1. A PRESENTATION
ON
TERM LOAN
SUBMITTED BY
1 Prashant
2 Sidharth
3 Rounak
4 Yogesh
5 Rahul
6 John Sachin
7 Rakshith

2. CONTENTS
 INTRODUCTION
 INDIAN SCENAIRO OF TERM LOAN
 CHARACTERISTICS OF TERM LOANS
 ADVANTAGES & DISAVANTAGES OF TERM LOANS
 THE TERM LOAN CAN BE AVAILED
 BENEFITS OF TERM LOAN
 SPECIALIZED FINANCIAL INSTITUTIONS IN INDIA
 PURPOSE OF TERM LOAN
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4. INTRODUCTION
Debt capital of a company may consist of either debentures or
bonds which are issued to public for subscription or term loans
which are obtained directly from the banks and financial
institution. Term loans are sources of long term debt. In India,
they are generally obtained for financing large expansion,
modernisation or diversification projects. Therefore, this method
of financing is also called project financing.

5.  The repayment of the loans and facilities is normally fixed on case to case
basis depending on projected cash flow of the borrower.
 Term loans are a good way of quickly increasing capital in order to raise a
business’ supply capabilities or range.
 One thing to consider when getting a term loan is whether the interest rate is
fixed or floating

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7. Indian scenario of term loan
1. India has 2 tire structure of financial institution comprised of
A.Indian financial institution
-Term lending
-specialize institution
- Invest institution
B. State level institution
-corporations providing
-other term lending facilities
2. Since independence there are not that many changes
3. Few operation & restrictions.
4. After liberalization.
5. Change must be done because of default in repayment.
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8. Example of term loan in India (Bank of Baroda)
SME Short Term Loans
PURPOSE:
 To meet temporary shortfall / mismatch in liquidity, for meeting genuine business
requirements only.
ENTERPRISES GROUP:
 Micro, Small & Medium Enterprises as per Regulatory definition and all other
entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores.
ELIGIBILITY CRITERIA
 Satisfactory credit rating for the last three years
 Latest Balance Sheet etc. should be available.
 Satisfactory financial performance in terms of sales / turnover and profits. Negative
variance, if any, should not be more than 10%.
 Satisfactory dealings with the Bank for at least three years.
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9. LOAN AMOUNT:
 Upto 25% of the existing Fund based Working capital limits (depending on the Credit Rating),
subject to a minimum of Rs. 10 Lakhs and maximum of Rs. 250 Lakhs.
PERIOD:
 Not exceeding 180 days – minimum 90 days
SECURITY
 First charge / Equitable mortgage of fixed assets of the company / firm or extension of existing
first charge / equitable mortgage of fixed assets, ensuring that there is a minimum asset cover
of 1.25.
 Extension of Charge on current assets for the additional facility ensuring that adequate
drawing power is available.
 Extension of all existing guarantees of Directors / Third party guarantees to cover the
additional facility.
RATE OF INTEREST:
 As applicable to existing working capital facilities.
 PROCESSING CHARGES:
 25% concession in applicable charges.
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11. CHARACTERISTICS OF TERM LOANS
 Time to maturity
 Interest.
 Security
 Repayment Schedule.

12. Time to maturity
Banks and specially created financial institutions are main source of term loans
in India. FIs provide term loans generally for a period of 6 to 10 years
Interest
The general rate of interest on term loans in India is above 14 or 15 %. For
companies undertaking their projects in specified backward areas, loans at
concessional interest rate (usually 1 and half % lower)

13. Security
Term loans are always secured. Specifically the assets acquired using term loan funds
secure them. This is called Primary security. The company’s current and future assets
also generally secure term loans. This is called secondary security or collateral security.
Also the lender may create either fixed or floating charge against the firm’s assets.

14. Repayment Schedule
 The principal amount of a term loan is generally repayable over a period of 4 to
7 years. Typically, term loans provided by financial institutions are repayable in equal
semi-annual instalments or equal quarterly instalments
 The interest burden declines over time, whereas the principal repayment remains
constant. This means that the total debt servicing burden (consisting of interest
payment and principal repayment) decline sover time. This pattern of debt servicing
burden, typical in India, differs from the pattern obtaining in western economies
where debt is typically amortized in equal periodic instalments

15. QUESTION
Suppose a company negotiates a RS 3 crore loan for 8 yrs. from FIs. The interest rate
will be 14 % annum on the outstanding balance. The principal will be repaid in 8 equal
yr. - end instalments . What is the payment schedule?
Solution –the payment schedule will include both interest and principal payment.
Interest will be calculated on the outstanding balance on loan. Note that Rs 3 crore was
borrowed in the beginning of 1st yr. therefore, the interest charges at the end of the yr.
will be
1. Interest is 14%
0.14x3=Rs 0.42 crore.
2 Instalments 8 yrs.
3/8= Rs 0.375 crore.
Thus, loan balance at the end of 1st yrs. Will be 3.0-0.375= Rs 2.62
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16. Year (1) Loan in the beginning (2) Principal repayment (3) Interest(4) Loan payment(5) loan at the end(6)
1 30000 3750 4200 7950 26250
2 26250 3750 3675 7425 22500
3 22500 3750 3150 6900 18750
4 18750 3750 2625 6375 15000
5 15000 3750 2100 5850 11250
6 11250 3750 1575 5325 7500
7 7500 3750 1050 4800 3750
8 3750 3750 525 4275 0

