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Prof : Naveen Rohatgi TYBMS: Term loan


Term loans (Oct 2004)are referred to as term finance; represent a source of debt finance
which is generally repayable in more than one year but less than 10years. Such loans are
raised for expansion, diversification and modernization of the enterprise. The primary
source of such loans are financial institution. They are employed to finance acquisition of
fixed assets and working capital margin. Term loans are repayable in fixed monthly,
quarterly or half yearly installments and secured by term loan agreements between the
borrower and the bank.

Financial institutions: the following financial institutions cater major part of financial
needs of the industrial sector:
- New India Assurance Company Ltd
- Oriental Insurance Company Ltd
- United India Assurance Company Ltd
- National Insurance Company Ltd

Security (April 2002)- Term loans are always secured. They are secured specifically by
the assets acquired using term loan funds. This is called primary security. Primary
security is taken for the assets for which term loans are given.

Collateral Security (April 2002)- Upto term loan of a certain amount Collateral Security
is needed. For term loan more than that amount minimum 30% to 35% security is needed.
It depends on the credit ratings of the borrower and relations of borrower with the bank

Charge (OCT 2005)- may be defined as the transfer on an interest or right in the assets
of a person in the favour of a lender for the purpose of securing the repayment of a loan.
First and Second Charge- loans are granted to the borrower against security. Sometimes
the borrower may use the same asset for raising finance from two or more lenders. In this
case the lender who has first lent to the borrower against the asset will have the right on
the asset, before the second lender in case of default. This is known as the first charge.
Only after the dues of the first lender are cleared, after selling off the asset the second
lender can claim his dues. This is known as the second charge. Generally the lender who
has the second charge will price his loan higher, considering the fact that he has to bear a
greater risk.

Prof : Naveen Rohatgi TYBMS: Term loan

Fixed and Floating Charge (Oct 2002, Oct 2005)- lenders lend money to the borrower
against the security. A lender can have either a fixed or a floating charge on the
securities. In case of a fixed charge lender can recover his dues from a certain predecided
asset only in case of default by the borrower. On the other hand, a lender who has a
floating charge can recover his dues from a gamut of fixed asset. The lender who lends
on a fixed asset has to bear a higher risk than the one lending on a floating charge

Lien- is the right of retention. Right of retaining goods/securities until the debt due is
paid off as per the statutory agreement. The lien can be of 2 types: Particular lien and
General lien. Particular lien is the right to retain goods until the claim pertaining to these
goods is fully paid. On the other hand, general lien can be applied till all dues of the
claimant are paid.

Hypothecation- means securing repayment against movable property. In hypothecation

goods continue to remain in the possession of the owner. Generally, bank gives loan
against hypothecation of stock of raw materials. Although the lender does not have
physical possession of the goods. It has a right to sell the goods to realize the outstanding

Pledge- means securing repayment by transferring possession of goods in favor of lender.

Bank gives loan by keeping in possession of shares and debentures. The borrower who
offers security is called “pawnor” (plegor), while the lender is called
“pawnee”(pledgee).The lodging of goods by plegor to the pledgee is a kind of bailment.
Therefor e pledge creates some liabilities for the lender. It must take reasonable take
reasonable care of goods with it. The term reasonable care means care of goods pledged
with it. The term reasonable care means care which a prudent person would take to
protect its own property. He would be responsible for any loss or damage if he uses the
pleged goods for his own purposes. In case of non-repayment of the loans, the lender
enjoys the right to sell the goods.

Pari Passu (with equal pace) (April 2003): On equal footing or proportionately. Pari
Passu is equal rights over the asset by two lending institution. It means equally without
preference,e.g. a series of debentures may be issued subject to the condition that they are
to rank Pari Passu as a first charge on the property charged by the debentures.

Moratorium (Oct 2004): Financial institution may allow for a delay in the payment of
the principal installment to the borrowers. The period between the sanction of the loan
and first principal installment repayment is known as moratorium. The bank studies
profitability statement and cash flow projections prepared by borrowing unit and arrives
at a conclusion regarding as to length of moratorium period.

Re- Schedulement: In the event of a borrower not being able to pay their installments as
as per the repayment schedule, the financial institutions may restructure the repayment
schedule of the borrowers to prevent the term loan turning bad.

Prof : Naveen Rohatgi TYBMS: Term loan

Flash report (April 2007): The Bank prepares flash report . The flash report is the guage
whether it is feasible to provide the loan to the applicant. It determines the feasibility of
the project by looking the financial, economical, technical, marketing, managerial
aspects. It determines the amount of money that bank will earn after providing loan. It

The financial ratios for appraisal of the project includes: (April 2005, OCT 2007)

1. Debt equity ratio.

2. Interest coverage ratio.
3. Debt service coverage ratio.
4. Profitability ratio.(such as return on capital employed, Net profit ratio, operating
profit ratio)
5. Capital structure

Margin money (April 2004): Margin means the own contribution of the owners for
purchase of machinery as no bank generally finances 100% of the total cost of
machinery. The margin change according to the purpose of loans or nature of loan. For
instance for machinery it is 25% and for land it is 40% which is negotiable..

