Corporate Credit

There are three  stages of any new business, viz:-

Project Implementation

This is the period when no cash is generated from the operations. During this period the movement of money is only from bank to the borrower.

Gestation Period

The unit comes into operation and starts generating cash but takes time to reach the break-even point.  Interest is accrued during this period to include it into the cost of product.

No money movement takes place between the borrower and the bank.

Earning Profits

This is the stage when enough cash flows are expected to be generated from the business to meet the installments (including interest and principle).

The movement of money is from borrower to bank now.

What to look at while appraising Project Loan to a Corporate?

Credit Worthiness , which include:-

Willingness to Repay

Repayment capacity of the borrower

Personality of the borrower

Management Talents

Risk

Likelihood that the borrower will receive a return on an investment that is different from the return the borrower  expected to make otherwise.

Cash flows

A term loan is a loan where the installments are to be paid by earning from the assets  (not from selling the assets – though bank can always do so)

What is Term Loan?

Term loan is financial accommodation provided by Banks/FIs for the purpose of acquisition of fixed assets by a borrower, the repayment of which is spread over a number of years

Components of  Term Loan Appraisal

Economical Appraisal

The demand of the product is evaluated. There should be a demand-supply gap, price advantage, timing and other such benefits.

The prime attention is that the project should survive the three stages of the business (implementation, gestation and operations).

Commercial Appraisal

Price/Quality of the Product and its Marketability for present/future

Extent of competition in the market

List of Principal Customers and any selling arrangement made

Particulars of Government control if any on price, distribution etc

Export possibilities and availability of export incentive if any

Management Appraisal

It Is the art of exploring -

Integrity, Capacity, Experience, Involvement of Entrepreneur/Management Team -

Through Interview/ Market Enquiry/ Visit to the Places of Borrower

Technical Appraisal

Availability of inputs at reasonable cost

Consistency & soundness of engineering design

Economics of scale in production

Appropriate technology & alternative ways of production.

Advantageous location of the project

Maintenance & Repairs

Provision for expansion

Anti-pollution laws

Financial Appraisal

This is the ultimate part of the evaluation process where all the things are summed up in the terms of money.

The cash flows are estimated, the installments periods are fixed, the interest rate is computed and the project is made bankable.

Financial Appraisal- in detail:-

Financial Appraisal is carried out through the following tools:-

Ratio Analysis

It’s a tool which enables the banker or lender to arrive at the following factors :

Liquidity position

Profitability

Solvency

Financial Stability

Quality of the Management

Safety & Security of the loans & advances to be or already been provided

Payback Period

 The Payback period is one of the most popular and widely recognized traditional methods of evaluating investment proposals. It is defined as the number of years required to recover the original cash outlay invested in a project.

Debt Service Coverage Ratio (DSCR)

DSCR is used to evaluate the repayment capacity in respect to payment of principal and interest in a definite time schedule on the basis of cash flow generated from the project.

Break Even Point Analysis

BEP is said to be no profit-no loss point in respect of goods manufactured or goods sold

At BEP, Total revenue = Total cost

# Total cost = Fixed cost + Variable cost