A PRESENTATION ON TERM LOAN

SUBMITTED BY 1 Prashant 2 Sidharth 3 Rounak4 Yogesh5 Rahul6 John Sachin7 Rakshith

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CONTENTS INTRODUCTION

INDIAN SCENAIRO OF TERM LOAN

CHARACTERISTICS OF TERM LOANS

ADVANTAGES & DISAVANTAGES OF TERM LOANS

THE TERM LOAN CAN BE AVAILED

BENEFITS OF TERM LOAN

SPECIALIZED FINANCIAL INSTITUTIONS IN INDIA

PURPOSE OF TERM LOAN

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INTRODUCTION

Debt capital of a company may consist of either debentures or bonds which are issued to public for subscription or term loans which are obtained directly from the banks and financial institution. Term loans are sources of long term debt. In India, they are generally obtained for financing large expansion, modernisation or diversification projects. Therefore, this method of financing is also called project financing.

INTRODUCTION

The repayment of the loans and facilities is normally fixed on case to case basis depending on projected cash flow of the borrower.

Term loans are a good way of quickly increasing capital in order to raise a business’ supply capabilities or range.

One thing to consider when getting a term loan is whether the interest rate is fixed or floating

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Indian scenario of Term loan

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1. India has 2 tire structure of financial institution comprised of A.Indian financial institution -Term lending -specialize institution - Invest institution B. State level institution -corporations providing -other term lending facilities

2. Since independence there are not that many changes

3. Few operation & restrictions.

4. After liberalization.

5. Change must be done because of default in repayment.

Indian scenario of term loan

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SME Short Term Loans

PURPOSE: To meet temporary shortfall / mismatch in liquidity, for meeting genuine business

requirements only.ENTERPRISES GROUP: Micro, Small & Medium Enterprises as per Regulatory definition and all other

entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores.

ELIGIBILITY CRITERIA Satisfactory credit rating for the last three years Latest Balance Sheet etc. should be available. Satisfactory financial performance in terms of sales / turnover and profits. Negative

variance, if any, should not be more than 10%. Satisfactory dealings with the Bank for at least three years.

Example of term loan in India (Bank of Baroda)

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LOAN AMOUNT: Upto 25% of the existing Fund based Working capital limits (depending on the Credit Rating),

subject to a minimum of Rs. 10 Lakhs and maximum of Rs. 250 Lakhs.PERIOD: Not exceeding 180 days – minimum 90 days

SECURITY First charge / Equitable mortgage of fixed assets of the company / firm or extension of existing

first charge / equitable mortgage of fixed assets, ensuring that there is a minimum asset cover of 1.25.

Extension of Charge on current assets for the additional facility ensuring that adequate drawing power is available.

Extension of all existing guarantees of Directors / Third party guarantees to cover the additional facility.

RATE OF INTEREST: As applicable to existing working capital facilities. PROCESSING CHARGES: 25% concession in applicable charges.

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CHARACTERISTICS OF TERM LOANS

Time to maturity

Interest.

Security

Repayment Schedule.

CHARACTERISTICS OF TERM LOANS

Banks and specially created financial institutions are main source of term loans in India. FIs provide term loans generally for a period of 6 to 10 years

Time to maturity

The general rate of interest on term loans in India is above 14 or 15 %. For companies undertaking their projects in specified backward areas, loans at concessional interest rate (usually 1 and half % lower)

Interest

Term loans are always secured. Specifically the assets acquired using term loan funds secure them. This is called Primary security. The company’s current and future assets also generally secure term loans. This is called secondary security or collateral security. Also the lender may create either fixed or floating charge against the firm’s assets.

Security

The principal amount of a term loan is generally repayable over a period of 4 to 7 years. Typically, term loans provided by financial institutions are repayable in equal semi-annual instalments or equal quarterly instalments

The interest burden declines over time, whereas the principal repayment remains constant. This means that the total debt servicing burden (consisting of interest payment and principal repayment) decline sover time. This pattern of debt servicing burden, typical in India, differs from the pattern obtaining in western economies where debt is typically amortized in equal periodic instalments

Repayment Schedule

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Suppose a company negotiates a RS 3 crore loan for 8 yrs. from FIs. The interest rate will be 14 % annum on the outstanding balance. The principal will be repaid in 8 equal yr. - end instalments . What is the payment schedule?

Solution –the payment schedule will include both interest and principal payment. Interest will be calculated on the outstanding balance on loan. Note that Rs 3 crore was borrowed in the beginning of 1st yr. therefore, the interest charges at the end of the yr. will be

1. Interest is 14% 0.14x3=Rs 0.42 crore.

2 Instalments 8 yrs.3/8= Rs 0.375 crore. Thus, loan balance at the end of 1st yrs. Will be 3.0-0.375= Rs 2.62

QUESTION

Year (1) Loan in the beginning (2) Principal repayment (3) Interest(4) Loan payment(5) loan at the end(6)

1 30000 3750 4200 7950 262502 26250 3750 3675 7425 225003 22500 3750 3150 6900 187504 18750 3750 2625 6375 150005 15000 3750 2100 5850 112506 11250 3750 1575 5325 75007 7500 3750 1050 4800 37508 3750 3750 525 4275 0

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Advantages & Disadvantages

of Term Loans

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Advantages & Disadvantages of Term Loans

Term loans provide you with the money you need, but they have some risks.Banks routinely offer various types of loans that cover the cost of whatever a person or business needs. One type of loan a company or individual may consider is a term loan. A term loan is a loan in which the borrower pays interest only for a set period. These loans have both advantages and disadvantages that the lender needs to weigh before signing any paperwork and committing to the loan agreement.

