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Loans and project hard copy


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Loans and project hard copy

  1. 1. K.E.S’s SHROFF COLLEGE OF ARTS & COMMERCE SUBJECT: Corporate finance -II
  2. 2. Class: S.Y.B.F.M. Semester: th 4 PRESENTATION ON: Loans and project appraisal Submitted to: Prof. Shweta Mishra Academic year: 2011-12
  4. 4. Meaning of loan: A loan is an amount of money that's given from one (the lender) to another person (the borrower) with an expectation of repayment. Loans are a type of debt. If you're not careful when you take out a loan, you could end up with one that's hard to repay, leaving you in debt. Loan is a form of debt, often with interest. There are several reasons why people apply for loans. Usually they borrow money to purchase a house, buy a car, or start a business. Often, applying for a loan is necessary because most do not have available financial resources they need to make a purchase. Other forms of loans, like the student loans have helped a lot of students get through school. Those who use student loan debt consolidation clearly have multiple student loans. They do this to manage their obligations better. Defination: An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk).
  5. 5. Term Loan: Definition: A loan for equipment, real estate and working capital that's paid off like a mortgage for between one year and ten years. Term loans are your basic vanilla commercial loan. They typically carry fixed interest rates, and monthly or quarterly repayment schedules and include a set maturity date. The range of funds typically available is $25,000 and greater.  Short-term Loans (upto two years) for different short term requirements including bridge loan, Corporate Loan etc.  Medium-term Loans (more than two years to eight years) for business expansion, technology up-gradation, R&D expenditure, implementing early retirement scheme, Corporate Loan, supplementing working capital and repaying high cost debt.  Long-term Loans (more than eight years to upto 15 years) Project Finance for new industrial/infrastructure projects Takeout Finance, acquisition financing (as per extant RBI guidelines / Board approved policy), Corporate Loan, Securitisation of debt.
  6. 6. Feature of term loan: 1.Maturity – The maturity period of term loans is typically longer in case of sanctions by financial institutions in the range of 6-10 years in comparison to 3-5 years of bank advances. 2. Negotiated – The term loans are negotiated loans between the borrowers and the lenders. They are akin to private placement of debentures in contrast to their public offering to investors. 3. Security – Term loans typically represent secured borrowing. Usually assets, which are financed with the proceeds of the term loan, provide the prime security. Other assets of the firm may serve as collateral security. All loans provided by financial institutions, alongwith interest, liquidated damages, commitment charges, expenses, etc. 4. Interest payment and principal repayment – The interest on term loans is a definite obligation that is payable irrespective of the financial situation of the firm. To the general category of borrowers, financial institutions charge an interest rate that is related to the credit risk of the proposal, subject usually to a certain minimum prime lending rate/ floor rate. Financial institutions impose a penalty for defaults. In case of default of payment of installments of principal and/or interest, the borrower is liable to pay by way of liquidated damages additional interest calculated at the rate of 2 per cent per annum for the period of default on the amount of principal and/or interest in default.
  7. 7. 5. Restrictive Covenants A financially weak firm attract stringent terms of loan from lender. The restrictive covenants 1) Negative Covenants: A)Asset Related Restrictive Covenants: These covenants put certain restrictions on the assets of the borrower. The borrower either cannot break these covenants or would need to take due approval or permission before breaking. These restrictions may be in the form of following:  Creation of any further charge on the assets.  Sale of fixed assets. B)Liability Related Restrictive Covenants: These covenants restricts any activity affecting the liability of the company which may include      Taking up additional loan. Repayment of existing loan. Issue additional equity shares. Issue of deposit certificates or unsecured loans etc. Any disposal or reduction in promoter’s shareholding. C) Cash Flow Related Restrictive Covenants: These covenants restrict the usage of the cash flow of the company.  Capital expenditure on new projects, expansion, diversification, modernization etc.  Dividend payment  Limitation on top management salaries etc.