17. Advantages & Disadvantages
of
Term Loans
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18. Advantages & Disadvantages of Term Loans
Term loans provide you with the money you need, but they have some risks.
Banks routinely offer various types of loans that cover the cost of whatever a person or business needs.
One type of loan a company or individual may consider is a term loan. A term loan is a loan in which the
borrower pays interest only for a set period. These loans have both advantages and disadvantages that
the lender needs to weigh before signing any paperwork and committing to the loan agreement.
Flexibility
Term loans are more flexible when compared to other types of loans. With a term loan, the borrower
doesn't have to make a payment toward both the interest and the principal balance. He can do so if it is
financially feasible, but it isn't required. Thus, a term loan better accommodates changes to a person's
budget due to unexpected life or business changes.
Interest
Term loans usually have a fixed interest rate, but this is not always the case and depends on the type of
the bank. If a term loan does have a fixed interest rate, then the term loan is extremely beneficial to the
borrower because it lets the borrower predict the payment they'll need to make. This is good for
budgeting. Term loans that have unfixed interest rates still can be advantageous, but they are riskier
because the borrower has no real control over how much interest they will pay in the future. This can
translate into more money paid toward the loan in the long run.
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19. Penalty Agreements
Eugene F. Brigham and Louis C. Gapenski, authors of "Test Bank: Financial Management: Theory and
Practice," claim that the agreements for term loans often contain penalty clauses. These clauses give the
issuing bank the right to issue additional charges if the borrower is late or deficient in payments. Since
people who take out term loans generally do so because they cannot afford a regular loan, this is not
desirable.
Predictability
A term loan specifies when the interest on a loan will be completely paid. For example, a five-year term
loan will have the interest paid predictably in five years. This is different from a regular loan in which
accumulated interest may draw out the payoff date. This can be extremely beneficial for budgeting and
receipt of future loans, since an individual has some proof that her debt will be repaid within a given
period.
Assumption of Assets
Term loans work by having the principal balance come due in full once the interest is completely paid.
Therefore, people generally use a term loan to get the capital they need to generate additional funds that
will pay off the loan. However, that a borrower's venture will succeed and that they can generate the
principal amount is not guaranteed. If a person cannot generate the principal with the loan funds, then
they have to figure out how to repay a large amount of money very quickly.
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21. The term Loan can be availed to
Purchase of Fixed Assets
The term loan can be used to purchase fixed assets like premises, plant & machinery
etc. The usage or performance of assets increases the business performance and
hence the profit and makes the repayment of the loan easier. Even the term loan is
settled the assets procured continue the productivity as asset life span is certainly longer
than the term loan span. If a premises is purchased then the value of premises is always
appreciated and in that case the business leverages higher value of premises which
further can be used to raise funds for business expansion or diversification.

22. Mortgage Term Loan
A Term Loan can be availed by mortgaging a kind of security like home, office premises
etc. This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The
repayment of the principal amount and interest may be fixed in nature or it may vary
over the course of repayment. The borrower may avail the revised rate of interest later
and may be benefited by saving in interest.

23. Switching of Higher Interest Loans
Many a time’s business owners opt to raise business loans at higher rate of interest.
Such loans are processes and sanctioned faster but result in heavy burden interest. This
interest payment becomes a fixed monthly expenses and starts leaking the profit. To
arrest the growing rate of interest and penalties the higher interest loan can be switched
to lower rate of interest loans or term loans. This way a borrower reduces the growing
burden of interest on business loan and can save a considerable amount of money. It
also benefits in maintaining the credit rating as the borrower closes one loan liability and
opens another in form of term loan with lower rate of interest and easier repayment
conditions

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25. BENEFITS OF TERM LOAN
 Fixed rate - Enjoy the peace of mind of fixed monthly repayments.
 Variable rate - linked to base rates (Rates can rise or fall).
 Repayment holidays - Improve your cash flow by making no loan
repayments or repaying only interest for a fixed term after drawing down
your loan.

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27. Specialized Financial Institutions in India
Commercial banks offer a wide range of corporate financial services that address the
specific needs of private enterprise. They provide deposit, loan and trading facilities but
will not service investment activities in financial markets.
The list of specialized financial institutions in India mainly includes, IFCI, IDBI Bank,
Export-Import Bank Of India, Board for Industrial & Financial Reconstruction, Small
Industries Development Bank of India, National Housing Bank. They are government
undertakings established with a view to offer financial as well as technical assistance to
the Indian industries.

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29. PURPOSE OF TERM LOAN
 Term Loan is sanctioned for acquiring Fixed Assets like, land, building, Plant &
Machineries, Electrical installations , computers, furniture-fixtures etc. in connection
with a project undertaken by the proponent.
The various types of projects can be broadly classified as under :
 1.New products , Diversification projects by existing units (Green Field)
 2.Expansion of existing products (Brown Field)
 3.Backward & forward integration projects
 4.Replacement/ Modernization of equipment or buildings
 5.Others viz., Research and development and miscellaneous items, such as the
expenditure of funds to comply with certain health standards or the acquisition of a
pollution-control device.
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