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TERM LOAN
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INDEX
CHAPTER I
INTRODUCTION
Page 2
CHAPTER II
Page 5
TECHNICAL VIABILITY
ECONOMIC VIABILITY
FINANCIAL VIABLITY
CHAPTER III
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TERM LOAN
assets.
Is repayable on demand.
thereafter.
Working capital advances are
cash accruals.
Purpose of a Term Loan: A term loan is utilized basically for the following
purposes:
1) Acquisition of fixed assets like land & buildings, plant & machinery etc.
2) Modernization / Renovation / expansion / diversification of an existing unit.
3) Strengthening the Net Working Capital.
4) Purchase of Balancing Equipments.
5) Purchase of second hand machinery.
6) Replacement of high cost debts. (for the residual period only)
7) Funding various long term expenses like VRS, R&D etc.
VARIOUS TYPES OF TERM LOAN FACILITIES
can be a fund based or non fund based facility. In a fund based facility the
funds are parted with immediately and the term loan is directly utilized for
purchase / investments in fixed assets. The non fund based term loans are in
the form of Deferred Payment Guarantees (DPG) used for acquisition of fixed
assets. In DPGs, the payment liability crystallizes only after the presentation
of the bills under such guarantees.
LOAN POLICY GUIDELINES APPLICABLE TO TERMS LOANS: are as
follows:
1. Maturity of Banks Advances: The maturity of any term loan
including moratorium should not normally exceed 8 years, except
cases under CDR mechanism / Rehabilitation packages approved
by the Bank, Infrastructure Loans, Housing Term Loans to
individuals, Education loans and Agricultural Term Loans under
approved schemes.
2. In case the maturity exceeds 8 years, the loan should be
administratively cleared by the appropriate authority.
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FINANCIAL PARAMETER
BENCHMARK
NET DSCR
GROSS DSCR
MARGIN
PROMOTERS CONTRIBUTION
TO EQUITY
and
20% for trading Companies (However
this is not a definitive benchmark.
Viability.
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Who is the man behind the project i.e the main promoter? What is his
track record both financial as well as business track record? Does he
have adequate proficiency, experience and managerial ability in the
proposed business activity?
Establish the KYC of the proprietor, partner (s), director (s), Company
etc. as per the KYC guidelines of the Bank.
Prepare the Opinion reports on the promoter (s). While preparing the
opinion reports, the details of properties should be specific: in case of
immovable property: - Khata No, Plot No, Area, Location, Value should
be mentioned. In case of marketable securities: FD No, LIC No, Mutual
Fund No, Face Value, Maturity Value, Interest Rate etc. must be
furnished.
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New loans
In all cases
restructuring
Refer to caution lists, RBI suit filed accounts, RBI Defaulters list, CIBIL,
ECGC caution list to ensure that the promoter / Company is not a
defaulter borrower.
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Technical Feasibility
Does the project have advantage in terms of its location: (a) availability
of infrastructure like power, water, roads, ports, rail-heads etc. (b)
distance of the plant from the sources of raw materials.
Adherence
to
environmental
and
regulatory
guidelines:
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Economic Viability
The viability of any term loan proposal depends upon ability of the
enterprise to generate stable cash flows. Cash flows in turn depend
upon the capability of the Company to sell its products in the market.
many
Companies
producing
identical
product
are
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Financial Feasibility
ITEM.
Land & Buildings.
a) Cost of Land.
b) Cost of Land Development & leveling.
c) Cost of erection and civil construction.
The evaluator should convince himself that
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Plant
Machinery
to
escalation
clause,
adequate
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Technical
Know- The costs estimates have to be crosshow, engineering &
checked from the relative contracts.
consultancy fees.
STATE BANK ACADEMY, GURGAON
Miscellaneous
Fixed Assets
fittings,
laboratory
equipments,
raising
costs,
underwriting,
Provision
contingencies.
due
to
delays
in
project
implementation.
Although no standard norm can be set for
contingencies, the accepted practice is to
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10-15%
of
the
project
cost
as
contingency requirements.
7.
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ITEMS
EQUITY
the
capital
Company.
While
structure
of
examining
the
this
policy
guidelines
regarding
funding
projects
for
existing
Sometimes
the
DEBT.
The
matters
to
be
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VIABILITY
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CASH ACCRUALS
Cash Accruals consist of profit after tax plus all non cash
expenses like depreciation and amortizations eg write off of
preliminary & preoperative expenses.
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A
B
Year
Cash
Accruals
Annual
Repayment
Net DSCR
(A/B)
1
100
2
125
3
150
4
180
5
200
TOTAL
755
75
75
75
75
75
375
1.33:1 1.66:1
2:1
2.40:1 2.66:1
2.01:1
In the initial 2 years of operation, the Net DSCR is less than 2:1.
However, when you compare the trend, it is improving over the years.
Moreover, the Average Net DSCR of the Project is 2.01, which is
acceptable as per the benchmarks set up in the loan policy guidelines.
In this case please note that the Average Net DSCR of the project is
not the arithmetical average for the 5 years Net DSCR, but it has been
calculated by taking the summation of cash accruals to the
summations of annual repayment obligations spread over the 5 years
in consideration.