Restrictive Covenants (Oct 2005)- a financially weak firm attracts stringent term of
loans from lenders. The restrictive covenants may be categorized as follows
a) Asset-related covenants
i) borrowing company should maintain its minimum asset base
ii) minimum current ratio to be maintained
iii) not to sell fixed assets without the lender’s approval
iv) refrain from creating any additional charge on its assets
b) liability-related covenants
i) restrained from incurring additional debt
ii) repay existing loan
iii) limits the freedom of promoters to dispose of their shareholding
c) cash flow- related covenants
Restrain on the firm’s cash outflow by:
(i) restricting cash dividends
(ii) restricting capital expenditure
(iii) Restricting salaries and perks of managerial staff etc.
d) Control-related covenants
i) broad-base board of directors
ii) appointment of nominee directors by financial institutions to safeguard the
interests of financial institutions
e) Positive Covenants: in addition to the foregoing negative covenants, certain
positive/ affirmative covenants stating what the borrowing firm should do during the
term of a loan are also included in a loan agreement. They provide for:
i) furnishing of periodical reports/financial statements to the lenders
ii) maintenance of a minimum level of working capital
iii) creation of sinking fund for redemption of debt
iv) Maintenance of certain net worth.

Prof : Naveen Rohatgi TYBMS: Term loan

Project Appraisal by Financial Institutions/ Content of project report (April 2008)

Project Appraisal is the process by which the Financial Institutions makes an independent
and objective assessment of the various aspects of the investment proposition for arriving
at a financing decision
Broad aspects of Appraisal
Financial Appraisal
Technical Appraisal
Economic Appraisal
Management competence
Market Appraisal
Technical Appraisal (Oct 2003)
Focuses mainly on the following aspects
i) product mix
ii) capacity
iii) process of manufacture
iv) engineering know-how and technical collaboration
v) raw materials and consumables
vi) site and location
vii) building
viii) plant and equipments
ix) manpower requirements
x) break-even point

Financial Appraisal
It seeks to assess the following:
1) Cost of Project.
2) Capital structure.
3) Cash flow estimate.
4) Return of investment on the project.
5) Tax benefit.

Economic Appraisal (Oct 2005): Economic Appraisal involves analysis of critical

factors such socio-economic benefit, availability of labour, import substitution,
technology absorption, impact on ecology, value addition, forex earnings, economies of
scale, development of backward region, effective utilization of resources.

Managerial Appraisal: The success of a business enterprise depends largely upon on

the resourcefulness, competence and integrity of its management. However the
assessment of managerial competence has to be necessarily qualitative calling for
understanding and judgment. The managerial appraisal includes assessment of and skill
of the promoters,

Market / Marketing Appraisal: (April 2005)

Prof : Naveen Rohatgi TYBMS: Term loan

1. Examine the reasonableness of the demand projections by utilizing the findings

of the available market survey findings/ reports, industry association projections,
planning commission and independent market surveys.
2. Assess the adequacy of the marketing infrastructure in terns of promotional effort,
distribution network, transport facilities, stock levels.
3. Judge the knowledge, experience and competence of the key marketing personnel.

TERM LOAN Procedure (April 2004, OCT 2008)

1. Submission of loan application- the borrower submits an application form that
seeks comprehensive information about the project. The application form covers
the following aspects
• Promoter’s Background- the promoters of the company must give their
detailed biodata
• Particulars of the Industrial Concern- the products to be manufactured and
the market that need to be penetrated must be stated. Also the forecast for the
growth in that industry as well as their opportunities (export potential) must be
• Particulars of the project-(capacity, process, technical arrangements,
management, location, land and buildings, plant and machinery, raw
materials, effluents, labor, housing and schedule of implementation)
• Cost of the project-the cost taking all factoring to account must be arrived at.
• Means of financing- there should be details of the debt equity ratio, the level
of gearing, the capital structure, and the source of financing.
• Marketing and selling arrangement- the project report must state if the
company has appointed any wholesalers or distributors for its goods, or if it
has tied up with another company for marketing its product
• Economic considerations- the project must be economically feasible
• Government consents- the promoters should have obtained the necessary
government approvals for the project
2 Initial processing of loan Application- when the application is received an
officer of the financial institution reviews it to ascertain whether it is complete
for processing. If it is incomplete the borrower is asked to provide the required
additional information. When the application is considered complete the
financial institution prepares a flash report which is essentially a
summarization of the loan application
On the basis of the flash report it is decided whether the project justifies a detailed
appraisal or not
3 Appraisal of the proposed project- the detailed appraisal of the project
covers the marketing, technical, financial managerial and economic aspects.
The appraisal memorandum is normally prepared within 2 months after site
inspection. Based on that decision is taken whether the project will be
accepted or not.
4 Issue of the letter of sanction- if the project is accepted, a financial letter of
sanction is issued to the borrower. This communicates to the borrower the
assistance sanctioned and the terms and conditions relating thereto

