CREDIT POLICY FOR TAM ENTERPRISES

This document underlines the credit policy that will be given to TAM enterprises, for a period of
9 months. It outlines the requirements satisfied by the client - TAM ENTERPRISES, herein
referred to as “the client”. The grant will be given by Klub, hereby referred as “the company”.
This document also fullfills the conditions for lending credit and also monitoring it thereafter.

Klub will be offering a credit of Rs. 35,00,000 ( Thirty Five Lakhs) with an yield of 10% and a
revenue share of 10.695% for a period of 9 months. The reason behind this calculation is detailed
out in the following points below. Please note that the all terms of credit are standardized
according to the current sales shown till the period of February 2021.

● The average revenue in the last 6 months ( August to February ) is 40 lakhs, as filed and
declared by the management. Considering the company operates in the same manner, if
not more the company can invest an amount of 35 lakhs with an yield of 10%. The same
can be recovered in 9 months with a revenue share of 10.695% amounting to Rs. 427800
within 9 months. Details can be found in the below table.

Month 1 427800

Month 9 427800*9=3850200

Total RBF 3500000

Yield@10%+RBF 3850000

● The company’s IRR value will be nearly 13.55% over a period of 9 months with an
investment of 35 lakhs, given that the client functions in the same way it does.

● The major credit analysis ratios can be quantified into 4 groups, namely : Profitability,
Leverage, Coverage and Liquidity. Covering each ratio and formula will determine if the
above stated hypothesis will yield profitable returns on the credit analysis or not.

● To calculate the first ratio i.e Profitability we will be using ROE i.e Return of Equity ratio
since the company will be investing an equity amount in it. Although the correct formula
for shareholders equity would be :
Shareholders Equity = Paid-In Capital + Retained Earnings + Accumulated Other
Comprehensive Income – Treasury Stock

However since the company is only paying in capital, we are assuming that the
shareholders equity to be the initial capital investment only.
 Hence ROE would be equal to : Annual Net Income / Shareholder’s equity. If we take up
the provisional turnover of January 2021 of 320 lakhs, divided by 35 lakhs, we get a high
positive ROE.

● Second, for leverage- we know that the client has raised capital in 2019 however since we
do not have much details on it, we will not be using this ratio for the credit risk analysis.

● Thirdly for coverage credit analysis, we will be using cash coverage ratio. It is given that
the EBITDA burn is 16 lakhs. Since EBITDA burn is an amount equal Borrower's
trailing three month EBITDA, divided by three, we will be now calculating the EBITDA
for one month only. It is given that the average of 6 months is 16 lakhs. Hence CCR ratio
would be equal to EBITDA/Interest (which in our case is the yield value of 10%)
Hence 16 lakhs/3.5 lakhs gives us 4.57. This means the client’s operating income can
cover the credit value 4.57 times.

● Lastly, Liquidity. To calculate this, we will be using cash ratio which is defined as cash or
cash equivalents divided by total liabilities. Assuming that they have already returned the
capital amount to their last investor, currently they have a liability of 35 lakhs. And the
cash equivalent in their bank is 85 lakhs. This gives us 85/35, a result of 2.42. Even
though the score is quite low, this investment can be classified as a high risk investment.

Some further parameters to be checked, because of the above analysis:

● Closely monitor the client’s revenues and the income sources for the upcoming months. If
the response in the first 2-3 months is not satisfactory, immediate actions for collection is
to be taken aggressively. This includes increasing the revenue share from 10.695% to
anywhere between 20-25%.

● Credit can be extended to the RBF value if the upcoming months show a good score.
Closely monitor the CIBIL score, EBITDA and Turnover ratio. Before investing, a
further check can be done to see if the capital has been returned to their initial investor.
Account balances where November’s revenue is logged and shown should be considered
before funding.

● The company’s reputation along with previous quarter’s balance sheet should be noted
and checked and kept. Extended background verification to be carried out before
investing. Time to time payment and retention policies from previous investor(s) to be
checked.
● Evaluation of Management’s experience and expertise. Further analysis and detailing on
the expertise of the board and employees can be taken in consideration. Things like
demonstration of knowledge of business, educational qualifications, years of experience,
association with chambers, experienced employees on board should also be taken in
consideration. This should be done for all the managers, boards and CEO.

● If more details come up, EAD modelling i.e Exposure at default should be done. This can
be done via Excel or R programming language. Once we have that, further analysis of
expected loss which is EAD* probability of default * loss given default.

● Next thing to be checked is financial standing of the company which will reveal to us
furthermore details if the RBF amount is worth investing or not.

● Industry condition- As the company is operating into fashion trends, it would be in a

good position. But it will also face severe competition. The company’s standpoint from a
userbase and a popularity point of view should also be kept in mind. Secondly, along with
the financial statements- their customer base must also be thoroughly evaluated and
checked.

● Repayment capacity- Collections should be taken as briefed above.