Page 47 - Banking Finance April 2022

ARTICLE

Particulars Cost Margin Term loan amount upon bank to bank. The intangible assets alike interest
(after deducting during construction, Preliminary and preoperative expenses
margin) are fully funded by promoter's own margin.
Land
C. Assessment of Profitability Projections
Building
The borrower has to submit the yearly sales & profitability
Plant & Machinery
projections for the entire repayment period. The sales
Furniture & Fixture projections, estimated growth in sales in each year should
Technical know- be justifiable and reasonable with supporting information
how fees like orders in hand/ expected market promotion activities
Interest during undertaken, capacity of the unit etc. The various items of
construction (IDC) expenditure should be reasonable and should not be
underestimated. The profitability projection should be
Preliminary& Pre-
operative expenses compared with similar units, industry average from various
data available through internet site and as per subscription
Contingencies
taken up by the bank like with CRISIL INDUSTRY RISK and
Margin for working ensure that the projected profitability is reasonable and
capital achievable.
Total Term
loan amount D. Assessment of the repayment capacity (Debt
Service Coverage Ratio)
The margin requirement may differ from bank to bank and The obligation to meet out the repayment for interest on
as per their schemes. The minimum margin required from term loan and installment on term loan is met out by a
borrower is 25 %. The margin for some items may be more borrower through the future cash flow generated from the
as per bank's policy like for building construction and for unit i.e. by net profit after tax. The repayment capacity is
purchase of second hand machineries.
assessed by calculating Debt Service Coverage Ratio (DSCR)
as under for the entire repayment period:
Sometimes margin for purchase of the land 100% depends

Sr. No. Particulars Year I Year II Year III Year IV Year V Year VI Year VII
1 Net Profit After Tax
2 Depreciation
3 Term loan Interest
4 Subtotal (A) = 1+2+3
5 Term loan installments
6 Term loan Interest
7 Subtotal (B) = 5+6
8 DSCR = (A/B)
9 Average DSCR Total of 5 / Total of 7

The minimum DSCR should be 1.2 in any of the year and average DSCR should be minimum 1.5, then the project is
economically viable.

Whenever the DSCR for the initial period is less than the minimum requirement of 1.2 and for remaining period is more
than the 1.2 then for initial period the installment amount of the term loan may be reduced and installment for rest of

BANKING FINANCE | APRIL | 2022 | 47