graduate of Business Administration by education. He is currently 37 years old. He is in a responsible position in the finance department of S. Alam Group.
5.4 PROJECT COST AND MEANS OF FINANCE: Company’s estimate of project cost ICB’s estimate of project cost Fixed Cost Net Working Capital
Tk. 145.94 Crore Tk. 132.82 Crore Tk. 131.14 Crore Tk.1.68 Crore
There is a difference in the estimation of project cost by the company and by ICB. The project cost has reduced in total by Tk. 13.12 crore in ICB’s estimate compared to the company. The difference can be attributed to the reduction and addition of excess expenditures as per ICB’s consideration based on the layout and design provided by the company and quotation of costs for estimating project costs. 5.5 TECHNICAL ANALYSIS: a) Land and land development of the project: Location of Project
S. Alam Power Generation Ltd.; Ichanagar, Banglabazar, Chittagong. Total Land Total land amount of the project is 50 decimals. Infrastructural Facilities The project site is enjoying every facility like electricity, gas, water, skilled labor and good road communication. ICB’s estimation of cost of Tk. 2.00 Crore land
b) Building and other Civil Works: Quantity of Total Civil 37,000 Sq. Ft Works Description of Civil Work Plant shade, office room, guard room, generator room etc. Will be constructed in the project location. Also, overhead tank, boundary walls and internal roads and passages will be constructed. Company’s estimation of Tk. 8.06 Crore cost ICB’s estimation of cost Tk. 2.61 Crore c) Machineries: Description of Machineries
Supplier of Machineries Company’s estimation of cost ICB’s estimation of cost
For the proposed project, reconditioned machineries will be imported from South Korea. The main imported machineries will be oil engine, boiler machine, steam turbine, substation, switch board etc. DAELIM ROYAL BOILER CO. LTD & JUNGSOO ENGINEERING CO. LTD. Tk. 114.58 Crore Tk. 114.58 Crore
d) Local Machineries: Description of Machineries Company’s estimation of cost ICB’s estimation of cost
Deep tube-well , firefighting equipment, diesel generator, sub-station, air conditioning system, electric cable etc. Tk. 2.57 Crore Tk. 2.43 Crore
e) Other Facilities: Electricity: The proposed project will obtain power connection from REB 11 KV High Tension Line. Apart from these, to meet up emergency power need, a generator of 200 KVA power will be obtained too. Water: The water requirement of the project will be met from the river & projects own deep-tubewell provisions. Gas: There is gas connection adjacent to the project. Production Process of Electricity:
Sensitivity Analysis: It has been observed that the profitability of the projct experiences negative effect if the production cost of is increased by 10% and the sales price is decreased by 10%. However, reduction is sales price has much more effect in prfitability of the project. The details of the sensitivity analysis has been enclosed in the report. 5.6 FINANCIAL ANALYSIS: The financial operational activity of the company has been decided based upon the information provided by the company. The estimated profit and loss statement, cash flow statement and balance sheet, breakeven point analysis, internal rate of return, payback period and debt service coverage ratios are shown in the annexure of the report. The 5 years statement with other information and estimated ratios of the company are shown below:
S. Alam Power Generation Ltd. Financial Statement Particulars Capacity Utilization Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Financial Expenses
Year-1 90% 892652 662603 230049 11534 218515 84500
Year-2 90% 898776 668633 230105 11754 218351 84500
Year-3 90% 898776 684284 214492 11966 202526 70417
(Tk. in Thousands) Year-4 Year-5 90% 90% 898776 898776 696624 708944 202152 189832 12186 12416 189965 177416 56333 42250
Preliminary and Expenses Write-off
Pre-operation 120
120
120
120
120
Financial & Other Expenses Profit before Other Income
84620 133895
84620 133731
70537 131989
55653 133512
42370 135046
Income from Short Term Investment Income Before WPP Workers Participation Fund
0 133895 6695
16800 150531 7527
26400 158389 7919
35200 168712 8436
46400 181446 9072
Profit after Workers Profit Participation Fund Income Tax Reserve Profit after Income Tax/Reserve
127200
143004
150470
160276
172374
50880 76320
57202 85802
60188 90282
64111 96165
68949 103425
Dividend Retained Earnings Last Year Balance Cumulative Retained Earnings
32500 43820 0 43820
65000 20802 43820 64622
65000 25282 64623 89905
65000 31165 89905 121070
65000 38425 121070 159495
25.77% 24.48% 8.55%
25.60% 24.30% 9.55%
23.86% 22.53% 10.04%
22.49% 21.14% 10.70%
21.12% 19.74% 11.51%
19.57% 11.74% 5% 42.58% 2.62 52.28% 16% 6 years
22.00% 13.20% 10% 75.75% 1.41
23.15% 13.89% 10% 72.00% 1.44
14.66% 14.79% 10% 67.59% 1.48
26.52% 15.91% 10% 62.85% 1.53
Ratios: Gross Profit to Sales Operating Profit to Sales Income after Tax to Sales Net Profit to Paid-up Capital Before Income Tax After Income Tax Dividend Dividend pay out Debt Service Coverage Ratio Break Even (in capacity utilized) IRR Pay Back Period
Group Exposure of S. Alam Group Sl. No. 1 2 3 4 5
6
Group Company
Product
Turnover
S. Alam Cold Rolled Steels Ltd. S. Alam Steels Ltd. S. Alam Cement Ltd. S. Alam Brothers and Karnaphuli Prakritik Gas Ltd. S. Alam Soyaseed Extraction Plant Ltd.
