TERM LOAN PROPOSAL
UNION BANK
Appraisal of MSME
proposals has four distinct stages:
- Conducting Due Diligence about the promoters
& the proposed activity.
- Conducting Techno-economic Feasibility Study.
- Undertaking Financial appraisal &
assessing Credit Requirements.
- Credit Risk Rating, Compliance of Takeover
Codes & Decision Making.
Loan proposals
falling within the delegation of the Branch are sanctioned and disposed off at
Branch level.
The bank has set up SARAL / SARAL LITE CENTRES at its various Regional Offices,
where all activities are attended under Single Window Concept in liaison with
the concerned branch with a view to quicken the decision making process, For
proposals above Branch Heads delegation, processing is done at Sarals, wherever
they are operational.
Where Saral / SARAL Lite are not operational, the proposals are sent by branches
through Credit Department of respective Regional Offices to Sanctioning
Authority under copies to Controlling Offices.
Working Capital requirement of Micro & Small Enterprises borrower uptoRs
5.00 crores is assessed based on Turnover Method, in which 25% of the Projected
Achievable Sales Turnover is computed as Working Capital Requirement, of which
20% is provided by the bank & balance 5% is to be brought by way of
promoter's contribution towards margin money.
Working Capital requirement of MSE borrower above Rs 5.00 crores is assessed
based on Flexible Bank Finance Method, which is an extension of Permissible
Bank Finance Method with customer friendly approach in as much as the scope of
Current Assets is made broad based and for evaluating projected liquidity,
acceptable level of Current Ratio is taken at 1.15:1 against benchmark level of
1.33:1. The assessment of credit requirement is made based on the projected
study of the borrowers business operations vis-a-vis the production /
processing cycle of the industry. The projected levels of inventory &
receivables are examined in relation to the past trend, market development
& industry trend. An uniform Classification for Current Assets &
Current Liabilities is adopted on the terms given in the CMA data Format.
In case of Specific Industries / Seasonal Industries such as Software
Development, Construction Industry, Film Industry, Sugar, Fertilizers etc.
assessment of Working Capital including Short Term Loans can be made based on
Cash Budget Method. In such cases apart from projected profitability,
liquidity, gearing & fund flows; projected cash flows are accounted for to
compute Working Capital Finance.
Term Loans are appraised based on viability of projects after judging Debt
Repayment Capacity, Break Even Capacity, Internal Rate of Return, Debt Equity
Ratio, Fixed Assets Coverage Ratio etc.
Term Loan Appraisal
The primary
task of a lending institutions before granting a term loan is to
assure itself that the anticipated rise in the income of the borrowing
unit would materialize, thus providing the necessary funds for
repaying the loans according to the terms of amortization.
The liquidity of term loans depends not so much on the
short-run sale ability of the goods and commodities as on the increased term
loan income of borrowing units resulting from a higher level of utilization
of existing installed capacity. For assessing the risks involved
in term lending, the normal criteria used for judging the soundness of
short-term loans are often unreliable and inadequate. The methods of analysis
and the standard to be adopted for appraisal of term loans are more similar to
investment decisions than to short-term lending. Appraisal of
term-loans requires a dynamic approach involving, inter alia,
a projection of future trends of output, sales, and estimates of costs, returns
and flow of funds. Appraisal of term loans depends to a large
extent on estimates of forecasts. Its purpose is not to set down a categorical
statement of the long-range prospects of an industrial unit but only to provide
broad guide outlines to the financial institutions.
The practice of making an appraisal of term loan applications
on modern scientific lines has not made much progress in India. This is partly
due to the fact that mainly the larger banks give such loans to highly
credit-worthy constituents and hence no elaborate enquiry is considered
necessary. The need for such appraisals is now being increasingly felt with the
expansion of term lending. There cannot be a fixed or standardized
approach to appraisal. Numerous and diverse elements enter into the
process. It is difficult to have a cut and dried formula with the help of which
a loan proposal can be considered; straightaway as acceptable or unacceptable.
While the same set of factors is taken into consideration in the scrutiny of
individual applications. The weightage given to the several factors varies from
case to case. The more important factors among these are: the type of
organisation and activity of the borrowing unit, the nature of its’ product and
its market potentiality, its size, the quality of its management, soundness of
financial position, the amount and, term of the loan required and its repayment
schedule.
Financial
institutions are usually inclined to adopt the criterion of
profitability rather than that of’ ‘development’ in extending term loans. In
other words, they are concerned mainly with the commercial profitability of a
project as determined by the level of prospective profits and its ratio to
invested capital of the borrowing unit and not with its broad economic
significance or importance in the development of the resources of the economy.
Commercial profitability could sometimes be more apparent than real. The extent
of state support and the manner in which it is made available in the form of
import controls, protective duties, subsidies, tax rebates and other
concessions have considerable bearing on the profit prospects of certain
industries. To the extent that the profitability of a project is conditional in
the continuance of such support, appropriate allowance has to be made by the
lending institution in the appraisal of the project. A number of other aspects
of the State policy such as transport rates, prices and wage limits, export
promotion, exchange regulations require due attention of the lending
institutions while appraising term loam.
