LENDING BY ALL INDIA FINANCIAL INSTITUTIONS ‑ COMMON FEATURES AND COORDINATION WITH BANKS
Industrial Development Bank of India (IDBI) is an apex body for
development financing in the country. Industrial Finance Corporation of India
(IFCI) is also actively involved in project appraisal and have developed some
common strategies in this regard. Other all India financial institutions namely
Life Insurance Corporation, Unit Trust of India and General Insurance
Corporation and its four subsidiaries who also participate in project financing
are generally lending through all India financial institutions and are not that
actively associated with the appraisal of the project as such. All India
Institutions generally invest in large projects while projects in small‑scale
or medium scale are left to be financed by state level institutions. Commercial
banks are also involved in term lending in consortium with financial
institutions. Financing of a project almost involves a definite pattern
depending upon the project cost as under.
Projects costing upto Rs. 5000 crores should normally be financed by
state level term lending institutions in consortium with commercial banks.
Indirect assistance by way of refinance from all India institutions to lending
institutions is, however, available in such projects.
Details are given in Chapter 5
SFCs and SIDCs look forward to refinance facilities from all India
institutions to augment their resources and as such confine their commitments
to the above level. There is, however, no bar on SFCs and SIDCs granting term
loan facilities in excess of the ceilings as stated above but in that case
refinance from all India institutions will not be available.
However, for existing companies all India institutions can provide
financial assistance even when the project cost is below Rs. 500 lacs.
As a part of Project Finance, the
Financial Institutions provide term loans in rupees and in foreign currency
repayable over 5‑ 10 years depending upon debt servicing capacity of the
borrower unit, and secured by a charge over the immovable/movable assets.
Credit evaluation constitutes the basis for sanction of assistance. The
financing can be done by institutions individually or jointly.
1. Commercial
banks may participate in granting term loans in projects where total project
cost does not exceed Rs. 500 lacs.
The banks in such cases would be eligible for refinance from all India
institutions.
2. In other
cases criterion is not linked to the cost of the project but to the quantum of
loan and the exact position is as
under:
(a) A bank
may provide term finance not exceeding its prudential exposure norm
as prescribed by Reserve Bank of India from time to time for individual
borrower/group of borrowers.
(b) Bank
and financial institutions may provide term finance to all projects including
infrastructure projects without any ceiling.
For lending to public sector units, banks are to ensure that such public
sector units are registered under the Companies Act, 1956, or are established
as corporation under relevant Acts. Such units should be made out of income to
be generated from the project and not out of subsidies, made available to them
by the Government.
As per guidelines of Reserve Bank of India the maximum exposure of a
bank for all its fund based and non fund based credit facilities, investments,
underwriting, investment in bonds and commercial paper and any other commitment
should not exceed 15 per cent of its capital funds to an individual borrower
including public sector undertakings and 40 per cent of its capital funds to
group of borrowers. The prudential exposure limit of banks to the borrowers of
a group can exceed by 10% if the additional credit is on account of
infrastructure projects (i.e. power, telecommunication, roads and transports).
Further, w.e.f. April 1, 2003, the exposure limit of banks to single borrowers
can exceed by 5% if the additional credit is on account of infrastructure
projects. These limits are referred to as prudential exposure norms. For
arriving at exposure limit, the sanctioned limits or outstanding, whichever is
higher, shall be reckoned. It may, however, be noted that while calculating
exposure, the non fund based facilities are to be taken at 100% of the
sanctioned limit or outstanding whichever is higher. The concept of capital
fun& has been broadened to represent total capital i.e., Tier I and Tier 11
capital (same as total capital defined under capital adequacy standards) for
the determination of exposure ceiling by banks. To illustrate this point let us
consider the following example:
Capital funds of the
bank Rs.250
crores
Exposure to a borrower Limits sanctioned Outstandings
(Rs.