C. R. Coil C.I Sheet Cement P.P. Cement, others Solvent Extraction Plant
S. Alam Refined Sugar Sugar Industries Ltd. Refinery
424.49
Total Assets 517.00
Total Net Liabilities Asset 419.00 98.00
314.00 110.55 4.54
460.69 94.20 15.27
345.82 41.00 8.92
114.87 53.22 6.35
Production lay 25.82 off
9.20
16.62
Waiting to 180.00 start operation
88.60
91.40
7 8 9 10 11 12 13
S. Alam Power Generation Ltd. S. Alam Luxury Chair Coach Services Ltd. S. Alam Brothers Ltd. S. Alam Trading Company Ltd. S. Alam and Ltd. S. Alam Hatchery Limited Hasan Abason (Pvt.) Ltd.
Total
Power Plant
Waiting to 35.00 start operation 76.69 90.89
23.80
11.20
7.20
43.69
379.55 92.48
155.70 81.53
142.36 37.80
13.34 43.73
Trading Shrimp Fry
96.83 5.80
93.66 5.70
8.20
85.46 5.70
Real Estate
Waiting to 40.00 start operation 15049.39 2189.7 4
Passenger Bus Service Trading Trading
40.00 1131.74
1057.84
5.7 MARKET ANALYSIS To eradicate poverty with limited resources and densely populated area, a growth rate of 6% to 7% need to be achieved by the country. To reach this goal, availability of electricity is a precondition. Bangladesh currently produces 4500 MW electricity which was only 88 MW in 1960. In the last 10 years, production of electricity increased by 7%. But to have a GDP growth of 8% to 10%, the growth rate in production of electricity should be at least 15%. Currently only 35% of the entire population enjoys electric connection which is insufficient compared to other LDCs. The demand is only 155 KW per head which is the lowest in the world but this amount cannot be provided because of production gap. For this reason, the government has currently taken steps to increase production of electricity through government and private initiatives. Recently, a decision has been made as to reduce consumption of gas and increase of fuel oil for producing electricity. For this reason, taxes on furnace oil will be withdrawn for production of electricity. Government may make the electric plants as dual fuel users. Any of the two of-coal, oil and gas will be used in all plants. The current scenario of electricity sector of Bangladesh can be seen from the statistics below: 1. Installed Capacity: PDB IPP & Others Total 2. Maximum Capacity Utilized: PDB IPP & Others Total 3. Transmission: a. Transmission Line 230 KV 132 KV Total b. Capacity of Grid Sub-station
3420 MW 1290 MW 4710 MW 2375 MW 1247 MW 3622 MW
733 KM 3186 KM 3919 KM
230 /132 KV 132/33 KV 4. Distribution Line: (33KV, 11 KV, 0.4 KV) 5. Total consumers: Urban Rural Total 6. No. of Consumers in Agricultural Sector: 7. No. of Villages with Electricity 8. Percentage of Users of Electricity of the Country 9. Per head Demand 10. System Loss
3700 MVA 784 MVA 226232 KM
25600000 54000000 79600000 153000 44546 35% 155 KW 24.49%
The government is working to reach electricity to each and every one of the country within 2020. The plan of government to increase electricity production up to 2020 can be seen in the following table: Financial Year 2000 2005 2010 2015 2020
Targeted Electricity Production MW Growth Rate 3149 5172 10.40% 7728 8.40% 11439 8.20% 16808 8.00%
It can be seen from the table that the target have not been achieved yet. For this reason, establishment of more electric plant has become a dire need for the country. Electricity Demand of S. Alam Group: S. Alam Group is one of the renowned groups of the country. For expanding its steel and heavy engineering business, the electricity demand of the company is increasing day by day. Because of the extreme electricity gap it has becoming very difficult for the group to meet up its power need from PDB and REB only. A captive power plant with a capacity of 6 MW and the PDB and REB collectively provides two-third of the power need of 23 MW of 11 companies of the group. It is expected that the power need will reach to 15 MW by 2009 and 20 MW by 2010. So, establishment of own power plant for meeting its own power need is a wise decision. Power Need of all companies under S. Alam Group
23 MW
Provided by PDB and REB and a captive power plant
15 MW
Deficit
8 MW
This deficit amount of 8 MW will be provided by the new project with a capacity of 15 MW and the rest will be sold to REB. 5.8 VISIT REPORT: With the permission from the authority, under the leadership of the deputy general manager of appraisal division, the team consisting of assistant general manager and other high officials of ICB visited the project location of S. ALAM POWER GENERATION LTD. at Ichanagar, Banglabazar, Chittagong at 31/07/2008. The assistant general manager, Mr. Jalal Uddin Ahmed Siddiqui and the Plant-in-charge of Sugar Refinery Project, Mr. Md. Ayub Ali (BSC Engineer) and other high officials of the project were present there. The required land of 50 Decimal has been purchased by the entrepreneurs. The land development procedures have been completed for construction purpose. From local correspondences it has been known that land of that location is being traded at Tk. 4 Lakh to Tk. 4.5 Lakh. The proposed project is a electric power plant with a production capacity of 15 MW per hour. The project will produce 3, 60,000 KW of electricity daily and the annual production volume will be 13, 14, 00,000 KW. For this reason, the company will install engines. New machineries will be imported from South Korea for the project. The main required imported machineries will be oil engine, boiler machine, steam turbine, substation, switch board, 11/33 KV, 28 MVA substation etc. The cost of the machineries has been estimated to be Tk. 114.58 Crore and the cost of machineries which will be collected locally has been estimated to be Tk. 2.43 Crore. The company will fix the price after collecting quotation from 3 renowned international companies. The total cover area for machineries and equipments will be 920 square meters and will be pre-fabricated steel structured. Water: water of 200 cubic meters will be required daily for the project which will be collected from the nearby river, Karnaphuli and projects own deep-tubewell provisions. Electricity: electric line of REB is present nearby the project location. The connected load of the project will be 200 KW and the maximum demand will be 150 KW which will be provided from the nearby 11 KV high tension line of REB through its own substation. Also a standby generator with capacity of 250 KVA/ 200 KW will be established in the project. Gas: there is no gas connection in the area currently. The gas line is situated at a distance of 2 KM from the project. It was informed during the visit that a gas connection will be established with the Bakhrabad Gas Station for the project. 5.9 CREDIT REPORT: The value of total assets of the Directors
