08/07/2017 Credit Appraisal of Term Loans by Financial Institutions like Banks

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Credit Appraisal of Term Loans by

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Financial Institutions like Banks
Credit appraisal of a term loan denotes evaluating the proposal of
the loan to find out repayment capacity of the borrower. The primary
objective is to ensure the safety of the money of the bank and its RELATED POSTS
customers. The process involves an appraisal of market,
Types of
management, technical, and financial.
Mortgage
No
Getting term loans from a financial institution is not so easy. The
Comments
corporate asking for the term loan has to go through several tests.
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08/07/2017 Credit Appraisal of Term Loans by Financial Institutions like Banks

The bank follows an extensive process of credit appraisal before Equipment

sanctioning any loan. It analyses the loan proposal from all angles. Lease
The primary objective of credit appraisal is to ensure that the money Agreement
is given in right hands and the capital and interest income of the No
bank is relatively secured. Comments

While appraising term loans, a financial institution would focus on

evaluating the credit-worthiness of the company and future
expected stream of cash flow with the amount of risk attached to
them. Credit worthiness is assessed with parameters such as the
Hypothecation
willingness of promoters to pay the money back and repayment
No Comments
capacity of the borrower.

Types of
Four broad
Debentures
areas of
5
appraisal by
Comments
banks are a
market, Letter of
management, Credit
technical and Discounting
management. No
Comments
Market
Appraisal:

As part of the market appraisal, the very first thing a financial SUBSCRIBE TO
institution would look at is the gap between demand and supply. BLOG VIA EMAIL
Bigger the demand-supply gap, higher is the chances of the
flourishing of that business. The demand versus the proposed Enter your email address
supply by the borrower should have a wide difference in demand of to subscribe to this blog
50000 units against the proposed supply of 10000 units. and receive noti cations
of new posts by email.
Another most important parameter is marketing efforts and
infrastructure. This is the factor which converts a demand into sales Join 122 other subscribers
for a business. The marketing side of the company needs to be very
strong as it is very critical to the success of the venture. Email Address

Management Appraisal: Subscribe

Management of the company needs to be appraised for their

intentions, knowledge, and dedication towards the project. By
intention, it is meant to evaluate the willingness of the promoters of
the company to pay the money back. It needs to evaluate the real RECENT POSTS
objective of borrowing.
Hedging
Only good intentions would not generate cash flows to honor the Dividend Payout Ratio
installments of the loan. The management needs to be strong in
Vertical Merger
terms of their knowledge about business, commitment towards
achieving the set goals etc. Horizontal Merger
P/E Ratio
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08/07/2017 Credit Appraisal of Term Loans by Financial Institutions like Banks

Technical Appraisal:

A technical appraisal is subject to the kind of business and industry

of the borrower. If its a manufacturing concern, all those parameters
Popular Comments
like project site, availability of raw material and labor, capacity
utilization, vicinity to selling market, transportation etc would be
examined. A project needs to be technically very sound to be able Sources of
to sustain all business cycles. Finance

Financial Appraisal:
Advantages
After all the other kinds of appraisal, everything boils down to and
financial appraisal. This probably is the most important part of credit
appraisal of business loans. The reason is that it expresses
everything in terms of money. Disadvantages of Bank
Overdraft
Financial appraisal tries to assess the correctness or reasonability
of the estimates of costs and expenses and also the projected Capital
revenues. These may include the estimation of the selling price, Structure
cost of machinery, the overall cost of the project and the means of Theory
financing. Modigliani
and Miller (MM) Approach
Financial appraisal involves extensive financial modeling in excel.
Wealth
Basically, it takes the financial statements of previous periods and
Maximization
forecasts the future financial position for at least till the loan
matures. From that, the cash flows of each year are compared with
the installment of loan because ultimately the cash flows are going
to honor the payments of the bank. Advantages
and
Feasibility of the project is evaluated in terms of debt servicing
capacity of the firm. Debt service coverage ratio is a key ratio which
is calculated for each future financial period and if that ratio is Disadvantages of Leasing
satisfying the norms accepted by the bank, the loan would get Next
another green signal.

It is difficult to explain the process of appraisal in an article or even a

set of articles. It is a very extensive work being done at financial
institutions. They have a separate team of professionals for
conducting such project appraisals.

About The Author

Sanjay Bulaki Borad
Sanjay Borad is the founder & CEO of eFinanceManagement. He is
passionate about keeping and making things simple and easy.

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08/07/2017 Credit Appraisal of Term Loans by Financial Institutions like Banks

Running this blog since 2009 and trying to

explain "Financial Management Concepts in
Layman's Terms".

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