Chapter 07 credit process in banksPresentation Transcript
CREDIT PROCESS IN INDIAN BANKS
Also referred as Term Finance , represents a source of debt finance, which is generally repayable in more than one year and less than ten years.
Employed to finance acquisition of Fixed Assets and WC margins .
Carry fixed interest rates , monthly or quarterly repayment schedules and a set maturity date
TERM LOAN Acquisition of New P &M, Expansion, Modernization, Technology up gradation; Debt swap SHORT TERM LOAN Repayable within 3 years MEDIUM TERM LOAN Repayable in more than 3 years and less than 6 years LONG TERM LOAN Repayable in more than 6 years
ADVANTAGES & DISADVANTAGES OF TERM LOAN
Cost of capital lower than cost of private equity and preference capital.
TL do not result in dilution of control.
TL are preferred since they are backed by security.
TL do not carry voting rights.
Generally do not represent negotiable securities.
Upon failure to repay or delay in payment beyond 1 years entails serious consequences.
Generally maturity period is 6 to 10 years. In some cases grace period of 2 year may be granted.
Borrower company or any of Directors should not violate Sec 274 (1) (g) of CA
It avoids underwriting commission and other flotation costs.
Provided on the basis of general agreement (Term Loan) containing terms and conditions.
Granted after detailed Project appraisal of the.
Secured, specifically by the assets acquired using the term loan funds. This is called Primary Security .
Basic Features (contd.)
Generally also secured by company’s other F/A and C/A. This is called Secondary security.
Some times, Promoters` Guarantee/their shareholdings are given; called Collateral security.
Fixed or Floating charge on assets of borrower company.
Restrictive Covenants : usually put for monitoring of deployment of funds:
Asset-related covenants :
Capital employed, minimum asset base, provision in AOA for Nominee Directors
Minimum Current Ratio to be maintained
Not to dispose off Assets without lender’s permission
Basic Features (Contd.)
b . Liability related covenants:
Restrained from incurring additional debt
Repay existing loan; Acceptable D/E Ratio
c. Cash-outflow related covenants :
Restricting dividends outflow Restricting capital expenditures.
Restricting salaries and perks of managerial staff, etc.
d. Positive covenants :
Furnishing of periodical reports/statements
Maintenance of a min. level of working capital.
Creation to sinking fund, and
Maintenance of certain Net Worth
FACTORS THAT BANKS CONSIDER
Credit worthiness of the borrower
Credit risk profile
Sensitivity to economic and market developments
Profitability of business
Safety of loans is directly related
basis on which decision to lend is taken
type and quantum of credit to be provided
terms and conditions of the loan
To determine the ‘bankability’ of each loan proposal
To ensure proper documentation, follow-up and supervision