Tk. 431.55 Crore
The amount of Investment by the Directors
Tk. 40.00 Crore
So the ratio of the total assets of the directors to the investment by them is 0.79. 5.10
CREDIT RATING REPORT:
CRISL rated the proposed project as follows: Debt Instrument Rating Date of Rating Declaration
Long Term BBB+ (Indicative) Moderate Safety October 20, 2009
The weaknesses and strengths that are described in the credit report by CRISL are discussed below. Weaknesses of the Project: a. The successful implementation of the project is dependent on the permission from the controlling body (Energy Regulatory Commission) b. As the produced electricity by S. Alam Power Generation Ltd. will be purchased by its other sister concerns, the profitability of the company depends on the financial soundness of the project c. Huge investment, large expenses for technical problems/repairing can create hindrance in paying off the project debt d. Short term loan against long term project may create pressure for the company to pay off its debt e. Increase of Fuel Oil in the international mark Strengths of the Project: a. b. c. d. e.
Strong group support Absence of market risk Financial strength of S. Alam Group Assistance from government in production of electricity Possibility of expansion of the market
Risks described in the Rating Report: The risks that were described in the Rating Report by CRISL are as below: 1. Risks associated with the increase of fuel oil: The main raw material of the project is furnace oil. The price of furnace oil fluctuated a lot in the last few years. In 2007 and 2008 the price was TK. 38.00 and Tk. 42 respectively. On the other hand the price reduced to Tk. 26 in 2009. In production plants run by furnace oil, 80% to 90% of the production costs are expensed for fuel oil. So the increase of furnace oil in the international market will influence the profitability of the project largely.
2. Risks associated with the implementation of the project: 5 generators will be established in the project. The supplier of the generators will be responsible for technical support for the equipments during the implementation of the project and up to a certain time after the implementation of the project. Moreover, S. Alam group have already installed a power plant with a capacity of 6 MW. Taking into consideration of all of these facts, it is the opinion of CRISL that there is no risk associated with the implementation of the project. 3. Maintenance Risk: The suppliers of the machineries will repair all of the machineries for free during the warranty period. Subsequently, overhauling will be done after each 4 years which may create pressure for the company in face of tight cashflow and the availability of spare parts in the local and the international market. 4. Sectoral Risk: As now a day the government is providing facilities for producing electricity and there is a huge demand for electricity in the country, there is no sectoral risk of the project. 5. Revenue Risk: as the produced electricity will be sold to the subsidiary companies of S. Alam Group, so the earnings of the project will be dependent on the cash availability of the subsidiary companies. But as the proposed project and the other subsidiary companies will run under the same management team, in CRISL’s opinion there will be no risk related to the earning of the company.
Critical Evaluation of Appraisal Procedure followed by ICB (In Case of Debenture Financing for S Every bank and FI has to follow some standard lending guidelines and credit risk strategy and significant policies relating to credit risk and its management which should be based on the FI’s overall business strategy. Credit risk policies should: • • • • •
Provide detailed and formalized credit evaluation/ appraisal process Provide risk identification, measurement, monitoring and control Define target markets, risk acceptance criteria, credit approval authority, credit origination/ maintenance procedures and guidelines for portfolio management Be communicated to branches/controlling offices. All dealing officials should clearly understand the FI’s approach for credit sanction and should be held accountable for complying with established policies and procedures Clearly spell out roles and responsibilities of units/staff involved in origination and management of credit
Every bank/FI has to follow its own detailed outlined lending procedures and risk grading systems for financing purpose. ICB evaluated the case of financing of a 13.50% redeemable, non-convertible, non-cumulative, non-participative debenture worth of Tk. 87 Crore of S. Alam Power Generation Ltd. according to its credit risk management policy. However, when evaluated critically based on best industry practices and contrasted to the procedures followed by other peer group FIs, some shortcomings and differences in the appraisal procedure followed by ICB have been identified. In the above section, the practices followed by ICB and the pitfalls in those standards have been analyzed thoroughly.
6.1 Lending Guideline All FIs should have established “Lending Guidelines” that clearly outline the senior management’s view of business development priorities and the terms and conditions that should be adhered to in order for facilities to be approved. Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of facilities that do not comply with Lending Guidelines should be restricted to the FI’s Head of Credit or Managing Director/CEO or Board of Directors. The Lending Guidelines should provide the key foundations for accounts officers/relationship managers (RM) to formulate their recommendations for approval, and should include-Industry and Business Segment Focus, Types of Facilities, Single Borrower/Group Limits/Syndication, Sector Lending Caps, Product Lending Caps, Discouraged Business Types, Facility Parameters etc. But, as can be seen from the appraisal report under consideration, any opinion as to the compliance of the application with any lending guideline followed by the company has not been given and it is apparent that ICB hardly follows any such lending guideline as to minimize the sectoral risk exposure and other risks associated with a project.