In crores) (Rs. In
crores)
Term loan 15.00 10.00
CC Hp. (incl. WCTL) 05.00 03.00
L/C 16.00 10.00
_____________ ___________
Total 36.00 23.00
_______________ ___________
Maximum exposure as
per prudential norms for an individual borrower
including public sector undertakings @ 15% of
Capital funds Rs.
37.50 crores
Exposure on the basis
of limits sanctioned/ outstanding whichever is higher:
(i) Fund Based TL
– 15.00
CC hyp. 5.00 Rs. 20.00 crores
(ii) Non Fund Based 100% of L/C
Limit Rs.
16.00 crores
i.e. of Rs 16.00 crores or
crores whichever is higher
____________
Total Rs. 36.00
crores
_____________
Maximum exposure for this bank for borrowers under the same group should
not exceed Rs. 100 crores (Rs. 125 crores for infrastructure projects relating
to power, telecommunications, roads and ports).
Notes : The exposure limits
are applicable to lending under consortium arrangements, wherever formalised.
1.
Rehabilitation
of Sick/Weak Industrial Units: The above ceilings on single/group exposure limits are not applicable to
existing/additional credit facilities (including funding of interest and
irregularities) granted to weak/sick industrial units under rehabilitation
packages.
2.
Food
credit :
Borrowers to whom limits are allocated directly by the Reserve Bank, for food
credit, are exempt from the ceiling.
3.
Loans
against bank's own term deposits: Loans and advances granted against the security
of bank's own term deposits are excluded from the purview of the exposure
ceiling.
Exposure includes credit exposure (funded and non funded credit limits)
and investment exposure (underwriting and similar commitments) as well as
certain types of investments in companies.
(i) Credit exposure ‑ It comprises of the following elements
·
all types of funded and non‑funded credit
limits.
·
facilities extended by way of equipment
leasing, hire purchase finance and factoring services.
·
advances against shares, debentures, bonds,
units of mutual funds, etc. to stock brokers, market makers.
·
bank loan for financing promoters'
contributions bridge loans against equity flows/issues.
·
financing of Initial Public Offerings (IPOs).
(ii) Investments exposure ‑ It comprises of the following
elements
·
investments in shares and debentures of
companies and bonds issued by PSUs acquired through direct subscription,
devolvement arising out of underwriting obligations or purchases from secondary
markets or on conversion of debt into equity.
·
investments in Commercial Papers (CPs) issued
by Corporate Bodies/PSUs.
·
investment made by the banks in bonds and
debentures of corporate which are guaranteed by a PFI will be treated as an
exposure by the bank on the PFI and not on the corporate.
(i) The
concept of 'Group' and the task of,' identification of the borrowers belonging
to specific industrial. groups is left to the perception of the banks/financial
institutions. Banks/financial institutions are generally aware of' the basic
constitution of their clientele for the purpose of regulating their exposure to risk assets. The group to which
a particular borrowing unit belongs, may, therefore, be decided by them on the
basis of the relevant information available with them, the guiding principle
being commonality of management and effective control.
(ii) For
identifying the group to which a company registered under section 26(2) of MRTP
Act, 1969 belongs, a reference may be made to the Industrial House‑wise
list of companies registered under the Act.
(iii) In
respect of borrowers not covered by the MRTP Act, the group affiliation may be
decided by banks on the basis of the principle explained above.
(iv) In
the case of a split in the group, if the split is formalised, the splinter
groups will be regarded as separate groups. If banks and financial institutions
have doubts about the bona fides of the split, a reference may be made
to RBI for its final view in the matter to preclude the possibility of a split
being engineered in order to prevent coverage under the Group Approach.
Specific Sectors ‑ Apart from limiting the exposures to individual
or Group of borrowers, as indicated above, the banks may also consider fixing
internal limits for aggregate commitments to specific sectors e.g., textiles,
jute, tea. etc. so that the exposures are evenly spread over various sectors.
These limits could he fixed by the banks having regard to tile performance of
different sectors and the risks perceived. The limits so fixed may be reviewed
periodically and revised, as necessary.
