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You are in: Home corporatebanking term loan

Any credit facility which is stipulated to be repaid in fixed instalments over a period of not less than 3 years is to be classified as Term Loans.Loans where the repayment period is less than 3 years are to be classified as Demand Loans.

• Term loans / Demand Loans are usually granted to various types of borrowers for acquiring fixed assets like land, buildings, plant & machinery, equipments, vehicles etc.
• In the case of individuals and firms, term loans / demand loans are granted usually for purchase of vehicles, construction of a house/flat, purchase of equipments, etc.
  
• In the case of industrial undertakings, term loans are granted to meet the capital expenditure in the form of acquiring land, building, plant & machinery etc. either for setting up a new unit, expansion or diversification of an existing unit. Such loans are also considered for modernisation or renovation programmes of the existing industrial undertakings for improving the quality of the products manufactured, reducing the cost of production or otherwise improving the efficiency and profitability of the organisation.

• The term loan appraisal and processing of the application requires very careful scrutiny in view of the    complexities involved and as such branches should devote sufficient attention to all the aspects covering such an appraisal.
• The essence of the term loan appraisal is to assess the ability of the unit to repay the loan and interest thereon, from surplus generated by utilising the fixed assets acquired. For this purpose, all the techniques of project appraisal should be employed in all cases, irrespective of loan amount or whether it is considered for the purpose of one item or for setting up entirely a new unit.

• The usual repayment period of a term loan varies from 3 years to 7 years. In case of capital intensive projects, it may be higher.
  
• The repayment period of a term loan is, therefore, fixed taking into account the DSCR and the IRR.
  
• In cases, where DSCR is more than 2, branches may consider reducing the repayment period suitably after considering all aspects.
  Basically, all term loans should have a fixed repayment schedule on a monthly basis.

Moratorium period is the initial repayment holiday allowed to the borrower i.e. the time gap allowed between the date of disbursement and the due date of first instalment. The due date should be so fixed that repayment does not fall during the period when the unit is incurring cash loss or cash accruals are very poor.

• Normally interest on term loan is to be paid with monthly rests from the date of disbursement.
  
• However, in the case of new projects under implementation and in other deserving cases, moratorium on payment of interest may be considered depending upon cash generating capacity of the unit.

• The term loan should be secured by way of hypothecation/mortgage of fixed assets for which the loan is sanctioned.
  
• Besides, the bank should normally be further secured by first charge on the assets of the firm by way of hypothecation/mortgage of other fixed assets and hypothecation of movable assets.
  
• Where the existing block of fixed assets/movable machineries are already charged to other banks or financial institutions, their specific permission should be obtained for creating a charge in bank's favour on any specific item of machinery etc. financed by us in the absence of a pari-passu charge.
  
• Wherever possible additional collateral securities in the form of equitable mortgage of landed property in the personal name of directors / guarantors should be obtained.
  
• Before stipulating such securities, the bank should ensure that the consent of the property holder has been obtained and that the title of the property is clear and marketable.
  
• Branches should maintain Plant & Machinery Register (borrower- wise) for recording the following particulars of machineries charged to us and also to facilitate physical verification.
  (f1) Date of purchase
  (f2) Details of machinery with identification numbers/marks
  (f3) Name of the supplier with address
  (f4) Invoice number and purchase price
  (f5) Depreciated value of machinery indicating the basis of calculating depreciation
  (f6) Condition of machinery (new or second hand)
  
• The valuation should be based on the acquisition price. Depreciation should be charged periodically as per any of the approved methods and should be consistent. The method followed should be mentioned in the register. In no case should the borrower be allowed to revalue the machinery or any other fixed assets to provide the requisite margin. In the case of second hand machinery, valuation should be done by Bank's technical officers or approved valuers and the report be retained on record. Any addition or sale of machinery should properly be recorded in the above register.