Financing term requirements

State Bank Staff College

Hyderabad
India
Term Loans / DPGs are
granted for
ACQUISITION 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 ??
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 )
Term Loan Requirements
For acquisition of office furniture /
equipment
For setting up of show rooms
For construction of godowns
For making rental deposit, cost of
interior decoration etc.,-- Clean term
loans


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
ON THE BASIS OF REPAYMENT, TERM
LOANS ARE CLASSIFIED INTO
SHORT TERM LOANS (Repayable within 2 / 3
years )

MEDIUM TERM LOANS (Repayable within 5 / 8
years )

LONG TERM LOANS (Repayment period above
8 years )

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.
Term Loan Appraisal - Stages
Technical appraisal
Economic & Market appraisal
Financial appraisal
Managerial appraisal

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 FEASIBILITY
ASSESSMENT OF ECONOMIC & MARKETING
VIABILITY &
EXAMINATION OF FINANCIAL FEASIBILITY
5/9/2014 DDM-SBSC-HYD 10
Assessment 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?

5/9/2014 DDM-SBSC-HYD 11
Economic & Market Appraisal
Assessment 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.
5/9/2014 DDM-SBSC-HYD 12
Economic & Market Appraisal
Availability 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.
5/9/2014 DDM-SBSC-HYD 13
Study of international market scenario
whenever exports are envisaged
Assessment 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?


5/9/2014 DDM-SBSC-HYD 14
Managerial Appraisal
Establishing the track record of the promoters and
the promoting companies
Evaluation of managerial competence of the
promoting entities
Assessment of past performance of the promoting
companies
Studying the adequacy of the project
implementation team, composition of the board
experience industrialists and professional
executives, who is the CEO.
5/9/2014 DDM-SBSC-HYD 15
Managerial Appraisal ( contd. )
Ability to manage the environment and
functional areas such as purchase,
production, marketing, finance and personnel
administration.

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 AVAILABILITY
Environmental and regulatory aspects


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?


Break Even
The point corresponding to no-
profit,no-loss situation
Simplifying assumptions
Fixed costs
Variable costs
Sales- variable costs= contribution
Break Even break even
point.ppt

BE Sales = Fixed Cost x Sales
Contribution
Margin of Safety
= Projected Sales- BE Sales x 100
Projected Sales
Debt Service Coverage
GROSS D.S.C.R = PAT+Depreciation+Interest ( L.T )
T.L instalments + Interest ( L.T )


Net DSCR

Net DSCR= Net Profit+Depreciation + non cash items
T L Instalments

Cost of the Project includes
Land
Building
Plant & Machinery
Other Fixed / Misc. Assets
Technical Know - how fees etc.
Power Connection & Installation Charges
Preliminary & Pre-operative expenses
Contingencies
Margin on WC requirements
Means of Finance includes
Own Capital
Debentures
Unsecured Loans
Loans from Friends & Relatives
Term Loans
Government Incentives
Steps to scrutinize a Term Loan
Proposal
Check 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)
Steps to scrutinize a Term Loan
Proposal (contd.)
Verify whether the Debt / Equity
Ratio & TOL / TNW Ratio are
within the acceptable norms
Verify the Gross Debt Service
Coverage Ratio
Verify the Yearly Debt Service
Coverage Ratios
Verify the Net Fixed Asset ratio
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 FOLLOWING
I. 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

DO YOU HAVE ANY QUESTIONS?