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A PRESENTATION
                      ON
                   TERM LOAN

SUBMITTED BY
1 Prashant
2 Sidharth
3 Rounak
4 Yogesh
5 Rahul
6 John Sachin
7 Rakshith
CONTENTS
 INTRODUCTION

 INDIAN SCENAIRO OF TERM LOAN

 CHARACTERISTICS OF TERM LOANS

 ADVANTAGES & DISAVANTAGES OF TERM LOANS

 THE TERM LOAN CAN BE AVAILED

 BENEFITS OF TERM LOAN

 SPECIALIZED FINANCIAL INSTITUTIONS IN INDIA

 PURPOSE OF TERM LOAN




                                                2
3
INTRODUCTION
Debt capital of a company may consist of either debentures or
bonds which are issued to public for subscription or term loans
which are obtained directly from the banks and financial
institution. Term loans are sources of long term debt. In India,
they are generally obtained for financing large expansion,
modernisation or diversification projects. Therefore, this method
of financing is also called project financing.
 The repayment of the loans and facilities is normally fixed on case to case
  basis depending on projected cash flow of the borrower.

 Term loans are a good way of quickly increasing capital in order to raise a
  business’ supply capabilities or range.

 One thing to consider when getting a term loan is whether the interest rate is
  fixed or floating
6
Indian scenario of term loan

1. India has 2 tire structure of financial institution comprised of
     A.Indian financial institution
          -Term lending
          -specialize institution
         - Invest institution
     B. State level institution
        -corporations providing
       -other term lending facilities

2. Since independence there are not that many changes

3. Few operation & restrictions.

4. After liberalization.

5. Change must be done because of default in repayment.



                                                                      7
Example of term loan in India (Bank of Baroda)


SME Short Term Loans

PURPOSE:
 To meet temporary shortfall / mismatch in liquidity, for meeting genuine business
  requirements only.
ENTERPRISES GROUP:
 Micro, Small & Medium Enterprises as per Regulatory definition and all other
  entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores.

ELIGIBILITY CRITERIA
 Satisfactory credit rating for the last three years
 Latest Balance Sheet etc. should be available.
 Satisfactory financial performance in terms of sales / turnover and profits. Negative
  variance, if any, should not be more than 10%.
 Satisfactory dealings with the Bank for at least three years.



                                                                                   8
LOAN AMOUNT:
 Upto 25% of the existing Fund based Working capital limits (depending on the Credit Rating),
  subject to a minimum of Rs. 10 Lakhs and maximum of Rs. 250 Lakhs.
PERIOD:
 Not exceeding 180 days – minimum 90 days

SECURITY
 First charge / Equitable mortgage of fixed assets of the company / firm or extension of existing
  first charge / equitable mortgage of fixed assets, ensuring that there is a minimum asset cover
  of 1.25.
 Extension of Charge on current assets for the additional facility ensuring that adequate
  drawing power is available.
 Extension of all existing guarantees of Directors / Third party guarantees to cover the
  additional facility.
RATE OF INTEREST:
 As applicable to existing working capital facilities.
 PROCESSING CHARGES:
 25% concession in applicable charges.



                                                                                             9
10
CHARACTERISTICS OF TERM LOANS

 Time to maturity

 Interest.

 Security

 Repayment Schedule.
Time to maturity
Banks and specially created financial institutions are main source of term loans
in India. FIs provide term loans generally for a period of 6 to 10 years


                                   Interest

The general rate of interest on term loans in India is above 14 or 15 %. For
companies undertaking their projects in specified backward areas, loans at
concessional interest rate (usually 1 and half % lower)
Security

Term loans are always secured. Specifically the assets acquired using term loan funds
secure them. This is called Primary security. The company’s current and future assets
also generally secure term loans. This is called secondary security or collateral security.
Also the lender may create either fixed or floating charge against the firm’s assets.
Repayment Schedule


 The principal amount of a term loan is generally repayable over a period of 4 to
  7 years. Typically, term loans provided by financial institutions are repayable in equal
  semi-annual instalments or equal quarterly instalments

 The interest burden declines over time, whereas the principal repayment remains
  constant. This means that the total debt servicing burden (consisting of interest
  payment and principal repayment) decline sover time. This pattern of debt servicing
  burden, typical in India, differs from the pattern obtaining in western economies
  where debt is typically amortized in equal periodic instalments
QUESTION
Suppose a company negotiates a RS 3 crore loan for 8 yrs. from FIs. The interest rate
will be 14 % annum on the outstanding balance. The principal will be repaid in 8 equal
yr. - end instalments . What is the payment schedule?