Exposure to Real Estate:
(i)
Banks should frame comprehensive prudential
norms relating to the ceiling on the total amount of' real estate loans,
single/ group exposure limits for such loans, margins, security, repayment
schedule and availability of supplementary finance and the policy should be
approved by the bank's Board.
(ii)
While framing the bank's policy the guidelines
issued by the Reserve Bank should he taken into account. Banks should ensure
that the bank credit is used for productive construction activity and riot for
activity connected with speculation in real estate.
1.
Banks have to limit their commitment by way of
unsecured guarantees in such a manner that 20 per cent of the bank's
outstanding unsecured guarantees plus the total of outstanding unsecured
advances do not exceed 15 per cent of total outstanding advances. Guarantees
counter guaranteed by another bank need not be taken into account for the
purpose of the norm.
2.
For the purpose of confirming to the above
norm, guarantees covered by counter‑guarantees of the Central Government
and the State Governments, public sector financial institutions and insurance
companies will be regarded as secured guarantees.
3.
However, deferred payment guarantees should be
backed by adequate tangible security or by counter guarantees of the Central
Government or the State Governments or public sector financial institutions, or
by counter‑guarantees of insurance companies or other banks, provided the
counter‑guarantees of insurance companies or other banks, are themselves
backed by adequate tangible security. Where the counter guarantees by
commercial banks are backed by adequate tangible securities, then all guarantees,
including deferred payment guarantees, will be treated as secured guarantees.
4.
In exceptional cases, the banks may give
deferred payment guarantees on an unsecured basis for modest amounts to first class customers who
have entered into deferred payment arrangements in consonance with Government
policy. But such unsecured guarantees should be accommodated within the maximum
ceiling limits.
Similar credit exposure norms as are applicable to banks shall also
apply to term lending institutions i.e. exposure ceiling for a single borrower
will he limited to 15% of capital funds and for a group of borrowers it shall
be 40%. In the case of financing for infrastructure projects, the limit for a
single borrower shall be extendable to 20% and for a group shall be extendable
to 50% of capital funds.
PROPOSAL FOR ASSISTANCE
All India financial institutions keep a very close liaison among
themselves on project appraisal and have evolved a common procedure to a large
extent. Assistance under normal project finance scheme is extended by these
institutions generally on the same terms and conditions. Procedure in respect
of Project Report, the appraisal and disbursement procedure and documentation
remain almost same under the normal scheme. The features that are common to all
the lending institutions are discussed hereunder followed by discussion on
special schemes of individual institutions in the subsequent chapters.
The borrower has to submit the proposal along with project report to the
term lending institutions. The salient features of the proposal and project
report have been discussed in Chapter 4. The papers/documents, to be sent along
with the proposal have also been listed therein.
The proposal shall be considered complete only if full information is
provided and necessary letter of intent/industrial licence, foreign
collaboration approval etc. have already been obtained and processing shall he
taken up only when the proposal is complete.
Debt equity ratio is a measure of resources that can he mobilised by the
promoter (this also helps to reduce dependence on borrowed funds which ma have
an adverse effect on profitability due to heavy interest cost in the initial
stages) with his own efforts and financial institutions lay a great emphasis an
try to keep it to the minimum level for the projects being financed by then
Broad norms for the minimum acceptable level of debt equity ratio have also
been specified and the project may be approved within these norms.
There is, however, a difference of opinion as to what constitutes a debt
an equity for the purpose of
calculation of this important ratio. The mo acceptable principles applied for
calculation of debt and equity are specified below:
Equity is sum total of the following terms:
Share capital
·
Ordinary paid‑up share capital.
·
Irredeemable preference share capital.
·
Redeemable preference capital provided
redemption is due after the years.
·
Premium on issue of shares.
Reserves And Surplus
·
Free reserves including any surplus in profit
and loss account
·
However, any accumulated losses, preliminary
expenses not written off, arrears of unabsorbed depreciation and any intangible
assets are to be deducted from free reserves. Unrealisable investments are also
to be deducted from free reserves.
