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TERM LOANS

Who are the persons (Promoters) behind the project and what is their experience in the line of business proposed? What is the purpose of the term loan? New unit, expansion of existing unit or diversification or replacement of an asset What are the current market and the future outlook for the clients product? Are there adequate supply of raw materials, skilled manpower and other utilities?

At what level of production the company would reach its Break Even Point (BEP)?
Will the new project generate sufficient surplus to service the loan commitments (interest and instalments)?

Managerial Competence Succession Planning Technical Feasibility:

Location: Is the location of project in an ideal place? Nearness to the raw material source, availability of required manpower.
Manufacturing Process and Equipments: Is the technology appropriate and suitable under the Indian conditions? Who are the suppliers of Machinery and what is the performance of the machines being supplied? What is the installed capacity of the Plant & Machinery and how does it compare with the production plans? Do the equipments accommodate for any expansion plans? Is the technology current or obsolete? Should any royalty be paid?

Technical Collaboration agreements, arrangements for technology transfer

if

any

and

Product: What is the final product? Does any by-product emerge during the process? What is the wastage?

Inputs/Utilities: Availability of raw materials, any supply chain management in place, long term relationships with suppliers? What is the source of power for the machines and their availability? Availability of administrative, skilled and un-skilled labour for the factory?
Disposal of Effluents: Have sufficient arrangements been made for the disposal of effluents? What measures are taken for prevention and control of pollution? Regulatory Clearances: Whether licences have been obtained from various government authorities like Department of Commerce & Industry (Licence), Approval

of Pollution Control Board, Power Licence, Registration under Labour & ESI Act, Importer Exporter Code (IEC), Sales Tax Registration, Income Tax PAN, etc. Project Implementation: PERT or CPM Chart if any and monitoring arrangements for implementation of the project. Commercial Viability: Market Survey for finding out the current demand and supply and the existence of a gap in the supply. To also include forecast of demand for the next 5 years. Any potential exists for export of the units products Availability of any substitutes, its price, import substitution Consumer preferences Pricing policies any government regulations?

Marketing & Sales strategies Advertisement and publicity measures to be undertaken Delivery Channels Arrangements for selling the product Life cycle of the product. Measures taken to improve the products, diversification, etc. Financial Viability:

Whether sufficient funds are available at affordable costs


Whether adequate profits/surplus would be generated to service the debts

At what point of sale will the unit achieve Break-Even


What would be the overall financial position of the borrower over various years (future).

Tools of Financial Analysis: 1. Comparative Statements and Common-size statements help in confirming that the projections are realistic and achievable over the project-period. 2. Funds Flow Analysis helps in matching the Sources of Fund and its Uses. 3. Break-even analysis helps in knowing the capacity/sales level at which the projects total costs equal total revenue. 4. Margin of Safety The sales in excess of Break Even sales This gives comfort levels about how much reduction in the projected sales would be OK for the firm to keep running, at least in the short term 5. Sensitivity Analysis A sensitivity analysis has to be made on the projections mainly on sales volume projected say

at 5% reduction and 10% reduction, what would happen to the total surplus and whether it would be sufficient to service the loan and other commitments. Similarly, a sensitivity analysis could be carried out on the basis of an increase of 5% or 10% on the total costs of production. 6. Ratio Analysis One of the most popular tools widely used in all Project Appraisals. Leverage Ratio Total Outside Liabilities/Tangible Net Worth (Total Outside Debts to Tangible Net Worth) a ratio of 2 is normally acceptable and in case of SME clients this could go up to 3 Interest Coverage Ratio Operating Profit/ Total Interest Commitments 1.5 to 2 is good Debt Service Coverage Ratio (DSCR) Most important for Term Loan (TL) appraisal. Ideal 1.5 to 2. It is calculated as follows:

Net Profit After Tax + Non-cash outflows + Interest on T L Interest on Term Loan + Annual Instalments of Term Loan
(Note: DSCR can be calculated for the term loan that is being assessed as a stand alone or for all term loan facilities enjoyed by the client. It is better and apt to calculate for all the term loans of the client.)

Average DSCR: We know that the term loans repayment is spread over a number of years (say 5-7 years). We would be under confusion as to in which year we should see whether the projects DSCR is 1.5 2. Invariably, in the first or second year, in many cases, it may be around 1. Then, should we reject the proposal. The answer to this is no and that our decision should be based on the Average DSCR. The average DSCR can be calculated in two ways: Taking the numerical total of DSCRs of each of the years in the project and dividing the same by number of years.

For example, if a project has DSCR of 1, 1.5, 2.5, 3.5 & 4.5 for 5 years, the average DSCR works out to 2.6 (13/5).
Under the second method take total of the cash flows available for servicing during the period of loan (numerator of the formula) and divide it by the total of the repayment commitments during the period of loan (denominator). This is correct method and many a time gives different number than the one given in the first method. Calculation of Pay Back period, Internal Rate of Return (IRR) or Net Present Value (NPV) would help in case of financing long term infra-structure projects. Security Coverage: (Primary). What is the coverage of security

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