Projectformulation:

Formulations --- prepare something methodically.

FormulationStages:

1) Exploration
2) Identification
3) Consideration
4) Selection

Exploration: It consists a desirable effort to know, understand, analyse and asses the
relevant data and information that maybe necessary for arriving at a balanced view
about the desirability and feasibility of a project. A survey of
 volume
 Pattern ofsupply
 Demand for the proposedproduct
 Its likelycompetitions
 Technicalknow-how
 Productionprocess
 Financialresources
 Government Consumption guidelines (would help in the efforttowards
projectselection)

Identification: Entrepreneurs may have a vague notion of the immense potentialities

of a product, but he may find that production may not b possible in the country due to
 Absence of technologicalsupport
 Governmentpolicy
 Marketconditionetc.(skillfullyidentifywhichisfeasible)

Consideration: While considering we have to take into account

 Pros &cons
 Advantages anddisadvantages
 Examinedinthelightofthehistoricalexperience
 Marketconditions
 Entrepreneurial competenceand
 Capability

Selection: He s to make-up his mind while selecting the project. If not lot of energy
and time and effort will be wasted.

Project appraisal

Concept of a project appraisal:

Project appraisal means the assessment of a project. Project appraisal is made for both
proposed and executed projects. In case of former project, appraisal is called ex-
anteanalysis and in case of latter post-ante analysis.
 Here,projectappraisalrelatestoapreparedproject–eg:ex-anteanalysis
 Projectappraisalisacostsandbenefitsanalysisofdifferentaspectsof
 proposedprojectwithanobjectivetoadjudgeitsviability.
 Aprojectinvolvesemploymentofscarceresources
 An entrepreneur needs to appraise various alternative projectsbefore
allocatingthescarceresourcesforthebestproject
 Forappraisingaprojectitseconomic,financial,technical,market,
managerial and social aspects areanalyzed.

Methods of Appraising:
Market and Demandanalysis TechnicalAnalysis
Financial Analysis
EconomicAnalysis
 Management competence:- Management ability or competence playan
important role in making anenterprise.
 Intheabsenceofmanagerialcompetence,theprojectswhichareotherwise
feasible mayfail.
 Onthecontraryapoorprojectmaybecomeasuccessfulonewithgood
managerialability.
 Researchstudiesreportthatmostoftheenterprisesfallsickbecauseoflackof
managerial competence ormismanagement.

Analysis of Market Demand:

Market demand:

The exercise of project evaluation and management is not complete without an

estimation of the size of the market.

Market study is very important to estimate at least roughly the size of the demand,
nature of the demand and anticipated level of sales.

If the market size is inadequate, there is no reason for the project to be undertaken.

The following are the categories of market demand analysis:

The past and present effective demand

Breakdown of demand – eg: seasonal, festivals

Method of distribution and promotion

Price (strategy)

Profile of the customers – middle class / higher class / lower class / male /
female / kids etc.

Govt. policies (Any tax burden / any tax rebate(given to Special economic
zones)

Competition in the market

The sources from which the above information obtained for the market is of two
types:

1)Primary source
2)Secondary source

Primary Source: The information is collected for the first time to meet the specific
purpose on hand.

Secondary source:
Census publication (given by G.O.I.)
 Economicsurvey–theannualpublicationoftheMinistryofFinanceprovides
details such as Industrial production, wholesale prices, consumer prices,
exportsetc.
 Annualbulletinofstatisticsofexportsandimports–(MinistryofCommerce
provides the data onimports)
 MonthlybulletinofR.B.I.–(Thisprovidesinformationonproductionindices,
prices,balanceofpaymentposition,exchangeratesetc.)
 Annual survey ofIndustries
 Publication of the Generalpress
 National information centre – (NIC has a wide range of data base and
informationonvariousaspectsofmarketanddemandofproductsandservices
available.

Key steps involved in market survey:

 Defining the targetpopulation

 Selection ofsamples
 Drafting aquestionnaire
 Recruiting and training fieldstaff
 Obtaininginformationfromtherespondent
 Checking of the informationgathered
 Analysis of interpretation ofdata

Demand of fore-casting: (future estimation of demand)

Trend Projection Method: - Factors influenced the behavior of the

consumption in the past would continue to influence the behavior of
consumption in the future.

Consumption method: - Consumption for a product is estimated on the basis of

elasticity co-efficient such as price and income elasticity.
 End use method: This is useful in determining the demand for intermediate
products.(wood, sugar, steel etc.)

Leading indicator method: Demand of one product naturally followsthe

demand for the other products- eg: real estate boom leads to demandfor
sanitary, woodetc.

