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Banking- Basics of Term Loan
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Financing term requirements
State Bank Staff CollegeHyderabadIndia
DDM-SBSC-HYD
Term Loans / DPGs are granted forACQUISITION OF FIXED ASSETS LIKE LAND, BUILDING, PLANT & MACHINERY FOR SETTING UP A NEW UNIT
MODERNISATION / RENOVATION / EXPANSION OF AN EXISTING UNIT
MEETING PRELIMINARY & PREOPERATIVE EXPENSES ??
DDM-SBSC-HYD
Term Loans are granted for (contd.)PURCHASE OF SECOND HAND MACHINERY
(After obtaining opinion from an approved valuer regarding working condition and residual life of the machinery )
DDM-SBSC-HYD
Term Loan RequirementsFor acquisition of office furniture / equipment For setting up of show roomsFor construction of godownsFor making rental deposit, cost of interior decoration etc.,-- Clean term loans
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Term Loan Appraisal A viable project is an asset which is expected to generate cash flows sufficient to service / repay funds raised to finance the project
DDM-SBSC-HYD
ON THE BASIS OF REPAYMENT, TERM LOANS ARE CLASSIFIED INTOSHORT TERM LOANS (Repayable within 2 / 3 years )
MEDIUM TERM LOANS (Repayable within 5 / 8 years )
LONG TERM LOANS (Repayment period above 8 years )
DDM-SBSC-HYD
Term Loans (contd.).BANKS NORMALLLY GRANT SHORT TERM LOANS.
.DEPENDING ON THE CASH SURPLUS GENERATED, TLs SHOULD NORMALLY BE REPAID IN 3 TO 7 YEARS. REPAYMENT PERIOD BEYOND 10 YEARS IN EXCEPTIONAL CASES ONLY
.IN CASES OF SECOND HAND MACHINERY FINANCING, THE PERIOD OF REPAYMENT NOT TO EXCEED RESIDUAL LIFE OF THE MACHINERY
.LONG TERM LOANS ARE USUALLY GRANTED BY DEVELOPMENT FINANCIAL INSTITUTIONS.
DDM-SBSC-HYD
Term Loan Appraisal - StagesTechnical appraisalEconomic & Market appraisalFinancial appraisalManagerial appraisal
DDM-SBSC-HYD
Assessment of Term Loans
TERM LOAN APPRAISAL IS A COMPREHENSIVE APPRAISAL OF THE ENTIRE PROJECT ITSELF. IT CONSISTS OF THE FOLLOWING :
APPRAISAL OF THE PROMOTERS, APPRAISAL OF MANAGERIAL COMPETENCY VERIFICATION OF TECHNICAL FEASIBILITYASSESSMENT OF ECONOMIC & MARKETING VIABILITY & EXAMINATION OF FINANCIAL FEASIBILITY
DDM-SBSC-HYD
Economic & Market AppraisalAssessment of the demand / market absorption for the product/service at the relevant pricing envisaged earning capacity of the project- depends on volume of sales. To assess how big is the market? How much is it likely to grow? How much of that can project capture? Is there an unsatisfied demand for the product? What is the idle / unutilized capacity in the industry?
DDM-SBSC-HYD
Economic & Market AppraisalAssessment of the competition to the product/service from similar/substitutable products of others brought in by technological changes. Shift in consumer preferences. Geared and non geared scooters.Change in demand depends on changes in prices and income. Whether product is a basic necessity like soap or a luxury item like a car.
DDM-SBSC-HYD
Economic & Market AppraisalAvailability of consumer financing can also affect consumer demand.Whether it is an intermediate product like yarn or woven cloth vis-a-vis the final product finished garments. Demand for the former is determined by demand for the latter.Whether unit is an ancillary industry supplying to one or two OEMs- success of the former depends on continued success of the latter.
DDM-SBSC-HYD
Economic & Market AppraisalStudy of international market scenario whenever exports are envisagedAssessment of the marketing arrangement including distribution channels. Is the unit close to its market? Is cost of production low? Buy-back arrangements, check for genuineness by calling for opinion report on the buyer.Is there an efficient sales organization?
DDM-SBSC-HYD
Managerial AppraisalEstablishing the track record of the promoters and the promoting companiesEvaluation of managerial competence of the promoting entitiesAssessment of past performance of the promoting companiesStudying the adequacy of the project implementation team, composition of the board experience industrialists and professional executives, who is the CEO.
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Managerial Appraisal ( contd. )Ability to manage the environment and functional areas such as purchase, production, marketing, finance and personnel administration.
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What do you see in Technical Feasibility ?NEW OR PROVEN TECHNOLOGY ? IF NEW, EXPERT OPINION TO BE SOUGHT. DO NOT ADOPT OBSOLETE TECHNOLOGY.Choice of machinery and basis of selection, suppliers reputation and delivery schedules
PRODUCT PERFORMANCE / QUALITY SPECIFICATION (BIS , AGMARK etc.)
SIZE OF THE PLANT, CAPACITY OF THE UNIT
LAND & LOCATION
MACHINERY, SKILLED MANPOWER, POWER & UTILITIES
RAW MATERIALS AVAILABILITYEnvironmental and regulatory aspects
DDM-SBSC-HYD
And, what are the components of Financial Feasibility ?COST OF THE PROJECT: Is it reasonable, will there be cost overrun?MEANS OF FINANCE does it ensure cash availability as and when needed?PROFITABILITY are estimates of expenses and revenues realistic?DEBT SERVICE COVERAGE RATIO will determine the moratorium period and repayment schedule.BREAK EVEN POINT is it reasonably low and easily achievable?
DDM-SBSC-HYD
Break EvenThe point corresponding to no-profit,no-loss situationSimplifying assumptions Fixed costs Variable costs Sales- variable costs= contribution
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Break Even break even point.ppt
BE Sales = Fixed Cost x Sales ContributionMargin of Safety = Projected Sales- BE Sales x 100 Projected Sales
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Debt Service CoverageGROSS D.S.C.R = PAT+Depreciation+Interest ( L.T ) T.L instalments + Interest ( L.T )
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Net DSCR
Net DSCR= Net Profit+Depreciation + non cash items T L Instalments
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Cost of the Project includesLandBuildingPlant & MachineryOther Fixed / Misc. AssetsTechnical Know - how fees etc.Power Connection & Installation ChargesPreliminary & Pre-operative expensesContingenciesMargin on WC requirements
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Means of Finance includesOwn CapitalDebenturesUnsecured LoansLoans from Friends & RelativesTerm LoansGovernment Incentives
DDM-SBSC-HYD
Steps to scrutinize a Term Loan ProposalCheck the Break-Even Point
(to be calculated for the first full year of commercial production and the year of maximum capacity utilisation during the repayment period)
DDM-SBSC-HYD
Steps to scrutinize a Term Loan Proposal (contd.)Verify whether the Debt / Equity Ratio & TOL / TNW Ratio are within the acceptable normsVerify the Gross Debt Service Coverage RatioVerify the Yearly Debt Service Coverage RatiosVerify the Net Fixed Asset ratio
DDM-SBSC-HYD
Financial Covenants for Term Loans IN RESPECT OF NEW TERM LOANS AND OLD TLS (ON RESCHEDULING), A SET OF FINANCIAL COVENANTS SHOULD BE STIPULATED COVERING THE FOLLOWINGI.Current Ratio
ii.TOL / TNW
iii.Interest Coverage Ratio
iv.Default in payment of interest / instalment
v.Cross Default (Default in payment of instalments / interest to institutions / banks
DDM-SBSC-HYD
DO YOU HAVE ANY QUESTIONS?
DDM-SBSC-HYD