Solution –the payment schedule will include both interest and principal payment.
Interest will be calculated on the outstanding balance on loan. Note that Rs 3 crore was
borrowed in the beginning of 1st yr. therefore, the interest charges at the end of the yr.
will be

1. Interest is 14%
     0.14x3=Rs 0.42 crore.

2 Instalments 8 yrs.
3/8= Rs 0.375 crore.
Thus, loan balance at the end of 1st yrs. Will be 3.0-0.375= Rs 2.62


                                                                                   15
Year (1) Loan in the beginning (2) Principal repayment (3) Interest(4) Loan payment(5) loan at the end(6)

   1              30000                     3750             4200           7950             26250
   2              26250                     3750             3675           7425             22500
   3              22500                     3750             3150           6900             18750
   4              18750                     3750             2625           6375             15000
   5              15000                     3750             2100           5850             11250
   6              11250                     3750             1575           5325              7500
   7              7500                      3750             1050           4800              3750
   8              3750                      3750              525           4275               0
Advantages & Disadvantages

           of

       Term Loans




                             17
Advantages & Disadvantages of Term Loans


Term loans provide you with the money you need, but they have some risks.
Banks routinely offer various types of loans that cover the cost of whatever a person or business needs.
One type of loan a company or individual may consider is a term loan. A term loan is a loan in which the
borrower pays interest only for a set period. These loans have both advantages and disadvantages that
the lender needs to weigh before signing any paperwork and committing to the loan agreement.

Flexibility
Term loans are more flexible when compared to other types of loans. With a term loan, the borrower
doesn't have to make a payment toward both the interest and the principal balance. He can do so if it is
financially feasible, but it isn't required. Thus, a term loan better accommodates changes to a person's
budget due to unexpected life or business changes.

Interest
Term loans usually have a fixed interest rate, but this is not always the case and depends on the type of
the bank. If a term loan does have a fixed interest rate, then the term loan is extremely beneficial to the
borrower because it lets the borrower predict the payment they'll need to make. This is good for
budgeting. Term loans that have unfixed interest rates still can be advantageous, but they are riskier
because the borrower has no real control over how much interest they will pay in the future. This can
translate into more money paid toward the loan in the long run.




                                                                                                      18
Penalty Agreements
Eugene F. Brigham and Louis C. Gapenski, authors of "Test Bank: Financial Management: Theory and
Practice," claim that the agreements for term loans often contain penalty clauses. These clauses give the
issuing bank the right to issue additional charges if the borrower is late or deficient in payments. Since
people who take out term loans generally do so because they cannot afford a regular loan, this is not
desirable.

Predictability
A term loan specifies when the interest on a loan will be completely paid. For example, a five-year term
loan will have the interest paid predictably in five years. This is different from a regular loan in which
accumulated interest may draw out the payoff date. This can be extremely beneficial for budgeting and
receipt of future loans, since an individual has some proof that her debt will be repaid within a given
period.

Assumption of Assets
Term loans work by having the principal balance come due in full once the interest is completely paid.
Therefore, people generally use a term loan to get the capital they need to generate additional funds that
will pay off the loan. However, that a borrower's venture will succeed and that they can generate the
principal amount is not guaranteed. If a person cannot generate the principal with the loan funds, then
they have to figure out how to repay a large amount of money very quickly.




