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APPRAISAL OF

TERM LOAN

INTRODUCTION
Setting up a
Steel Plant / Cement Plant / Road Project /
Hospital / Hotel etc.
will involve CAPITAL EXPENDITURE
A CAPITAL EXPENDITURE involves current
outlay of funds in the expectation of a
stream of benefits extending far into the
future

Any Project normally passes through these


processes for its materialisation
PLANNING

ANALYSIS

SELECTION

FINANCING

IMPLEMENTATION

REVIEW

PLANNING gives the framework of the


project

ANALYSIS involves technical,


marketing, financial, economic and
environmental aspects
SELECTION the decision after
ANALYSIS gives a direction which way
to go under the circumstances

FINANCING gives the source of funds,


i,e, own funds (Equity) and borrowed
funds (Term Loan)
IMPLEMENTATION involves
construction and commissioning
REVIEW involves review of the
performance of the project vis--vis
assumptions

FACTORS IN
TERM LOAN APPRAISAL
a)
b)
b)
c)
d)
e)
f)

Purpose of Term Loan


Pre-sanction visit Report
Techno-Economic Viability (TEV) Study
Cost of Project and Means of Finance
Production factors / Technical Aspects
Marketing and Selling Arrangements
Utilities
- Power
- Water
- Manpower
- Logistics

Appraisal of Term Loan


contd.
g) Approvals and Clearances
h) Implementation Schedule
i) Disbursement Schedule
j) Commercial Viability (DSCR)
k) Repayment Schedule
l) Security Margin
m) Break-even Analysis
n) Sensitivity Analysis

SOME IMPORTANT
TERMINOLOGIES
TENOR OF LOAN Time period for which the
loan will remain in the books of the Bank. It is
calculated Door to Door
DEBT : EQUITY Ratio (DE) the ratio of Term
Loan to Equity component
QUASI EQUITY the equity not forming part of
the share capital of the company, it can be
unsecured loan, deposit from the Public etc.

DSCR Debt Service Coverage Ratio


BEP Break-Even Point
SECURITY MARGIN The fixed assets
available as security vis--vis Term Loan
outstanding
FI Financial Institutions
INSTALLED CAPACITY the maximum
production capacity of the machineries under
ideal conditions
UTILISED CAPACITY the capacity at which
the goods are produced
CMA Credit Monitoring Arrangement

PURPOSE
Mention the purpose for which the Term
Loan is intended

PRE-SANCTION VISIT
Visit to the Factory site and submit a
comprehensive report
The visit will give the ground reality of the
Project and the stage of progress of the
Project

TEV STUDY
If required, a TEV study of the Project may be
entrusted to a 3rd Party having expertise in the
particular industry
Compare the TEV Report with the Project
Report submitted by the company and the
acceptability of the TEV Report
If there is wide divergence in the two reports,
call for a meeting between the TEV
Consultant and the Promoters of the Project

APPROVALS & CLEARANCES

i)

These are Project Specific, but some


approvals common to all projects are :
NOC from Pollution Control Board
First they issue Consent to Establish
and after the factory is set up, they
inspect the site and issue Consent to
Operate if fully convinced that the
company has taken all required
measures to control pollution from the
unit.

ii) NOC from Gram Panchayat if the industry


is located outside an Industrial Estate
iii) Assurance of Power Connection by the
Electricity Authorities
iv) Assurance by Water Resources
Department to lift water from water bodies
/ tap ground water
v) TIN to pay VAT
vi) Central Excise Registration
vii) NOC from Inspectorate of Factories &
Boilers mandatory for units installing
boilers

COST OF PROJECT

i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
xi)
xii)

Will include
Land & Land development
Civil Construction Factory Building & Non-factory building
Plant & Machinery Imported & Indigenous
Electricals
Technical Know-how Fee
Miscellaneous Fixed Assets
Preliminary Expenses
Pre-operative expenses
Interest during construction (IDC)
Margin Money for Working Capital
Initial Cash losses
Contingencies (ranging from 5 to 15% of core costs)

PRELIMINARY EXPENSES Expenses


incurred till the formation of the company
to be amortised in 5 years time from
DCCO
PRE-OPERATIVE EXPENSES All
expenses incurred from formation of
company till DCCO
INTEREST DURING CONSTRUCTION
The interest charged in Term Loan from
the date of disbursement till DCCO

