SBI Term Loan Appraisal Guide

State Bank of India
TERM LOAN
APPRAISAL
SME Gyanshala Capsule Training Programme for Officials handling SME Credit 9.1
State Bank of India
SESSION OVERVIEW
Term Loans Features

Guidelines in Loan Policy
Credit Appraisal Standards
Purpose of Term Loan
Term Loan Vs. Working Capital
Appraisal of Term Loan:
1.
Prima facie acceptability
2.
3.
4.
5.
6.
7.
8.
Technical Feasibility
Economic Viability
Financial Feasibility
Commercial Viability
Managerial Competency
Other Parameters
Miscellaneous Issues
Deferred Payment Guarantees

State Bank of India
TERM LOAN & ITS FEATURES

A Term Loan is an advance which is granted usually
against the security of the borrowers Fixed Assets
for a fixed term of not less than 3 years, is intended
normally for financing acquisition of Fixed Assets,
with a repayment schedule normally not exceeding 8
years.
Term Loans may be drawn / disbursed in lump sum

or in instalments depending on the nature of the
project.
Term Loans are repayable out of the future earnings
of the unit, in instalments, and as per a pre-arranged
schedule.
State Bank of India
TERM LOAN & ITS FEATURES..

An element of risk is inherent in any type of loan
because of the uncertainty of the repayment.
The longer the duration of the credit, greater is the
attendant uncertainty of repayment and consequently
higher risk to banks.
Thus, risk involved in Term Loans is greater.
State Bank of India
GUIDELINES IN LOAN POLICY

Term Loans (Loans with residual maturity of over 3
years) should not in the aggregate exceed 35% of
the total advances of SBI.
The Bank shall endeavour to restrict the Term Loan
exposure to infrastructure projects to 10% of the
Banks total advances.
Maturity of Term Loans, including moratorium, should
not normally exceed 8 years, except under CDR /
rehabilitation packages approved by the Bank,
Infrastructure Loans, Housing Term Loans to
individuals, Education Loans & ATL under approved
schemes. AC is required beyond 8 years.
State Bank of India
CREDIT APPRAISAL STANDARDS
Quantitative Parameters: ii) Term Loan / DPG:

i.
Technical Feasibility & Economic Viability : To be vetted

by the Bank. If required, second opinion from TCC /
Consultants of Bank / SBI Caps may be sought.
ii.
Promoters Contribution : To be at least 30% (Mfg.) (20%

for others) in the total equity. However, this is not a
definitive benchmark.
iii. DSCR (Net) : Not to be normally below 2.

iv. DSCR (Gross) : Not to be normally below 1.75.
v.
Margin : This would depend on Debt / Equity gearing for

the project. To be maximum 2 : 1. Deviations may be
permitted very selectively.
State Bank of India
PURPOSE OF TERM LOAN

Acquisition of Fixed Assets such as Land, Building,
Plant & Machinery.
Modernisation / renovation
diversification of an existing unit.
expansion
Strengthening NWC.
Other Long Term Requirements VRS.

Purchase of second hand machinery.
Acquisition of balancing equipments.
Replacement of high cost debt (For residual period
only).
State Bank of India
TERM LOANS Vs. WORKING CAPITAL

Purpose of TL is for acquisition of FA.
Advance is not repayable on demand, but in
instalments ranging over a period of years.
Repayment is not out of the sale proceeds of the
goods, but out of the future earnings of the unit.
Security (FA) not readily saleable.
State Bank of India
APPRAISAL OF TERM LOANS

The purpose of Term Loan appraisal is to ascertain
whether the project is sound technically,
economically, financially and managerially and is
ultimately viable as a commercial proposition.
State Bank of India
APPRAISAL OF TERM LOANS

Appraisal of a project involves the examination of:
1. Prima facie acceptability.
2. Technical Feasibility.
3. Economic Viability.
4. Financial Feasibility.
5. Commercial Viability.
6. Managerial Competency.
7. Other parameters.
8. Miscellaneous Issues.
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1. PRIMA FACIE ACCEPTABILITY

Banks Lending Policy / RBI Guidelines.
Prudential Exposure norms.
Substantial Exposure norms.