6.2 CREDIT ASSESSMENT A thorough credit and risk assessment should be conducted prior to the granting of a facility, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is reviewed by Credit Risk Management (CRM) for identification and probable mitigation of risks. As per the Credit Risk Management Manual of Bangladesh Bank, Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details: • • •
Amount and type of facility(s) proposed Purpose of facilities Facility Structure (Tenor, Covenants, Repayment Schedule, Interest)
• • •
Security Arrangements Government and Regulatory Policies Economic Risks
All of these requirements have been covered by the credit application of S. Alam Power Generation Ltd. for debenture financing and subsequently approved. Also, focus needed to be given to the following areas as per the manual. a. Borrower Analysis: The majority of Shareholders, Management team and group of affiliated companies need to be assessed critically. In case of S. Alam Power Generation Ltd., information regarding the experience and ability of the company’s management shows that the management is highly capable and belongs to a renowned and established group of companies of the company. This ensures their capability of successfully operating the company and meeting its goal. So managerial risk factors i.e. entrepreneurial background, overall capability to manage the activity, lack of professionalism and control are absent in this case. b. Intra-industry Analysis: No intra-industry analysis has been done of other existing captive plants which was crucial for the successful implementation of the project. There are other strong competitors like DESCO, DESA, Summit Power ltd. etc which are established companies in this sector. Also there are Greenfield companies like Power Grid Company of Bangladesh Ltd. which should be taken into consideration for comparing their infrastructural strengths and also other competitive forces in the industry and overall industry concerns should have been analyzed for successful implementation of the project and also for being competitive in the industry to survive. c. Buyer Analysis: Buyer analysis has been done for the company. The financial statements of the main customer of the company, S. Alam Cold Rolled Steels Ltd. has been provided and the performance of other companies of the group has been analyzed as the profitability of the company will depend upon the overall performance of the group. d. Social-Cost-Benefit Analysis: Social-Cost-Benefit analysis is important as the successful implementation of the project depends largely on the positive result of such analysis. If the SCB analysis shows that the project can be socially harmful or the cost of the project outweighs the benefits gained from the project, then it may fail even after sound market, technical, financial analyses. In this case, if people face problem from encroachment of land by the company for setting up the facility or if people get less supply of natural gas or water for the commercial usage of natural resources of the area then the project may face a negative effect and may fail. So such an analysis was necessary for evaluating the project properly. e. Projected Financial Performance:
The projects financial performance has been projected for the next 5 years with an analysis of the sufficiency of cash flow for servicing debt obligations. The estimated cash flow statement and the calculated debt service coverage ratio show the project will be able to cover its debt obligation. However, if the operating profit of the company suffers due to increase in raw materials and inability to increase price per unit of electricity accordingly for limitations from government or other reasons, its cash flow may suffer which will result in reduced ability to cover its debt obligations. f. Credit Investigation: The CIB report from Bangladesh Bank has been collected which shows no classified loans against the project promoters. Also credit report on promoters and credit rating report of the company has been collected. g. Type of Control on Cash Flow: The assessment of the credit application shows that there is no control on the borrower’s cash flow for securing the repayment which could have included payment assignment from customers of the borrower etc. h. Midterm Evaluation: Condition of midterm evaluation after a certain time period should have been included in the appraisal. It is important as the grading of the project may fall in future and due to its long tenure risk can be minimized by periodical evaluation of projects after each 3/5 years. As the project is 15 years long so at least 2 midterm evaluation at the 5 th and 10th year could have been arranged for minimizing the risk of failure. i. Exit Option: Credit application should clearly state the exit option from the borrower in case of early identification of deterioration of grading of the borrower which in this case is absent from the application and there was no further requirement by ICB from the company. j. Name Lending: Credit proposals should not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of facilities should be based on sound fundamentals, supported by a thorough financial and risk analysis. But in this case, much reliance on the company’s parent group’s reputation has been shown which is risky and should have been avoided. More analysis of the financial strength of the customer company, S. Alam Cold Rolled Steels Ltd. should have been conducted for minimizing risks of the project.
6.3 CREDIT RISK GRADING The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. A Credit Risk Grading
deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management system and is an important tool for credit risk management as it helps the Financial Institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a FI. The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the lending price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stage, the FI can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Risk grading should be assigned at the inception of lending, and updated at least annually. FIs should, however, review grading as and when adverse events occur. As per the prescription of Bangladesh Bank, every FI should use a credit risk grading model and outline a detail Credit Risk Grading matrix which will allow application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the FI as a whole. The proposed CRG scale, which is applicable for both new and existing borrowers, is presented below:
Grading
Short Name
Number
Superior Good Acceptable Marginal/Watchlist Special Mention Sub Standard Doubtful Bad & Loss
SUP GD ACCPT MG/WL SM SS DF BL
1 2 3 4 5 6 7 8
The prescribed Risk Grade Matrix and the Risk Grade Scorecard is attached as appendix in the report. All FIs use their own grading model to classify projects/borrowers based on their risk level. But the appraisal report of S. Alam Power Generation Ltd. shows no such grading of the project’s risk level and no decisions related to pricing (credit-spread) and specific features of the credit facility could be made based on such grading of the facility.
