TERM LOAN Procedure

Submission of loan application

- the borrower submits an application form that seeks comprehensive
information about the project. The application form covers the following
aspects
Promoters Background
- T h e p r o m o t e r s o f t h e c o m p a n y m u s t g i v e t h e i r detailed
biodata
Particulars of the Industrial Concern
- The products to be manufactured and the market that need to be
penetrated must be stated. Also the forecast for the growth in that industry
as well as their opportunities (export potential) must be mentioned.
P a r t i c u l a r s o f t h e p r o j e c t - (
C a p a c i t y , p r o c e s s , t e c h n i c a l a rr a n g e m e n t s , m a n a g e m e n t ,
location, land and buildings, plant and machinery, raw
materials, effluents, labor, housing and schedule of implementation)
Cost of the project
-the cost taking all factoring to account must be arrived at.
Means of financing
- There should be details of the debt equity ratio, the level of gearing,
the capital structure, and the source of financing.
M a r ke t i n g a n d s e l l i n g a r r a n g e m e n t
- T h e p r o j e c t r e p o r t m u s t s t a t e i f t h e company has
appointed any wholesalers or distributors for its goods, or if it has
tied up with another company for marketing its product
Economic considerations
- The project must be economically feasible
Government consents
- T h e p ro m o t e r s s h o u l d h a v e
government approvals for the project2

obtained

the

necessary

Initial processing of loan Application

- When the application is received an officer of the financial institution
reviews it to ascertain whether it is complete for processing. If it is
incomplete the borrower is asked to provide the required a d d i t i o n a l
i n f o rm a t i o n . W h e n t h e a p p l i c a t i o n i s c o n s i d e re d c o m p l e t e t h e
fi n a n c i a l i n s t i t u t i o n p r e p a r e s a fl a s h r e p o r t w h i c h i s

e s s e n t i a l l y s ummarization of the loan application On the basis of the

flash report it is decided whether the project justifies a detailed appraisal or
not3
Appraisal of the proposed project
- T h e d e t a i l e d a p p r a i s a l o f t h e p r o j e c t covers the marketing,
technical, fi nancial managerial and economic aspects. The appraisal
memorandum is normally prepared within 2 months after site
i ns pe ct i on . Bas ed on tha t de cis i on i s ta ke n wh et he r th e
p r o j e c t w i l l b e accepted or not
4. Issue of the letter of sanction
- If the project is accepted, a fi nancial letter of sanction is issued to
the borrower. This communicates to the borrower the assistance
sanctioned and the terms and conditions relating thereto
5. A c c e p t a n c e o f t h e t e rm s a n d c o n d i t i o n s b y t h e b o r ro w i n g
unit
- On receiving the letter of sanction from the fi nancial institution the
borrowing unit convenes its board meeting at which the terms and
conditions associated with the letter of sanction are accepted and an
appropriate resolution is passed to that eff ect. The acceptance of the
terms and conditions has to be conveyed to the financial institution
within stipulated period
6. Execution of loan agreement
- the fi nancial institution after receiving the letter of acceptance from
the borrower, sends the draft of the agreement to the borrower to be
executed by the authorized persons and properly stamped as per the
Indian Stamp Act, 1899. The agreement properly executed and stamped
along with other documents as required by the fi nancial institution
must be re t u rn e d t o i t . O n c e t h e fi n a n c i a l i n s t i t u t i o n a l s o s i g n s
t h e a g re e m e n t , i t becomes effective.
7. Disbursement of loansp e r i o d i c a l l y t h e b o r ro w e r i s re q u i re d t o s u b m i t information on
the physical progress of the projects, fi nancial status of the project,
arrangements made for fi nancing the project, contributions made by
t h e p ro m o t e r s , p r o j e c t e d f u n d s fl o w s t a t e m e n t , c o m p l i a n c e
w i t h v a r i o u s statutory requirements, and fulfi llment of the predisbursement conditions. Based on the information provided by the
borrower, the FI will determine the amount of term loan to be disbursed from
time to time. Before the entire term l o a n i s d i s b u r s e d , t h e
b o r r o w e r m u s t f u l l y c o m p l y w i t h a l l t e r m s a n d conditions of
the loan agreement.
8 Creation of security