                                                                                                  19
20
The term Loan can be availed to

Purchase of Fixed Assets
The term loan can be used to purchase fixed assets like premises, plant & machinery
etc. The usage or performance of assets increases the business performance and
hence the profit and makes the repayment of the loan easier. Even the term loan is
settled the assets procured continue the productivity as asset life span is certainly longer
than the term loan span. If a premises is purchased then the value of premises is always
appreciated and in that case the business leverages higher value of premises which
further can be used to raise funds for business expansion or diversification.
Mortgage Term Loan
A Term Loan can be availed by mortgaging a kind of security like home, office premises
etc. This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The
repayment of the principal amount and interest may be fixed in nature or it may vary
over the course of repayment. The borrower may avail the revised rate of interest later
and may be benefited by saving in interest.
Switching of Higher Interest Loans

Many a time’s business owners opt to raise business loans at higher rate of interest.
Such loans are processes and sanctioned faster but result in heavy burden interest. This
interest payment becomes a fixed monthly expenses and starts leaking the profit. To
arrest the growing rate of interest and penalties the higher interest loan can be switched
to lower rate of interest loans or term loans. This way a borrower reduces the growing
burden of interest on business loan and can save a considerable amount of money. It
also benefits in maintaining the credit rating as the borrower closes one loan liability and
opens another in form of term loan with lower rate of interest and easier repayment
conditions
24
BENEFITS OF TERM LOAN


 Fixed rate - Enjoy the peace of mind of fixed monthly repayments.

 Variable rate - linked to base rates (Rates can rise or fall).

 Repayment holidays - Improve your cash flow by making no loan
  repayments or repaying only interest for a fixed term after drawing down
  your loan.
26
Specialized Financial Institutions in India


Commercial banks offer a wide range of corporate financial services that address the
specific needs of private enterprise. They provide deposit, loan and trading facilities but
will not service investment activities in financial markets.

The list of specialized financial institutions in India mainly includes, IFCI, IDBI Bank,
Export-Import Bank Of India, Board for Industrial & Financial Reconstruction, Small
Industries Development Bank of India, National Housing Bank. They are government
undertakings established with a view to offer financial as well as technical assistance to
the Indian industries.
28
PURPOSE OF TERM LOAN


 Term Loan is sanctioned for acquiring Fixed Assets like, land, building, Plant &
  Machineries, Electrical installations , computers, furniture-fixtures etc. in connection
  with a project undertaken by the proponent.

The various types of projects can be broadly classified as under :
 1.New products , Diversification projects by existing units (Green Field)
 2.Expansion of existing products (Brown Field)
 3.Backward & forward integration projects
 4.Replacement/ Modernization of equipment or buildings
 5.Others viz., Research and development and miscellaneous items, such as the
  expenditure of funds to comply with certain health standards or the acquisition of a
  pollution-control device.