Econometric method: Applying mathematical relationship of different variable

s.

Demand and supply gap :

Surplus & shortage:-

If the market price is above the equilibrium price, quantity supplied is greater than
the quantity demanded, creating a surplus, the market price will fall.If the market
price is below the equilibrium price quantity supplied is less than the quantity
demanded, creating a shortage. The market price is not clear. Market price will rise
because of the shortage.

Possible price Total demand Total supply Pressure on price

20 1000 10,000 Low

19 3000 8,000 Low

18 4000 6,000 Low

17 5000 5,000 Neutral equilibrium

16 7000 4,000 High

15 10000 2,000 High

Technical analysis:
The technical analysis encompasses various aspects of manufacturing and operations
such as

1) Material inputs and rawmaterials

2) Productiontechnology:
 Decisionofrighttechnologyfortheproductionprocessafterthetechnology
analysis of Initial costinvestment.
 Product life cyclestage
 Product-mixconsideration
 Skill levelneeded
 Criticalinputsanditsinfluenceontheprocess
  Sourcesoftechnology,itsavailabilityandabsorptionetc.(eg:LCD,LED,
BLUERAYetc.)

3) Product-mix : If you produce office furniture and can have a product mix of
photocopier,inter-com,P.C.,faxmachines,whicharerequiredforthepurposeof
officeuse.

4) Capacity consideration:For example, if you want to produce 1000 output that you
choose the machinery which gives 10,000 output. At the same time investment also
depending upon the capacity only youinvest.

5) Location: The unit must be located properly so that it can enjoy certain definite
advantage through location - Advantages like - plentiful availability of infrastructural
facilities, power, transport facilitiesetc.

6) Size and optimum size consideration: The size of the plant is aimed at taking into
accountmanufacturingcapacitytobebuiltupinthenextfewyearsbasedondemand
projections, the process of manufacturing and the productmix.

FINANCIAL ANALYSIS :

Corporate management has not only to conceive the project in realistic and
comprehensive terms but also ensure that the project will have the continuous ability
to serve the providers of funds with satisfactory returns and in addition generate
internal resources to support growth.

The sourcing and the composition of funds and their costs have a significant bearing
on the earning power of the enterprise.

Estimates of financial requirement:

The financial analysis of the project involves the estimation of cash-flows – 1)capital
cost and 2)operation cost
Capital cost:
The capital cost of a large project has diverse components.

The purchase cost of plant and equipment and the cost of building and
facilities are part of the capital cost,

In addition, the project office expenses and the cost of investigative studies etc
. getcapitalised and absorbed in the project capital cost.

Plant layout, structural requirements, building sizes, offside supply lines, roads
, parking areas, drainage, fencing, pumping stations, cooling towers, power
substations etc. will have to be estimated.
 Note also has to be taken of freight costs, import duties, impact of exchange
rate variations on foreign exchange commitments.

Construction equipment allowances for rental, fuel, maintenance etc. of major

itemssuchascranes,bulldozersetc.canbesubstantialandhastobeestimated
carefully.

Man power for project administration and implementation at the managerial

and operational levels is a critical cost factor that has to be worked out in
detail.
Associated costs such as design engineering, procurement and field
construction costs can also be sizeable and require special attention.

Raw materials, utilities, emoluments, supplies, royalties, rentals, contingencies

, fixed costs including taxes, insurance etc., loading, packing and shipping
expenses have to be estimated.

Administration, sales, corporate office and general expenses will have to be

estimated in detail.

Operating cost:

Funds require for working capital with reference to inventories of raw

materials and supplies, work-in-process and inventories of finished goods,
trade credits to customers etc. have to be assessed in detail and provided for in
the estimates.

Having determined the operated capital costs of the project and its operating
costs at the operational phases, the expected returns on investment needs to be
computed and reviewed.

Hence financial analysis of the project involves the examination of its cash flows. It
isaprocessofreviewofcostsandbenefits,wherecostconstitutescashoutflowsand benefits
are measured in terms of cashinflows.

Profitability analysis can help key personnel in an enterprise to:

 Identifythemostandleastprofitableclients.
 Identifythemostandleastprofitableproductsorservices.
 Discoverwhichsourcesofinformationofferthemostreliablefacts.
 Optimizeresponsestochangingcustomerneeds.
 Evolvetheproductmixtomaximizeprofitsinthemediumandlongterm.
 Isolateandremedythecausesofdecreasingprofitmargins.