·
Development rebate reserve.
·
Investment allowance reserve.
·
Debenture redemption reserve.
·
Dividend equalisation reserve.
Any such other reserve
shall also be taken as free reserve.
·
Amount of Central/State subsidy.
·
Long term unsecured interest free loans from
Government or Government agencies such as sales‑tax loan etc.
·
Long term unsecured interest free loans from promoters
provided such loans are subordinated to the loans from financial institutions.
·
Non refundable deposits in the case of co‑operatives.
Note: Assistance provided by Risk Capital and Technology Finance
Corporation Limited (RCTC) under Risk Capital Assistance Scheme and other seed
capital provided by other institutions under similar schemes would be treated
as equity for the purpose of determining of debt equity ratio.
Debt
is the sum total of the following items:
§
Redeemable preference shares where redemption
is due between one to three years.
§
Convertible and non convertible debentures
except that part of convertible debentures which is compulsorily to be
converted to equity.
§
Long‑ term (repayable after 12 months)
interest bearing loans, deposits from Government/ Government Agencies /
Promoter
§
Deferred payments not falling due within a
period of 12 months.
§
Long term loans (repayable after 12 months).
(The loan which has been applied for is also to be included to determine. debt after the financial
assistance has been extended).
Note: Redeemable preference
shares where the period of their redemption remains only 12 months or less are
treated neither as debt nor equity but a current liability.
The normally acceptable debt equity ratio norm is 1:5:1 except for large
projects where the debt equity ratio could go upto 2:1
Notes:
(i)
The above norms are to be taken only as broad
guideline or a genera indicator and the exact ratio in a particular project is
to be decide depending upon (a) tile nature of the industry, (b) the size of
the project (c) the gestation period, (d) the profitability potential, (e) the
debt service capacity of the project, (f) the risk attendant on the project ill
view of factor such as background of the promoters, nature of technology
employed likely demand for the product, (g) current capital market conditions
an economic situation etc.
(ii)
The norms are not applicable to shipping
industry (including trawlers).
(iii)
The norms of debt‑equity ratio for joint
sector projects are to be the same as followed in, the case of projects
promoted in private sector. However joint
sector projects, if promoted in association with Large Houses, the norms of
debt equity ratio in relation to such projects are to be the same as applicable
to projects promoted by Large Houses as indicated above.
The promoter must have his own financial stake in a project to ensure
his sincerity in implementation of the project and his continued interest
thereafter. The share, the promoter shall bring as percentage of total cost of
project inter alia depends upon the
resources of the promoter, the type of the project and its size.
The promoters are expected to bring in maximum possible contribution.
Contribution can be in the form of share capital, internal generation during
the period of implementation of the project, additional capital or unsecured
deposits/ loans to be brought or arranged by promoters.
The norms for minimum
promoters' contribution are as under:
I.
The minimum level of promoters' contribution shall be 20% of the project cost (varies from
scheme to scheme).
II.
Core promoters for the above purpose consist of
main promoters, their family members, relatives, group companies under their
management friends and associates, equity contribution by Industrial
Development Corporations (IDCs) etc.
III.
The equity contributed by core promoters shall
be covered by non disposable undertakings to the financial institutions.
IV.
Non
core promoters' contribution could include contribution to equity by IDCs,
Mutual Funds etc. (without non‑disposal undertakings) with buy back
arrangement with promoters.
V.
Where venture capital companies are called upon
to make contributions t the equity to help promoters make Lip their stipulated
contribution project cost, the financial institutions do not insist on
furnishing non disposable, shortfall undertakings. However, where venture
capita companies themselves are promoters of ventures, their contribution to
equity will be covered by non‑disposable undertakings and they will also
be required to furnish the shortfall Undertakings.
VI.
For large sized projects
(i.e., project costing more than Rs. 200 crores), a minimum promoters'
contribution of not less than 10% of the project cost is accepted.
