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major precautions while taking up finance proposals. by Articulate Management Consultants Pvt. Ltd. CA Anil Khandelwal. INTRODUCTION.

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major precautions while taking up finance proposals

major precautions while taking up finance proposals

by Articulate Management Consultants Pvt. Ltd.CA Anil Khandelwal

introduction
INTRODUCTION

It is often seen that the finance proposals taken up by the finance professionals get stuck up with the Banks or do not see the light of the day because of haste in taking up the proposals for seeking financial assistance. The haste is normally shown with a fear of losing the business. Eventually, when the efforts to tie up with the Bank go waste in terms of time and money, one belies the hope of the client and face embarrassment and humiliation. It is therefore suggested to adopt the following measures before taking up the proposals for financial assistance;

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points of considerations
Points of considerations

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cibil
CIBIL
  • Credit Information Bureau India Ltd. keeps the track of the borrowers’ payment behaviour.
  • One must ensure that the name of the borrower does not appear in RBI/ CIBIL’s defaulters’ list. If there are words like ‘Write off’, ‘Settled’ or ‘Compromise’, one must not take up the proposal, however, it may be good in any terms. If it shows ‘Overdue’, one must enquire the reasons and ask the borrower to get it corrected or pay it;
  • If it shows ‘overdue’, one must enquire the reasons and ask the borrower to get it corrected or pay it.

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past banking transactions
PAST BANKING TRANSACTIONS

One must peruse the Bank statement of the client before entering into an agreement for syndication of loan. If there are more than 5 instances of cheque bouncing for financial reasons in one financial year, the proposal may suffer for a longer period as this will change the level of sanctioning authority and it may have to see the door of the Head Office of the Bank which will entail more time and effort and the chances of decline;

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slide8

Justification of Switch over to other Bank

  • Take over Norms

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justification of switch over to other bank
Justification of Switch over to other Bank

When it is a case of switching over to some other Bank from the existing one, one must convince himself for doing so. If the existing Bank is not satisfying the requirement of the party, why so, one must evaluate. The reasons could be genuine too, but normally it is a different case. The expectations of the party may be unfounded or very high or the background is not good or there is an adverse banking relationship;

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take over norms
Take over Norms

If one has been assigned the job of ‘take over’ case, he/ she must keep the considerations of ‘take over norms’ in mind. Different Banks have different take over norms which are normally very strict. There are certain Banks who have policies of not taking over the accounts at all. The norms normally include:

- The Balance Sheet of the borrower should not be in loss in the past three financial years;

- The Current Ratio should be at least 1.33;

- The DE ratio should be less than 3:1;

- The TOL/ TNW should be less than 4:1;

- The net worth of the borrower should be positive;

- Where the enhancement sought from the new banker is exceeding 25% of the present sanctioned/ availed limits it goes to the next sanctioning authority;

- Where the ED/MD of the Bank taking over the account has been from the existing Bank, it cannot be taken over;

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due diligence
DUE DILIGENCE

The professional should undertake the exercise of due diligence of the borrower through social network, party’s existing Bank and other sources viz. Persons of the same trade or industry. One must visit the residential house or office of the borrower, before taking up the proposal. Even the site of the borrower where the industry/ institution/ hotel is being established, should be visited. One must try to find out the family background of the borrower and try to dig out the commonly known persons to get a feedback both in terms of payment to the professionals and Bank and also to ensure the commitment value of the borrower;

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rating
RATING
  • Internal
  • External

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internal rating
INTERNAL RATING

Every proposal is subject to rating which is done by the Bank itself. The Banks have formed minimum rating criteria below which they will not entertain the proposal. The rating is based on the industry, last audited Balance Sheet, borrowers’ industrial experience and financial ratios too. Hence, while taking up such proposals, one must see it from the angle of financial ratios viz. DE, Current Ratio, DSCR etc.;

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external rating
EXTERNAL RATING

There are other rating agencies too who are involved where the total Bank exposure is Rs.5.00crore and above. The agencies include CRISIL, FITCH, CARE, ICRA. The minimum investment rating is BBB, hence if the rating is below this, the proposal may suffer for want of proper rating;

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collateral security
COLLATERAL SECURITY

The financial institution/ Banks normally insist for collateral security in the form of land & building. The market rate is normally reported on the higher side by the client whereas it is underestimated by the valuer of the Bank. In such case, normal prudence should be applied and keeping this in mind, one should take up the proposal;

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expectations of the party
EXPECTATIONS OF THE PARTY

Sometimes the expectations of the party are too high, which may be in terms of quantum of funds that is expecting more than the eligibility or expecting the rates of interest, processing fee, stamping fee, margins which are not practically possible or which one is not eligible for. Many a times, challenge is given in terms of time based on ‘fastest fingers first’;

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audited balance sheet extract from roc
AUDITED BALANCE SHEET – EXTRACT FROM ROC

It is generally seen that many companies prepare two sets of Balance Sheet, one for the Bank and another for income tax. To check the veracity of the Balance Sheet given to us, may be verified from that filed with ROC so that the professional does not have to cut a sorry figure before the financing authorities. Let us not forget that our reputation is formed with the quality of proposals we submit to the Banks. If we lose the face, our bread and butter will be at stake;

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power chart of various banks
Power Chart of Various Banks

While giving nod for taking up the proposal, one should try to analyse as to which Bank would be appropriate for this proposal in terms of sanctioning authority and their powers. The proposal should be aimed to get cleared at the lowest level of authority to avoid the time lag and host of observations;

