Disbursement and Monitoring
Appraisal looks at the project at
a point in time and when such project is only on paper. Monitoring on the
other hand is a continual check on the project as it materializes from
an idea on paper into a facility capable of meeting its stated purpose.
Thus, monitoring acts as a means of a regular check on the timely implementation
along the committed course of action.
Need for Monitoring
Given the rapid changes in regulations
enhancing the level of competition, fluctuations in commodity prices and
evolving technology, monitoring a project implementation has become extremely
important. This enables the FIs to judge the seriousness of the implementation
effort and stop any/further disbursement to a non-serious (or incapable)
promoter rather than throw good money after bad.
Monitoring also assumes tremendous
importance in the Indian context due to a number of reasons:
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Projects especially those of a conventional
nature face a number of procedures involving clearances by public authorities
that take time.
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Projects especially in the small and
medium sector also get bogged down on account of poor prior planning especially
in meeting pre-disbursement conditions such as documentation related to
the primary assets and collateral, sanction of working capital and power
connection.
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Promoters (small, medium as well as
large) often lose interest on the project and deploy the money in financial
assets or flavour of the month projects with an eye on short-term wealth.
The importance of monitoring or following
up on the projects which are financed by the term lending institutions
after due appraisal has gained importance in recent years due to many unethical
practices which have come to light regarding the mis-utilisation of funds
sanctioned. Other than this monitoring also became important due to the
rising incidence of sickness in the corporate sector and the amounts that
have been blocked in the process.
This has led to many financial institutions
coming to the conclusion that prevention is better than cure, since many
of them are now raising resources from the market and any lack of efficiency
on their part will be detrimental to their survival.
Monitoring Process during
Disbursement:
Monitoring is usually inbuilt during
the Disbursement process in the following ways:
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In case of large projects the disbursal
of funds is generally through periodic credits to a No Lien Account
from where the payments are met as and when required. Monitoring here is
generally through a review of the implementation generally conducted on
completion of key milestones.
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In case of small and medium enterprises,
the disbursement is on reimbursement basis where the promoter initiates
implementation through his own funds and periodically seeks reimbursement
from the FI. The monitoring is effected each time a request for reimbursement
is initiated by the promoter. This involves scrutinizing the documents
indicating various expenses on the project and ascertaining the reasons
for any deviations. In case of first time promoters, this may also involve
visits to the site and inspection of key machineries prior to erection
at the site.
Problems during Disbursement
Problems during Disbursement occur
on account of the following broad reasons:
· Significant change in
the Project Parameters. This includes change in state capacity, location
(on account of litigation, environment, local opposition, technology, etc.)
· Non-fulfillment of the
Pre-Disbursement Conditions such as the First Investment Clause, sanction
of Working Capital from bank, non-receipt of power connection and non-receipt
of No-Objection Certificate from the Pollution Control Board.
· Lack of subsequent interest/commitment
from the entrepreneur subsequent to the Sanction of financing.
· Sudden change in the
economic environment – recession, downturn in the capital markets, war,
natural calamity, etc.
In case of larger projects delays
in implementation generally happen on account of formalities pertaining
to acquisition of land (incl. delays caused by litigation), changes in
the economic environment, etc. In case of SMEs, problems during Disbursement
predominantly arise on account of non-fulfillment of the Pre-Disbursement
conditions imposed at the time of Sanction. These include:
1. Non-submission of
In-Principle Approval for Working Capital from the commercial bank
An application for working capital
is made to the bank at the same time while the process for project financing
with the Financial Institution is initiated. On accepting an application,
the bank provides an acknowledgement that the application has been received
and is being processed. An In-principle approval from the bank is the next
stage. In case of applicants who do not have prior business contacts with
the bank, there is often a delay in the receipt of such In-Principle Sanctions.
Part of the reason is the reluctance of the banks to lend any longer to
new projects by promoters without prior track record (or long standing
relationship with the bank). Delays are often witnessed in the receipt
of the In-Principle Approval as well as final approval subsequently.
2. Fulfillment of the First Investment
Clause
The First Investment Clause requires
the promoter to invest his equity contribution prior to availing disbursement
from the financial institution. Often, the promoter is unable to mobilize
his share of funds leading to delays in obtaining disbursement from the
State Financing Institution.
3. Receipt of Power Connection
from the Electricity Board and Pollution Control Board
The receipt of Power Connection
from the Electricity Board could get delayed due to bureaucratic tangles
or in cases where incremental infrastructure has to be laid specifically
for the connection.
4. Changes in key machinery suppliers
for the project
In the event of a change in the
suppliers of key machinery, the entrepreneur would have to convince the
financing institution about the necessity for the change. Major changes
or persistent changes in machinery could lead to delays in disbursement
and project implementation.
The nature of problems (indicated
above) during disbursement especially in case of SMEs is primarily on account
of inadequate planning by the entrepreneur at earlier stages. Problems
relating to First Investment Clause and changes in key machinery are typical
examples of this. Problems in availing working capital and power connection
refer to issues, which are to some extent outside his control. Financing
Institutions due allow initial disbursements if these conditions are partially
met, but require that these be fulfilled by the time of the last disbursement.
In the past few years, delays in
disbursement are also occurring in some cases on account of delays in the
state financial institutions disbursing the funds. This has particularly
been in case of those State Financial institutions, which are suffering
from severe financial problems resulting in default on commitments to refinancing
institutions. This has caused cessation of fresh refinance support as a
result of which these state institutions are finding problems of meeting
disbursement commitments.
Tips to an entrepreneur seeking
project financing
Application and Preliminary Scrutiny
Appraisal and Sanction
Post Sanction – Documentation
Post Implementation Review
We would look forward to receiving
your feedback and suggestions on this module at services@indiamarkets.com
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