Page 27 - Banking Fiannce March 2018

ARTICLE

Project, the costs are generally bifurcated in the following big Projects are never completed within the scheduled date
major heads. as such it invariably results in time overrun. When time
Y Land and Buildings overrun happens, it has to result by default in cost overrun.
Y Plant and Machinery As a limited recourse, these type of unexpected expenses
are to be financed by the promoters for which bankers
Y Furniture and Fixtures
always take a declaration to this effect.
Y Preliminary Expenses
Y Pre-Operative Expenses 2. Subordination of debts other than bank's
Y Consultancy Costs. Term Loans:
The usual bifurcation of sources or means side of the project
Y Contingency
can be divided into three main categories:
Y Interest During Construction
Y Promoter's Capital
Y Margin for Working Capital. Y Bank's Term Loan
Y Other secured and unsecured loans
When it comes to cost, it is segregated into Hard and Soft
Costs. The difference of these lies in the nature of security
Many business entities which are applying for the Term Loan
that is available for our security. It can be said as availability
are usually in the form corporate concerns. It may be
of tangible security as Prime Security to the bank's Term
Loan. The first three expenses/investments definitely create private, closely held private, listed private or public
enterprises. There are some business activities where the
an asset which is tangible. The assets created by other types
entire capital cannot be brought in as shares. With PPP
of expenses are not generally creating any tangible assets
as security for the banks. module, the Special Purpose Vehicle (SPV) clearly states that
once the project is over and amount recovered then it will
In case of pre-operative expenses, the companies act permits be dismantled at the time handing over the project assets
certain expenses to be capitalized and other than that the to the appropriate government authorities. In specific cases
rest of the expenses are not creating any tangible security. like this, the capital is always brought in by minimum capital
In case of working capital all the security available for the and rest infused as unsecured loans.
bank finance is current assets which by nature of definition
are convertible into cash at short notice. In case of Term The most important factor the banker has to consider is the
Loan the security is the main concern of the banks when it prioritization of the repayments. As long as the bank's dues
comes to tangibility of assets. are pending, the promoter should not be allowed to
withdraw his loan. This can be taken care by stipulating
Since these soft costs do not generate any tangible assets conditions like "Dividend" should not be declared without
normally as a banker we exclude these items from the point prior permission in the initial periods. The best option to
of financing them. This is the prime reason why the margin check early removal of profits from the system towards
in the project is always higher the stipulated margin, as these repayment of unsecured loans is to subordinate all
soft costs are to be fully borne by the promoters. The credit unsecured loans from friends, relatives, directors or any
processing officer should not fall in this trap like asset other source to our bank's term loan. There cannot be any
financing. In asset financing we normally see the cost and repayment of interest and/or repayment of unsecured loans
prescribe the margin for the entire costs. when there is a due for bank's interest and/or installments.

Normally in big projects this will be restricted to a spread of There is also another drawback played by the borrowers in
3 to 5% with Interest during Construction at the actuals. In projecting these unsecured loans as Quasi Capital. In case
small projects like Start Up India, the guidelines are in place of industries like Commercial Real Estate where the
with a maximum of 25% of the project cost towards these borrower exits the scene once the project is over this
soft costs. Except for few corporate houses, normally the request is understandable and acceptable. This request as

BANKING FINANCE | MARCH | 2018 | 27