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clarity about promoters contribution
Clarity about Promoters’ Contribution
  • One should be clear about the promoters contribution and make it abundantly clear to the promoters about the stages when such contribution is expected from them else the professionals may be charged with the blame of non communication about this fact.
  • The mix of the promoters contribution should also be clarified to the promoters as to the quantum of equity share capital, redeemable preference shares, unsecured loans, booking advance (in case of real estate proposals). Many a times, this is objected to, by the promoters because of cost of increase in authorized share capital and their inability to charge the interest on unsecured loans. Also to avoid dividend tax on the proposed shares¸ the promoters prefer the unsecured loans in contrast with the equity share capital;
  • The promoters also prefer to keep the equity amount under ‘shares application money’ which is now not possible. Apart from this, issuance of equity shares on premium is also not possible in view of the recent income tax provisions for taxation on the difference between the book value and the share issue price;

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promoters profile
PROMOTERS´ PROFILE

The promoters’ profile should be discussed thoroughly to assess the technical and financial capability of running the project. The promoters should be resourceful also so that in the event of delay in the project implementation, the interest and instalments can be serviced by them;

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promoters contribution vis a vis net worth statement
PROMOTERS’ CONTRIBUTION VIS A VIS NET WORTH STATEMENT

The promoters’ contribution to be brought in should reflect in the net worth statements/ personal Balance Sheet of the promoters so that it does not fall short of the stipulated amount of contribution. The net worth statement should be got signed by the promoter concerned and not by their Chartered Accountant;

Promoter’s Contribution

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swot analysis
SWOT ANALYSIS

The strengths, weaknesses, opportunities and threats should be analysed beforehand. The technical support and marketability should be in-depth studied and accordingly the proposal should be taken up;

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disbursement reimbursement
Disbursement/ Reimbursement

The client should be apprised with the mode and stage of disbursement of term loan and release of working capital in advance so that there is no ambiguity with this issue. Many a times, the promoters spend the capital expenditure exceeding their contribution and in such case they expect the reimbursement, in such event, one should tell the party clearly about the eventuality of getting reimbursement and the circumstances when it would be possible;

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sector wise exposure
SECTOR WISE EXPOSURE

There are sectors where the loan powers are concentrated by the Head Office/ Regional/ Zonal Office of the Banks/ Financial Institutions. The sectors like Trading, Retail, Real Estate, Gems & Jewellery (Diamond) and now Educational Institutions are closely monitored by Head Office/ Zonal / Regional Office of the Banks. The time factor for getting such kind of proposals should be accordingly conveyed to the promoters and so about the financing pattern;

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financial physical status of the project
FINANCIAL/ PHYSICAL STATUS OF THE PROJECT

Where the promoters have started investing the funds in the project, it shows their more confidence in the project which is taken as a plus point by the Bank. But where the promoters first wait for the financial tie up, one should assess the limitations or risk taking capacity of the promoters as they have limited source and want to play only with the Bank’s funds. One has to be careful in such cases;

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financial physical status of the associate companies
FINANCIAL/PHYSICAL STATUS OF THE ASSOCIATE COMPANIES

The capacity of the promoters of running the industries can be assessed with the performance of their associate companies and their Balance Sheets. The DE/ CR/ DSCR/ Turnover/PBT etc. will reflect their potential, mentality and capacity;

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where the entrepreneur is a woman
WHERE THE ENTREPRENEUR IS A WOMAN

Though the Government is encouraging the women entrepreneurs to come up with the businesses or industries and is giving concessions in terms of interest and other incentives, yet one should try to assess the reasons of putting woman on the front side where she is not actively participating in the business. If her husband intends to do business under her name, one should be careful in handling such projects as these might prove to be your bad decision. There are cases, where the account of the husband is NPA or he is under prosecution/ litigation with any FI or Bank;

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property for creation of charge
PROPERTY FOR CREATION OF CHARGE

One must satisfy himself/ herself with regard to the following:

- The land use of the property which is offered for creation of mortgage whether it is agricultural, residential or commercial;

- The market/ realizable/ distress/ DLC value of the property;

- The title of the property whether it is having JDA/ MC/ Collectors lease deed/ conversion letter;

- The drawings of the proposed building should be approved by the competent authority especially in case of real estate/ educational institution/ hotel business;

- The location of the property;

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slide29
FACR

Many professionals consider the market value of the land in the project cost whereas it is only book value which is considered. The land is generally not financed barring a few circumstances. The FACR should be worked out while deciding the total security being offered;

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heterogeneous project
HETEROGENEOUS PROJECT

Where the project is set up by a group of persons from different families or different walks of life, the project is called heterogeneous. This situation is normally dicey as different people have different thinking and putting them together is a difficult task on every point of time. This kind of proposal may pose threat to the professional and the Banker as well, since this may jeopardize the interest of both. Any disagreement with them with respect to their stake, collateral security, choice of professional to take up this assignment, selection of Bank will be inimical to the interest and prospects of the project.

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terms of professional fee stages of payment
TERMS OF PROFESSIONAL FEE/ STAGES OF PAYMENT

Now last but not the least, one should be upfront in quoting one’s professional fee before taking up the assignment. The possible charges payable to the Bank, advocate and the valuer should be preferably left upon the client to avoid any ambiguity and confine oneself to his/ her own fee;

The stages of payment of professional fee should also be outlined beforehand and an MoU should be entered into with the client narrating the scope of work, professional fee, stages of payments and other inclusions/ exclusions. One should avoid giving any sort of guarantee of getting the work done as the professional can take up the proposal only on ‘best efforts’ basis since he/ she is not the sanctioning authority.

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types of borrowers
Types of Borrowers

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slide33

One who has no interest in paying the Principal amount. One who has no Principle to pay interest.

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slide35
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An outstanding borrower whose outstanding shall never reduce.

slide36

A promising borrower who will always keep on promising to meet his obligations.

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slide37

One who is ‘CIBILISED’

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