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DOMESTIC TERM LOAN:
Loan syndication is the assistance rendered
merchant banks to get mainly term loans for
projects.
Obtained from single development financial
institute or syndicate.
Merchant banks and investment banker
provide assistance.
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Term Loans:
DFIs (Development Finance Institutions) or
development banks starting with IFCI (Industrial
finance corporation of India) and state finance
corporation
DFI play significant role in financing investment
activity.
Constitute 10% of total sources of funds
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Based on activities, FIs classified as under-
(1) Henn lendiva institutes which extends longterm finances (IFCI, IIBI, EXIM bank, TFCI)
(2) Re-finance institutes extends refinance
banks and NBFCs to lend agriculture, SSIsand housing sectors (NABARD, SIDBI, NHB)
(3) Investment Institutes which deply theirassets largely in marketable securities.
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Sources:
Country level-
Industrial development bank of India (IDBI)
Industrial credit and investment corporation
of India (ICICI)
Industrial Finance corporation of India(IFCI)
Small Industries Development bank of India
(SIDBI)
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State Level-
State finance Corporations (SFCs)
State Industrial Development Corporation
(SIDC)
Investment Institutes-
UTI
LIC
GIC
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Development Finance Institution (DFIs)
(1) Industrial development bank of India (IDBI)
Established in 1964 under Act of Parliament
Functions:
Provide credit and other facilities for
development of industry
Co-ordinating working of Institution
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Financing, Promoting and developing
industrial units and development of such
institutes.
Direct assistance to industries.
Paid up capital of IDBI was 653 crores in
1995 and outstanding portfolio is amounted46102 crores in 2001.
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(2) Industrial credit and investment corporation ofIndia (ICICI)
Established in 1955
Functions-
Encourage and assist industrial units Provide term loans in rupee and foreign currencies
Underwrites the issue of shares and debenture and
direct subscription of issues
Paid up capital of ICICI was 1135 crores in 2001 and
outstanding portfolio is amounted 46279 crores in
2001.
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(3) Industrial Finance corporation of India (IFCI)
Established in 1948
Functions-i) Project finance- financial assistance, expansion,
diversification & modernization
ii) Financial services- underwriting and directsubscription of equity, debenture
iii) Promotional services- guarantee of deferred
payment, foreign currency loans
Paid up capital of IFCI was 1088 crores in 2001 and
outstanding portfolio is amounted 16157 crores in
2001.
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Trends in Disbursements:
Private sector progressively reduced dependence onfinancial institutes.
Competition from Banking and capital market sector
Large companies reducing debt obligation of FIs. Liberalisation made banks to finance big projects
with available funds
Interest rate rose in the market in 1990s
Withdrawal of concessional finances available to FIs
Company started raising funds from equity and debt
capital market
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Raise funds through rights/ public issue with
premiums
GDR route also utilized. FIs raised funds from debt market at high cost
Financed funds to risky projects with high gestation
period
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State finance Corporations (SFCs)
Established under State financial Corporations
Act, 1951.
More than 20 state level corporations
Functions-
Financial assistance to small and medium
enterprises
Direct subscription to equity
Discounting of bills
Special capital and seed capital
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Small Industries Development bank of India (SIDBI)
Established in 1989
Apex bank for tiny and small scale industry
Function- Promotion, financing and development of industrial
concern in small scale units
Direct assistance
Participate with selected commercial banks in
financing to facilitate working capital requirement
Assistance for technology upgrdatation
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Shipping Credit and Investment Company of India
(SCICI)
Established in 1987 by ICICI
Focus on development of shipping, fishing projects
and allied businesses and provide all the assistancerequired
Function-
Financial assistance in rupee and foreign currency
Capital market support like underwriting, private
issue and offer for sale.
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Tourism Finance Corporation of India Ltd. (TFCI)
Established in 1989 by IFCI
Function-
Provides project loans, lease assistances, directsubscription to shares
Apart from conventional tourism projects like
accommodation and hospitality assistance also given
to non conventional projects like amusement parks,car, rental services, air taxi passenger facilities.
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Borrowing from Financial Institutes
Merchant banks help clients approach
financial institutions for term loans
Institute need to be approached based on
nature of industry, location of unit, size ofproject cost.