Prof : Naveen Rohatgi TYBMS: Term loan

5 Acceptance of the terms and conditions by the borrowing unit- on

receiving the letter of sanction from the financial institution the borrowing
unit convenes its board meeting at which the terms and conditions associated
with the letter of sanction are accepted and an appropriate resolution is passed
to that effect. The acceptance of the terms and conditions has ti be conveyed
to the financial institution within stipulated period
6 Execution of loan agreement- the financial institution after receiving the
letter of acceptance from the borrower, sends the draft of the agreement to the
borrower to be executed by the authorized persons and properly stamped as
per the Indian Stamp Act, 1899. the agreement properly executed and stamped
along with other documents as required by the financial institution must be
returned to it. Once the financial institution also signs the agreement, it
becomes effective.
7 Disbursement of loans- periodically the borrower is required to submit
information on the physical progress of the projects, financial status of the
project, arrangements made for financing the project, contributions made by
the promoters, projected funds flow statement, compliance with various
statutory requirements, and fulfillment of the pre-disbursement conditions.
Based on the information provided by the borrower, the FI will determine the
amount of term loan to be disbursed from time to time. Before the entire term
loan is disbursed, the borrower must fully comply with all terms and
conditions of the loan agreement.
8 Creation of security- the term loans and the deferred payment guarantee
assistance provided by the financial institutions are secured through the first
mortgage, by way of deposit of title deeds, of immovable properties and
hypothecation of moveable properties. As the creation of mortgage,
particularly in the case of land, tends to be a time consuming process, the
institutions permit interim disbursement against alternate security. The
mortgage however has to be created within specified period from the date of
the first disbursement. Otherwise, the borrower has to pay an additional
charge of 1%interest
9 Monitoring- Monitoring of the project is done at the implementation stage as
well as at the operational stage. During the implementation stage, the project
is monitored through:
1) Regular reports, furnished by the promoters, which provide information about
the placement of orders, construction of buildings, procurement of plant,
installation of plant and machinery, trial production etc.
2) Periodic site visits
3) Discussion with promoters, bankers, suppliers, creditors, and other connected
with the project
4) Progress reports submitted by the nominee directors
5) Audited accounts of the company
During the operational stage, the project is monitored with the help of (i)
quarterly progress report on the project (ii) site inspection (iii) reports of nominee
directors (iv) comparison of performance Vs promise

Prof : Naveen Rohatgi TYBMS: Term loan

The most important aspect of monitoring, of course, is the recovery of dues

represented by interest and prince


What is difference between Fixed Charge and Floating Charge? (Oct. 2002)
What is Flash Report? (April 2007)
Explain primary and collateral security with examples. (April 2002)
Pan Passu Charge. (April 2003)
Technical Appraisal. (Oct. 2003)
What is margin money? (April 2004)
What is Term Loan? (Oct 2004)
What is Moratorium Period? (Oct 2004)
What are the matters coy red in a Marketing Appraisal of a Term Loan Appraisal’? (April
What do you mean by economic appraisal of a Term Loan Project? (Oct 2005)
What is a charge? What is the difference between a Fixed and a Floating charge? (Oct.
Discuss any five ratios which will have bearing on sanction of loan by Bank of Baroda.
(Oct. 2007)
Discuss the financial ratios used for appraisal of Term Loan Proposals. (April 2005)
What are the important covenants of a Long Term Loan agreement? (Oct. 2005)
What are the contents of a Project Report? (April 2008)
What are the steps involved in the Project Financing? (Oct. 2008)

Sums and Case study

1) Calculate the important ratios for granting Terms Loans and give recommendations
from the given projections: (Rs in millions)
Year 2006 2007 2008 2009 2010
EBIT 560 630 700 735 805
Additional Information
a) Tax Rate@30%
b) Principal amount of loan is repayable equally along with interest payable on
outstanding loans at the end of each year
c) Loan amount in consideration Rs.1750 million to be contracted @9%
d) Repayment tenure 5 years
e) Total Capital Investment in Project: Rs 2,500 million depreciable equally over 5