  8. 8. D)Control Related Restrictive Covenants: Covenants on control are very embarrassing for the management because it directly impacts the way they have managed the company prior to the debt.  Selection of management team and bringing organizational change in consultation with the bank or financial institution.  Appointment of Nominee Directors. 2) Affirmative / positive covenants: These covenants are called affirmative or positive covenants because they do not put any restriction on anything but normally impose certain additional task to the borrower.  Submission of financial statements from time to time as agreed in the loan agreement.  Maintenance of certain working capital level and net worth of the company.  Secure debt payment by maintaining sinking fund. What not you have to do for obtaining and maintaining that loan in the company? Taking money from a financial institution is not so easy. Borrowers lose all their freedom. But, if we think from the point of view of the bank or financial institution, who is holding public money with it, has to do such due diligence before handing over that money to anybody. They have to make sure that the loan does not become bad debt.
  9. 9. Types of loan: There are many different types of loans you can take out. When you’re looking to borrow money, it’s important that you know your options. 1)Open-Ended and Closed-Ended Loans:  Open-ended loans are loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans. With both of these loans, you have a credit limit that you can purchase against. Each time you make a purchase, your available credit decreases. As you make payments, your available increases allowing you to use the same credit over and over.  Closed-ended loans cannot be borrowed once they’ve been repaid. As you make payments on closed-ended loans, the balance of the loan goes down. However, you don’t have any available credit you can use on closedended loans. Instead, if you need to borrow more money, you’d have to apply for another loan. Common types of closed-ended loans include mortgage loans, auto loans, and student loans.
  10. 10. 2. Secured and Unsecured Loans: a)Secured loans: it is loans that rely on an asset as collateral for the loan. In the event of loan default, the lender can take possession of the asset and use it to cover the loan. Interests rates for secured loans may be lower than those for unsecured loans. The asset may need to be appraised before you can borrow a secured loan.  Lien: A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold. Liens can be structured in many different ways. In some cases, the creditor will have legal claim against an asset, but not actually hold it in possession, while in other cases the creditor will actually hold on to the asset until the debt is paid off. The former is a more common arrangement when the asset is productive, since the creditor would prefer that the asset be used to produce a stream of income to pay off debt.  Hypothecation: it is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that he has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, in which the consumer's house becomes collateral until the mortgage loan is paid off.
  11. 11.  Pledge:The transfer of possession of personal property from a debtor to a creditor as security for a debt or engagement; also, the contract created between the debtor and creditor by a thing being so delivered or deposited, forming a species of bailment; also, that which is so delivered or deposited; something put in pawn.  Mortgage: A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan. The mortgagor's lien on the property expires when the mortgage is paid off in full. b)Unsecured loans: These loans may be more difficult to get and have higher interest rates. Unsecured loans rely solely on your credit history and your income to qualify you for the loan. If you default on an unsecured loan, the lender has to exhaust collection options including debt collectors and lawsuit to recover the loan. credit card debt personal loans bank overdrafts credit facilities or lines of credit corporate bonds
  12. 12. 3)Home Loans: Home Loans are given for the property like houses or apartments bought in your name. This type of loans are very common in the salaried employees to buy the house. The eligible limit for the home loans will be based on the financial strength of the app0licant. Nowadays all the banks are tightening the loan restriction because of economy crisis. One advantage with the home loans is tax savings. You can read more about the tax benefits on home loans. Also you can read the list of articles on home loans. 4)Auto Loans: Personal car loans are loans which you obtain in your own name for the purpose of purchasing a car. They cannot be used for other expenses, or for other purchases. They must be spent on a car, which the lender then uses as collateral to secure the loan. They are repaid to the lender monthly, or at some other period agreed upon by both parties. Personal car loans are the responsibility of the individual who signed for the loan, and not their company or business. 5)Personal Loans: Personal loans are tricky – you never can quite make out whether it is absolutely necessary or if it is just a luxury you will be paying back for the next few years. That new computer, or that credit card outstanding, or the house refurnishing…the need for personal loans is never ending. This site helps to get online cash advance through online application.
