Film production constitutes the most important part of Film industry.
Film production involves development of story, screenplay, dialogue, etc.,
music recording, film shooting, lab processing and post production activities
such as editing, dubbing, re‑recording, mixing, taking final prints,
obtaining censor clearance and release of prints for distribution. Under the
existing financing practices followed in the industry, the producers normally
bringing about 25 per cent of the cost of production of a film and, the balance
75 percent is met by way of advance payments from distributors and finance from
private financiers. A peculiar feature of film production is that the producer
recovers the entire cost of production of a film before/at the time of release
of the film through sale of distribution rights to the distributors (normally
distributors pay up to 40 per cent of the agreed amount when the film is under
production and the balance at the time of the release of the film).
Given the need for institutional finance for film production, in June
1998, the Indian Banks' Association (IBA) had constituted a Working Group,
comprising representatives of banks and film industry to suggest a suitable
methodology for financing film industry, which constitutes an important segment
of the entertainment industry. The Working Group submitted its Report to IBA in
May 1999 and the same was circulated by IBA among member banks for necessary
action. Further, Government of India has also conferred industry status to the
'Entertainment Industry including Films'. However, despite the above
developments, film financing has not made much headway so far.
Keeping in view the need of bank finance for film industry and after
extensive consultations with banks, IBA and representatives of film industry,
Reserve Bank of India has framed broad guidelines regarding bank finance for
production of films vide IECD No. 17/08.12.01/2000‑2001 dt. 14.5.2001.
However, RBI has stated that its stance of bestowing operational freedom to
banks in the matter of credit dispensation remains unchanged and that banks are
free to take lending decisions based on their own experience and other relevant
information without reference to Reserve Bank, keeping in view the spirit of
the guidelines. The salient features of the guidelines are stated in the
succeeding paragraphs.
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Banks may provide finance to film producers
(corporate as well as non‑corporate entities) with good track record in
the relative field.
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Banks may also provide finance to these
entities for production of films in participation with the National Film
Development Corporation.
(i) Criteria
for financing :
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Banks may obtain from the producers a detailed
budget for each film, clearly indicating the entire cost estimates for the film
and the means of financing the same.
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Ordinarily producers are required to bring in at
least 25 per cent of the project cost as promoters' contribution. Producers are
also required to tie up the advances from the Distributors in the usual course
as per usual practice (sales advances) to cover 35 per cent to 40 per cent of
the budget. Thus, bank advances could be for the balance requirement of 35 per
cent to 40 per cent of the project cost. However, in deserving cases where the
banks are quite comfortable with the project as well as the background of the
producers, the financing could be increased up to 50 per cent of the project
cost on merits.
§
Banks may now provide finance to the projects
irrespective of the total cost of production of the film1. The amount sanctioned should be within the overall, ceiling of the
prudential exposure norms.2 prescribed by RBI from time to time. Banks may also internally
prescribe a suitable limit/or their overall exposure to the film industry.
§
The disbursement of bank loan should ordinarily
start only after utilising the promoter's contribution and advance payments
from the distributors. 'Mere may not, however, be any objection to bank loan
being disbursed side by side along with payments by distributors on
proportionate basis. The arrangement should be firmed up at the commencement of
the project. However, in any case, banks may disburse loan only after the
promoter has brought in his contribution to the project.
(ii) Period
of Loan :
The period of loan may be fixed based on the financing bank's assessment
of cash generation of the project.
(iii) Security
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Banks may obtain the Laboratory Letter
conveying rights on the negatives in favour of the lenders.
§
The Music Audio/Video rights, CD/DVI)/Internet
Rights, Satellite Rights, Channel Rights, Export/International Rights, etc.
should also be assigned to the banks to serve as main security along with the
negative rights in the form of lab letter, through appropriate documentation.
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First hypothecation charge on all the tangible
movable assets under project. .
§
Assignment of all agreements and Intellectual
Property Rights (IPRs) in favour of the lenders. Lenders to have right in
negotiation of valuation of all IPRs.
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Collaterals, if necessary, may be obtained at
the discretion of banks.
§
A Trust & Retention Account (TRA) may be
maintained for all capital as well as revenue inflows and outflows. Thus,
receivables on sale of all IPRs may be credited to TRA. The modalities of TRA
may be worked out on case‑to‑case basis to the satisfaction of the
lenders. A No Objection Certificate (NOC) from all concerned parties for the
TRA arrangement will be required. The lenders will have first charge on the
TRA.
§
Banks may look into the legal aspects of the
laboratory letter, assignment of music, audio/video rights, etc.
(iv) Insurance
The existing insurance products as acceptable to banks may be obtained
from film producers.
(v) Follow‑up/Monitoring
Banks should devise appropriate accounting and information/data
submission formats for periodic flow of information from the producers. They
should also obtain periodical progress reports, cash flow statements, audit
reports and such other reports as are considered necessary. Banks may also
consider appointing specialised agencies for monitoring the timely
shooting/processing of the film and assessing the reasonableness of the
expenditure.
(vi) Risk
factors
Production completion risk is one of the major risks in any film
production. To mitigate this risk it would be necessary for banks to carefully
appraise the projects having due regard to the track record of the producers as
also the distributors. If necessary, banks may also engage industry
specialists/consultants for evaluation of proposals. Insurance of risks, key
personnel, etc. needs to be organised. Pending development of appropriate risk
insurance products, the existing products such as equipment insurance, key
personnel insurance etc. could be availed of.
In this regard following points may be kept in view
(i) The
National Film Development Corporation Ltd. (NFDC) is a specialised agency set
up by Government of India for promoting quality cinema. NFDC produces, co‑produces
and finances films, particularly small budget films. Over the years, it has
provided a wide range of services essential for the integrated growth of Indian
cinema. Considering that appraisal of film projects requires special skills
(which all banks may not be equipped with, at least in the initial years),
banks at the request of NFDC, may also consider extending credit for production
of films in participation with NFDC. This would be an additional channel for
extending credit to the film industry. The detailed modalities in this regard
(including security cover) may, be worked out mutually by banks and NFDC.
(ii) Banks
may also consider providing reasonable credit facility to NFDC taking into
account usual safeguards observed while taking credit exposure.