Assessment of Term Loans

Purpose.

Generally granted to finance Capital Expenditure i.e.

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:-

i) Technical feasibility of the project.

ii) Economic viability of the project.

iii) Financial viability of the project.

iv) Managerial competence.

Technical Feasibility.

To determine the suitability of the technology selected and the adequacy of the technical
investigation and design.

Factors to be considered are:

• Location of plant

• Accessibility to critical inputs

• Size of the plant

• Type of technology

• Manufacturing process

• Labor

Technical report

Economic Viability.

This has reference to the earning capacity of the project.

Since earnings depend on the volume of sales, it is necessary to determine how much output of the
unit or additional production from an established unit the market is likely to absorb at given prices.

Factors to be considered are:

• Thorough market analysis

• Demand forecast, Supply position, Gap

• Intermediate product

• Export oriented units

Financial Feasibility.

This involves analyzing the data received from the borrower to ensure that the project meets the
minimum financial criteria

Estimates of earnings and operating costs are as realistic as possible.

Estimated project cost is reasonable and complete and has a fair chance of materializing as per
anticipations.

Cost of the project includes:

• Land (including site development)

• Building

• Plant & Machinery

• Other Fixed Assets / Misc. Assets

• Technical know-how fees, etc.

• Power connection & installation charges

• Preliminary & Pre-operative expenses*

• Contingencies

• Margin on WC requirements

Means of finance includes:

• Equity Share Capital from promoters / other shareholders

• Preference Share Capital from Preference shareholders

• Debentures

• Unsecured Loans

• Deposits

• Loans from Friends & Relatives

• Term Loans from Banks & FIs

• 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.

• In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors

depends to a large extent, in the relative strength of its management.

• Integrity, track record, credit worthiness, initiative, competence and experience of the
management should be examined.

Location of the project

When financing a project, its location is very important and forms a major factor responsible for the
success or failure of the project.

The main points about the location are:-

 Connectivity options: (Rail, Road, Air)

 Proximity to the raw material source

 Proximity to the market place

 Adequate supply of electricity & water

 Easy availability of trouble shooting options (technicians, labour/authorized service centres)

 Developed neighborhood (State capitals, metropolis, SEZs, Export Promotion Zones)

Door to Door Tenor.

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

Debt Equity Ratio

• 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

• Examination of environmental regulations – To ascertain whether the project is in full

compliance with the various environmental provisions in force.

• Examination of Government policies

• Examination of other statutory obligations

IDC & Pre Operative Expenses

• 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.

DEBT SERVICE COVERAGE RATIO

• It indicates the ability of a business entity to generate cash accruals for repayment of
installment and interest.

• DSCR = PAT + Depreciation + Interest on TL

Annual Installment + Interest on TL

• A ratio of 1.5 to 2 is considered reasonable. Lower ratio needs to be looked into further
while a very high ratio may require fixing lower repayment period.

• A very high ratio may require fixing lower repayment period.

• MONITORING

Disbursement

Accuracy/correctness of price of any asset being financed shall be ensured by reference to

the website of manufacturers, wherever price is available on website. If the payments are
not being released to manufacturers, reasons thereof are to be ascertained and recorded. If
there is any price variation from the price displayed in website, it should be subjected to
scrutiny and explanation to our satisfaction to be obtained.

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

Search report on ROC charge

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.

Periodic inspection of Security

In case of IP

Particulars Primary Collateral

Value of property At least on yearly basis At least once in three

mortgaged/charged is or as per terms of years or as per terms of
upto Rs.20 lac or credit sanction, whichever is sanction, whichever is
facilities are upto Rs.1 earlier. earlier.
crore.
 Value of property At least on half yearly At least on yearly basis
mortgaged/charged is basis or as per terms of or as per terms of
above Rs.20 lac or the sanction, whichever is sanction, whichever is
credit facilities are of earlier earlier.
above Rs.1 crore

End use Verification

• Periodical scrutiny of borrowers‟ books of accounts/operating statements, balance sheets of

the borrowers.

• Regular inspection of borrowers‟ assets charged to the Bank as security.

• System of periodical stock audit, in case of working capital finance;

• 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.

• Obtaining of original/certified copy Bills, Stamped Receipt, etc.

• Obtaining of Report of Bank’s / Lender’s approved Engineer confirming verification of end

use of funds released by Bank with the envisaged purpose.

• CA certificate. 

• Bank’s Officials should ensure compliance of the guidelines.

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.

Fraud prone areas

• Genuineness of Suppliers

• Genuineness of quotation

• Reasonableness of price of the assets

• Genuineness of bills

• Genuineness of Title deeds