I. Rate of
Interest on Rupee Loan:
Based on Minimum Term Lending Rate fixed from time to time. Actual rate
within the prevailing rate band depends upon creditworthiness of borrower and
risk perception. Interest is payable quarterly.
II. Rate of interest on Foreign Currency Loan
Floating rate based on LIBOR depending upon the source of the currency
plus a fixed spread according to the risk perception and maturity of the loan.
The exact rate can he found out only at the time of execution of foreign
Currency loan agreement. The exchange fluctuation risk in these loans is borne
by the borrower.
III. Rehabilitation Finance
The rates of interest for funded interest term loan, existing term loan and
fresh rehabilitation term loan, are subject to change from time to time and
latest position may be ascertained from concerned Financial institution.
2.5% of the under
written amount.
(In substitution of
the practice of 1.0% of the loan amount commitment charge)
In respect of Loans
under Project Finance.
VI. Commitment Charges
0.25% on the undrawn portion of loan payable from the date of signing of
die loan agreement.
There are certain general conditions which are applicable for assistance
under tile Scheme. These relate to composition of Board of Directors,
Management set‑up, Government approvals and sanctions, payment of
dividend, sale or purchase of assets, selling arrangement etc. Specific
condition as may be applicable to
individual cases are conveyed separately.
The mandatory convertibility clause which enabled financial institutions
to convert a part of term loans into equity for new projects has been dispensed
with in August, 1991.
The 'convertibility clause' is not applicable, except in overrun or
default or rehabilitation cases.
All India financial institutions normally reserve the right to appoint
their nominee directors on the Boards of assisted concerns. The actual
appointments are, however, made generally after mutual consultation among the
institutions depending upon the extent of their combined shareholdings, the
size of aggregate assistance etc. Detailed guidelines are issued to the
nominee directors appointed by institutions. They are not to interfere in the
day‑to‑day affairs of the assisted concern, but are expected to
keep themselves fully acquainted with the affairs of the assisted concern and
extend full co‑operation to the management. They have also to ensure
that, among other things, the following issues are reviewed at periodical Board
meetings:
·
Financial performance;
·
Payment of dues to institutions;
·
Payment of statutory and other dues to
Government;
·
Inter-corporation investments including deposits, loans and advances;
·
Transactions in shares;
·
Contracts, purchase and sale of raw materials,
finished goods. Machinery, ect.; and
·
Major items of expenditure particularly those
relating to management.
In the interest of healthy growth of the corporate sector, the
institution expands that management of every assisted concern develops proper
organisational set-up with a suitably board‑based Board of Directors to
serve the operations of the concern as a whole. The Board of Directors may
constitute suitable committees to look into specific functional area. At least
one of the on the Board of an assisted concern is expected to be included in
the more important of these committees.
The financial institutions have a flexible approach in respect of
fixation of repayment period is based on the debt service coverage ratio of 2:1
is generally ensured. The repayment period may be fixed initial 1 to 3 years as
moratorium period. Projects having the repayment period reduced to even 6 years
including. The period of repayment may he accelerated by the warranted by
profitability and cash flow of borrowing concern. The borrowing concern can pre
pay the outstanding loan or loan instalment with the prior approval of
Institutions.
DOCUMENTATION AND DISBURSEMENT OF RUPEE TERM LOAN
After the project has been approved by the financial institutions, a
formal financial letter of intent is issued in favours of the applicant.
The letter of intent is issued to the applicant in the prescribed form enclosing therein the following other
papers:
·
Special terms and conditions as applicable to
the financial assistance.
·
General conditions as applicable to financial
assistance.
·
Specimen copy of common loan agreement.
·
Draft of the resolution to be passed by the
Board of Director~ of the borrower fm accepting the letter of intent.
On receipt of letter of intent the applicant must scrutinise the papers
and may seek any additional clarification from the lending institution, if
necessary. If the terms of suction are acceptable, the company may
simultaneously take the following steps:
§
To convene a board meeting for acceptance of
letter of intent and passing the ‑board resolution. The formal acceptance
to the lending institution is to be conveyed within 30 days from the date of
issue of intent letter.
