Loan Delivery System

Guidelines on Loan System for Delivery of Bank Credit with a view to

enhance credit discipline among the larger borrowers enjoying working
capital facility from the banking system, delivery of bank credit for such
borrowers shall be as under:
1. Minimum level of ‘loan component’ : In respect of borrowers having
aggregate fund based working capital limit of ₹1500 million and above
from the banking system, a minimum level of ‘loan component’ will
be 40 percent. Accordingly, for such borrowers, the outstanding ‘loan
component’ (Working Capital Loan) must be equal to at least 40
percent of the sanctioned fund based working capital limit, including
ad hoc limits and TODs. Now increased to 60%
Hence, for such borrowers, drawings up to 40 percent of the total fund
based working capital limits shall only be allowed from the ‘loan
component’. Drawings in excess of the minimum ‘loan component’
threshold may be allowed in the form of cash credit facility. The
bifurcation of the working capital limit into loan and cash credit
components shall be effected after excluding the export credit limits
(pre-shipment and post-shipment) and bills limit for inland sales from
the working capital limit. Investment by the bank in the commercial
papers issued by the borrower shall form part of the loan component,
provided the investment is sanctioned as part of the working capital
limit.
 Sharing of Working Capital Finance : The ground rules for sharing of cash
credit and loan components may be laid down by the consortium, wherever
formed, subject to guidelines on bifurcation as stated in paragraph 1 above.
All lenders in the consortium shall be individually and jointly responsible to
make sure that at the aggregate level, the ‘loan component’ meets the above
mentioned requirements. Under Multiple Banking Arrangements (MBAs),
each bank shall ensure adherence to these guidelines at individual bank level.
Amount and tenor of the loan: The amount and tenor of the loan component
may be fixed by banks in consultation with the borrowers, subject to the tenor
being not less than seven days. Banks may decide to split the loan component
into WCLs with different maturity periods as per the needs of the borrowers.
 4. Repayment/Renewal/Rollover of Loan Component
Banks/consortia/syndicates will have the discretion to stipulate repayment of
the WCLs in instalments or by way of a "bullet" repayment, subject to IRAC
norms. Banks may consider rollover of the WCLs at the request of the
borrower, subject to compliance with the extant IRAC norms.
5. Risk weights for undrawn portion of cash credit limits : Effective from April
1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to
the aforesaid large borrowers, irrespective of whether unconditionally
cancellable or not, shall attract a credit conversion factor of 20 percent.
6. The 40 percent loan component has been revised to 60 percent, with
effect from July 1, 2019.
Guarantees

Before issuing the bid bond the bank must assess the strength of the borrower
based on whatever data is available/ furnish

Once the bid bond is issued, the same borrower will approach for a performance
bond. The bank at that time cannot refuse except in exceptional cases.

So the request for both bid bond and performance bonds must be assessed as a
consolidated proposal.
Difference between purchase/ discounted and negotiated

• DP bills ( demand) - purchased

• DA bills ( usance ) - discounted
• LC bills ( Demand or usance) - negotiated
Preshipment finance
• Packing credit (clean)
• Shipping loan (Hypothecation)
• Shipping loan (Pledge)
Release of preshipment Credit
Export orders / LCs
( verify the name of buyers, commodity, quantity, value, date of
shipment, terms of payment, destination of export, on whom the LC
stands ( applicant)

Running Account or against orders from 14th March , 1992 onwards

Requirements
( convince the bank of his capacity to execute orders)
• Past performance and future projections
• New exporters – domestic market
Import – Export Code (Import Export (IE) Code is a registration required for
persons importing or exporting goods and services from India. IE Code is issued by the Directorate
General of Foreign Trade (DGFT), Ministry of Commerce and Industries, Government of India). This is
done through the bank
• Caution / defaulters list of RBI and SAL of ECGCI Ltd
• Restricted cover country of ECGCI
Assessment
Credit Risk

• Properly introduced
• Good track record
• Export finance outstanding with other banks
• Overdue bills including collection bills
• Procurement of export orders
• Credit reports of the overseas buyers
Assessment
Commodity Risk
• Ready market
• Not banned or restricted