6.4 RISK CONSIDERATIONS In case of S. Alam Power Generation Ltd. the risks associated with the project were identified by CRISL as risks associated with the increase of fuel oil, project
implementation related risk, maintenance risk, sectoral risk and revenue risk. But there may present some other type of risks which needed to be considered. •
Availability of Input: Another risk can be rationing of natural gas by the government. Natural gas is becoming scarce in the world and there is limited reserve of natural gas in the country. With the rapid growth of industrialization in the country the use of fuel is increasing and it’s becoming obvious that there will be shortage and rationing of these natural resources in future. In such a case, a project with a life of 15 years may not be able to get required fuel in full quantity. Also, with the contraction of supply of fuel it may also happen that OPEC will ration furnace oil too in the future.
•
Changes in Government Policy: Though according to CRISL there is no sectoral risk as the sector is enjoying complete support from government, risks may arise due to changes in government policies. The government is currently considering giving rebate in import duty and taxes for furnace oil. But if policy changes in the future, it may become difficult for the company to collect cheap raw materials due to excessive price which is possible as the price of furnace oil is fluctuating in nature in the international market. Also, as the reserve for gas and oil is limited, the government may decide to divert its concentration on supporting projects which needs natural gas or oil for production purpose and focuses on encouraging atomic energy, windmill or solar power facilitated projects in future. Such a change in policy may affect the continuation of the project drastically and may result in winding up of the company at last.
•
Cross Industry Risk: The risks associated with delay in payment by the customers have not been taken into consideration. As the main customer of the company is one of its sister concern, S. Alam Cold Rolled Steels Ltd., if it delays in clearing its payment due to its low receivables turnover, it will hamper the project as it may face shortage in working capital.
6.5 MARKETING APPRAISAL As per the training course materials on” Project Appraisal and Management” provided by Bangladesh Institute of Bank Management for the employees of ICB, a standardized marketing appraisal should contain: A brief description of the market Past and present demand Past and present supply Demand forecasting
Supply forecasting Level of competition and trend etc. It can be said that the marketing appraisal by ICB was adequate as it contained all of the above information which shows the general standard for conducting marketing appraisal has been followed by ICB in this case.
6.6 TECHNICAL APPRAISAL Technical appraisal of a project involves the critical study of the location and site; size; technology, plant and equipment; building and layout. Analysis of the location and site involves the consideration and evaluation of raw materials supplies, proximity of market, transportation facilities, power and fuel supply, water, manpower and other natural and climate factors. Adequacy and suitability of the plant and equipment ad their specifications, plant layout, balancing of different sections of plant, reputation of the machineries suppliers also need to be considered under technology, plant and equipment aspect. All of these specifications have been provided and discussed in the technical analysis part of the appraisal report of S. Alam Power Generation Ltd. which shows the project to be technically viable.
6.7 FINANCIAL ANALYSIS Financial statement analysis consists of applying analytical tools and techniques to financial statement and other relevant data to obtain useful information. This information reveals significant relationships between data and trends in those data that assess the company’s past performance and current financial position. The information shows the results or consequences of prior management decisions. In addition, analysts use this information to make predictions that may have a direct effect on decisions made by users of financial statements. Every item reported in the financial statement has significance. It is necessary to compare each item of a financial statement with other financial statement data. Comparisons can be made on a number of different bases. Such as: 1. Intra-Company Basis: This basic compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. 2. Industry Averages: It compares an item or financial relationship of a company with industry average published by financial rating organizations such as Credit Rating Information and Services Limited (CRISL) and Credit Rating Agency of Bangladesh (CRAB).
3. Inter-Company Basis: The basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. There are various tools used to evaluate the significance of financial statement data. Three commonly used tools are: 1. Horizontal Analysis- used to evaluate a series of financial statement data over a period of time. 2. Vertical Analysis- used to evaluate financial statement data that expresses each item in a financial statement in terms of a percent of a base amount. 3. Ratio Analysis- used to express the mathematical relationship between two figures. In the financial analysis part of the appraisal report of our subject company, S. Alam Power Generation Ltd., only ratio analysis of the forecasted financial statements has been done. As the project is a new venture, Horizontal analysis could not be done as there were no previous financial statements to be analyzed and also vertical analysis or common size analysis could not be done. However sensitivity analysis, breakeven analysis, payback period and IRR have been calculated for the project. Though Income Statement, Balance Sheet, Cash flow Statement have been forecasted for the next 5 years of the project, the basis on which the financial statements of the company are prepared is not a proper procedure to follow in case of a new project. Generally when the financial statements of a new project need to be estimated, it is prepared and contrasted with the financial statements of its peer group companies with the same capacity. A consolidated common size statement is prepared and the estimated statement of the new project is compared with the industry standard. If major differences are found, the reasons are analyzed and remedial measures are taken. Thus, any industry standards have not been taken to forecast the items and assumptions were taken without any sound ground. Now, the pitfalls from the financial analysis of the report are analyzed one by one as below: Financial Statements a. Income statement: i. Capacity Utilization: The capacity utilization has been assumed to be 70%, 75% & 80% in the 1st, 2nd 3rd year & subsequent years on the project proposal. But during calculations, the capacity utilization has been considered to be 90% throughout the period in both the project proposal document and the appraisal report which is inconsistent. ii.
