Project Report submitted by a corporate unit to a financial institution for grant of financial facilities is properly appraised by a team of experts drawn from different disciplines.
The project appraisal is done as a “business risk” and, therefore, efforts are made to corroborate the data submitted by a company with authentic sources. Each project is appraised on its own merits and flexibility is observed while applying the norms of ratio analysis, funds flow analysis, financial indicators, technical norms, etc. The basic objective during appraisal remains the project and its future in the form of successful implementation and efficient operation so as to contribute to the national economy. If a project remains successful, the money lend by financial institutions is returned safely. The growth of the project is the best security for financial institutions than physical and legal security. No doubt this security form an important part of the entire transaction for lending and borrowing for the project.
Viewing from the above angle, project appraisal, in general, by the financial institutions seek to consider inter alia the following aspects:
1. The Project
The first and foremost consideration for the appraisal of a project report by a financial institution is the examination of the project itself. It may be recalled that the term lending financial institutions have been established by the Government with the sole objective to promote development and growth of the industries which are given planned priorities for the economic development of the country. Therefore, the project should be such which meets this standard and falls within the category of approved projects.
Another important consideration in this area is that the project report prepared by the corporate unit should conform to the prescribed standard of the financial institutions. To be on the safe side, it is desirable if the project report is prepared by the reputed consultants approved by the financial institutions or the Technical Consultancies organization established in different parts of the country by the financial institution.
2. The Promoters: Capacity and competence
The promoter’s capacity and competence should be examined with reference to their management background, traits as entrepreneurs, business or industrial experience, and past performance in other concerns, their integrity and reputation, market standing, and legal competence.
Different considerations have got to be applied for the established entrepreneurs, or promoters and the new entrepreneurs. The basic requirement is that their profile should inspire the confidence in their abilities and capacities to run the project successfully and continue the interest therein till the repayment of the financial facilities disbursed by the institutions to the unit promoted by them. In the cases of technocrats who are coming up and taking up the industrial project, these aspects are paid more attention than their experience with entrepreneurism ability or skills.
3. Viability Tests
After analyzing the Project and Promoters’ capacity, a bank/financial institution carries out the different validity tests.