§
To finalise a final drawal schedule depending
upon the progress of project implementation. The drawal schedule is also to be
intimated to the lending institution along with the acceptance.
§
To convene the General Body Meeting of the
company, if necessary, to pass resolution for availing of the loan under
section 293(1)(d) of Companies Act, 1956.
§
To obtain draft copies of other loan document
such as deed of hypothecation and/or letter of guarantees, undertaking for
disposal of shareholding acquired for meeting shortfall in Project Cost,
declaration for creation of joint mortgage by deposit of title deed etc. as
required as per terms of sanction.
§
To convene a board‑meeting to approve all
the loan documents and get necessary authority of the board for execution of
documents.
§
The disbursement of loan is further subject to
pre‑disbursement conditions as stated in 'General conditions applicable
to financial assistance being complied with Necessary undertakings,
certificates from legal advisors and/or statutory auditors wherever necessary
must be got ready and submitted to the lending institution.
§
All loans are subject to creation of
a valid mortgage of all immovable properties in favour of the lending institution. Creation of mortgage generally involves
a lengthy procedure and
lending institution may agree to release the loan against personal guarantee of
the promoters pending creation of final charge over the security. The matter in
this regard must be got cleared and draft for personal guarantee be obtained
from the lending institution.
§
All the documents are then to be executed by
authorised persons in the legal department of the lending institution.
DISBURSEMENTAND UTILISATION OF LOAN
·
The lending institution shall get all the
document executed.
·
The disbursement of the loan by the lending
institution may be in stages depending upon the progress in project
implementation and will be subject to compliance of pre‑disbursement and
other special conditions. Promoter has to first bring in a substantial part of
his contribution (generally a minimum of 50%) before any disbursement of loan
by the financial institution. An auditor's certificate may also be required for
this purpose certifying the paid up capital of the company at the time of
disbursement.
A progress report on project implementation giving details of
expenditure already incurred under various heads and a funds flow statement
showing therein the phased requirement of funds for timely execution of the
project must also be submitted to the lending institution. The lending
institution will evaluate these reports and finalise a disbursement schedule
which will further be subject to review from time to time on the basis of
progress in project implementation.
·
All the disbursements are made by cheque drawn
in favour of the borrower and the date of cheque is taken as the date of
disbursement of loan.
·
All these cheques are required to be deposited
in a 'special bank account' to be maintained for this purpose. The funds lying
in this account are not subject to the right of set off or lien by the bank.
For this purpose a letter from the bank forgoing his right of set off or lien
must be obtained from the bank and deposited with lending institution.
· The borrower must keep proper record of withdrawals from this special account and also authorise his bank to reveal all the information as required to the lending institution regarding operations in this account. The borrower is also required to furnish a statement showing the manner in which the loan already disbursed has been utilised. The statement is to be submitted to the lending institution at the end of each month following the month in which the loan monies are disbursed
·
Entire loan is not disbursed as long as final
security by way of mortgage of immovable
property is not created.
Usually 10% of the sanctioned loan is withheld and disbursed only when all the formalities in this regard are completed.
All loans by
financial institutions are secured by:
·
A first mortgage and charge in favour of the lending
institutions of all the borrower’s immovable properties, both present and
future; and
·
A first charge by way of hypothecation in favour of lending institution of all
borrower's movables (except book debts), including movable (except book debts),
including movable machinery spares, tools and accessories, present and future
subject to prior charges created and/or to be created;
q
In favour of borrower's bankers on
the borrower’s stocks of raw materials, semi‑finished and finished
goods, consumable stores and such other movables as may he agreed by the lending institutions for securing
the borrowings for working capital requirements in the ordinary course of
business; and
q
On specific items of machinery purchased/ to be
purchased under deferred payment facilities to the borrower and as permitted by
lending institutions.