Annual wage increment: Annual wage increment should be incongruence with projected rate of inflation over the years in consideration rather than taking a constant rate which was considered to be 5% in this case.
iii. Overhead Expenses: The overhead expenses i.e. the cost of repair & maintenance of machineries was assumed to be 0.5%, 0.75% & 1% for the 1 st, 2nd, 3rd and subsequent years. But the rate has been applied accordingly up to year 3 and then the rate was not consistent with the assumptions made before. However, the growth rate of rent, tax & insurance has been constant after 2 nd year and onwards and the growth rate of other manufacturing overheads has been a constant of 25% over the years. iv. Depreciation: The depreciation of machineries have been assumed to be 5% and depreciated on straight line basis, which is not a proper practice. The depreciation should have been calculated based on the capacity and per reporting period utilization of each of the machines. v. Selling Expenses: The assumption for selling expenses was a yearly increase of 0.25%, but the calculations were not done accordingly rather it has been increased by 0.67% in the 2nd year and then continued to be constant afterwards. vi. Financial Expenses: The interest of 13% on debenture has been calculated on the remaining balance after repayment of an equal amount of Tk. 108,333,000 every year. vii. Preliminary and Pre-operation Expenses: The total cost of Tk. 600,000 has been divided into 6 equal installments of Tk. 120,000. viii. Workers Participation Fund: The amount of this fund is generally fixed for all other companies whereas the rate is fluctuating in this case. b. Balance Sheet: 
Assets: i. Short Term Investment: the growth in short term investment has been considered to be 57%, 33%, 32% and 36% in the 2 nd, 3rd, 4th and 5th year which are inconsistent and does not show any valid reason behind such forecast. ii. WIP and FG: Work-In-Process and Finished Goods have been calculated for the project which is not quite understandable as the produced product is electricity which cannot be stored. Also, the growth rates of both of the items are random and cannot be defended on strong ground for being a proper estimation. iii. Stores and Spares: the stores and spares for the project have been calculated at 0.5%, 0.75% & 1% for the 1st, 2nd, 3rd and subsequent years. But the rates have not been applied accordingly and the amounts were not consistent with the assumptions made before.

Liabilities: i. Short Term Bank Loan: This item has also been estimated on a random basis rather than considering the requirements in working capital.
ii. Dividends Payable: Dividend has been considered to be a constant dollar amount on the subsequent years after the 1st year. iii. Directors Loan: The directors’ loan will be repaid at equal payments of Tk. 5,635,000 in each year within the next 6 years which is a properly arranged. c. Cash flow Statement: The cash flow statement was prepared based on a standard format and is representative. Sensitivity Analysis: Some Pitfalls •
Sensitivity has been analyzed taking raw materials cost as the variable which has been increased by 5%. This change in price is a subjective judgment without any sound ground for consideration. The proper rate would have been the standard deviation of the prices of furnace oil in the international market for at least over the last 10 years as the project life is 15 years.
•
Financing horizon of the project is 15 years, whereas sensitivity analysis has been done only for 5 years.
•
Sensitivity to the sales price needed to be analyzed for getting a proper understanding of the most important factor under consideration.
Scenario Analysis Scenario analysis could have been done for the proper implication of the influencing factors jointly. This could have been done taking raw materials cost and sales price and watching their influence on the performance of the project jointly. Capital Budgeting Techniques: Payback Period The payback period is the expected number of years required to recover the original investment. ICB estimated the payback period of the project and considered this period to be the loan period which is 6 years. But payback period has some limitations. Such as- It does not consider the time value of money, - It does not consider any required rate of return and - It does not consider all of the project’s cash flows. Because of these major flaws in the method, more representative methods like NPV, IRR or MIRR should have been used to evaluate the project’s profitability.
Internal Rate of Return (IRR) The IRR is the discount rate that equates the present value of a project’s expected cash inflows to the present value of the project’s cost. PV (inflows) = PV (outflows/investment costs) In our concerned project, the IRR is 16%. Net Present Value Method (NPV) NPV is equal to the present value of all cash flows discounted at the weighted average cost of capital. Using the hurdle rate as the required rate of return, the net present value of an investment is the present value of cash inflows minus the present value of the cash outflows.
Which method is better: the NPV or the IRR? Though IRR is the most popular measure used for evaluating projects, the superior one is NPV method. NPV is superior to IRR method for at least two reasons: The NPV assumes that the cash inflows are reinvested to earn the hurdle rate, the IRR assumes that the cash inflows are reinvested to earn the IRR. Of the two, the NPV’s assumption is more realistic in most situations. It is possible for the IRR to have more than one solution. If the cash flows experience a sign change (e.g., positive cash flow in one year, negative in the next), the IRR method will have more than one solution. The NPV method does not have this problem. Thus NPV is the better measure than the IRR. But the problems of IRR can be overcome by using Modified Internal Rate of Return (MIRR) where The cash inflows are assumed to be reinvested at the firm’s hurdle rate and There is only one solution to the problem. In our discussed appraisal report, ICB calculated the payback period and the IRR of the project only whereas the more representative measure would have been NPV method or MIRR method. The NPV method would have been the best as if the NPV is positive; it says that the company expects to receive benefits that are large enough to repay the company for
The asset’s cost,
The cost of financing the project and
A rate of return that adequately compensates the company for the risk found in the cash flow estimates.
And if the NPV is negative, the benefits are not large enough to cover all three of the above, and therefore the project should be rejected. Thus the NPV method is the best measure for evaluating project’s effectiveness, which has not been calculated by ICB.
