Bank financial appraisal in lending activities

project period. Therefore, the results of the appraisal must be independent of all subjective opinions, regardless of which side they come from.

The purpose of project appraisal is to detect and prevent bad projects, not to miss good projects in the increasingly scarce law of resources.

Through project appraisal, the Bank has the most general view of the investor and the project. Regarding the investor, the Bank evaluates the legal capacity, financial capacity, qualifications, and current production and business situation of the project owner. Regarding the project, the Bank comprehensively evaluates a project in terms of: technical, financial efficiency, economic efficiency, social efficiency, and distribution from the perspective of the investor, the capital sponsor, or the entire economy.

However, for the Bank, financial appraisal is still the top concern. Because, while conducting project appraisal, the Bank

Pay special attention to the financial efficiency of the project, especially the time and resources used to repay the Bank.

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Therefore, project financial appraisal can be understood as follows: Project financial appraisal is the appraisal of factors affecting the financial efficiency of the project. In other words, financial appraisal is the appraisal of

Determine the financial feasibility of the project, the project's borrowing needs, and the project's ability to repay debt and interest.

1.1.3. The necessity of project financial appraisal in operations

commercial bank lending

Banks make their profits mainly from lending. Therefore, each credit granted must be effective, which is

synonymous with ensuring the bank's operations are safe and effective. Therefore, what the bank cares about most is the ability to repay the loan, both principal and interest, on time. Therefore, the bank must conduct an appraisal

Project planning in all aspects of technology, market, management organization, finance

…is very important, in which project financial appraisal can be said to be the most important.

An investment project as mentioned usually requires a very large amount of capital, over a long period of time, largely beyond the financial capacity and self-financing capacity of enterprises. Therefore, they must mobilize funding from commercial banks. On the part of commercial banks, lending for investment projects is a traditional business, with high profitability but also contains many risks. And to minimize possible risks, commercial banks have no other choice but to conduct appraisal of investment projects, the most important task here is project financial appraisal. The important role of project financial appraisal is shown in that it is the most important basis for commercial banks.

make your funding decisions.

It can be said that project financial appraisal is the most important and most complicated content in the project appraisal process. Because it requires the synthesis of all financial, technical, market variables... that have been quantified in the previous appraisal contents to analyze and create financial forecast tables, appropriate and meaningful financial indicators. And these indicators will be the top important measures to help commercial banks.

make the final decision: approve funding or not?

In terms of operations, Commercial Banks with the motto of operation

In order to operate effectively and safely, the Bank's project financial appraisal helps:

- The bank has a relatively solid basis to determine efficiency.

capital investment as well as the project's ability to recover capital, more importantly, is to determine

determine the investor's ability to pay.

- The Bank can predict possible risks that may affect the project implementation process. On this basis, it can detect and add measures to overcome or limit risks, ensure the feasibility of the project and at the same time consult with State management agencies.

country and investor to make the right investment decision.

- The bank has a plan to minimize credit risk when determining loan value, term, interest rate, debt collection level and reasonable debt collection method, creating conditions for the project to operate effectively.

- The bank creates bases to check the proper use of capital.

purpose, right target and save investment capital during project implementation.

- Banks draw on their lending experience to implement and develop with better quality. Based on the necessity, practicality, and effectiveness of project financial appraisal, it has and continues to become an important and decisive part in the lending activities of each bank.

However, to do a good job of project financial appraisal, we must first understand the content of project financial appraisal.

1.2. Contents of project financial appraisal in lending activities of commercial banks

Project financial appraisal activities take place according to a unified process with specific steps. Normally, project financial appraisal

is carried out through the following steps:

1.2.1. Appraisal of total investment capital and funding sources for the project

1.2.1.1. Appraisal of total investment capital

This is the first important content to consider when conducting a project financial analysis. Accurate assessment of the total investment capital is very important for the feasibility of the project. If the estimated investment capital is too low, the project will not be implemented, conversely, if the estimate is too high, it will not accurately reflect the financial efficiency of the project.

The total investment capital of a project includes all the capital required to set up and operate the project. This total capital is divided into two types: Investment capital in fixed assets and initial working capital.

Investment in fixed assets includes: investment in equipment, production lines... However, it is also necessary to pay attention to "sunk" costs - that is, costs that the business spends that are not related to the feasibility of the project or not. Typically, costs for surveying the project construction site, project design consulting costs...

Initial working capital includes : capital invested in initial current assets.

to ensure that the project can operate normally according to the

economic and technical conditions have been planned. It includes: raw materials, electricity, water, fuel, spare parts, wages, reserves, ... and reserve capital.

1.2.1.2. Appraisal of funding sources for the project

Based on the total investment capital for the project, the bank will consider the sources of funding for the project, including the ability to secure capital from each source in terms of scale and progress. The sources of funding for the project can be government funding, bank loans, the investor's own capital, and mobilized capital.

from other sources.

To ensure the progress of project investment and to avoid capital stagnation, funding sources should be considered not only in terms of quantity but also in terms of the time of receiving funding.

Next, the capital demand must be compared with the ability to secure capital for the project from sources in terms of quantity and progress. If the ability is greater than or equal to the demand, the project is accepted. After considering the sources of funding for the project, it is necessary to consider the capital structure of the project. That is, consider the proportion of each source in the total expected investment capital.

So through this step of research, the bank can make the appropriate decision on how to disburse the loan to ensure the project is carried out smoothly.

1.2.2. Project cash flow appraisal

After assessing the total capital demand, capital structure and capital mobilization progress, the next step is to assess the project's financial and economic indicators, that is, the bank considers the revenue and expenditure factors, thereby considering the project's cash flow. The assessment of these indicators is carried out through the assessment of the financial reports expected for each year or each stage of the project's life.