                                                                                     29
30

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  • 1. A PRESENTATION ON TERM LOAN SUBMITTED BY 1 Prashant 2 Sidharth 3 Rounak 4 Yogesh 5 Rahul 6 John Sachin 7 Rakshith
  • 2. CONTENTS  INTRODUCTION  INDIAN SCENAIRO OF TERM LOAN  CHARACTERISTICS OF TERM LOANS  ADVANTAGES & DISAVANTAGES OF TERM LOANS  THE TERM LOAN CAN BE AVAILED  BENEFITS OF TERM LOAN  SPECIALIZED FINANCIAL INSTITUTIONS IN INDIA  PURPOSE OF TERM LOAN 2
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  • 4. INTRODUCTION Debt capital of a company may consist of either debentures or bonds which are issued to public for subscription or term loans which are obtained directly from the banks and financial institution. Term loans are sources of long term debt. In India, they are generally obtained for financing large expansion, modernisation or diversification projects. Therefore, this method of financing is also called project financing.
  • 5.  The repayment of the loans and facilities is normally fixed on case to case basis depending on projected cash flow of the borrower.  Term loans are a good way of quickly increasing capital in order to raise a business’ supply capabilities or range.  One thing to consider when getting a term loan is whether the interest rate is fixed or floating
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  • 7. Indian scenario of term loan 1. India has 2 tire structure of financial institution comprised of A.Indian financial institution -Term lending -specialize institution - Invest institution B. State level institution -corporations providing -other term lending facilities 2. Since independence there are not that many changes 3. Few operation & restrictions. 4. After liberalization. 5. Change must be done because of default in repayment. 7
  • 8. Example of term loan in India (Bank of Baroda) SME Short Term Loans PURPOSE:  To meet temporary shortfall / mismatch in liquidity, for meeting genuine business requirements only. ENTERPRISES GROUP:  Micro, Small & Medium Enterprises as per Regulatory definition and all other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores. ELIGIBILITY CRITERIA  Satisfactory credit rating for the last three years  Latest Balance Sheet etc. should be available.  Satisfactory financial performance in terms of sales / turnover and profits. Negative variance, if any, should not be more than 10%.  Satisfactory dealings with the Bank for at least three years. 8
  • 9. LOAN AMOUNT:  Upto 25% of the existing Fund based Working capital limits (depending on the Credit Rating), subject to a minimum of Rs. 10 Lakhs and maximum of Rs. 250 Lakhs. PERIOD:  Not exceeding 180 days – minimum 90 days SECURITY  First charge / Equitable mortgage of fixed assets of the company / firm or extension of existing first charge / equitable mortgage of fixed assets, ensuring that there is a minimum asset cover of 1.25.  Extension of Charge on current assets for the additional facility ensuring that adequate drawing power is available.  Extension of all existing guarantees of Directors / Third party guarantees to cover the additional facility. RATE OF INTEREST:  As applicable to existing working capital facilities.  PROCESSING CHARGES:  25% concession in applicable charges. 9
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  • 11. CHARACTERISTICS OF TERM LOANS  Time to maturity  Interest.  Security  Repayment Schedule.
  • 12. Time to maturity Banks and specially created financial institutions are main source of term loans in India. FIs provide term loans generally for a period of 6 to 10 years Interest The general rate of interest on term loans in India is above 14 or 15 %. For companies undertaking their projects in specified backward areas, loans at concessional interest rate (usually 1 and half % lower)
  • 13. Security Term loans are always secured. Specifically the assets acquired using term loan funds secure them. This is called Primary security. The company’s current and future assets also generally secure term loans. This is called secondary security or collateral security. Also the lender may create either fixed or floating charge against the firm’s assets.
  • 14. Repayment Schedule  The principal amount of a term loan is generally repayable over a period of 4 to 7 years. Typically, term loans provided by financial institutions are repayable in equal semi-annual instalments or equal quarterly instalments  The interest burden declines over time, whereas the principal repayment remains constant. This means that the total debt servicing burden (consisting of interest payment and principal repayment) decline sover time. This pattern of debt servicing burden, typical in India, differs from the pattern obtaining in western economies where debt is typically amortized in equal periodic instalments
  • 15. QUESTION Suppose a company negotiates a RS 3 crore loan for 8 yrs. from FIs. The interest rate will be 14 % annum on the outstanding balance. The principal will be repaid in 8 equal yr. - end instalments . What is the payment schedule? Solution –the payment schedule will include both interest and principal payment. Interest will be calculated on the outstanding balance on loan. Note that Rs 3 crore was borrowed in the beginning of 1st yr. therefore, the interest charges at the end of the yr. will be 1. Interest is 14% 0.14x3=Rs 0.42 crore. 2 Instalments 8 yrs. 3/8= Rs 0.375 crore. Thus, loan balance at the end of 1st yrs. Will be 3.0-0.375= Rs 2.62 15
  • 16. Year (1) Loan in the beginning (2) Principal repayment (3) Interest(4) Loan payment(5) loan at the end(6) 1 30000 3750 4200 7950 26250 2 26250 3750 3675 7425 22500 3 22500 3750 3150 6900 18750 4 18750 3750 2625 6375 15000 5 15000 3750 2100 5850 11250 6 11250 3750 1575 5325 7500 7 7500 3750 1050 4800 3750 8 3750 3750 525 4275 0
  • 17. Advantages & Disadvantages of Term Loans 17