2) Prepare an amortization schedule from the following information assuming that the
Principal amount of loan is repayable equally along with interest payable on unpaid loans
Amount Borrowed Rs 12 lakhs
Annual Interest @12%
Repayment Period 10 years

Prof : Naveen Rohatgi TYBMS: Term loan

3) Prepare an amortization schedule from the following information assuming that the
amount is an equated annual installment
Amount Borrowed Rs 650000
Compound Annual Interest @10%
Repayment Period 8 years

4) Prepare an amortization schedule from the following information assuming that the
amount is an equated annual installment
Amount Borrowed Rs 22000
Compound Annual Interest @12%
Repayment Period 6years


( OCT 2006)

5)Mr. Chawte, GM of FICOM, a Financial Institution, was in relaxed mood. Just thought
of having a walk around went out grabbed peanuts to munch. As he was about to throw
the wrapping paper in dust bin, he noticed something! The paper was a part of old flash
report of FICOM’s appraisal process. Only partial data was visible. GM could make out
that the report was of Chemexperts Ltd of Nasik, a manufacturer of bulk drugs and whose
directors were IIT Gold Medalist. Total loan sanctioned was Rs1200 lacs@13% rate of
interest of reducing balance, against the total cost of the project at Rs.1850lacs. Principal
amount to be repaid in 24 equal quarterly installments. Loan sanctioned against the
security of Plant and Machinery, collateral security of RBI Bonds and Personal
Guarantee of the directors. You are required to list any eight items of the flash report


Name of the Term Lending Financial Institution: FICOM.

Name of the Borrower: Chemexperts Ltd.
Set up at: Nasik.
Nature and Type of Business: Manufacturer of bulk drugs.
Loan Amount: Rs. 1,200 Lakhs.
Tenure of Loan: 6 years.
(i) Market Appraisal:
(1) Manufacturing of bulk drugs which has a huge demand.
(ii) Technical Appraisal:
(1) Directors are IIT Gold Medalist therefore they have the required
engineering know-how.
(2) The site and location is at Nasik.
(iii) Financial Appraisal:
(1) Total cost of the project is Rs. 1,850 lakhs.
(2) Amount of term loan is Rs. 1,200 lakhs.

Prof : Naveen Rohatgi TYBMS: Term loan

(3) Promoters are contributing Rs. 650 lakhs [Capital cost Rs. 1,850 lakhs —
Rs. 1,200 lakhs] as margin money towards the project.
(4) Security for term loan:
(a) Primary security of Plant and Machinery.
(b) Collateral security of RBI Bonds and
(c) Personal guarantee of the Directors.
(5) Promoters are contributing 35.14% (approx.) of the total project cost.
(6) The Debt-Equity Ratio after the proposed term loan will be 1.85: 1.
(iv) Economic Appraisal:
(1) Manufacturing of bulk drugs resulting into positive impact on health in the
(v) Managerial Appraisal:
(1) Directors are IIT Gold Medalist.
(2) Directors have technical expertise due to higher professional

Analysis and Observation:

Amount of Term Loan Rs. 1,200 lakhs.
Rate of interest @ 13% on RBM.
Principal amount repayment in 24 equal quarterly instalments

April 20026)The following data is available in respect of Jay Textiles Ltd.

a) the company was incorporated in 1982 with the promoters have an experience of more
than 35 years in the textile field and is a brand leader in micro yarn
b) The company proposes to borrow the term loan under TUFS
c) The present installed capacity is 10 machines or 6000 TPA of polyester texturised yarn
d) The additional investment will increase the installed capacity by 3600 TPA
e) The present and proposed set up is at silvassa a backward area and enjoys Income Tax
holiday for 5 years. Tax Rate is 40%
f) GIIC, GSFC and SBI financed the present unit. All the accounts are regular
g) The project will lead to economies of scale, reduced cost of production, higher
production due to yarn speed being faster due to latest generation machine best quality
due to the modernized machine
h) The expected ROI of the project is 18%
i) Depreciation for the project is Rs 400 lacs every year
j) The cost of proposed project and the means of finance are as follows:

Proposed Project Rs. In lacs

Cost of project
Land and site development 27
Factory building 155
Plant and machinery 1604
Electrical installation 24
Misc. fixed assets 10
Pre-operative exp 20
Contingencies 67

Prof : Naveen Rohatgi TYBMS: Term loan

Margin money for working capital 93

Total 2000
Means of finance
Promoter’s fund
Additional equity share capital 300
Internal cash accrual 500
Term loan 1200
Total 2000
k) The term lending institution has interest rate of 13% for similar risk project and loan is
repayable in 5 years with installment and interest repayable at the end of each yea
General Manager of the Term Lending Institution has requested you to
a) Prepare flash report from the point of view of the Term Lending Institution
b) Evaluate the project for profitability in the next 5 years
c) Calculate the Debt Service Coverage ratio for the Term Loans