Individual & Group Exposure norms.
Industry Exposure norms.
Credit Risk Rating norms.
RBI Defaulters List.
ECGC Specific Approval List.
State Bank of India
1. PRIMA FACIE ACCEPTABILITY

Takeover norms, if applicable.
Government regulations.
MA in respect of cos., to know the scope of activity

and borrowing powers.
AA in respect of cos., to know authorised signatories;
no prejudicial clauses.
Project cost.
Proposed Debt / Equity.
CoProdn., Profitability, etc.
State Bank of India
2. TECHNICAL FEASIBILITY
To determine the suitability of the technology
selected and the adequacy of the technical
investigation and design.
It consists of an assessment of the various

requirements of the actual production process.
It is in short a study of the availability, cost, quality
and accessibility of all the factors required for
production.
State Bank of India
2. TECHNICAL FEASIBILITY
The factors to be considered are:
Location of plant & accessibility to critical inputs.
Size of the plant.
Type of technology.
Manufacturing process.
Labour.
Technical report.
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3. ECONOMIC VIABILITY
To determine the conduciveness of economic
parameters to setting up the project and their impact
on the scale of operations.
This has reference to the earning capacity of the

project. Since earnings depend on the volume of
sales, it is necessary to determine how much output
of the unit or additional production from an
established unit the market is likely to absorb at
given prices.
State Bank of India
3. ECONOMIC VIABILITY
The factors to be considered are:
Thorough market analysis
Future trends in volume and patterns of Supply &

Demand
Demand forecast, Supply position, Gap
Intermediate product
Ancillary industry
Export oriented units
State Bank of India
4. FINANCIAL FEASIBILITY
To determine the accuracy of cost estimates,

suitability of the envisaged pattern of financing and
general soundness of the capital structure.
This involves analysing the data received from the

borrower to ensure that the project meets the
following minimum financial criteria:
Estimated project cost is reasonable and complete
and has a fair chance of materialising as per
anticipations.
Financial arrangement is complete, without any
gaps, and ensures cash is available as and when
needed.
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Estimates of earnings and operating costs are as
realistic as possible.
Borrowers repaying ability as judged from the
project operation is demonstrable with a reasonable
margin of safety.
The basic data required would be:
Cost of the project, including WCL.
Means of finance.
Cost of Production & estimates of profitability.
Cash Flow estimates and sources of finance.

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Cost of the project includes:
Land (Including site development).
Building.
Plant & Machinery.
Other Fixed Assets / Misc. Assets.
Technical know-how fees, etc.
Power connection & installation charges.
Preliminary & Pre-operative expenses.
Contingencies.
Margin on WC requirements.
State Bank of India
Means of Finance includes:
Equity Share Capital from promoters / other
shareholders.
Preference Share Capital from Preference
shareholders.
Debentures.
Unsecured Loans.
Deposits.
Loans from Friends & Relatives.
Term Loans from Banks & FIs.
Government subsidies.
Internal accruals.
State Bank of India
5. COMMERCIAL VIABILITY
To determine the extent of profitability of the project
and its sufficiency in relation to the repayment
obligations pertaining to term assistance.
Cash Flow estimates help in determining the

disbursal of the Term Loan.
Estimate of profitability & BEP help in drawing up the
repayment programme, start-up time, etc.
Profitability estimate also helps in arriving at
estimated DSCR, the single most important factor in
Term Credit.
State Bank of India
A study of the projected Balance Sheet is essential

to ensure that the unit will continue to have a sound
financial position even after the implementation of
the proposed project.
BEP:
In a mfg. unit, if at a particular level of production, the
total mfg. cost equals the sales revenue, this point of
No Profit-No Loss is known as BEP.
Mathematically, BEP =
Fixed Cost
Unit Sale Price - Unit Variable Price
State Bank of India
BEP is expressed as a percentage of sales / capacity.
A good project should have BEP not higher than 70%.
DSCR:
Serves as a guide to determining the period of repayment
of a loan.
This is calculated by dividing cash accruals in a year by

amount of annual obligations towards repayment.
Gross DSCR =
Cash Accruals + Interest on Term Loan

Maturing annual obligations + Interest on Term Loan
State Bank of India
SMCR =
WDV of Fixed Assets - Term Loan outstandings
WDV of Fixed Assets