  • 18. Advantages & Disadvantages of Term Loans Term loans provide you with the money you need, but they have some risks. Banks routinely offer various types of loans that cover the cost of whatever a person or business needs. One type of loan a company or individual may consider is a term loan. A term loan is a loan in which the borrower pays interest only for a set period. These loans have both advantages and disadvantages that the lender needs to weigh before signing any paperwork and committing to the loan agreement. Flexibility Term loans are more flexible when compared to other types of loans. With a term loan, the borrower doesn't have to make a payment toward both the interest and the principal balance. He can do so if it is financially feasible, but it isn't required. Thus, a term loan better accommodates changes to a person's budget due to unexpected life or business changes. Interest Term loans usually have a fixed interest rate, but this is not always the case and depends on the type of the bank. If a term loan does have a fixed interest rate, then the term loan is extremely beneficial to the borrower because it lets the borrower predict the payment they'll need to make. This is good for budgeting. Term loans that have unfixed interest rates still can be advantageous, but they are riskier because the borrower has no real control over how much interest they will pay in the future. This can translate into more money paid toward the loan in the long run. 18
  • 19. Penalty Agreements Eugene F. Brigham and Louis C. Gapenski, authors of "Test Bank: Financial Management: Theory and Practice," claim that the agreements for term loans often contain penalty clauses. These clauses give the issuing bank the right to issue additional charges if the borrower is late or deficient in payments. Since people who take out term loans generally do so because they cannot afford a regular loan, this is not desirable. Predictability A term loan specifies when the interest on a loan will be completely paid. For example, a five-year term loan will have the interest paid predictably in five years. This is different from a regular loan in which accumulated interest may draw out the payoff date. This can be extremely beneficial for budgeting and receipt of future loans, since an individual has some proof that her debt will be repaid within a given period. Assumption of Assets Term loans work by having the principal balance come due in full once the interest is completely paid. Therefore, people generally use a term loan to get the capital they need to generate additional funds that will pay off the loan. However, that a borrower's venture will succeed and that they can generate the principal amount is not guaranteed. If a person cannot generate the principal with the loan funds, then they have to figure out how to repay a large amount of money very quickly. 19
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  • 21. The term Loan can be availed to Purchase of Fixed Assets The term loan can be used to purchase fixed assets like premises, plant & machinery etc. The usage or performance of assets increases the business performance and hence the profit and makes the repayment of the loan easier. Even the term loan is settled the assets procured continue the productivity as asset life span is certainly longer than the term loan span. If a premises is purchased then the value of premises is always appreciated and in that case the business leverages higher value of premises which further can be used to raise funds for business expansion or diversification.
  • 22. Mortgage Term Loan A Term Loan can be availed by mortgaging a kind of security like home, office premises etc. This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The repayment of the principal amount and interest may be fixed in nature or it may vary over the course of repayment. The borrower may avail the revised rate of interest later and may be benefited by saving in interest.
  • 23. Switching of Higher Interest Loans Many a time’s business owners opt to raise business loans at higher rate of interest. Such loans are processes and sanctioned faster but result in heavy burden interest. This interest payment becomes a fixed monthly expenses and starts leaking the profit. To arrest the growing rate of interest and penalties the higher interest loan can be switched to lower rate of interest loans or term loans. This way a borrower reduces the growing burden of interest on business loan and can save a considerable amount of money. It also benefits in maintaining the credit rating as the borrower closes one loan liability and opens another in form of term loan with lower rate of interest and easier repayment conditions
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  • 25. BENEFITS OF TERM LOAN  Fixed rate - Enjoy the peace of mind of fixed monthly repayments.  Variable rate - linked to base rates (Rates can rise or fall).  Repayment holidays - Improve your cash flow by making no loan repayments or repaying only interest for a fixed term after drawing down your loan.
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  • 27. Specialized Financial Institutions in India Commercial banks offer a wide range of corporate financial services that address the specific needs of private enterprise. They provide deposit, loan and trading facilities but will not service investment activities in financial markets. The list of specialized financial institutions in India mainly includes, IFCI, IDBI Bank, Export-Import Bank Of India, Board for Industrial & Financial Reconstruction, Small Industries Development Bank of India, National Housing Bank. They are government undertakings established with a view to offer financial as well as technical assistance to the Indian industries.
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  • 29. PURPOSE OF TERM LOAN  Term Loan is sanctioned for acquiring Fixed Assets like, land, building, Plant & Machineries, Electrical installations , computers, furniture-fixtures etc. in connection with a project undertaken by the proponent. The various types of projects can be broadly classified as under :  1.New products , Diversification projects by existing units (Green Field)  2.Expansion of existing products (Brown Field)  3.Backward & forward integration projects  4.Replacement/ Modernization of equipment or buildings  5.Others viz., Research and development and miscellaneous items, such as the expenditure of funds to comply with certain health standards or the acquisition of a pollution-control device. 29
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