(I) Facts:
Name of the Borrower: Jay Textiles Ltd.
Incorporated: in 1982
Present and Proposed Set up: at Silvassa
(I) Market Appraisal:
(1) Brand Leader in micro yarn.
(II) Technical Appraisal:
(1) Higher production due to yarn speed being faster due to latest generation
(2) Best quality due to the modernized machine.
Purpose of Term Loan: To increase the installed capacity by 3,600 IPA.
(3) Capacity: 6,000 TPA + 3,600 TPA = 9,600 TPA of Polyester Texturised
(III) Financial Appraisal:

(1) 15% of the fund should be raised through issue of equity shares. 25% of
the required funds can be arranged through internal accurals and only 60% is
required as borrowings in the form of term loan. Since set-up in a backward area
therefore it enjoys a tax holiday. Income-tax holiday for 5 years.
(3) Term Loan under TUFS (Technology Upgradation Fund Scheme) Rs. 1,200 Lacs.
(4) Investment Rs. 2,000 Lacs
Expected ROl @ 18% Rs. 360 Lacs
Depreciation Rs. 400 Lacs
Life 5 years
(5) GIIC, GSFC and SBI financed the present unit.
(IV) Economic Appraisal:
(1) Economies of scale resulting in reduced cost of production.
(V) Managerial Appraisal:
(1) Promoters having an experience of more than 35 years in the textile field.

Prof : Naveen Rohatgi TYBMS: Term loan

Term Loan Rs. 1,200 Lacs @ 13%

Year Principal + Interest = Total Repayment
1 240 + 156.0 = 396.0
2 240 + 124.8 = 364.8
3 240 + 93.6 = 333.6
4 240 + 62.4 = 302.4
5 240 + 31.2 = 271.2
1,200 + 468 = 1,668
Debt-Service Coverage Ratio
∑ PAT +Dep. +nt. on Long - Term Loan
∑ nt. on long term loan +Loan repayment Instalment
Investment is Rs. 2,000 Lacs
ROI is 18%
Profit Before Interest and Tax
ROI = ×100
Investment × ROI
PBIT = 2,000 ×18/100
= Rs. 360 Lacs
1 2 3 4 5 Total
Calculation of interest
Loan outstanding at the beginning 1,20 960 720 480 240 N. A.
Less: Repayment yearly in 5 years 0 240 240 240 240 1,200
Loan outstanding at the end 240 720 480 240 0 N. A.
Interest @ 13% on loan at beginning 960 124.8 93.6 62.4 31.2 468
Calculation of Profitability 156
PBIT 360 360 360 360 1800
Less: Interest 360 124.8 93.6 62.4 31.2 468
Profit Before Tax 156 235.2 266.4 297.6 328.8 1,332
Less: Tax 204 0 0 0 0 0
Profit After Tax 0 235.2 266.4 297.6 328.8 1,332
Calculation of DSCR 204
Profit After Tax 235.2 266.4 297.6 328.8 1,332
Add: Depreciation 204 400 400 400 400 2,000
Interest 400 124.8 93.6 62.4 31.2 468
Funds Available for Repayment(A) 156 760 760 760 760 3,800
Repayments 760
Loan Repayment 240 240 240 240 1,200
Interest Repayment 240 124.8 93.6 62.4 31.2 468
Total Loan and 156 364.8 333.6 302.4 271.2 1,668
InterestRepayments(B) 396
Debt Service Coverage Ratio = 2.08 2.28 2.51 2.80 2.28
(A/B) 1.92

Prof : Naveen Rohatgi TYBMS: Term loan

April 20037) You are approached by a Financial Institution to appraise the following
Name of the borrower: Blue Lines Chemicals Private Limited
Proposed loan is taken to set up a chemical unit for processing industrial waste into a
marketable product XYZ. The product has a demand for 50,000 Liters. The processing
costs include variable cost Rs.5 per Liter and fixed cost (excluding depreciation)
Rs.30,000 per year. Advertising expenses are also expected to be Rs.20,000 per year
XYZ can be sold at Rs10 per liter. Raw Material (industrial waste) is available at Re 1
per liter. The capital cost of chemical units is Rs.7,50,000.
The company has applied for a loan of Rs.6,00,000 for term of 10 years that is over the
life of the asset. The promoters are young and doing the venture for the first time. The
promoters are unable to provide any collateral security for the loan except Personal
Guarantee of their parents
They have thought of this research after market research. The said research has stated the
risk factors about invasion of South Korea in Chemical Market and drastic reduction in
Selling Price of similar products
The above unit is a SSI unit and its average tax rate is 20%
Interest rate 12%
Loan is repayable equally in 10 annual installments along with interest at the end of each
You are required to
a) Give the cash flow generated by the above project for the first three years
b) Calculate the Debt Service Coverage Ratio for the above 3 years
c) Prepare Flash Report presenting the above information to the Financial Institution

