This document discusses the assessment of term loans and working capital limits. It provides details on: - Term loans being provided for medium to long term periods for new/existing projects, secured by fixed assets, with repayment over a specific period. - Factors considered in term loan appraisal like technical feasibility, commercial viability, financial viability, etc. - Projections of balance sheets, profit and loss statements, and key financial ratios for term loan assessment. - Types of working capital facilities provided by banks like cash credit, overdrafts, and short term loans. - Methods of working capital assessment like turnover method and inventory method based on the operating cycle. - Non-fund based

1. Unit-2

2. Assessment of Term loan
& working capital limits

3. Term loan
Provided for medium & long term ( 3 to 15 years) periods for
new / existing projects for expansion / diversification
Repayment is for specific period with initial holiday period
Secured by fixed assets such as land/ building/ plant / machinery/
other fixed assets
Basic aspect in T L is that the borrower should repay the amount
with interest from the anticipated income earned from the
assets acquired.
Technical & economic viability of the project is a must for
considering the term loan.
In India, the commercial banks extend term loan along with other
banks & F I’s in the Consortium / multiple banking modes.

4. Term loan appraisal
No item to be ignored in project financing
Costs shown should be true & not overstated.
Three sets of quotation from various suppliers to be obtained
Suppliers details and credibility need to be verified
Building construction estimates to be properly vetted
Funds to be released based on progress of the work.
Security coverage is to be assessed.

5. Term loan appraisal
Technical
feasibility
Commercial
viability
Managerial
competence
Financial
viability
Technology / process
Indian/ foreign/
Collaboration
back up arrangement
Infrastructure
Availability of land /
R M / transport/
power / water
Pollution/
Project implementation
E I C analysis
Demand/ supply of
the product
Competition/ market
Marketing abilities
Product / service
differentiation
Organization set up
CCC of the borrower
finance,
management
Operations
H R
Qualified technical
persons
Cost of the project &
means of finance
Production/
profitability
Cash flow/ funds flow
Projected balance sheet
profitability statements
B E P / CMA

6. Cost of project
Land (inc dev charges)
Building / Machinery
(inc fright / transp. erection charges)
Other fixed assets
Technical Know- how
Consultancy charges
Preliminary expenses
Contingent expenses
Working capital margin
Total
Means of Finance
Capital (equity)
USL from others
Term loan from bank/s
Term loan from F I’s
Subsidy from Government (if any)
Total

7. Balance sheet Projections
Balance sheet Base
yr
1st yr
Esti
2nd yr
Proj
3rd yr
Proj.
4th yr
Proj.
5th yr
Proj.
6th yr
Proj
7th yr
proj
Share capital
Reserves & surplus
Other term liabilities
Other current
liabilities
Total liabilities
Net Fixed assets
L. T Investments
L T loans /advances
Current assets
Investments/ others
Intangibles
Total assets

8. Profit & loss projections
Base
yr
1st yr
Esti
2nd yr
Proj
3rd yr
Proj.
4th yr
Proj.
5th yr
Proj.
6th yr
Proj
7th yr
proj
Total sales/ revenue
Cost of production
Raw materials
Labour
Power/ fuel
Repairs
Administrative exp
Depreciation
Interest
Operating profit
Taxes
PAT

9. Specific Ratios for term loan
Debt-equity= long term liabilities / Net worth ( 2 to 3 )
Debt to total funds ratio= L T Debts / share holders funds + Long term
debts
Debt to total asset ratio= Total debt/ total assets
Interest coverage ratio= EBIT/ fixed interest charges. ( 1.5 to 2 )
DSCR= PAT + Depreciation + Interest on Term Loans ( 1.5 to 2 )
Interest on term Loan + Term Loan installments
B E P= Fixed costs / Contribution (Sales – Variable Costs )
For long term projects - IRR, PBP & N P V is also calculated

10. Case studies

11. Working capital
Types of working capital provided by Indian Banks are cash credit
(Open/ Key) / overdraft / Bills discounting or purchase , STL
Cash credit / bills limits are assessed based on the production/
sales/inventory/ past credit limits.
Customer allowed to draw the amount from the cash credit account as
per his requirement & also deposit the amount based on the surplus
funds available.
Cash credit / overdrafts are running accounts & the credits in the
account should reflect the sales of the company.
The drawals permitted to the extent of the drawing power
D P is calculated based on the stock statement submitted on monthly
and suitable margins are maintained for RM/ SFG/ FG/ B D