Security Margin Cover Ratio is computed to verify
that the minimum margin stipulated is maintained.
The contribution of promoters to the project cost is to

be ascertained.
Margins to be arrived at.
Debt Equity Ratio is to be calculated.
State Bank of India
Sensitivity Analysis:
Is the capacity of the project to absorb various
shocks, i.e., changes in critical factors like Cost,
Volume & Price.
Funds Flow Analysis to be done to ensure that:
Internal cash accruals are sufficient to meet the

requirement for the additions in the Fixed Assets
during the period of the loan.
Adequate long term surplus is available during the

currency of the loan to meet margin for WC.
State Bank of India
6. MANAGERIAL COMPETENCY
To ascertain that competent men are behind the
project to ensure its successful implementation and
efficient management after commencement of
commercial production.
In a dynamic environment, the capacity of an
enterprise to forge ahead of its competitors depends
to a large extent, in the relative strength of its
management.
Integrity, track record, credit worthiness, initiative,
competence and experience of the management
should be examined.
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7. OTHER PARAMETERS
Examination of environmental regulations To
ascertain whether the project is in full compliance
with the various environmental provisions in force.
Examination of Government policies.

Examination of other statutory obligations.
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8. MISCELLANEOUS ISSUES
Return on Investment or the Rate of Return: This
should not be less than what would have been
earned in long term investment of funds in a bank.
Internal Rate of Return (IRR) : It is the rate at which

the sum of the discounted cash flows is equal to the
investment outlay. It gives an idea about the rate of
return that a project is likely to earn over its useful
life.
IRR =
Lower
Discount Rate
Diff. between
the two
Discount rates
Net Present Value at the lower

Discount rate
Absolute difference between the

Net Present values at the
two Discount Rates
State Bank of India
DEFERRED PAYMENT GUARANTEES (DPG)

A DPG is a contract to pay to the supplier the price
of machinery, supplied by him on deferred terms, in
agreed instalments with stipulated interest, on the
respective due dates, in case of default in payment
thereof by the buyer.
As servicing of DPG obligations can be done only
out of future cash accruals, the economics of the
project, its technical feasibility and economic viability
will have to be assessed in detail, exactly as in case
of a TL, and the standards of appraisal are therefore,
the same as those applicable to TL.
State Bank of India
SESSION RECAP
Term Loans Features

Guidelines in Loan Policy
Credit Appraisal Standards
Purpose of Term Loan
Term Loan Vs. Working Capital
Appraisal of Term Loan:
1.
Prima facie acceptability
2.
3.
4.
5.
6.
7.
8.
Technical Feasibility
Economic Viability
Financial Feasibility
Commercial Viability
Managerial Competency
Other Parameters
Miscellaneous Issues
Deferred Payment Guarantees

State Bank of India
THANK YOU

SBI Term Loan Appraisal Guide

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Term Loans Features

Prima facie acceptability

Deferred Payment Guarantees

State Bank of India

TERM LOAN & ITS FEATURES

Term Loans may be drawn / disbursed in lump sum

State Bank of India

TERM LOAN & ITS FEATURES..

State Bank of India

GUIDELINES IN LOAN POLICY

State Bank of India

CREDIT APPRAISAL STANDARDS

Quantitative Parameters: ii) Term Loan / DPG:

Technical Feasibility & Economic Viability : To be vetted

Promoters Contribution : To be at least 30% (Mfg.) (20%

iii. DSCR (Net) : Not to be normally below 2.

Margin : This would depend on Debt / Equity gearing for

State Bank of India

PURPOSE OF TERM LOAN

Other Long Term Requirements VRS.

State Bank of India

TERM LOANS Vs. WORKING CAPITAL

Security (FA) not readily saleable.

State Bank of India

APPRAISAL OF TERM LOANS

State Bank of India

APPRAISAL OF TERM LOANS

State Bank of India

1. PRIMA FACIE ACCEPTABILITY

Substantial Exposure norms.

State Bank of India

1. PRIMA FACIE ACCEPTABILITY

MA in respect of cos., to know the scope of activity

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It consists of an assessment of the various

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Location of plant & accessibility to critical inputs.

Size of the plant.

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This has reference to the earning capacity of the

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Thorough market analysis

Future trends in volume and patterns of Supply &

Demand forecast, Supply position, Gap

Export oriented units

State Bank of India

To determine the accuracy of cost estimates,

This involves analysing the data received from the

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Cost of the project, including WCL.

Cost of Production & estimates of profitability.

Cash Flow estimates and sources of finance.

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Cash Flow estimates help in determining the

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A study of the projected Balance Sheet is essential

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This is calculated by dividing cash accruals in a year by

Cash Accruals + Interest on Term Loan