Name of the Borrower : Blue Lines Chemicals Private Limited.
Proposed Loan : Rs. 6,00,000.
Tenure of Loan : 10 years.
Purpose : To set up a chemical unit for processing industrial waste
into a marketable product “XYZ”.
(I) Market Appraisal:
(1) Promoters have taken up this project after a proper market research.
(2) The market research report in its risk factors has stated about invasion of
South Korea in chemical market
(3) The market research report in its risk factors also mentioned drastic
reduction in selling price of similar products.
(II) Technical Appraisal:
(1) The project involves setting up of a waste recycling plant.
(III) Financial Appraisal:
(1) Promoters are contributing as margin money Rs. 1,50,000 (Cost 7,50,000
— 6,00,000 loan amount)
(2) Promoters are unable to provide any collateral security for the loan except
personal guarantee of their parents.

Prof : Naveen Rohatgi TYBMS: Term loan

(3) The unit is a Small Scale Industrial (SSI) unit and therefore it enjoys a
lower tax rate of 20% along with other government incentives.
(IV) Economic Appraisal:
(1) The project involves making proper resource utilization in the nation.
(2) The project will result into reduction of waste and recycling it into usable
(V) Managerial Appraisal:
(1) Promoters are young, dynamic and highly qualified people.
(2) Promoters are doing the venture for the first time.
(I) Observation and Analysis:
Rs. pa.
Projected Sales 50,000 litres × Rs. 10 per litres 5,00,000
Less: Variable Costs:
Processing Costs:
Variable Cost Rs. 5 per litres × 50,000 litres 2,50,000
Raw Material (Industrial Waste) Re. 1 per litres × 50,000 litres 50,000
Less: Fixed Cost
Fixed Cost (Excluding Depreciation) 30,000
Advertising Expenses 20,000
Profit Before Depreciation, Interest and Tax 150,000
Less: Depreciation
10 Years 75,000
Profit Before Interest and Tax
1 2 3 Total
Calculation of Interest:
Loan outstanding at the beginning 6,00,000 5,40,000 4,80,000 N. A.
Less: Repayment in 10 annual installments 60,000 60,000 60,000 1.80,000
Loan outstanding at the end 5,40,000 4,80,000 4,20,000 N. A.
Interest 12% pa. on loan at beginning 72000 64800 57,600 1,94400
Calculation of Cash Flows:
PBIT 75,000 75000 75,000 2,25,000
Less: Interest 72.000 64.800 57,600 1,94,400
Profit Before Tax 3,000 10,200 17,400 30,600
Less: Tax @ 20% 600 2,040 3,480 6,120
Profit After Tax 2,400 8,160 13,920 24,480
Calculation of Debt Service Coverage Ratio:
Profit After Tax 2,400 8,160 13,920 24,480
Add: Depreciation 75,000 75,000 75,000 2,25,000
Interest 72,000 64,800 57,600 1,94,400
Funds Available for Repayment (A) 1,49,400 1,47,960 1,46,520 4,43,880
Loan Repayment 60,000 60,000 60,000 1,80.000
Interest Payment 72,000 64.800 57,600 1,94,400

Prof : Naveen Rohatgi TYBMS: Term loan

Total Loan and Interest Repayments (B) 1,32,000 1,24,800 1,17,600 3,74,400
Debt Service Coverage Ratio = (NB) 1.13 1.19 1.25 1.19

April 2006
8)Mr Anil Sane wishes to start a Manufacturing Unit from his ancestral factory premises.
He has Rs1,05,200 in his bank account. His parents have promised to gift him
Rs.3,50,000.He has estimated the project cost at Rs18,00,000 of which machinery will be
Rs15,25,000 and the remaining amount will be for furniture and fittings. The bank
finance is available to the extent of 80% of the project cost. He expects first year’s sales
at Rs40,00,000 with the annual increase of 20% every year over previous year. The cost
of sales will be 80%of sales. The rate of interest on loan will be 10% on reducing balance
method. The loan is repayable @ Rs300000 at the end of every year. He charges
depreciation @20% on his fixed assets under straight line and his other overheads for
three years are Rs240000, Rs300000 and Rs360000 per year respectively. You are
required to prepare the Projected Profit and Loss account and Projected Balance Sheet for
the first 3 years of operations to be presented to the bankers, assuming that the first year
is also a full year of 12 months activities and rate of income tax is flat @30%
b) Also find out any five plus points of the above loan proposal from Banker’s Point of