Project financing in India:Sources of finance

Commercial Banks
Financial Institutions

and

Equity capital
Preference capital
Convertible
debentures
Non-Convertible
debentures Term loans in
rupees Deferred credit
Bill rediscounting scheme
Supplier’s line of credit
Government subsidies
Lease and hire-purchase finance etc.
-
NEED FOR INSTITUTIONAL FINANCE TO ENTERPRISES:

Small enterprises in India are literally small in size and resources including
-Duefinancial resources.
to lack of own funds, small enterpreneurers fall prey to local money lenders whoare
generally known as exploiter by charging exorbitant high rate
of interest.
Burden of high interest rate on borrowed capital from local money lenders, on
the other hand and failure of enterpreneurers in repaying loans due totheir
weak financial position, on the other, makes their financial position more and
morevulnerable.
Failure in repaying loans in extreme cases leads the money lenders to usurp
- the assets of smallenterpreneurers.
Availability of funds from local money lenders is moreover, uncertain and
- untimely also.
Small enterpreneurers need protective finance under set rules and regulations
- not the exploitative finance without any prescribed rules and regulations.
COMMERCIAL BANKS:
The scheduled commercial bank in the country comprise the State Bank of India an
itsassociated banks, nationalized banks, private sector banks, regional rural banks
(RRBs) and foreign banks. Presently the total no. of branches of SCB are 62,067
ofthese 35,060 are in rural areas.
For a larger time the commercial banks did not come forward toextend
 financial assistance to the small scale industries because of the SSIs weak
economic base.
The first lead in this regard was taken by the State Bank of India (SBI)in
consultation with the Reserve Bank of India in March 1956 in setting upa
pilot scheme for the provision of credit for small scale industries.
After that the Commercial Banks started taking initiation in financing S.S.I.s
- A notable feature in the financing of SSIs has been the introduction of the
- Lead Bank Scheme by the R.B.I. Under this scheme each district isallotted
one scheduled commercial bank for intensive development of banking
facilities.
The introduction of CGS (Credit Guarantee Scheme) in 1960 was a bigfill-up
- in the field of Commercial Bank financing to S.S.I.s
Initially this scheme was introduced in 22 districts on experimental basis.
- Later it extended to all over thecountry.
- Further RBI set up a Committee under the chairmanship of Sri R.R.Nayak,
to look into the adequacy of institutional credit to SSIs.
Based on the recommendations of the Committee, the RBI introduced a
- special package of measures of financing SSIs. and advised banks to
increase
the credit flow to the SSIs. and arresting the problem of sickness insmall
sector.
IDBI (Industrial Development Bank of India:
Established on 1stJuly, 1964 as only subsidiary of the R.B.I.
- Delinked from RBI with effect from 16thFebruary, 1976 and itsownership
was transferred to Govt. ofIndia.
CTIVITIES:
A
Financing, developing and promoting industries.Providing credit and other facilities for
-the development of Industry.
- was conceived as the principal finance institution for coordinating, in
It
conformity with national priorities.
OBJECTIVE :
Serve as an apex institution to coordinate the activities of other F.Is. andprovide them
finance to the industry in the country.
It is expected to play both the role of a financing and developmentagency.
Planning, promoting and developing industries to fill the gaps in the industrial
structure inIndia.
Coordinating work of the financial institutions engaged in financing,
- promoting or developingindustries.
Providing technical and administrative assistance for promotion, management
- or expansion of industry.
Undertaking market and investment research and survey as alsotechno-
- economic studies in connection with development of industry.

FUNCTIONS :
- direct financial assistance to industrialunits. Extending indirect financial assistance through
Providing
helping other financialinstitutionsUndertaking promotional work and acting as a coordinating agency.
PRODUCTS &SERVICES :
 Assetcredit
 Equipmentfinance
 Equipmentleasing
 Bridgeloans
 Corporateloans
 Merchantbanking
 Debenturetrusteeship(debentureshorttermloans)
 Forexservices
IDBI coordinates the working of institutions engaged in encouraging, financing,promoting and
developing industries. IDBI undertakes/ supports wide-ranging
 promotionalactivitiesincludingentrepreneurshipdevelopmentprogrammesfor new
entrepreneurs, provision of consultancy services for small andmedium enterprises, up gradation of
technology and programmes foreconomic upliftmentof the under privileged. Its functions include: Direct
loansto industrial undertakings to finance their new projects. Soft loans for variouspurposes including
modernization under equipment finance scheme.
 Underwritinganddirectsubscriptiontoshares/debenturesoftheindustrial
 companies.
 Sanctionofforeigncurrencyloansforimportofequipmentofcapitalgoods
 Shorttermworkingcapitalloanstothecorporatehousesformeetingtheir
 working capitalrequirements.
 Refinancetobanksandotherinstitutionsagainstloansgrantedbythem.

