Assessing the viability or feasibility of a proposed project by the lending institutions is called project appraisal.
Why is Project Appraisal necessary?
Generally, commercial banks cannot finance on a long term basis to industries as most of their funds are short term in nature. In the case of term loans, the bank provides them on the basis of the purpose and they differ from short term loans.
Term loans are not only huge but they are given for a longer period and there are greater risks involved. But, the earnings of the banker will be more which compensates for the loss. The borrowing industry is able to utilize the term loans in a much better manner and it improves their production capacity, earnings and utilization of existing capacity.
While providing term loans, the lending institutions will have to find that the income received from the utilization of these loans by the borrower firm is sufficiently large that they are able to repay the loan. A banker has to assess the project for which the loan is required. He must make sure that the project will provide enough contribution so that the loan could be repaid. Hence project appraisal is necessary.
An appraisal made by a banker on the viability of the project from the point of repayment is known as project appraisal.
The problem for the banker will be more when there are different projects with different rates of return. It is here that the bank has to adopt a technique and go in for the selection of a suitable project.
Four major criteria in project appraisal
There are four major criteria which have to be studied in project appraisal to ascertain its feasibility. They are:
Technical feasibility of projects
1. To find out whether the various factors of production are available.
2. Suitable location of the project.
3. Adopting appropriate technology.
4. Providing suitable training to manpower.
6. Erection of plant and equipment.
6. Technical know-how.
7. Suitable plant lay-out.
8. Clearance for pollution from the pollution control board.
9. Environment clearance under Environment Protection Act.
10. Protection under the Patent Right and Trademark Act.