I have in my earlier postings covered the topic of Bank Loan Appraisal process. I have compiled here certain important financial tools being used in appraising the admissibility of loan. The tools used in the appraisal process for start-up projects, for existing organizations, for Term Loan and for Working Capital are not all the same. There are some additional tools not covered herein.
The common requirement for an entrepreneur is availing loan / financial support from Government or Banks. Mostly the government support is extended in the form of capital subsidy, interest subsidy, marketing support, technology support, skill development, credit guarantee and more as could be seen from http://www.dcmsme.gov.in/schemes/sidoscheme.htm.
However, all the financial support is routed through banks. Term loans for CAPEX are released in the name of machinery & equipment suppliers while the Working capital is made available in the form of OCC. The sanction could be through fund based or non-fund based or mixed.
Every prospective borrower of loan would get a common question as to whether bank will sanction loan for the project. Even the regulating authority of respective government schemes would not be able to confirm about the prospects of loan sanction.
I have attempted to draw important points evaluated by banks in the sanction of loan. Mind these are not exclusive. If you feel you have answers for most of the things, you will sure get loan from the Bank. After all, Banks are always keen to lend money where they find business i.e. confidence and assurance that the borrower will not default in loan repayment. Hence, it is the duty of borrower to satisfy the business requirement of banks so that he become eligible to draw deserved financial support. Once a healthy relation is formed with a banker, we can always be sure about drawing further support in the name of extended Term Loan or extended Working Capital or any other mode.
Loan sanction is a cumbersome process. Depending upon the availability and submission of various data by the borrower, it would take a minimum of 4 weeks time for a new loan application for a start-up project.
One of the most important aspects of starting any business is determining the project cost. The profitability performance of entire project is based on the accurate calculation of project cost and savings in the very project cost. Because, the project cost is the base to determine as to how much money the owner should invest and how much he should mobilize in the form of loan or co-promoter’s equity. This element is addressed as debt and equity ratio. Once we have clear understanding of debt & equity, we will be able to draw the cost of capital i.e. the interest rate for own equity and loan amount. High interest rate and longer amortization tenure will cause considerable cash outflow for the loan tenure. If the business is a slow revenue model, it would cause strain on the short-term capital. Besides, it could also contribute in the late break-even, negative DSCR, lesser IRR and even negative NPV.
How to fix project cost? What are the determining heads of expenses in the project cost? How to optimize project cost? What should be the right investment for the project?
Any given project at the outset will have following expenses before the project goes into commercial stage.
- Cost of infrastructure
- Deposits towards buildings or franchisee
- Legal & Professional fee
- Costs towards obtaining licenses & permits
- Setup and installation costs
- Pre-operative expenses
- Working capital
- Business launch and promotion
It is imperative that we save costs in each of the above items. For example:
- It is possible to save cost on the infrastructure by exploring phase-wise deployment of infrastructure, leasing of buildings in place of construction of own building, outsourcing services like packaging, maintenance, logistics, or even certain amount of product spares.
- If it is franchisee based business, it is possible to negotiate for deferred payment of franchisee deposits or fee or revenue based sharing totally avoiding the franchisee deposit.
- It is important to identify a right consultant who is economical and who could also advise on the total economics of the project.
- Licenses or permits which are not vital for initial project commencement could be deferred based on the dependent activity phase.
- Procurement of equipment, machinery, software, hardware or any such things should be carefully decided where the procurement cost absorbs the setup, installation and annual maintenance. With respect to Software, it is very important to practically assess the licensing requirement. Procurement as a whole is a professional job and it should be done by an experienced team member who could bring in savings in terms of taxes, delivery time, and value added benefits.
- The other major savings could be in pre-operative and launching expenses. This is always contextual and depending upon the type of business, the amount of PR or exposure required to the project, there could be considerable savings against this head.
- The contingency amount should be judiciously decided so that we don’t block the borrowings while we end up paying the interest costs for the unused amount.
Besides the above, the very major saving is effective management of project schedules and production schedules. Delayed project schedule would always result in the budget overheads. This is a common phenomenon in the government projects.
The right investment for a project is always contextual and the major consideration should be early recovery where-after one could always bring in more investments for expansion or capacity upgradation.
The following are the details of financial assistance available under PMEGP.
|Industry||Eligible loan||Promoters equity||Subsidy||Loan given by||Security|
|Manufacturing||INR 25.00 lakhs||General Category:
Special (including SC / ST /
Urban : 15%
Special (including SC / ST /
Urban : 25%
|Any Public Sector Bank or Private Scheduled Bank at their discretion based on the project viability.||Nil up to INR 5.00 lakhs
Covered under CGF above INR 5.00 lakh and up to INR 1.00 crore.
Under CGF no security required up to INR 1.00 crore.
Banks at time might demand depending upon the merits and demerits of the project.
|Service||INR 10.00 lakhs|
Required enclosures along with application:
- Project report of the activity
- Attested copy of OBC / ST / Minority / PHC / Ex-servicemen certificate.
- Attested copy of the educational qualification, experience, training certificate if any.
- Attested copy of EDP training [for a minimum period of 2 weeks] certificate, if any.
- Affidavit in bond paper costing Rs. 15/-
- Consent letter from Bank, if available.
- No objection from Gram Panchayat, if applicable
- All the loan applications received under PMEGP scheme will be placed before the District Level Task Force Committee [DTFC] under the Chairmanship of the Deputy Commissioner of the concerned District from time to time.
- The DTFC is conducts personal interview of the applicants and recommends the deserving cases on the basis of the viability of the project to the concerned banks.
- The recommended cases will be sponsored to the concerned banks for consideration of finance under the captioned scheme.
- The bank will sanction 90% of the project cost in case of General category and 95% of the project cost in case of Special category of beneficiary / institution and recommend their cases to the KVIB for arranging 2 weeks duration compulsory EDP training.
- KVIB will arrange EDP training. Once the beneficiary undergone EDP training, the bank will disburse full amount suitably for setting up of project.
- Once the 1st installment of bank finance is released, the bank will submit margin money claim in the prescribed proforma [which is 25% of the project cost in case of General category and 35% of the project cost in case of Special category] to the designated Nodal Banks.
- Once the margin money is released in favor of the loanee, it should be kept in the term deposit receipt of 3 years at branch level in the name of the beneficiary / institution. During this period, no interest will be paid on the TDR and no interest will be charged on loan to the corresponding amount of the TDR.
- The margin money component [back ended subsidy] will be credited to the borrowers loan account after 3 years on the basis of 100% Physical Verification Report of the said unit.
- 100% Physical Verification of the actual establishment and working status of the units, setup under PMEGP will be done by KVIC.
May also check for Credit Guarantee Fund scheme details in the other posting.