SFCs can sanction loans up to 1.5 crores, SIDCs
up to 90 lkhs, SIDBI up to 50 lkhs.
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Foreign currency loans
For imported machinery and equipment
Foreign currency loans are part of various
lines of credit like euro, dollar, yen for
financing projects based on imported plantand equipments
Loan covers CIF values of capital goods and
know how fees. Available in fixed and floating rate
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Floating rate linked to LIBOR
IDBI, IFCI and ICICI operate Exchange Rate
Administration Scheme (ERAS) to cover the
risk of foreign exchange rate fluctuation and
charge composite rates to borrower.
Merchant bankers should make appraisal ofthe project
Capital structure designed for equity and debt
on the basis of cost of capital and ability toyield the rate of return.
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Promoters Contribution
Promoters contribution depend on the size of
the project and size of the risk
Promoter contribution in form of share
capital, right issue, unsecured loan
If promoter not capable to contribute thefunds can avail the seed financing from SFCs
or any financial institutes to fill the gap
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Appraising Term loans
After determining promoters contribution,merchant banker analyse the amount of term
loan to be raised
Merchant banker also ensure project adheres theguidelines for financing of industry project.
Priority given to the projects related with the
developments like infrastructure, rural backward
areas, employment, export-import, technology
related.
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Project should not fall under the negative list
of industry like cigarettes, alcohol, beer.
Apply for loan with the FIs.
Market and technical analysis conducted
Financial analysis prepared and projected
income flow statements, cash flow statementsand balance sheet prepared
Working capital requirements are assessed
and then commercial banks approached
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Merchant bankers involvement required for
all due diligences.
After verification project would be eligible for
term loan and meeting fixed with FIs.
DFI consider the check list for term loan
Details of promoters back ground, technicalskills, relevant experience required
Along with loan application, MOA, AOA,
certificate of incorporation, latest annualreports, guarantors required
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Final structure of financing emerges after
considering promoter contribution, debt
equity ratios, debt services coverage ratio,margin money.
Financial institutes determines the debt on
basis of nature of project. The ability of debt repayment within time and
priority of the industry in government policy
also considered.
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Security margin
Term loan is sanctioned against the security of
fixed assets
Normally term loan is 75% of the value of
fixed assets and security margin is 25%
Term loans are granted subject to terms andconditions.
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After loan sanctioned requirements need to
be met
Before loan disbursed documents have to be
executed and submitted and stamp duty and
registration fees to be paid, promoter paid upcapital to be brought.
After all these requirement complieddisbursement provided.
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Loan Syndication:
Borrower approach several banks who providessyndicate loans, specifying the amount and tenor
Used for project financing
Lead bank assembles other banks whoparticipate in syndicates
Mandate to organise the loan is awarded by theborrower to bank
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After receiving mandate, placementmemorandum is prepared and submitted to
lead bank
All banks willing to be member of syndicateintend the amount, tenure and interest rates
Draft document prepared with all theconditions and signed by borrower
All administrative work carried by lead banker
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Total syndicate loan take care of project
finance and working capital requirements
Interest charges either fixed of floating.
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Syndicate document
Includes-
Provision on tenor, interest, repayment, pre-
payment, business health, compliance, tax
provisions, default clause, charge on assets.
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External term loan:
After gulf crisis and downgrade of Indianprojects had put limits on Indian industries onExternal commercial borrowings.
In 1991 in phase of liberalisation opened upthe external borrowing markets.
GOI restricted the limits and also keep closeeyes on debt.
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Guidelines for ECB
Cap on ECB to ensure that debt is kept at asustainable level
ECB specially for meeting the foreignexchange cost of projects.
Preference given to infrastructure and coresector.
Export oriented industry given priorities.
Commercial loan should be of minimum 5years.
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Choice of the currency loan and interest basisleft to borrower
Raise loans on their own strength withoutsovereign authority
Approval from RBI and FEMA is alsomandatory
Repayment and pre payment of loan as perthe GOI and RBI regulation.
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Procedure for approval:
Approval from Department of Economicaffairs
Application required to be submittedcontaining the approval from relevant
authorities, details of lenders. Approval letter from ECB division
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Pricing of Euro dollar loan
Annual charges LIBOR rate is followed plus spreads ( generally
0.125 to 1.5 %)
Praecipium ( lead manager fees), commitment
fees and annual agent fees