Appraisal of Term Loan
Appraisal of Term Loan
Appraisal of Term Loan
Purpose.
acquisition of land, building and plant & machinery, required for setting up a new industrial
undertaking or expansion/diversification of an existing one and also for acquisition of movable fixed
assets.
Term Loans are also given for modernization, renovation, etc. to improve the product quality or
increase the productivity and profitability
Term Loans are given for acquisition of fixed assets and have to be liquidated from the surplus cash
generated out of earnings.
The unit should make enough surplus earnings after meeting all the expenses, taxes and other
necessary provisions and the same should be adequate for servicing the loan and interest thereon
within a reasonable period of time.
Analysing feasibility.
While appraising any proposal for term loan/project loan, the following four fundamentals should be
carefully studied and analysed:-
Technical Feasibility.
To determine the suitability of the technology selected and the adequacy of the technical
investigation and design.
• Location of plant
• Type of technology
• Manufacturing process
• Labor
Technical report
Economic Viability.
• Intermediate product
Financial Feasibility.
This involves analyzing the data received from the borrower to ensure that the project meets the
minimum financial criteria
Estimated project cost is reasonable and complete and has a fair chance of materializing as per
anticipations.
• Building
• Contingencies
• Margin on WC requirements
• Debentures
• Unsecured Loans
• Deposits
• Government subsidies
• Internal accruals
Commercial Viability.
Cash Flow estimates help in determining the disbursal of the Term Loan.
Estimate of profitability & BEP help in drawing up the repayment program, start-up time, etc.
Profitability estimate also helps in arriving at estimated DSCR, the single most important factor in
Term Credit.
A study of the projected Balance Sheet is essential to ensure that the unit will continue to have a
sound financial position even after the implementation of the proposed project.
Managerial Competency.
• To ascertain that competent personnel are behind the project to ensure its successful
implementation and efficient management after commencement of commercial production.
• Integrity, track record, credit worthiness, initiative, competence and experience of the
management should be examined.
When financing a project, its location is very important and forms a major factor responsible for the
success or failure of the project.
Door to door tenor indicates the total period within which the total debt borrowed is to be paid back
by the borrower to the lender. This total period also includes the period of moratorium.
e.g. a Term Loan having a repayment period of 7 Years including 1 year of moratorium period; thus
the door to door tenor will be 84 months
• The ratio indicates long term solvency of a business entity and it is a measure of long term
liabilities with respect to Tangible Net Worth (TNW).
• Debt includes all long term liabilities whereas TNW is sum total of Capital and Reserves &
Surplus, net of intangible assets.
• Reserves for calculation of TNW denotes free reserves created out of profit and not those
created for meeting specific liabilities or revaluation reserve. A lower ratio represents higher
stake of the promoters in the business and looked upon favorably by a banker.
• Higher ratio indicates entity‘s larger dependence on outside long term liabilities. DER is
arrived as under:- Debt Equity Ratio = Long Term Debts /Tangible Net Worth Long Term
Debts include long term unsecured loans raised by a business entity. However, that portion
of unsecured loans which is treated as quasi equity (in case of Partnership, Proprietorship
and Private Ltd. Companies) is to be deducted from long term debts and it is to be included
as part of TNW for arriving at DER. Our Bank has in place Policy on DER, contained in L&A Cir.
145/2019 dated 31.12.2019, wherein level of DER for project financing under different
industries and vested powers with various authorities has been prescribed.
• General safeguards
• All the securities mortgaged or hypothecated to the Bank should be kept fully insured
against fire and other risks which may be considered necessary.
• The insurance policies should be in the joint names of the borrower and the Bank with the
agreed Bank clause and remain in the custody of the Bank.
• In cases where new plant and machinery is to be financed, the cost price indicated in the
quotation/ supplier’s bill shall be reckoned as its value, which should be verified by making
enquiries through other vendors supplying such machinery.
• Where the value of Plant & Machinery to be charged is Rs.50 crore & above, branches shall
get valuation of such P&M done from minimum two valuers on the Bank’s approved panel
• IDC (Interest During Construction) forms an integral part of cost of the project.
• PREOPERATIVE EXPENSES include expenses like Up-front fee to lending Institution, interest
during construction period and other pre-operative expenses like travelling, salary and other
expenses; which the company will capitalize over cost of the project.
• It indicates the ability of a business entity to generate cash accruals for repayment of
installment and interest.
• MONITORING
Disbursement
Presently, the above guidelines to be implemented in high value purchases above Rs.1
crore. However, in other cases also the genuineness of supplier/reasonableness of the price
to be ascertained, while sanctioning/disbursing the loans
We need to obtain the search report after filing the RoC charge. Search report should be
obtained from empanelled CA/CS other than who has filled the charge.
For RTO charge verification we need to send SMS as VAHAN <space> the vehicle's
registration number (upper case letters with no spaces), to 7738299899
Vetting of documentation
All the loan documents in respect of sanctioned limits of Rs. 2 crore & above (both FB and
NFB) vetted from the local approved advocate/solicitor, first before their execution and
again after execution but before disbursement of the loans.
In case of IP
• In order to minimize the instances of selling off of mortgaged IP/multiple mortgages, etc. a
well defined system for periodic visit to the mortgaged site already in place to ensure that
the security remains charged to the bank during the currency of the loan should be followed.
• CA certificate.
Insurance
• The insurance cover provides the assurance that in the event of loss of security, the
insurance company will compensate the loss.
• The securities charged to the bank should be insured for full value to cover the possible risk
of loss/damage.
• Genuineness of Suppliers
• Genuineness of quotation
• Genuineness of bills