Page 31 - Banking Fiannce March 2018

ARTICLE

Profit Rs. 2,00,000
To Depreciation Rs. 1,00,000 By Depreciation Rs. 1,00,000
Accumulated Surplus in P&L Rs. 2,40,000
Year 5 TL FA
Bank's Term Loan Rs. Nil Fixed Assets Rs. Nil
Promoters Margin Rs, Nil
Profit Rs. 2,40,000
To Depreciation Rs. 1,00,000 By Depreciation Rs. 1,00,000
Accumulated Surplus in P&L Rs. 3,80,000

Ideally the promoter's margin which he would have inducted by way of Unsecured Loan is reducing in sync with the bank's
loan. At the end of the five years he can replace the machinery with the accumulated surplus in P&L. If the borrower
wants to siphon off the money at a rate faster than the repayment of bank, of course through legal book entries, then let
us see how it is going to change in the above equation.

Year 0 TL FA
Bank's Term Loan Rs.4,00,000 Fixed Assets Rs. 5,00,000
Promoters Margin Rs.1,00,000
Year 1 TL FA
Bank's Term Loan Rs.3,20,000 Fixed Assets Rs. 3,80,000

Promoters Margin Rs.60,000
Profit Rs.1,20,000
To Depreciation Rs.1,20,000 By Depreciation Rs. 1,20,000
Surplus in P&L Rs.0.00
Year 2 TL FA
Bank's Term Loan Rs.2,40,000 Fixed Assets Rs. 2,60,000
Promoters Margin Rs.20,000
Profit Rs.1,60,000
To Depreciation Rs.1,20,000 By Depreciation Rs. 1,20,000
Accumulated Surplus in P&L Rs.40,000
Year 3 TL FA
Bank's Term Loan Rs.1,60,000 Fixed Assets Rs. 1,40,000
Promoters Margin Rs.-20,000

Profit Rs.1,60,000
To Depreciation Rs.1,20,000 By Depreciation Rs. 1,20,000
Accumulated Surplus in P&L Rs.80,000

Now exactly at the end of three years, he would have drawn Rs.1,20,000 against his margin of Rs.1,00,000 whereas the
term loan outstanding balance will be Rs.1,60,000. This is only an example how a simple legal book entry can be used
either to repay his margin faster or his other term loan outstanding faster, leaving the bank in lurch. Exactly this is where

BANKING FINANCE | MARCH | 2018 | 31