Page 28 - Banking Fiannce March 2018

ARTICLE

routine matter of fact cannot be accepted by banks. There repayment known as "Moratorium" period. If we talk of
are certain banks which have taken proactive and bankers they are comfortable with Non Discounted method
preemptive actions to check this menace. Due to practical of repayment through the dual formulae DSCR and Fixed
difficulties when the amount is introduced as unsecured loan, Assets Coverage Ratio (FACR).
then the distribution of profit should be equally towards
repayment of term loan interest and installments first, then For the borrower he is more bothered about his investment
to the owners. in the project and taking back the investment with
acceptable minimum profit after meeting all his costs.
In case of regular capital this can be declared as "dividend" Borrower's line of thinking is if I invest Rs.1 lakh in the project
and in the years where there is no profit is made then it is then how much future profit the investment decision gives
not possible to declare "Dividends". Taking this fundamental during the total yielding period of investment. In other
principle into account some bankers introduced that the words, if the borrowers invest Rs.1 lakh today in
unsecured loans to be treated as Quasi Capital should not Reinvestment Certificate and he gets Rs.2 lakhs as total
rank for any payment of interest. If this check is not in return over a period of 5 years he is approximately getting
place, then even without making any profit in the system, 12+% as interest.
they will be taking out their loan on priority basis in the
name of interest. To say the Rs.1 lakh today has become Rs.2 lakhs in the
course of 5 years and the value of Rs.2 lakhs in future is equal
3. Discounted and Non discounted methods of to today's investment of Rs.1 lakhs. The yield is 12+% .
Assuming the average project cost is working out to 13%
determining repayment or taking back the and all the future incomes discounted to today's value is
investment. marginally equal to the cost then the unit stands no chance
Any term loan by the banks is a long term investment of worth investing. Literally he discounts all the future
decision which is beyond doubt. In most of the cases the income alongwith the residual value of investment to
maximum contribution towards financial assistance in the today's investment.
form of term loan is done by the banks only. Rather it is
our investment is more in any project compared to the This is also called as Internal Rate of Return (IRR). If he is
owner's investment by way of capital and / or unsecured getting a decent return over and above the average project
loan. As such the psyche of bankers and borrowers are cost then there will be an inclination to invest in the project.
totally poles apart. Since the borrower is discounting the future income / profit
/ cash flows of the project to the present value of money,
The bankers are more bothered about the repayment of this is called as discounted value of investment.
their principal while interest is to be paid separately over
the years. The present money value concept is taken care Though the investment / loan for the project is by both
by fixing appropriate interest and tenor premium into borrower and banks, the determination of viability of the
interest cost. Resultantly the bankers prefer Non Discounted unit in terms of loan repayment / taking back the investment
method of repayment fixing. What is Non Discounted through discounted and non-discounted methods of
Method of repayment is we are taking the future cash flows repayment are serving varied interests of the parties
projected as it is without discounting it to its real value as involved. It is like chalk and cheese in comparison.
of today.
While the method of "Non Discounted" approach is for
Say for example if the borrower says he will be making Rs.5 bankers, where the return for the bank is determined by
lakhs profit 3 years down the line, we take that amount as the suitable interest cost including tenor premium,
it is. So for the bankers, Debt Service Coverage Ratio (DSCR) "Discounted" approach is for the borrower to determine
is the prime instrument in determining the repayment whether he is getting real return by discounting it to today's
period with appropriate repayment holiday for principal value of all future income.

28 | 2018 | MARCH | BANKING FINANCE