Ch 4 Term Loans New

7/29/2019 Ch 4 Term Loans New

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DOMESTIC TERM LOAN:

Loan syndication is the assistance rendered

merchant banks to get mainly term loans for

projects.

Obtained from single development financial

institute or syndicate.

Merchant banks and investment banker

provide assistance.


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Term Loans:

DFIs (Development Finance Institutions) or

development banks starting with IFCI (Industrial

finance corporation of India) and state finance

corporation

DFI play significant role in financing investment

activity.

Constitute 10% of total sources of funds


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Based on activities, FIs classified as under-

(1) Henn lendiva institutes which extends longterm finances (IFCI, IIBI, EXIM bank, TFCI)

(2) Re-finance institutes extends refinance

banks and NBFCs to lend agriculture, SSIsand housing sectors (NABARD, SIDBI, NHB)

(3) Investment Institutes which deply theirassets largely in marketable securities.


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Sources:

Country level-

Industrial development bank of India (IDBI)

Industrial credit and investment corporation

of India (ICICI)

Industrial Finance corporation of India(IFCI)

Small Industries Development bank of India

(SIDBI)


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State Level-

State finance Corporations (SFCs)

State Industrial Development Corporation

(SIDC)

Investment Institutes-

UTI

LIC

GIC


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Development Finance Institution (DFIs)

(1) Industrial development bank of India (IDBI)

Established in 1964 under Act of Parliament

Functions:

Provide credit and other facilities for

development of industry

Co-ordinating working of Institution


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Financing, Promoting and developing

industrial units and development of such

institutes.

Direct assistance to industries.

Paid up capital of IDBI was 653 crores in

1995 and outstanding portfolio is amounted46102 crores in 2001.


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(2) Industrial credit and investment corporation ofIndia (ICICI)

Established in 1955

Functions-

Encourage and assist industrial units Provide term loans in rupee and foreign currencies

Underwrites the issue of shares and debenture and

direct subscription of issues

Paid up capital of ICICI was 1135 crores in 2001 and

outstanding portfolio is amounted 46279 crores in

2001.


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(3) Industrial Finance corporation of India (IFCI)

Established in 1948

Functions-i) Project finance- financial assistance, expansion,

diversification & modernization

ii) Financial services- underwriting and directsubscription of equity, debenture

iii) Promotional services- guarantee of deferred

payment, foreign currency loans

Paid up capital of IFCI was 1088 crores in 2001 and

outstanding portfolio is amounted 16157 crores in

2001.


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Trends in Disbursements:

Private sector progressively reduced dependence onfinancial institutes.

Competition from Banking and capital market sector

Large companies reducing debt obligation of FIs. Liberalisation made banks to finance big projects

with available funds

Interest rate rose in the market in 1990s

Withdrawal of concessional finances available to FIs

Company started raising funds from equity and debt

capital market


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Raise funds through rights/ public issue with

premiums

GDR route also utilized. FIs raised funds from debt market at high cost

Financed funds to risky projects with high gestation

period


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State finance Corporations (SFCs)

Established under State financial Corporations

Act, 1951.

More than 20 state level corporations

Functions-

Financial assistance to small and medium

enterprises

Direct subscription to equity

Discounting of bills

Special capital and seed capital


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Small Industries Development bank of India (SIDBI)

Established in 1989

Apex bank for tiny and small scale industry

Function- Promotion, financing and development of industrial

concern in small scale units

Direct assistance

Participate with selected commercial banks in

financing to facilitate working capital requirement

Assistance for technology upgrdatation


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Shipping Credit and Investment Company of India

(SCICI)

Established in 1987 by ICICI

Focus on development of shipping, fishing projects

and allied businesses and provide all the assistancerequired

Function-

Financial assistance in rupee and foreign currency

Capital market support like underwriting, private

issue and offer for sale.


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Tourism Finance Corporation of India Ltd. (TFCI)

Established in 1989 by IFCI

Function-

Provides project loans, lease assistances, directsubscription to shares

Apart from conventional tourism projects like

accommodation and hospitality assistance also given

to non conventional projects like amusement parks,car, rental services, air taxi passenger facilities.


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Borrowing from Financial Institutes

Merchant banks help clients approach

financial institutions for term loans

Institute need to be approached based on

nature of industry, location of unit, size ofproject cost.