MARGIN MONEY FOR WORKING


CAPITAL This is the margin component
of Working Capital Requirement this is
funded by way of Term Loan in the Debt :
Equity ratio
INITIAL CASH LOSS If required as per
industry need, then it can be funded by
way of Term Loan also
CONTINGENCIES ranging from 5 to
15% of core cost of the project forms part
of the project cost to take of price hike of
items to be used in the Project

The details of Civil Construction, i.e.,


constructed area, RCC , Shed area,
Internal Roads inside the factory are
mentioned in the Appraisal Memorandum
The details of Machineries, their suppliers,
credentials of suppliers, Imported
Machineries and their modes of payment
are also mentioned.

MEANS OF FINANCE
I) SHARE CAPITAL can be
a) Equity Capital contribution bythe owners
b) Preference Capital by preference
shareholders
II) TERM LOAN by Banks / FIs
III) DEBENTURE CAPITAL can be
a) Non-convertible Debentures have a fixed
rate of interest and normally have a maturity of 5
9 years
b) Convertible Debentures can be converted
fully / partially to Equity shares, upon maturity

IV) DEFERRED CREDIT this is extended by the


Suppliers of the Machineries
V) INCENTIVES by Govt. to boost Industries can be
a) Seed Capital as margin money provided at a
nominal rate of interest
b) Capital Subsidy announced to attract industries to
certain locations
c) Tax Exemption for industries at certain locations
VI) MISCELLANEOUS SOURCES like Unsecured
Loan, Deposits from Public, Lease Finance, HirePurchase Finance etc.

Depending on the Loan component and


the Equity Component, the DEBT :
EQUITY ratio is calculated. Ideally, it
should not exceed 2 : 1

TECHNOLOGY
Here, the technology to be used in the
production process are mentioned. The
Appraising Official has to state clearly that
the technology is current, tested and there
will be no hassles in production process.

PRODUCTION FACTORS
I)
II)
III)
IV)
V)
VI)

RAW MATERIAL
CONSUMABLES
POWER
WATER
MAN-POWER
LOGISTICS, i.e.,
- Transportation by road / railway
- Availability of Trucks
- Nearest Railway Yard
- Nearest Sea-Port

MARKETING
Inputs on marketing arrangement by the
company to sell its products. Tie-up with
clients if any, needs to be mentioned

IMPLEMENTATION SCHEDULE
Starting from Land acquisition to
construction to installation of P&M to Trial
Run to Commercial operation need to be
mentioned

FINALISATION OF CMA
Based on the parameters, the CMA is
finalised and acknowledgement of the
company obtained.
The CMA will contain Profitability
statement, the Balance Sheet and the
various financial ratios for the project and
the company

DISBURSEMENT SCHEDULE OF
TERM LOAN
Schedule of disbursement, preferably on
quarterly basis this will calculate the IDC
for the Project cost

REPAYMENT SCHEDULE OF
TERM LOAN
Moratorium needs to be specified
moratorium is the repayment holiday after
DCCO
The repayment may be quarterly / monthly
basis - needs to be mentioned in the
appraisal
These are only installments. Interest to be
paid as and when due

COMMERCIAL VIABILITY
This is assessed on DSCR, i.e., debt servicing
capability of the company from its income.
Gross DSCR = Cash Accrual + TL Interest
TL installments + TL interest
Net DSCR = Cash Accrual
TL installments
Cash Accrual = Profit + Depreciation + Amortisation
expenses

Average DSCR is calculated by


summation of the numerator for the tenor
of the loan divided by summation of the
denominator for the tenor of the loan,
commencing from the repayment date.
Ideally, Average Gross DSCR should be
minimum 1.75 and Average Net DSCR
minimum 2.00

BREAK-EVEN POINT (BEP)


This is a point of No Profit No Loss
BEP = Fixed Cost
Contribution
Contribution = Sales variable cost

SENSITIVITY ANALYSIS
This indicates the sensitivity of the plant to
adverse variations in production factors and
sales
Normally, this is assessed on
- adverse variations in variable cost
- adverse variation in sale volume and
- adverse variation in selling price
The sensitivity is calculated till the Gross DSCR
reaches 1.00

SECURITY MARGIN
This is the availability of fixed assets vis-vis the Term Loan outstanding
The value of Fixed assets is the Written
Down Value (WDV)
Ideally, the security margin should be
25%+