Activities of IDBI

Some of the developmental activities carried out by IDBI are as follows:

Promotional activities

IDBI performs a wide variety of promotional activities for new entrepreneurs,

consultancy services for small and medium enterprises and programmes designed
for accredited voluntary agencies for the economic upliftment of the needy. These
include entrepreneurship development, self-employment and wage employment in
the industrial sector for the weaker section of society through voluntary agencies,
entrepreneurs’ parks, energy conservation, and common quality testing centres for
small industries.

Technical consultancy Organizations

IDBI, in collaboration with other All- India Financial Institutions has set up
anetwork of Technical Consultancy Organizations covering the entire country
toprovide consultancy and advisory services to entrepreneurs, particularly to
newand small entrepreneurs at a cheaper cost (Gupta, Kumar, 2009: 173).technical
consultancy organizations offer diversified services to small andenterprises in the
selection, formulation, implementation and appraisal of
projects.

Entrepreneurship Development Institute

 Since entrepreneurship development is the precondition to industrial development,
IDBI played a major role in setting up of the Entrepreneurship Development
Institute of India for promoting entrepreneurship in the country. IDBI also provides
financial support to various organizations in conducting studies and surveys
beneficial for industrial development.
IFCI (Industrial Finance Corporation of India) :
The Industrial Finance Corporation of India was set up in 194ke by an act of Parliament to make medium
and long term funds, readily available to industrial
concerns particularly when the normal banking support is in-appropriate or going tothe capital market is
impracticable.
-
It consists the following ways:
 Granting loan in rupee as well as foreign currency
 Underwriting the issue of public limited companies
 Directly subscribing to the securities of public limited Cos.
 Guaranteeing loans.
NEW PROMOTIONAL SCHEMES :
Interest subsidy scheme for womenentrepreneurers
Consultancy fee subsidy schemes for providing marketing assistance tosmall
scale industries.
Encouraging the modernization of tiny, small scale and ancillary units
- Control of pollution in the small and medium scale industries.
-
FLAWS :
There are great delays in sanctioning loans
The IFCI has failed to exercise necessary control over the defaulting andmisusing borrowers.
IRBI:
IRCI (Industrial Reconstruction Corporation of India) was set up in April
1971undertheIndianCompaniesActmainlytolookafterthespecialproblemsof‘sick’unitsandprovide
assistance for their speedy reconstruction. In August 1984, the Govt. of India
pass ed an Act converting the Industrial Reconstruction Corporation of India into the I.
R.B.I.
IRBI Main Principles :
All India credit and reconstruction agency for industrial revival.Assisting and
promoting industrial development
-
- Finance Corporation) :
SFC (State
SFC- is state level financial institutions operating as regional development banks.
There are 18 SFCs in the country.
SFC Act was passed by the Parliament on September 28th, 1951. The first SFC wasset up in Punjab in
1953. Today the SFCs exist almost in every State of the country.
SFC comprises board of directors, a managing director, and an executivecommittee.SFC provide long
term finance to small and medium size industrial units organized by as proprietary, cooperative,
public or private companyconcerns.SFCs also grant financial assistance to small road transport
operators, hotels,tourism related activities, hospitals and nursing homes etc.SFCs sanction around 90% of
its assistance to small scale industries and smallroad transport operators.It also gives purpose-wise
assistance to : Newprojects
  Expansion
 Diversification

 Modernization

 Balancing equipmentetc.

SIDC: State Industrial Development Corporation

SIDCs were incorporated under the companies ACT 1956, in the sixties and early
seventies as wholly owned state governments’ under takings for promoting
industrial development in the country.
They provide assistance as in the form of:
 Term-loans

 Under writing direct subscription toshares.

 Preparation of feasibilityreports.

 Conducting industrial potentialsurveys.

 Entrepreneurship developmentprogrammes.

 Developing industrialestates.

Also offer a package of development services :

 Technicalguidance

 Assistance plantlocations

 Co-ordinations with otheragencies.

With the changing environment, SIDCs are making efforts to diversify and entering
into the fields of:
 Equipmentlearning

 Merchantbanking

 Venturecapital

 Mutualfunds

 BulkofthesanctionsofSIDCsareclaimedbythePrivatesector/Public
sector / Joint sector / Co-operativesector.

 Purpose-wise assistance like the new projects has the largest

shareof sanctions, distantly followed by – Expansion –
Diversification - Balancing equipment - Supplementary
 assistanceetc.