SFCs can sanction loans up to 1.5 crores, SIDCs

up to 90 lkhs, SIDBI up to 50 lkhs.


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Foreign currency loans

For imported machinery and equipment

Foreign currency loans are part of various

lines of credit like euro, dollar, yen for

financing projects based on imported plantand equipments

Loan covers CIF values of capital goods and

know how fees. Available in fixed and floating rate


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Floating rate linked to LIBOR

IDBI, IFCI and ICICI operate Exchange Rate

Administration Scheme (ERAS) to cover the

risk of foreign exchange rate fluctuation and

charge composite rates to borrower.

Merchant bankers should make appraisal ofthe project

Capital structure designed for equity and debt

on the basis of cost of capital and ability toyield the rate of return.


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Promoters Contribution

Promoters contribution depend on the size of

the project and size of the risk

Promoter contribution in form of share

capital, right issue, unsecured loan

If promoter not capable to contribute thefunds can avail the seed financing from SFCs

or any financial institutes to fill the gap


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Appraising Term loans

After determining promoters contribution,merchant banker analyse the amount of term

loan to be raised

Merchant banker also ensure project adheres theguidelines for financing of industry project.

Priority given to the projects related with the

developments like infrastructure, rural backward

areas, employment, export-import, technology

related.


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Project should not fall under the negative list

of industry like cigarettes, alcohol, beer.

Apply for loan with the FIs.

Market and technical analysis conducted

Financial analysis prepared and projected

income flow statements, cash flow statementsand balance sheet prepared

Working capital requirements are assessed

and then commercial banks approached


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Merchant bankers involvement required for

all due diligences.

After verification project would be eligible for

term loan and meeting fixed with FIs.

DFI consider the check list for term loan

Details of promoters back ground, technicalskills, relevant experience required

Along with loan application, MOA, AOA,

certificate of incorporation, latest annualreports, guarantors required


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Final structure of financing emerges after

considering promoter contribution, debt

equity ratios, debt services coverage ratio,margin money.

Financial institutes determines the debt on

basis of nature of project. The ability of debt repayment within time and

priority of the industry in government policy

also considered.


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Security margin

Term loan is sanctioned against the security of

fixed assets

Normally term loan is 75% of the value of

fixed assets and security margin is 25%

Term loans are granted subject to terms andconditions.


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After loan sanctioned requirements need to

be met

Before loan disbursed documents have to be

executed and submitted and stamp duty and

registration fees to be paid, promoter paid upcapital to be brought.

After all these requirement complieddisbursement provided.


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Loan Syndication:

Borrower approach several banks who providessyndicate loans, specifying the amount and tenor

Used for project financing

Lead bank assembles other banks whoparticipate in syndicates

Mandate to organise the loan is awarded by theborrower to bank


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After receiving mandate, placementmemorandum is prepared and submitted to

lead bank

All banks willing to be member of syndicateintend the amount, tenure and interest rates

Draft document prepared with all theconditions and signed by borrower

All administrative work carried by lead banker


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Total syndicate loan take care of project

finance and working capital requirements

Interest charges either fixed of floating.


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Syndicate document

Includes-

Provision on tenor, interest, repayment, pre-

payment, business health, compliance, tax

provisions, default clause, charge on assets.


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External term loan:

After gulf crisis and downgrade of Indianprojects had put limits on Indian industries onExternal commercial borrowings.

In 1991 in phase of liberalisation opened upthe external borrowing markets.

GOI restricted the limits and also keep closeeyes on debt.


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Guidelines for ECB

Cap on ECB to ensure that debt is kept at asustainable level

ECB specially for meeting the foreignexchange cost of projects.

Preference given to infrastructure and coresector.

Export oriented industry given priorities.

Commercial loan should be of minimum 5years.


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Choice of the currency loan and interest basisleft to borrower

Raise loans on their own strength withoutsovereign authority

Approval from RBI and FEMA is alsomandatory

Repayment and pre payment of loan as perthe GOI and RBI regulation.


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Procedure for approval:

Approval from Department of Economicaffairs

Application required to be submittedcontaining the approval from relevant

authorities, details of lenders. Approval letter from ECB division


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Pricing of Euro dollar loan

Annual charges LIBOR rate is followed plus spreads ( generally

0.125 to 1.5 %)

Praecipium ( lead manager fees), commitment

fees and annual agent fees

Documents

Ch 4 Term Loans New