The hypothecation agreement is got executed invariably before any
disbursement. The borrowers should, however, take immediate steps for creation of mortgage to entitle himself to avail the entire sanctioned
loan. Creation of mortgage would involve the following steps:
q
Scrutiny of title deeds of all immovable
properties and mutation certificates by the legal department of the tending
institution to determine the ownership and clear marketable title of borrower
over these properties. Copies of all title deeds, mutation certificates and
other relevant documents should be promptly made available to the lending
institution to enable it to carry out these verifications.
q
Investigation of records of local land
authorities/Registrar's office is relevant to ensure that the property under
investigation is free from all encumbrances. This exercise will also be
conducted by the legal department of the lending institution.
q
Obtention of the authority of the Board for
creation of mortgage and signing the declaration in prescribed form. The
board's resolution in this regard shall also authorise the person/persons who
have to deposit the original title deeds with the lending institution for
creation of mortgage.
q
Obtaining of income‑tax clearance under
section 281(1) of Income‑tax Act for the creation of mortgage. The income‑tax
clearance certificate is also to be submitted to the legal department of the
lending institution.
q
Depositing of all the original title deeds,
mutation certificates etc. with the legal department of the lending
institutions and furnishing the necessary declaration in the prescribed form
duly signed by authorised person(s).
With the completion of all formalities as above the mortgage charge is
created. Nevertheless the legal department of the lending institution will
communicate to the borrower regarding final creation of security and the date
from which the mortgage is deemed to be created.
It may once again be emphasised here that all the steps for creation of
mort ag charge must be completed as early as possible. However, penal rate of
interest @1% higher than the normal rate shall be charged by the lending
institution on the entire outstanding loan till the date of creation of
mortgage.
Particulars of all charges created
over the assets of the company are required to be registered with the Registrar
of Companies under section 125 of Companies Act,1956 within 30 days of creation
of charge. The company should therefore, arrange to file particulars of charge
created by it in the prescribed form ‘8’ and form 13 with the Registrar of
Companies within the stipulated time. Particulars of both the hypothecation charge over the movable property as created by ‘Deed of Hypothecation’
and mortgage charge over immovable properties are required to be submitted and
registered with t Registrar of companies.
Term loans for setting up of any
new project or for modernisation, diversification or expansion of existing
units are sanctioned by all India financial institutions with or without
sharing such term loans with banks. Working capital finance is now in mode
available to the companies already assisted by the financial institution.
Companies have to depend upon commercial banks for finance of their working
capital loan component. For this purpose co‑ordination between banks and
all India financial institution is important so that banks are able to sanction
working capital limits to such units expeditiously. Reserve Bank issued
detailed guidelines in this regard in 1988 important aspects of these guidelines
to banks which are of interest to the borrower am discussed hereunder.
The banks which is to take up the maximum share of term loans among the
bank and/or the working capital finance should be identified and associated
with the appraisal exercise initiated by lead financial institution. The
promoter is free to choose such a bank who (the bank) will be involved in all
aspects of appraisal.
Where more than one bank is to share term loan an or working capital
requirements due to the large project size, the promoter has to identify other
banks in consultation with lead bank. It should, however, be understood that
the bank who shares term loans must also give facilities for working capital.
Other banks associated with the project must accept the appraisal jointly
finalized by lead financial institution and the lead bank. This norm is,
however, being relaxed on case to case basis.
The association of the bank having the maximum share of term loan among
the banks and/or working capital finance with the project appraisal will ensure
that assessment of working capital requirements is in accordance with the
general approach adopted by banks aw is in conformity with the guidelines
issued by Reserve Bank of India in this behalf. It would also ensure that
adequate margin money for working capital is provided in the project cost.
Financing of Cost Overrun of Projects
Term loan requirements due to cost overrun should be met by the
financial institutions and banks which had participated in the original
financing of the project by extending additional term loans on a pro rata basis
and the tending bank must be associated with the overrun appraisal carried out
by lending financial institution. Other banks may also be brought in to share
cost overrun financing.