12. Working capital (cont’d)
Interest is charged on the actual usage of the limit.
There are three methods of working capital assessment.
The turn over method (Nayak committee) , the inventory method &
II method of lending (Chore committee)
The turn over method / inventory method is normally used for
working capital limits up to Rs 5 crs & second method thereafter.
If the operating cycle is three months & less , the turnover method
is followed & inventory method for more than three months .
It should be ensured that the projected turn over is following
similar trend as per the last three years. Any deviation may need a
closer look for further inputs.
Operating cycle method is applied

13. Temporary & permanent W C
WorkingcapitalinRs
Time
Regular Working capital
Temporary Working capital
Working capital for a growing company

14. Working capital Cycle
1. Cash
4. F G
3. SFG
6.
Debtors
5. Sales
2. R M
Operating cycle for manufacturing firm

15. Working capital cycle
1. Cash
2. F G
4. Debtors
3 . Sales
Operating cycle for non manufacturing firm

16. Factors influencing Working capital
Nature of business
Size of the business
Production cycle process
Production policy
Terms of purchase & sales
Business cycle ( Up ward/ down ward)
Growth & expansion
Availability of R M
Profit level
Operating efficiency
Availability of credit

17. Working capital (cont’d)
Turn over method (Nayak committee )
Operating cycle of three months & less
25% of the projected turn over
Minimum working capital margin ( NWC) - 5% of the projected
sales
Borrower has to bring additional margin if it is less than the
prescribed limit
Working capital eligibility = (25 % of projected turn over – min
NWC or actual NWC ) which ever is less
NWC = Current assets - current liability

18. Working capital (cont’d)
Inventory method (Operating cycle of more than three months )
1 Build up of current assets
2 Build up of current liabilities
(other than Bank borrowings for W C)
3 Working capital gap ( 1-2)
4 Actual NWC
5 Required NWC ( min 15% of current assets )
6 Maximum permissible bank borrowings ( 3-4 ) or
( 3-5) which ever is less
7 Margin to be brought in ( 5-4)
The minimum stipulated margins can vary from banks to banks
based on the credit policy guidelines
Ex; ( It can be 15% / 20% / 25% )

19. Working capital (cont’d)
II method of lending (Chore committee ) for credit limits above Rs 5 crs
1 Build up of current assets Amt
2 Build up of current liabilities
(other than Bank borrowings for W C)
3 Working capital gap ( 1-2)
4 Actual NWC
5 Required NWC ( min 25% of current assets )(excluding export
receivables)
6 Maximum permissible bank borrowings ( 3-4 ) or ( 3-5) which ever
is less
7 Margin to be brought in ( 5-4)
Borrower provides the required CA , CL for the next year based on the past
performance in CMA . The build up has to be in line with past
Min 25% of the Current assets has to provided as NWC by the borrower .

20. Case studies

21. NON Fund based limits- L C
Parties to LC
1. Applicant/ Importer
2. Beneficiary/ Exporter
3. Issuing bank / Importers bank
4. Advising bank / Exporters bank

22. Types of L C
ILC/ FLC Sight/
Usance
Revocable/
Irrevocable
Confirmed
Unconfirmed
Back to Back
Red clause
(LC authorizes negotiating bank to
provide PC to exporter)
Green clause
( Also provides payments for storage)
Revolving

23. N FB Limits Assessment of FLC
ILC/ FLC is opened by Banks for credit purchase of Raw Materials
FLC is also opened for purchase of Imported capital goods.
FLC limit (For R M) (Rs in lakhs)
1 Annual purchase of imported R M 50 .00
2 Import component 24 .00
3 Average monthly purchase 2.00
4 Import duty element 0.50
5 Net value component ( 3-4) 1.50
6 Transit time 2 months
7 Usance period 2 months
8 Total period 2+2=4 months 6.00
9 FLC requirement 6.00

24. N FB Limits Assessment of ILC
1 Annual purchase of domestic R M on LC 36 .00
2 Average monthly purchase 3.00
3 Credit purchase 3 months
4 Transit period 0.5
months
5 Total period of RM purchased on LC 3.5 month
6 Total worth of R M on LC purchase 10.50
7 Total ILC requirement 10.50

25. N FB Limits Assessment of B G
B G is normally provided for three purposes.
Performance , Advance payment and Bid Bond guarantee
BID Bond guarantee (Rs in lakhs)
1 Projected contracts for the ensuring year 1000
2 Projected bids for the ensuring year 1800
3 Average monthly bids 150
4 Average Bid period 3 months
5 BG requirement 450

26. N FB Limits Assessment of B G
1 Orders received 1000
2 Advance payment to be received (10%) 100
3 BG for advance payment of the contract 100
4 Performance BG (10%) of the contract
( after completion of the project)
100
BG for advance payment/ performance

27. Case studies

28. N F B Limit- DPG

29. Unit-2 Concluded.