- t h e t e rm l o a n s a n d t h e d e f e rre d p a y m e n t g u a r a n t e e
assistance provided by the fi nancial institutions are secured through
the fi rst m o r t g a g e , b y w a y o f d e p o s i t o f t i t l e d e e d s , o f
i m m o v a b l e p ro p e r t i e s a n d h y p o t h e c a t i o n
of
moveable
p r o p e r t i e s . A s t h e c re a t i o n o f m o r t g a g e , particularly in
the case of land, tends to be a time consuming process, the
i n s t i t u t i o n s p e rm i t i n t e r i m d i s b u r s e m e n t a g a i n s t a l t e rn a t e
s e c u r i t y. T h e mortgage however has to be created within specifi ed
period from the date of t h e fi r s t d i s b u r s e m e n t . O t h e r w i s e , t h e
b o r ro w e r h a s t o p a y a n a d d i t i o n a l charge of 1%interest
9. Monitoring
- Monitoring of the project is done at the implementation stage as well as at
the operational stage. During the implementation stage, the projects
monitored through:1) Regular reports, furnished by the promoters, which
provide
information
about
the
placement
of
orders,
c o n s t r u c t i o n o f b u i l d i n g s , p r o c u r e m e n t o f p l a n t , installation
of plant and machinery, trial production etc.2) Periodic site visits3)
Discussion with promoters, bankers, suppliers, creditors, and other
connected with the project4) Progress reports submitted by the nominee
directors5) Audited accounts of the company D u r i n g t h e o p e r a t i o n a l
s t a g e , t h e p r o j e c t i s m o n i t o re d w i t h t h e h e l p o f ( i ) quarterly
progress report on the project (ii) site inspection (iii) reports of nominee
directors (iv) comparison of performance Vs promise.

Appraisal of Term Loans by Financial Institutions

Credit appraisal of a term loan denotes evaluating the proposal of the loan to find out repayment
capacity of the borrower. The primary objective is to ensure safety of the money of the bank and
its customers. The process involves appraisal of market, management, technical, and financial.
Getting a term loan from financial institution is not so easy. The corporate asking for the term
loan has to go through several tests. The bank follows an extensive process of credit appraisal
before sanctioning any loan. It analyses the loan proposal from all angles. The primary objective
of credit appraisal is to ensure that the money is given in right hands and the capital and interest
income of the bank is relatively secured.
While appraising a term loan, a financial institution would focus on evaluating the credit
worthiness of the company and future expected stream of cash flow with the amount of risk
attached to them. Credit worthiness is assessed with parameters such as willingness of promoters
to pay the money back and repayment capacity of the borrower.

Credit Appraisal of Term Loans by Financial Institutions like Banks

Four broad areas of appraisal by banks are market, management, technical and management.
Market Appraisal:
As part of market appraisal, the very first thing a financial institution would look at is the gap
between demand and supply. Bigger the demand supply gap, higher is the chances of flourishing
of that business. The demand versus the proposed supply by the borrower should have a wide
difference like demand of 50000 units against the proposed supply of 10000 units.

Another most important parameter is marketing efforts and infrastructure. This is the factor
which converts a demand into sales for a business. Marketing side of the company needs to be
very strong as it is very critical to the success of the venture.
Management Appraisal:
Management of the company needs to be appraised for their intentions, knowledge, and
dedication towards the project. By intention, it is meant to evaluate the willingness of the
promoters of the company to pay the money back. It needs to evaluate the real objective of
borrowing.
Only good intentions would not generate cash flows to honor the installments of the loan. The
management needs to be strong in terms of their knowledge about business, commitment towards
achieving the set goals etc.
Technical Appraisal:
Technical appraisal is subject to the kind of business and industry of the borrower. If its a
manufacturing concern, all those parameters like project site, availability of raw material and
labor, capacity utilization, vicinity to selling market, transportation etc would be examined. A
project needs to be technically very sound to be able to sustain all business cycles.
Financial Appraisal:
After all the other kinds of appraisal, everything boils down to financial appraisal. This probably
is the most important part of credit appraisal of a business loans. The reason is that it expresses
everything in terms of money.
Financial appraisal tries to assess the correctness or reasonability of the estimates of costs and
expenses and also the projected revenues. These may include the estimation of selling price, cost
of machinery, the overall cost of project and the means of financing.
Financial appraisal involves extensive financial modeling in excel. Basically, it takes the
financial statements of previous periods and forecasts the future financial position for at least till
the loan matures. From that, the cash flows of each year are compared with the installment of
loan because ultimately the cash flows are going to honor the payments of bank.
Feasibility of the project is evaluated in terms of debt servicing capacity of the firm. Debt service
coverage ratio is a key ratio which is calculated for each future financial period and if that ratio is
satisfying the norms accepted by the bank, the loan would get another green signal.
It is difficult to explain the process of appraisal in an article or even a set of articles. It is a very
extensive work being done at financial institutions. They have a separate team of professionals
for conducting such project appraisals.