Solution Rs.
(1) Bank balance 1,05,200
Gift from parents 3,50,000
Owned funds available 4,55,200

Total Project Cost

Rs.18 lacs

Owned Funds (Balance) Bank Loan

Rs. 3.6 lacs Rs. 14.4 lacs

(3) Rs.
Machinery 15,25,000
Furniture and Fittings (Balance) 2,75,000
Project Cost 18,00,000

(4) Depreciation (SLM) @ 20% = ×18 lacs =Rs. 3,60,00O p.a.
(5) Bank Finance = ×18 lacs =Rs. 14,40,00O p.a.
(6) Working Capital outflows to be show at:

Prof : Naveen Rohatgi TYBMS: Term loan

T-0 T-1
Additional investment in working The project will require working
capital will be required to the capital of Rs. Given Amount
extent of Rs. Given Amount during the year 1.

Loan Amortisation Schedule (Equal Principal Repayment)

Year Balance at the Principal Interest Total Loan Balance at
Beginning Repayment @ 10% Instalment the End
1 14,40,000 3,00,000 1,44,000 4,44,000 11,40,000
2 11,40,000 3,00,000 1,14,000 4,14,000 8,40,000
3 8,40,000 3,00,000 84,000 3,84,000 5,40,000
Income Statement / Profit and Loss A/c
Particulars Years
1 2 3
Sales 40,00,000 48,00,000 57,60,000
Less: Cost of Sales/Cost of Goods Sold (80% of Sales) 32,00,000 38,40,000 46,08,000
Gross Profit 8,00,000 9,60,000 11,52,000
Less: (i) Depreciation @ 20% 3,60,000 3,60,000 3,60,000
(ii) Other Overheads 2,40,000 3,00,000 3,60,000
EBIT 2,00,000 3,00,000 4,32,000
Less: interest on Loan 1,44,000 1,14,000 84,000
EBT 56,000 1,86,000 3,48,000
Less: Tax @30% 16,800 55,800 1,04,400
NPAT 39,200 1,30,200 2,43,600
Balance Sheet Year 1
Liabilities Rs. Rs. Assets Rs. Rs. Rs.
Owned Funds 3,60,000 Fixed Assets:
(+) NPAT 39,200 3,99,200 Machinery 15,25000
Bank Loan 14,40,000 (-) 20% Depreciation 3,05,000 12,20,000
(—) Repaid 3,00,000 11,40,000 Furniture and Fittings 2,75,000
(-) 20% Depreciation 55,000 2,20,000
Net Fixed Assets 14,40,000
Working Capital 99,200
(Balancing Figure)
15,39,200 15,39,200
Balance Sheet Year 2
Liabilities Rs. Rs. Assets Rs. Rs. Rs.
Owned Funds 3,99,200 Fixed Assets:
(+) NPAT 1,30,200 5,29,400 Machinery 12,20,000
Bank Loan 11,40,000 (-) 20% Depreciation 3,05,000 9,15,000
(—) Repaid 3,00,000 8,40,000 Furniture and Fittings 2,20,000
(-) 20% Depreciation 55,000 1,65,000

Prof : Naveen Rohatgi TYBMS: Term loan

Not Fixed Assets 10,80,000

Working Capital 2,89,400
(Balancing Figure) 13,69,400
Balance Sheet Year 3
Liabilities Rs. Rs. Assets Rs. Rs. Rs.
Owned Funds 5,29,400 Fixed Assets:
(+) NPAT 2,43,600 7,73,000 Machinery 9,15,000
Bank Loan 8,40,000 (-) 20% Depreciation 3,05,000 6,10,000
(—) Repaid 3,00,000 5,40,000 Furniture and Fittings 1,65,000
(-) 20% Depreciation 55,000 1,10,000
Not Fixed Assets 7,20,000
Working Capital 5,93,000
(Balancing Figure)
13,13,000 13,13,000
(b) 5 positive points from Bankers point of view:
(1) Fresh MBA: Young qualified person.
(2) Ancestral Factory Premises: No gestation time. Production can start
immediately. No charge on factory premises.
(3) Gift from parents of As. 3,50,000: No burden of repayment and no charge
on company’s assets.
(4) Own bank balance As. 1,05,200. No repayment burden.
(5) 25.28% of the project cost can be contributed by him from his own bank
balance and gift from parents. This can be his margin money and only the balance
amount is required in the form of bank borrowings.
(6) Projected increase in sales every year by 20%.
(7) High Profitability Ratios [i.e. Gross Profit Ratio, Net Profit Ratio, etc.]
(8) Sound DSCR and Interest Coverage Ratios indicating loan instalment
repayment ability.
The company will utilise the entire bank loan and enjoy the benefit of “Trading on
Equity” since cost of debt is lower than the profit percentage and the company’s sales and
operating profits are on an increasing trend. If the company will utilise the entire owned
funds available and take the balance by way of bank loan then it won’t be able to
maximise the returns on its owned funds and enjoy the benefit of “Trading on Equity”
and the Return on Net worth will be low in alt the three years.