RECOMMENDATIONS Investment corporation of Bangladesh (ICB) is one of the most reputed company in our country. Since independence it has made significant contribution in the industrialization of the country and also has become the capital market maker of the country as it’s the main tool through which government controls the market by offloading and withdrawing shares. Inspite of its successes, like all other organizations, it has some weaknesses in its methods and execution of projects. As the concentration of the report is only on the appraisal procedure followed by ICB, recommendations are provided focusing on this arena only. ICB should follow some strict lending guideline to reduce their exposure to sectoral risks and project risks. Intense focus should be given in the performance of the company itself and the surrounding industry environment rather than considering the reputation of the group itself. It can be seen historically that loans made considering group reputation has always led to default of loans. The giant corporations are the top listed defaulters in our country. Thus till this default culture can be changed, loans made on name lending of groups should be avoided for keeping a healthy loan recovery record of the company. ICB must perform intra-industry analysis which is very crucial for the assessment of a project as the projects success depends on the actions and strategy of other players in the market. Though buyer analysis has been done in a short scale. More rigorous analysis should have been done for forecasting the performance of the main customer, S. Alam Cold Rolled Steels Ltd. in the future.
Social cost-benefit (SCB) analysis is important in case of production and extraction of natural resources. ICB should conduct such analysis to see whether the project can be socially harmful or not, for the betterment of the society. The provision for midterm evaluation is very important to observe whether the project is continuing to be viable and also exit option need to be attached if the company thinks it would be wise to exit from the contract for the fall of rating of the company. ICB does not have any risk grading manual for screening projects based on their risk levels and thus no decisions related to pricing (credit-spread) and specific features of the credit facility are made by the company based on such evaluation. SO, ICB should prepare and follow a risk grading model based on their business strategy and on other criterion as usuage of such a model is prescribed by Bangladesh Bank to reduce exposure to excess sectoral and firm specific risks by the companies. For financial forecasting, the financial statement of the company should be prepared and then contrasted with the consolidated financial statements of its peer group companies of the same capacity for observing whether any major difference can be seen in the forecast of the company and the industry. Scenario analysis should also be conducted for understanding the influence of the factors combinedly over profitibility of the company along with sensitivity analysis which shows individual factor influence on profitibility of the project. For analyzing profitability, NPV method should be used rather than using payback period method and IRR method. Finally, it can be said that, though ICB was one of the pioneers and has been very successful in the country for bridging gaps of funds by providing financial support required by different companies, the performance of the company is recovering loans has been very poor over the years. This is because of lack of expertise in evaluating projects properly which leads to defualt by the borrowers. This can only be done by employing experts and financial analysts in the company who have sound theoritical and practical
knowledge along with knowledge about industry practices. The Project Appraisal Comittee needs to be free from all bureaucratic and other political pressures for being able to choose only viable and promising projects with sound financial background.
Conclusion Lending business relies on the effective appraisal procedure of projects. If the procedure is faulty, then companies may expose to significant credit risk. Credit risk in its simplest definition refers to the task of loss through default on financial assets. If this risk is not managed and mitigated effectively and efficiently, the fundamental business of lending can brought trouble to entire financial industry. Establishing and following an effective credit risk management framework in the appraisal procedure should be a top priority for every organization in this regard. But if the established framework is not feasible enough for generating sufficient return for the stakeholders, we cannot hope that it will be sustainable in the long run. So, the managements of the financial institutions have to find out an effective, at the same time, profitable and sustainable credit risk management policy and practice an effective appraisal procedure using expertise for the smooth running of its operations in the lending business.
Appendices Risk Grade Matrix
Appendix 1
Risk Rating
Definition
Superior – Low Risk
1
Good – Satisfactory Risk
2
Acceptable Fair Risk
–
3
Marginal Watch list
-
4
Special Mention
5
Substandard
6
⇒Credit facilities, which are fully secured i.e. fully cash covered. ⇒Credit facilities fully covered by government guarantee. ⇒Credit facilities fully covered by the guarantee of a top tier international Bank. ⇒Strong repayment capacity of the borrower ⇒The borrower has excellent liquidity and low leverage. ⇒The company demonstrates consistently strong earnings and cash flow certainty. ⇒Borrower has well established, strong market share. ⇒Very good management skill & expertise. ⇒Credit facilities fully covered by the guarantee of a top tier local Bank. ⇒Aggregate Score of 85 or greater based on the Risk Grade Score Sheet ⇒These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow certainty and have a good track record. ⇒Borrowers have adequate liquidity, cash flow and earnings. ⇒Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property). ⇒Acceptable management ⇒Acceptable parent/sister company guarantee ⇒Aggregate Score of 75-84 based on the Risk Grade Score Sheet ⇒This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment. ⇒These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. ⇒Weaker business credit & early warning signals of emerging business credit detected. ⇒The borrower incurs a loss ⇒Facility repayments routinely fall past due ⇒Account conduct is poor, or other untoward factors are present. ⇒Credit requires attention ⇒Aggregate Score of 65-74 based on the Risk Grade Score Sheet ⇒This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. ⇒Severe management problems exist. ⇒Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), ⇒An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. ⇒Financial condition is weak and capacity or inclination to repay is in doubt. ⇒These weaknesses jeopardize the full settlement of facilities. ⇒Bangladesh Bank criteria for sub-standard credit shall apply.
Risk Rating
Definition ⇒An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.
Doubtful Bad
and
⇒Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. ⇒However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. ⇒Bangladesh Bank criteria for doubtful credit shall apply. ⇒An Aggregate Score of 35-44 based on the Risk Grade Score Sheet. ⇒Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. ⇒Prospect of recovery is poor and legal options have been pursued. ⇒Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the facility as a bankable asset is not warranted, and the anticipated loss should have been provided for. ⇒This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad facilities must be adhered to. Legal procedures/suit initiated. ⇒Bangladesh Bank criteria for bad & loss credit shall apply. ⇒An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.