Sanction of Timely
Working Capital Facilities and Release of Funds for Meeting Need‑based
Requirements
Depending upon the, quantum of working capital finance required vis‑a‑vis
other relevant factors, the bank associated with the appraisal of project may
either meet the working capital requirement of the entrepreneur himself or
enter into consortium agreement with other banks. This consortium of banks
should be simultaneously finalised while appraisal for term loan is being
completed. The working capital limits are to be sanctioned by the
lending bank either as sole financing bank or under consortium arrangements‑
immediately after sanction of term loans. Where, however, banks have not, for
any reason, participated in the appraisal of the project, the lead financial
institution will keep the bank which is to provide maximum working capital
finance informed about the appraisal and sanction of loan assistance to the
project. An 'in‑principle' sanction of working capital limits should be
communicated by that bank to the borrower as well as to the lead financial
institution soon after the sanction of term loan assistance.
The assessment of the lead bank of the initial working capital limit
should be accepted by other participating banks in the consortium in order to
avoid delay.
In order to obviate difficulties which inadequate working capital limits
may create for the promoter, the lead bank must review the limits already
sanctioned about 6 months before the commencement of commercial production.
While sanctioning such limits banks are required to take into account the
requirements for working capital for achieving the level of production
envisaged for the second year of production. Banks must communicate the formal
sanction at least three months before the commencement of commercial
production. The release of funds under the sanction will, however, be dependent
upon actual needs of the borrower on one hand and build up of chargeable assets
on the other hand.
Stipulation of Shorter
Period for Repayment of Term Loans Extended by Banks
Repayment should continence simultaneously for all lenders, but the term
loans given by banks may he liquidated over a shorter period of 5 to 6 year
after commencement of commercial production in normal projects and over a
period of 7 to 8 years in case of capital intensive projects. The stipulation
of shorter repayment period will not, however, apply to deferred payment
guarantees issued by banks.
In order that the build up of
production in stages (till the unit reaches normal level of operation) does not
suffer on account of paucity of short‑term funds, banks adopt a realistic
and flexible approach and release working capital finance commensurate with the
increasing tempo of operations. Where, due to unforeseen developments, the
margin money is found to be inadequate or has been eroded and where it comes in
the way of sanctioning of need based working capital, the lead bank should discuss
with the borrower along with the lead institution, the injection of additional
long term funds to make up the deficiency. Where, the borrower is unable to
immediately mobilise long term funds, the banks may take into account all
relevant factors and allow him to make up the deficiency in margin within a
time frame of 12 months or 24 months in extreme cases.
Where all ‑India financial institutions are not involved in
providing financial assistance, the banks may meet the entire financial
requirement by way of deferred payment guarantees to projects for modernisation/diversification/
expansion of existing units. In such cases, however the concerned bank or the lead batik
should make a detailed appraisal of the project and assess the risks involved
before sanctioning the deferred payment guarantees.
Stipulation of
Bank Guarantees Against Term Loan Granted by Financial Institutions
Bank may issue guarantees favouring financial institutions for the term
loans extended by the latter, subject to strict compliance of stipulated
conditions in this regard.
In the case of projects involving
modernisation/diversification/expansion of existing units, the lead bank under
the consortium arrangement should invariably be informed by the lead financial
institution about the approach made by the borrower and lead bank must
invariably be associated with the detailed appraisal. Other aspects such as
sharing pattern between financial institutions and banks etc. will be the same
as in case of setting up of' new units.
Import of second hand machinery is subject to compliance with the
regulation framed by the government of India from time to time. Banks may grant
tern loans for import of second hand machinery provided the same is in
conformity with such regulations. Such proposals will, however, be closely
scrutinised and due precaution be taken before granting the term loan
facilities.
1(a) As per DBOD Circular No. DIR. BC.20113.03.0012002‑03 dt.
20.08.2002.
(b) Details of exposure norms applicable from 31st March, 2002 onwards are given later in this Chapter.