FlexibilityTerm loans are more flexible when compared to other types of loans. With a term loan, the borrower doesn't have to make a payment toward both the interest and the principal balance. He can do so if it is financially feasible, but it isn't required. Thus, a term loan better accommodates changes to a person's budget due to unexpected life or business changes.

InterestTerm loans usually have a fixed interest rate, but this is not always the case and depends on the type of the bank. If a term loan does have a fixed interest rate, then the term loan is extremely beneficial to the borrower because it lets the borrower predict the payment they'll need to make. This is good for budgeting. Term loans that have unfixed interest rates still can be advantageous, but they are riskier because the borrower has no real control over how much interest they will pay in the future. This can translate into more money paid toward the loan in the long run.

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Penalty AgreementsEugene F. Brigham and Louis C. Gapenski, authors of "Test Bank: Financial Management: Theory and Practice," claim that the agreements for term loans often contain penalty clauses. These clauses give the issuing bank the right to issue additional charges if the borrower is late or deficient in payments. Since people who take out term loans generally do so because they cannot afford a regular loan, this is not desirable.

PredictabilityA term loan specifies when the interest on a loan will be completely paid. For example, a five-year term loan will have the interest paid predictably in five years. This is different from a regular loan in which accumulated interest may draw out the payoff date. This can be extremely beneficial for budgeting and receipt of future loans, since an individual has some proof that her debt will be repaid within a given period.

Assumption of AssetsTerm loans work by having the principal balance come due in full once the interest is completely paid. Therefore, people generally use a term loan to get the capital they need to generate additional funds that will pay off the loan. However, that a borrower's venture will succeed and that they can generate the principal amount is not guaranteed. If a person cannot generate the principal with the loan funds, then they have to figure out how to repay a large amount of money very quickly.

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The term Loan can be

availed to

Purchase of Fixed Assets

The term loan can be used to purchase fixed assets like premises, plant & machinery etc. The usage or performance of assets increases the business performance and hence the profit and makes the repayment of the loan easier. Even the term loan is settled the assets procured continue the productivity as asset life span is certainly longer than the term loan span. If a premises is purchased then the value of premises is always appreciated and in that case the business leverages higher value of premises which

further can be used to raise funds for business expansion or diversification.

The term Loan can be availed to

Mortgage Term Loan

A Term Loan can be availed by mortgaging a kind of security like home, office premises etc. This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The repayment of the principal amount and interest may be fixed in nature or it may vary over the course of repayment. The borrower may avail the revised rate of interest later and

may be benefited by saving in interest.

Switching of Higher Interest Loans

Many a time’s business owners opt to raise business loans at higher rate of interest. Such loans are processes and sanctioned faster but result in heavy burden interest. This interest payment becomes a fixed monthly expenses and starts leaking the profit. To arrest the growing rate of interest and penalties the higher interest loan can be switched to lower rate of interest loans or term loans. This way a borrower reduces the growing burden of interest on business loan and can save a considerable amount of money. It also benefits in maintaining the credit rating as the borrower closes one loan liability and opens another in form of term loan with lower rate of interest and easier repayment conditions

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BENEFITS OF

TERM LOAN

BENEFITS OF TERM LOAN

Fixed rate - Enjoy the peace of mind of fixed monthly repayments.

Variable rate - linked to base rates (Rates can rise or fall).

Repayment holidays - Improve your cash flow by making no loan repayments or repaying only interest for a fixed term after drawing down your loan.

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Specialized Financial Institutions in India

Specialized Financial Institutions in India

Commercial banks offer a wide range of corporate financial services that address the specific needs of private enterprise. They provide deposit, loan and trading facilities but will not service investment activities in financial markets.

The list of specialized financial institutions in India mainly includes, IFCI, IDBI Bank, Export-Import Bank Of India, Board for Industrial & Financial Reconstruction, Small Industries Development Bank of India, National Housing Bank. They are government undertakings established with a view to offer financial as well as technical assistance to the Indian industries.

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PURPOSE OF

TERM LOAN

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PURPOSE OF TERM LOAN

Term Loan is sanctioned for acquiring Fixed Assets like, land, building, Plant & Machineries, Electrical installations , computers, furniture-fixtures etc. in connection with a project undertaken by the proponent.

The various types of projects can be broadly classified as under : 1.New products , Diversification projects by existing units (Green Field) 2.Expansion of existing products (Brown Field) 3.Backward & forward integration projects 4.Replacement/ Modernization of equipment or buildings 5.Others viz., Research and development and miscellaneous items, such as the

expenditure of funds to comply with certain health standards or the acquisition of a pollution-control device.

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THANK YOU