OCT 2007 9) Mr. Hemendra Dane is carrying out retail business in electronic items.
After observing trade practices, he has decided to start a small scale manufacturing
unit to produce electrical fittings. His Balance Sheet as on 31 -3-2007, before starting
manufacturing activities, is as under:
Liabilities Assets
Capital 5,55,500 Furniture 40,000
Computer 60,000
Investments 1,50,000
Fixed Deposits with bank 2,00,000
Cash and Bank balance 1,05,500
Rs. 5,55,500 Rs. 5,55,500

Prof : Naveen Rohatgi TYBMS: Term loan

In order to carry out new activity he will take factory premises on rental basis @ Rs.
10,000 p.m. from 1.9.2007 and from 1.4.2008 the rent will be Rs. 15,000 p.m. He is
confident of setting up manufacturing unit by 30.8.2007 and start manufacturing and
selling from 1st September 2007.

The cost of machineries will be Rs. 10,00,000 for which he will be approaching Bank
of Baroda for term loan of Ps. 8,00,000, balance being his own contribution. The loan
repayment will start from 1.4.2008, in the quarterly installment of Rs. 50,000 payable
on 1st April, 1st July, 1st October and 1st January every year.

He will have no income in financial year 2007-08 till setting up of the unit i.e. upto
30-8-2007. Thereafter he expects his Sales to be Rs. 80,000 p.m. from 1-9-2007 to
31-3-2008 and afterwards every year Rs. 18,00,000 with yearly increment of 10%
over previous year.

His cost structure will remain more or less unchanged upto 31-3-2010 and Cost break
up on Sales will be: Direct Cost @ 40%, Office Overheads 20%; Selling and
Distribution 5%, Depreciation will be charged on all fixed assets @ 10% under W.D.V.
(full year’s depreciation even if the assets are used for a part of the year) and
interest for first year ending 31 -3-2008 will be Rs. 59,000 and thereafter it will be at
Rs. 70,000, Rs. 54,000 and Rs. 43,000 respectively for subsequent years.
You are required to prepare Projected Statement of Profit and Loss for the
financial years 2007-08 08-09 and 2009-10.
Projected Profit and Loss Statement (All figures in Rupees)
Particulars 2007- 2008-09 2009-10
Sales 5,60,00 18,00,000 19,80,000
Less: expenses: 0
Direct Cost (40% Sales) 7,20,000 7,92,000
Office Overheads (20% Sales) 2,24,00 3,60,000 3,96,000
Selling and Distribution Overheads (5% Sales) 0 90,000 99,000
Factory Rent 1,12,00 1,80,000 1.80,000
PBDIT 0 4,50,000 5,13,000
Less: Depreciation on: 28000
Furniture 70,000 3,600 3,240
Computer 1,26,00 5,400 4,860
Machinery 0 90,000 81,000
PAIT 3,51,000 4,23,900
Less: Interest on Term Loan 4,000 70,000 54,000
NPBT 6,000 2,81,000 3,69,900
Working Notes:
(1) Factory Rent:
01/09/200710 31/03/2008 (7 Months) @ Rs. 10,000 p.m. = Rs. 70,000
01/04/2008 to 31/03/2009 and 01/04/2009 to 31/03/2010(12 Months) @ Rs. 15,000
p.m. = Rs. 1,80,000 p.a.
(2) Sales:
01/09/2007 to 31/03/2008 (7 Months) @ Rs. 80,000 p.m. = Rs. 5,60,000
01/04/2008 to 31/03/2009 = Rs. 18,00,000
01/04/09 to 31/03/2010 = Rs. 18,00,000 + 10% = Rs. 19,8C’.OOO

Prof : Naveen Rohatgi TYBMS: Term loan

(3) Cbst Break-up:

Direct Cost 40% × Sales
Office Overheads 20% × Sales
S and D Overheads 5% × Sales
(4) Depreciation on all Fixed assets:
@ 10% WDV Method
Particulars Furniture Compute Machiner
r y
WDV/Cost 40,000 60,000 10,00,000
Depreciation 07-08 4,000 6,000 1,00,000
WDV 36,000 54,000 9,00,000
Depreciation 08-09 3,600 5,400 90,000
WDV 32,400 48,600 8,10,000
Depreciation 09-10 3,240 4,860 81,000