7
(nonperforming)
Loss
8
(nonperforming)
CREDIT RISK GRADING SCORE SHEET
Appendix 2
Reference No:
Date:
Borrower: Group Name (if any): Branch: Industry/Sector: Date of Financials: Completed by: Approved by: 1.1 Number 1.2
Aggregate Score: _________
Grading
Risk Grading:
_________
1.3
Score
1
Superior
SUP
2
Good
GD
Shor t
1.4
Fully cash secured, secured by Government/International Bank Guarantee 85+
3 4 5 6 7 8 Criteria A. Financial Risk
Acceptable Marginal/Watchlist Special Mention Substandard Doubtful Bad/Loss Weight 50%
75-84 65-74 55-64 45-54 35-44 <35 Score
Parameter
Debt Equity Ratio (×) Total Liabilities to Tangible Net worth 2. Liquidity: Current Ratio (×) Current Assets to Current Liabilities 3. Profitability: Operating Profit Margin (%) Operating Profit ×100 Sales 4. Coverage Interest Coverage Ratio (×) Earning Before Interest & Tax (EBIT) Interest on debt Total Score–Financial Risk 1. Leverage:
ACCPT MG/WL SM SS DF BL
Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x 0.51× to 0.75 x 0.76× to 1.25 x 1.26× to 2.00 x 2.01× to 2.50 x 2.51× to 2.75 x More than 2.75× Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x 1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70× Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1% More than 2.00× More than 1.51× Less than 2.00× More than 1.25× Less than 1.50× More than 1.00× Less than 1.24× Less than 1.00×
Criteria Weight B. Business/Industry Risk 15%
Actual Score Parameter Obtained
15 14 13 12 11 10 8 7 0 15 14 13 12 11 10 8 7 0 15 14 13 12 10 9 7 0 5 4 3 2 0 50
Parameter
Score
Actual Score Parameter Obtained
Criteria Weight 1. Size of Business (Sales in BDT > 60.00 crore) Parameter 30.00 – 59.99 10.00 – 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50 2. Business Outlook Favorable Stable Slightly Uncertain Cause for Concern 3. Industry Growth Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%) 4. Market Competition Dominant Player Moderately Competitive Highly Competitive 5. Entry/Exit Barriers Difficult Average Easy 1.5 Total Score-Business/Industry Risk Criteria C.
Weight 15
Parameter
Management Risk % 1. Experience (Management & Management Team)
3. Team Work
Total Score-Management Risk
Actual Score Parameter Obtained
2 1 0 15
Score
More than 10 years in the 5 related line of business 5–10 years in the related line 3 of business 1–5 years in the related line 2 of business No experience 0
Ready Succession Succession within 2-3 years Succession within 3-5 years Succession in question Very Good Moderate Poor Regular Conflict
2. Second Line/ Succession
5Score 4 3 2 1 0 3 2 1 0 3 2 1 0 2 1 0
5 3 2 0 5 3 2 0 15
Actual Score Parameter Obtained
Criteria D. Security Risk
Weight 10%
Score
1. Security (Primary)
Coverage
Parameter
2. Collateral Coverage (Property Location)
3. Support (Guarantee)
Total Score- Security Risk
Fully pledged facilities/substantially cash covered Registered Hypothecation (1st charge/1st Pari passu charge) 2nd Charge/Inferior charge Simple hypothecation/negative lien on assets. No security Registered Mortgage on Municipal Corporation/Prime area property. Registered Mortgage on Pourashava/semi-urban area property Equitable Mortgage or No property but plant & machinery as collateral Negative lien on collateral No collateral Personal guarantee with high net worth or Strong Corporate Guarantee (Guarantor’s Grading Acceptable or higher) Personal Guarantees or Corporate Guarantee with average financial strength No Support/Guarantee
Actual Score Parameter Obtained
4 3 2 1 0 4 3 2 1 0 2
1 0 10
Criteria Weight Parameter E. Relationship 10% Risk 1. Utilization of Limit More than 70% (actual/projection) 51% - 70% 30% - 50% Less than 30% 2. Account Conduct More than 3 (three) years accounts with faultless record Less than 3 (three) years accounts with faultless record Accounts having satisfactory dealings with some late payments Frequent Past dues & Irregular dealings in account
Score 3 2 1 0 3 2 1 0
Actual Score Parameter Obtained
Criteria Weight 3. Compliance of Full Compliance Covenants/Conditions Parameter Some Non-Compliance No Compliance 4. Personal Deposits
Total Score-Relationship Risk Grand Total- All Risk
2 1Score 0
Actual Score Parameter Obtained
All personal accounts of the key 2 business Sponsors/ Principals are maintained in the bank, with significant deposits Principals maintain some accounts, 1 but have relationship with other banks No depository relationship 0 10 100
REFERENCES Literature 1.
Annual Report 2008-09, Investment Corporation of Bangladesh
2. Managing Core Risk of Financial Institutions – Industry Best Practices, 21 July, 2005, Bangladesh Bak 3.
Seitz, Neil E. Capital Budgeting and Long Term Financing Decisions, Third Edition.
Special Training Course on “Project Appraisal and Management” for the executives of Investment Corporation of Bangladesh (ICB), (July 28-August 10, 2009), Bangladesh Institute of Bank Management Websites
www.icb.gov.bd www.bangladesh-bank.org