SIDBI (Small Industries Development Bank of India :

With a view to ensuring larger flow of financial and non-financial assistance to the
small scale sector, the Govt. of India set up the Small Industries Development Bank
of India, under a special Act of Parliament in Oct. 1989 as wholly owned subsidiary
of the IDBI.
The Bank commenced its operations from April 2, 1990 with its head-office in
Lucknow. It has taken over the outstanding portfolio of the IDBI relating to the
small scale sector.

FUNCTIONS :

-To initiate steps for technological up-gradation and modernization of existing units.
-To expand the channels for marketing the products of SSI sector in domestic and
international market.
-To promote employment oriented industries especially in semi-urban areas to
create more employment opportunities and thereby checking migration of people to
urban areas.
Purpose-wise assistance: (two schemes)
Scheme – I : - technology upgradation, modernization, re-finance for settlement of
voluntarily retired workers of the National Textile Corporation (NTC).
Scheme - II: - Venture capital finding exclusively for small scale units
withan initial corpus of Rs.10crore.
-SIDBI is an institutional member of the OTC Exchange of India (OTCEI)
-SIDBI also provides financial support to NSIC for providing : leasing, hire-purchase,
marketing support to SSI.

Other functions:

 Administrationofsmallindustriesdevelopmentfundfordevelopmentand
equity support to small and tinyindustries.
 Providingworkingcapitalthroughsinglewindowscheme
 Providingrefinancesupporttobanks/developmentfinanceinstitutions
 UndertakingdirectfinancingofSSIunits
Coordination of functions of various institutions engaged in finance to SSI and tiny
units.

EXPORTS – IMPORTS BANK OF INDIA (EXIM BANK) :

EXIM Bank was set up on Jan.1 st1982 to take over the operations of the
international financing wing of the IDBI and to provide assistance to exporters and
importers to promote India’s foreign trade.
It also provides refinance facilities to the commercial banks and financial
institutions against their export – import financing activities.
FUNCTIONS :
1. FinancingofexportandimportofgoodsandservicesbothofIndiaandof
outsideIndia.

2. Providingtechnicalandadministrativeassistancetohepartiesengagedin
export and importbusiness.
3. Providing finance for joint ventures in foreigncountries.

4. Undertaking merchant banking functions of companies engaged

inforeign trade.

5. ProvidingadvanceinformationandbusinessadvisoryservicestoIndian
exports in respect of multilaterally funded projectoverseas.

With a view to promote exports, EXIM Bank has introduced the following three
schemes:
1. Production equipment financeprogramme

2. Export marketingfinance.

3. Export vendor developmentfinance.

Equity Capital: The owners of the business provide equity capital, which is also
knownasriskcapital,astheyhaveonlyresidualclaimsontheprofitsofthebusiness. They
might enjoy very high rewards of the company performs well or may run the risk of
little or no returns or even erosion of their capital if the company continuously fails
to earn profits. The extent of their liability is however limited to the capital
contributed bythem.

Preference Capital: Preference capital has some attributes of equity capital and
some of loan capital. Dividend on preference shares has to be paid out of profits
after tax and are similar to equity dividends in the sense that they are not tax-
deductible. If the dividend cannot be paid in one year, it will accumulate and will
have to be paid subsequently.

Debenture Capital: These are Non-convertible, Partially Convertible Debentures or

Fully Convertible Debentures. Non-Convertible Debentures usually get redeemed
in 5 to 10 years and are issued against the security of the assets of the issuing
company. While some agreed portion of partially convertible debentures get
converted into equity and the whole of fully convertible debentures get converted
into equity as per the stipulated terms ofconversion.

Term loans in rupees: Term loans in domestic currency, repayable over a period of
8 to 10 years, with an initial moratorium period of 1 to 3 years can be obtained
from development financial institutions and from commercial banks for financing
projects.
Deferred credit: Manufacturers of capital goods often extend differed credit
facility, enabling the buyer to pay the price amount in installments, over a period
of time, which varies. In such cases, the buyer may be asked to provide a bank
guarantee to the supplier.

Bill rediscounting scheme: This is Scheme is offered by the IDBI, with a view to
promote sale of indigenous machinery on deferred payments terms. The bills or
promissory notes accepted by the buyer are discounted by the supplier
(manufacturer) with his bankers, who in turn can get them rediscounted with the
IDBI.
Supplier’s line of credit: This scheme offered by ICICI, has similar objective as
IDBI’s Bill Rediscounting Scheme but the payment for the equipment purchased is
made by the ICICI directly to the supplier against usabce bills accepted or
guaranteed by the bank of the buyer.

Government subsidies: The industrial units set up in back areas, get subsidies from
concerned State Governments ranging from 5% to 25% of the fixed capital
investment in the project, subject to a ceiling of Rs. 5 lakh to Rs.25 lakh, depending
on where the unit is located.