Term Loan Appraisal Procedure
There are four broad aspects of term loan appraisal, namely, technical
feasibility, economic feasibility, managerial competence and financial or
commercial feasibility. A brief account of each of these aspects follows.
1. Technical Feasibility
The examination of this aspect requires an assessment of the goods and
services needed for the project-land, housing, transportation, raw materials,
supplies, fuel, power, water, etc. The financial institution has to satisfy
itself that these requirements are available. Where they are not domestically
available and have to be imported, conditions foreign market as well as
government policy at home in terms of availability of foreign exchange calls
for a review. The location of the project is highly to its technical
feasibility and hence special attention is paid to this feature. In fact, the
accessibility to the various resources has meaning only with reference to
location. Another important feature of technical feasibility relates to the
type of technology to be adopted for the project. In case new technical
processes are adopted from abroad, attention is paid to the differences in
conditions. The dangers of hasty adoption of new techniques are quite
substantial in an underdeveloped country. It is, therefore, desirable for
lending institutions to make use of the services of technical personnel.
2. Economic Feasibility
This aspect relates to the determination of the extent of absorption of
the output of the new unit or the additional production from an established
unit at given prices. In other words, it takes account of the total output of
the product concerned and the existing demand for it with a view to
establishing whether there is an unsatisfied demand for the product. Two general
indicators of the existence of unsatisfied demand are the price level and the
prevalence of controls. It is necessary to know specifically whether the
unsatisfied demand is ephemeral or genuine. The study goes beyond immediate
prospects. Possible future changes In the volume and pattern of supply and
demand will have to be estimated in order to assess the long-run prospects of
the industry as well as earning capacity of the unit.
Projection or forecasting of demand is a complicated matter though of vital
importance. The demand for a product is affected by a variety of factors and it
may be difficult to take account of all these. If information concerning the
demand for a product in the past is available, projections of demand over a
period of years can be made on the basis of assumptions concerning future trend
of all prices and incomes, particularly in the case of consumer goods industry.
The projection of demand for intermediate goods (goods used as inputs for
further production) and capital goods is more complicated because the demand
for such goods is affected by changes in incomes and prices only indirectly.
Often intermediate and capital goods have multiple uses, being needed in
several lines of production, and hence it is necessary to take into account
inter-industry relationships also.
Estimations of demand can never be wholly accurate or absolutely
reliable; they can at best be considered as approximations.
3. Managerial Competence
The confidence of the lending institution in repayment prospects of a
loan is largely conditioned by its opinion of the borrowing unit’s management.
It has, therefore, been remarked that appraisal of management is the touchstone
of term credit analysis. Where the technical competence, administrative
ability, integrity and resourcefulness of the management are well established,
the loan application gets the most favorable consideration.
4. Financial or Commercial Feasibility
The financial appraisal is designed to seek answers to the following
questions:
1.
Whether the estimates of the cost of the project fully cover all items
of expenditure and are realistic.
2.
Whether the sources of finance contemplated by the sponsors of the
project will be adequate and the necessary finance will be available during the
period of construction as per their schedule.
3.
What is the likely impact of the project on the level of production,
sales, net earnings, borrowings, costs, etc. of the borrowing unit? Or, when
can the project be expected to break-even (with
offsetting expenditure) and start yielding profit?
4.
What time should be fixed for starting of repayment over a period to be
determined in the light of the financial capacity of the borrowers ” arising
from increased output and income?
The magnitude
of the available surplus and other cash accruals to meet the
interest and principal repayments (called as debt service coverage)
is an essential point for investigation in deciding the period of amortization.
The financial position of the concern has to be examined during the
sanctioning of the loan. For having a proper perspective of the financial
position of the concern, it is not sufficient to consider a single year’s
performance as revealed in the balance sheet and profit and loss
account. On the other hand, a dynamic view has to be taken of the
organisation in the next few years.
Term lending institutions follow different methods in obtaining the
financial data. Some use comprehensive application form calling for particulars
of different aspects of the projects presented for financing, others use a
simple preliminary application form to judge whether the schedule of the
application is prima facie feasible and later on follow-up by
a comprehensive form. Quite often, the lending institutions adopt the interview method for eliciting as many details
and particulars of the schedule as possible.
The basic data required for a financial analysis can be grouped under
the following heads:
1.
Cost of the project.
2.
Cost of production and profitability.
3.
Cash-flow estimates during the currency of loan.
4.
Pro-forma balance sheets.
Term lending institutions have to critically analyse the data obtained
from the borrowers with a view to ensuring that:
1.
The estimated cost of the project is reasonable and the project has a
fair chance of materializing;
2.
The financial arrangement is comprehensive without leaving any gaps and
ensures cash availabilities as and when needed;
3.
The estimates of earnings and operating costs are as realistic as
circumstances permit; and
4.
The borrower’s repaying ability, as judged from the project operations,
exists with a reasonable margin of safety .
https://www.mbaknol.com/business-finance/term-loan-appraisal/