  13. 13. 6)Business Loans: These loans may be long-term for funding asset procurement or short-term for financing working capital requirements. Startup entrepreneurs may be required to offer collateral. Moreover, borrowers are asked to present a business plan to become eligible for such loans. 7)Student Loans: These loans are intended for funding higher education in the absence of scholarships and grants. Initially, student loans only covered tuition. Currently, education loans cover other expenses pertinent to a college education, including accommodation, books and supplies. Student loans in the US are offered by private financial institutions, as well as the US federal government. The latter accompanies lower interest rates and flexible repayment terms.
  14. 14. Advantages of loans : Below are the advantages of getting a loan. These are also the reasons why many apply for it: 1. There is a loan for just about anything. If you are in need of money to purchase a house, you can apply for a housing loan. If you need a car, you can apply for a car loan. With all the loans available, you will be able to purchase everything you need. 2. It helps a person afford an expensive purchase. All of us wish to acquire a property. However, we do not have the amount of money to make the purchase. Loans allow us to do this. They lend us the money so that we can finally afford our desired property. 3. Payment is staggered, which makes it affordable. This enables the person to pay off the loan gradually. If a person has chosen a good deal, he should be able to finish paying off the loan in the time specified. 4. One gets the funding he needs. If a person wants to start a business, he can do so by applying for a business loan. He does not have to wait for his savings to build up before he can start his own business. They can also use the amount they loan for investment purposes. Getting a loan is very helpful to start building your dream. However, you have to be very careful with your decisions. This is because of the problems you will possibly encounter if you mismanage your loans and other debts. If you have multiple loans, make sure to manage it well. Use a debt consolidation loan calculator and check if it is better to consolidate all your loans.
  15. 15. Disadvantages of loans :  long-term debt: This means that you have to deal with it for a specified period, which means that you have to commit yourself to making monthly payments specified in your agreement for the period indicated to repay the loans.  Miss payments: you will face serious consequences. You can face foreclosure or repossession of the property. In addition, you could also face penalties and legal issues. It will also reflect in your credit rating, which can lead to a low credit scores.  Borrowers over-borrow: People sometimes over borrow money and get caught in their own debt. Often, this can lead to a shortfall in cash flow and payments can take precedence over income. To prevent this, loan repayments are restricted to a set percentage of a borrower’s income.  Prepayment penalty: Often, loans come with a prepayment penalty which prevents the borrower from paying the loan earlier than the stipulated date without incurring any extra costs.  Restrictions: Banks levy a number of restrictions on the transaction. This includes having a good credit history before applying for a loan, and there are often restrictions about how the money should be used.
  16. 16. Project appraisal: it is a generic term that refers to the process of assessing, in a structured way, the case for proceeding with a project or proposal. In short, project appraisal is the effort of calculating a project's viability. It often involves comparing various options, using economic appraisal or some other decision analysis technique. It involves detail study of the arrangements made for production, marketing and financing. Any venture, which is put on stream, should sustain itself without external support and only then it can be treated as viable. Viability study can be made on the following aspect: A) Technical Feasibility B) Commercial and Economic Viability C) Financial Feasibility D) Managerial Competence Areas of Project Appraisal: 1) Marketing Appraisal: a)Examine the reasonableness of the demand projections by utilizing the findings of available market survey reports b) Assess the adequacy of the marketing infrastructure in terms of:  Promotional efforts  Distribution network  Transport facility c)Judge the knowledge, experience and competence of the key marketing personal
  17. 17. 2) Technical Appraisal: Focuses mainly on the following aspects: a. Product mix b. Capacity c. Process of manufacture d. Raw material e. Site and Location f. Building g. Break-even point 3) Financial Appraisal: The process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance.
  18. 18. 4) Economic appraisal: it is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and satisfying requirements for decision accountability. It is a systematic process for examining alternative uses of resources, focusing on assessment of needs, objectives, options, costs, benefits, risks, funding, affordability and other factors relevant to decisions. 5) Managerial Appraisal: Managerial appraisal involves efficiently allocating the scare resources such as Manpower material and facilities. One of the main preoccupations of management in any organisation and in project organisation is the allocation of scare resources. There should be all the required resources for a given project should be available and the best use of these resources.
  19. 19. Bibliography:  Vipul prakashan book