However, to assess the cash flow of a project, it is necessary to understand the concept of time value of money. Money has a time value due to the influence of factors: inflation, risk, mobility and profitability of money.

Normally, when banks appraise a project's cash flow, they appraise

determine the following factors

1.2.2.1. Appraisal of project cash flow

Project cash inflow is the after-tax cash flow that the enterprise can recover to reinvest in another project. Cash inflow is actually the project's receivables and therefore has a positive sign. Project receivables are usually calculated annually and are determined based on the project's annual production and consumption plan. In this step, the appraiser determines whether the project owner's estimated mobilization capacity is correct or not; product consumption capacity; product selling price; ... based on the development orientation of the industry and forecasts the impact of environmental factors.

1.2.2.2. Project cash flow appraisal

The project's cash outflows are represented by the project's costs, so they have a negative sign. The cash outflows are related to the investment costs for fixed assets.

for construction and for procurement. And the cost indicators also reflect

are calculated annually throughout the life of the project. The estimation of production and service costs is based on the annual production plan, the plan

depreciation, project debt repayment plan. The appraiser reviews the completeness of all types of expenses, whether the depreciation plan is appropriate or not...

Depreciation is a factor of production costs. Therefore, the depreciation rate affects the profit and the annual income tax payable by the enterprise. If depreciation increases, the profit decreases and therefore the corporate income tax decreases and vice versa. Therefore, determining the exact depreciation rate is very important in project financial analysis. Depreciation rate

is determined annually depending on the depreciation method.

1.2.2.3. Project cash flow appraisal

Based on the estimated data on cash inflows and cash outflows each year, the annual profit and loss of the project can be estimated. This is a very important indicator, reflecting the results of production and service activities in each year of the project life cycle. For commercial banks, it is the financial basis for accurate project evaluation.

In project financial appraisal, project cash flow appraisal can be said to be the most difficult task. Project financial appraisal is concerned with the amount of money coming in (inflow) and going out (outflow) of the project. Ensuring a balance between income and expenditure (balance between cash inflow and cash outflow) is an important goal of project financial analysis.

Project revenues and expenditures are determined from information in the project's income and expense reports, but it is necessary to distinguish between revenues and revenues, between expenses and costs before constructing the project's balance sheet.

- Assessing the cash flow or the project's costs: it is necessary to distinguish between costs and expenses. For costs, the enterprise has agreed to buy goods and services but the cash flow may not have appeared yet; for expenses, the enterprise has actually spent money, meaning that the cash flow has appeared. The first cost that the project owner must pay is the cost of machinery, factories, and equipment, in addition, it must also be taken into account.

accompanying costs such as installation, transportation, insurance, costs for training operating workers, test run costs, etc.

In calculating costs, it is also necessary to take into account the opportunity cost factor, opportunity cost is defined as the income opportunity forgone by accepting this project instead of accepting another project. When calculating expenses for machinery and equipment, an easily overlooked fact is the working capital needed to operate the investment project, which must also be included in calculating the investment cost. If the working capital is recovered when the project is discontinued, the project has a net value at the end and this fact must be taken into account. Sunk costs will not be taken into account in the analysis, it should not be considered as a cost to include in the cash flow, because it is a cost that the project owner pays regardless of whether the project is accepted or not. In addition, depreciation costs are a fairly important cost, in the income statement of accounting, depreciation

Depreciation is deducted from expenses to determine profit for the period, but it is a non-funded expense, depreciation is considered as a source of income for the project.

While assessing the cost flow, it is also necessary to pay attention to interest, interest is both a cost and a real cash expenditure, but interest is not included in the cash flow because interest represents the time value of money and this amount is calculated by discounting future cash flows.

- Assessing income streams: It is necessary to distinguish between revenue and receipts. Revenue is the value of goods and services that have been sold and the buyer declares his acceptance to purchase the goods and services. However, for amounts recorded as revenue, the buyer cannot be identified.

paid or not, but for the receipts, it is certain that the business has received the money. That is, the revenue may not have appeared to have cash flow into the business, but for the receipts, the cash flow is certain.

has appeared.

The project's cash flow also needs to take into account the residual value of equipment and machinery when the project ends. The residual value of an asset is the value

assets that can be sold at the time the project ends. For revenue streams, it is also necessary to pay attention to the revenue from the project to remove income tax to calculate the cash flow accurately. Therefore, the cash flow used to calculate in the appraisal of investment projects is the cash flow after tax.

So the cash flow of a project is the difference between the cash received and the cash spent. Cash flow is not the same as profit or income. Income can still change while there is no corresponding change in cash flow.

And the project cash flow is calculated as follows

Net cash flow year i

Profit after

= +

tax year i

Depreciation year i

1.2.3. Project financial indicators

A project is considered very good when it must generate absolute profit - that is, the largest amount of net wealth; have a high rate of return - at least higher than the interest rate or the desired rate of return or the average discount rate of the industry or market; low break-even volume and revenue and the project must quickly recover capital - to limit unexpected risks.

Based on that thinking, people have corresponding indicators to use.

to assess the effectiveness of the project.

 Net Present Value (NPV) indicator

Financial analysis of an investment project is an analysis based on the project's cash flows. Based on the estimated cash flows, financial indicators are calculated as a basis for making investment decisions.

The net present value of a project is the difference between the present value of the project's expected future cash flows and the initial investment. Therefore, this indicator reflects the added value (when NPV is positive) or the decreased value (when NPV is negative).

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