OTHERS
Net Present Value (NPV) is the sum of the
present values of all the cash flows (+ve / -ve)
that are expected to occur over the life of the
Project
NPV = Summation of (Cash flow year wise)
(1+Discount Rate)yr wise
less Initial Investment
Accept the proposal if NPV is +ve and Reject if it
is -ve

Internal Rate of Return (IRR) is the Discount


rate which makes its NPV equal to zero, i.e.,
Investment = Summation of (Cash flow year wise)
(1+Discount Rate)yr wise

TERM LOAN EXERCISE


Pl calculate a)Break-even point
b)Security margin coverage ratio
c)Gross DSCR
d) Net DSCR
With following information
COST OF PROJECT
(RS. IN LACS) DEPRN. RATE
BUILDING
230.84
20%
PLANT & MACHINERY
99.02
25%
FURNITURE & FIXTURES
42.08
15%
PRELIM. EXPENSES
75.00
MARGIN FOR W / C
25.00
471.94
MEANS OF FINANCE
PROMOTERS CONTR.
184.84
TERM LOAN
190.00 (+ CC 25.00)
UNSECURED LOAN
50.00
SUBSIDY
47.10
471.94
36

TERM LOAN INSTALMENT 15.00


(QUARTERLY)
INCOME (AT 70% CAPACITY UTILISATION)
ROOM RENT
FOOD & BEVERAGES
MISCELLANEOUS

141.19
63.54
14.12
218.85

37

EXPENSES
FOOD & CONSUMABLE
34.24
POWER & FUEL (70% FIXED) 13.13
SAL. & WAGES (40% FIXED)
10.94
ADMIN. EXPENSES
4.38
DEPRECIATION
77.23
REPAIRS & MAINTENANCE
4.58
INTEREST ON TERM LOAN
33.90
INTEREST ON CASH CREDIT
1.40
PRELIMINARY EXPENSE
15.00
ADVERTISING
4.24
199.04
PROFIT BEFORE TAX(PBT)
19.81
TAX
1.49
PROFIT AFTER TAX (PAT)
18.32

Assumptions: Term loan interest @ 20% p.a


Cash credit interest @14% p.a.
with average outstanding of Rs 10/- lakhs
38

TERM LOAN EXERCISE (SOLUTION)


BREAK-EVEN POINT
FIXED COST
POWER & FUEL
SALARY & WAGES
ADMIN. EXPENSES
DEPRECIATION
REPAIRS & MAINTENANCE
INTEREST ON TERM LOAN
PRELIM. EXPENSES
ADVERTISING

9.19 (70%)
4.38 (40%)
4.38
77.23
4.58
33.90
15.00
4.24
152.90
VARIABLE COST = TOTAL COST FIXED COST
= 199.04 152.90 = 46.14
CONTRIBUTION = INCOME VARIABLE COST
= 218.85 46.14 = 172..71
BEP = FIXED COST
= 152.90
172.71

x
70

% CAP. UTILISATION

CONTRIBUTION

= 62%

39

SECURITY MARGIN COVERAGE RATIO(NEXT YEAR END)


WDV OF BUILDING
230.84 46.17 = 184.67
OF PLANT & MACHINERY
99.02 - 24.76 = 74.26
OF FURNITURE & FIXTURES
42.08 - 6.30 = 35.78
371.94 - 77.23 = 294.71
TERM LOAN OUTSTANDINGS 190.00 - 60.00 = 130.00
SMCR = WDV OF FIXED ASSETS TL OUTSTANDINGS
WDV OF FIXED ASSETS
= 294.71 130.00 = 164.71 =
55.89%
294.71
294.71

40

DEBT SERVICE COVERAGE RATIO


CASH ACCRUALS
PROFIT AFTER TAX (PAT)
DEPRECIATION
PRELIMINARY EXPENSES

INSTALMENTS DUE
(IN ONE YEAR)

18.32
77.23
15.00
110.55
15.00
x
4
60.00

NET DSCR = CASH ACCRUALS = 110.55


= 1.84
INSTALMENTS DUE
60.00
GROSS DSCR = CASH ACCRUALS + TL INTT.
INSTALMENTS DUE + TL INTT.
= 110.55 + 33.90 = 144.45 = 1.54
60.00 + 33.90
93.90
41

Thanks

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