CAIIB ABM Unit 29 - Term Loans

1. Banks provide term loans normally for acquiring the fixed assets like land, building, plant and machinery, infrastructure etc., (personal loans, consumption loans, educational loans etc. being exceptions)

2. In exceptional cases, banks provide term loans for current assets This is called Working Capital Term Loan (WCTL)

3. Working capital loans are normally sanctioned for one year but are payable on demand. Term loans are payable as per the agreed repayment schedule, which is stipulated in the terms of the sanction.
Therefore, for the purpose of matching assets and liabilities of the bank, term loans are considered long term assets while working capital loans are considered as short term assets.

4. As a term loan is expected to be repaid out of the future cash flows of the borrower, the D S C R assumes great importance while considering term loans, while for working capital loans, the liquidity ratios assume greater importance.

5. There is no uniform repayment schedule for all term loans. Each term loan has its own peculiar repayment schedule depending upon the cash surplus of the borrower.

Deferred Payment Guarantees ( DPGs)

When the purchaser of a fixed asset does not pay to the supplier immediately, but pays according to an agreed repayment schedule, and the bank guarantees this repayment, the guarantee is called DPG. This is a Non-fund based method for financing purchase of fixed assets.

Project appraisal

Project appraisal can be broadly taken in the following steps:

(1) Appraisal of Managerial Aspects
(2) Technical Appraisal
(3) Economic Appraisal

Types of Financing of infrastructure projects by Banks

(a) Take-out Financing
(b) Inter-institutional
(c) Financing Promoter’s Equity

Appraisal

For fixed assets, WCTL, longer period, future cash flows
Deferred payment guarantees
Project appraisal : all fin requirements are considered, for term loan appraisal : TEV/IRR/DSCR is taken into a/c
Appraisal of managerial aspects : credentials, financial stake, business module, form of organisation

Prudential Requirements

(1) Prudential Credit Exposure Limits
(2) Assignment of Risk Weight for Capital Adequacy Purposes
(3) Asset Liability Management
(4) Administrative arrangements

Take-out Financing or Liquidity Support

(1) Take-out Financing or Liquidity Support
(2) Liquidity support from I D F C