Country Risk
Against Order
• Current orders
• Release against particular order
• After keeping margin
• If LC is available then negotiation date and shipping date mentioned
in LC should be in currency
Running Account
• Good track record
• No orders at time of release
• Orders collected within reasonable time ( generally 30 days)
• No bills can be sent on collection ( no limit purchase but restrict pre
shipment finance)
• Realisation of bill on FIFO method basis.
Quantum of finance
• The quantum of finance will be fixed on the FOB value of the
contract/ LC or domestic value of the goods whichever is less after
deducting profit margin.
• Advance for freight and insurance charges will be released when
goods are ready for export
• FOB vs CIF vs CNF
• FOB – Free on Board (or Freight on Board). This basically means that
the cost of delivering the goods to the nearest port is included but the
buyer is responsible for the shipping from there and all other fees
associated with getting the goods to your country/address.
• CIF – Cost, Insurance and Freight. In this case, the price also includes
sea freight charges and insurance to deliver the goods to the buyer’s
port. But only to port – from that point onwards, the buyer takes the
shipment into his hands.
• CNF – Cost & Freight (or Cost, no Insurance, Freight). Similar to CIF
only this time insurance is not included.
Liquidation of pre-shipment advance
• With export proceeds of the relevant shipment
• Pre to post
If export does not take place, then what?
Substitution of export contracts. Liquidation against export documents
of another order / different commodity. But relative bill should not
have pre shipment outstanding in any bank. Substitution of export
orders permitted from December 1994
• Look at past history of performance
• Networth and its composition
• Leverage
• Liquidity
• Meeting the covenants
Project Loan
Assessment of Term loan
Cost of the Project
• Land site development and building construction
• Plant and Machinery & Equipment
• Working capital Margin
• Pre operative expenses
Sources of Finance
Share capital, reserves and surplus ( Promoters contribution)
Unsecured loans
Term loan from Bank
Assessment of a Term Loan
• Term loan appraisal covers the appraisal of the borrower and appraisal of the
project. The characteristics of a term loan are that term loan commitments are for a
long term. The banks and financial institutions normally offer term loans repayable in
10-15 years and beyond that period in  exceptional cases like housing loans. The
repayment would be made out of cash generated from business activities.
•  Appraisal of the borrower covers honesty and integrity of the borrower, standing of
the borrower, business capacity, managerial competence, financial resources in
relation to the size of the project. The sources of information for the above are
the personal interview, credit investigation, trade circle enquiries, market report,
 existing bank’s report, CIBIL report, assets and liabilities statements submitted by
the borrowers, Income Tax assessment orders and wealth tax assessment orders of
promoters.
Assessment of a Term Loan
Appraisal of project covers the following details.
• Commercial Viability of the project:
• Line of business, demand-supply, profit margin, imports, exports, list
of important customers and suppliers, extent of competition, costing
and pricing, mechanism of the product, dependence on single or few
customers or suppliers, prevailing Government policies, embargo etc.
are to be evaluated
• Production Arrangement: Power, water supply, transport,
infrastructure facilities like Proximity to the source of raw materials,
stores and other production facilities, workforce etc.
Assessment of a Term Loan
• The Manager has to visit the place of the factory to see that the
business exists at the address furnished and also to ascertain the
infrastructure available,  the level of activity and make a preliminary
report on his/her visit which includes inspection report on prime and
collateral security offered.  
• The Manager has to familiarise with borrower’s business, form
 opinion about adequate labour strength, maintenance of the factory,
godown etc.
Assessment of a Term Loan
Techno Economic Viability (TEV)
• Assessment of the practicality of the project
• It refers to estimation of the potential demand and choice of optimal technology
It contains:
background of the industry & of the enterprise submitting the report
the product characteristics, market positions and trends,
raw material requirement and manufacturing processes,
required land area, building specifications and construction schedules, plant and
machinery requirements,
 Financial implications, marketing channels, requirement of labor and personnel.
Assessment of a Term Loan
• Market conditions & marketing arrangements:
 Demand, supply, pricing etc.,
Names of the main buyers, names of major competitors and their total market
shares.
• Financial appraisal:
 Past financial statement like profit and loss accounts, balance sheets.
The correlation between fixed assets and under charging of depreciation,
Operating loss position, contribution of other income to net profit,
valuation of closing stock, borrowings and interest cost,
extent of reserve created by revaluation of assets,
Assessment of a Term Loan
unsecured loan shown as quasi-equity,
movement of unsecured loans over the years,
borrower’s stake in the business,
 investment in intangible assets, other non-current assets.
 Acceptability of projection and assumption considered for the
assessment,
profitability estimate, solvency ratio i.e. ability to service outside
liabilities like TOL/TNW, Funded Debt/TNW etc.
Liquidity position like networking capital and current ratio.
Assessment of a Term Loan

• The major problems concerning term finance is maturity mismatch, funding risk, Interest rate
risk (IRR).
• These aspects are to be carefully looked into while fixing loan amount and repayment
instalments.

• Clearance from appropriate government agencies: Consents, approvals & environment

clearance aspects.
• Non-fund based facilities: Apart from the term loan, a project may also require non –fund
based facilities like Deferred Payment Guarantee, Co-acceptance, Buyers credit etc.
Assessment of non-fund based limits in such cases.
• SWOT analysis  (Strength, Weakness, Opportunity and Threat)
Amortisation Schedule

• An amortization schedule is a complete table of periodic loan

payments, showing the amount of principal and the amount of
interest that comprise each payment until the loan is paid off at the
end of its term.

• The amortization schedule is important when we are considering

repayments other than EMIs
Loan to the real estate sector
Appraisal of a Loan for the real estate sector
• Understand the Real Estate (Regulation and Development) Act, 2016
(RERA) guidelines to check the required due diligence
• Understand the Techno Economic Viability (TEV) evaluating the
technical and financial information about the project.
• Analyse the Credit Monitoring Arrangement (CMA) showing the past
& projected performance of a business in financial terms, to ascertain
the financial health of a business.
The Real Estate (Regulation and
Development) Act, 2016 
• Seeks to protect home-buyers as well as help boost investments in the real estate industry.
The Act establishes a Real Estate Regulatory Authority (RERA) in each state for regulation of
the real estate sector and also acts as an adjudicating body for speedy dispute resolution.
• The Real Estate Act makes it mandatory for all commercial and residential real estate
projects where the land is over 500 square metres, or eight apartments, to register with the
Real Estate Regulatory (RERA) for launching a project, in order to provide greater
transparency in project-marketing and execution.
• The Act prohibits unaccounted money from being pumped into the sector and as of now 70
per cent of the money has to be deposited in bank accounts through cheques.  A major
benefit for consumers included in the Act is that builders will have to quote prices based on
carpet area not super built-up area, while carpet area has been clearly defined in the Act to
include only usable spaces. Under RERA, its mandatory for the builders to disclose the carpet
area.