These are the following risk categorizations adopted for judging the
efficacy of Net DSCR:
2:1
IDEAL
1.75 2:1
HIGH RISK
** In this case the credit officer has the option of accelerating the term
loan repayment schedule since surplus servicing cushion is available.
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A
B
C
D
E
F
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Year
Cash Accruals
Interest On T/L
A+B
Annual
Repayment
Interest On T/L
C+D
Gross DSCR
(C/F)
1
100
41
141
75
2
125
32
157
75
3
150
23
173
75
4
180
14
194
75
5
200
9
209
75
TOTAL
755
119
874
375
41
116
1.22
32
107
1.47
23
98
1.77
14
89
2.18
9
84
2.49
119
494
1.77
5
328
0
pro-rata
margin
contribution
of
the
Company
is
strengthening.
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OB = Fixed Costs
BC = Variable Costs
OA = Sales Volume
P = BEP. Here Sales Volume = Fixed Costs + Variable Costs
Before P, THE Company is incurring losses.
At P, The Company operates on no profit no loss basis.
After P, The Company starts having profits.
Thus when we talk of break-even, the first task is to classify all the
costs / expenses as fixed costs and variable costs.
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Contribution =
Break Even at =
The break even point should be calculated for 2 years: (a) First full
year of commercial production (b) Year of maximum capacity
utilization. There cannot be a uniform prescription for an ideal
breakeven point and every project shall have its own unique
breakeven depending upon multiple variables like plant efficiency
and stabilizations of various inputs. However the general dictum is
lower the breakeven point, higher the profitability of the
project leading to better viability. The risk categorizations in
terms of break even at installed capacity are as follows:
Risk Range
Low Risk
Medium Risk
High Risk
Very high risk range
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10000 Nos.
7000 Nos.
(CU)
70%
Sales Volume
Variable Expenses
Raw Materials
Packing Materials
Consumable Stores
Power & Fuel
Repairs & Maintenance
Distribution Expenses
Interest on Working
Capital
Contribution
Fixed and semi-fixed
expenses
Wages & Salaries
Factory overheads
Depreciation
Sale Expenses
Interest on term loans
and deferred payment
credits
Administrative Expenses
Royalty and know how
Operating Profit
C
D
7000=00
4000
200
300
150
120
100
150
5020=00
A-B
1980 (C )
200
100
200
250
300
250
50
C-D
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1350 (FC)
630
47.72%
(1350-200/1980)X70 =
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40.65%
This relation between CPV (sensitivity analysis is also called CPVcost, volume, price analysis) is subject to many uncertainties which
can adversely affect cash flows. For e.g suppose Sales falls by
10% (say) with the Cost remaining the same, the profitability and
consequently the cash accruals also fall having the debilitating
effect on the DSCR. Similarly if the Costs increase by 10% (say)
with sales volume remaining constant, the situation becomes
critical i.e profits, cash accruals & DSCR are affected adversely.
Thus, sensitivity analysis allows the Banker to judge the resilience
of the project to adverse variations in costs and sales. It tells the
analysts: what is the cushion of profits available to the Company to
service its debts if the projected / assumed financial results fall
short of expectations owing to any uncertainties arising in future.
In a nutshell sensitivity analysis is done to discern whether the
project can survive the effect of any unfavorable changes in
profitability, and if so, how much.
Sensitivity analysis is done by decreasing price or by increasing
costs in the range of 5% - 15%. Inevitably this leads to stress on
profitability. DSCR and Breakeven is than calculated under these
stressful conditions to judge the tolerance & sustainability of the
project.
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10%
decrease
in Volume
of sales
10%
decrease
in selling
price
Sales
Variable Exp
Contribution
Fixed Exp
Operating Profit
Break Even Sales
BEP
PAT
Cash Accrual
Repayment
Obligation
DSCR
Span of resilience
High
Medium
Low
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Year
Cash
Cash
Cumulative
Cumulative Cash
Outflow
Inflow
cash inflow
Outflow
-500
-500
150
-500
150
200
-500
350
200
-500
550
th
Year
Cash
Cash
Discount
Outflow
Inflow
Factor @
Present Value
NPV
15% **
1
-500
1.000
-500
-500
150
0.870
(0.870x150)= 131
-369
200
0.756
-218
200
0.658
(0.658x200)= 132
-86
250
0.572
(0.572x250)=143
+57
** The discount tables at various interest rates are given in text books.
Thus we observe in the NPV method, that the original investment is
recovered only in the 5
th
th
year
IRR
(+)
(x)
Thus IRR is the rate at which the sum of discounted cash flows
(both inflows as well outflows) becomes zero. Two different rates of
returns (one high & one low) are used and the IRR is calculated by
extrapolating the same.
The IRR is compared to the cost of capital. If the IRR is sufficiently
high i.e it is able to meet the cost of capital and thereafter provides
a return to the promoter which is comparable to the returns from
investment in alternative avenues, the project is considered to be a
paying one and can be accepted.
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