By Monuram Gogoi

WHAT DO WE MEAN WHEN WE SAY LET’S AVAIL BANK FINANCE/BANK LOAN?

Bank finance refers to the provision of financial services by a bank to individuals, businesses, or other organizations. It encompasses various types of funding and lending options, such as loans, credit, and other forms of capital provision, enabling businesses to fund operations, expansions, or investments and helping individuals meet personal financial needs.

Types of bank finance include:

1. Loans: The bank lends a lump sum to be repaid over time with interest.
   • Term loans: Fixed amount borrowed for a set period.
   • Working capital loans: Short-term loans to finance day-to-day operations.
2. Overdrafts: A facility allowing an account holder to withdraw more money than what is in their account, up to a limit.
3. Credit Lines: A revolving loan where borrowers can draw, repay, and redraw funds within a limit.
4. Project Finance: Long-term funding for large infrastructure or industrial projects.
5. Trade Finance: Supporting businesses involved in importing and exporting goods.
6. Equipment Financing: Loans or leases for purchasing business equipment.
7. Mortgage Loans: Loans used to purchase property, often with the property as collateral.

Banks provide these financial services based on credit assessments, collateral, and repayment capacity, making bank finance a crucial tool for economic growth and personal financial management.

 

HOW TO AVAIL A BANK LOAN/ BANK FINANCE IN INDIA?

To avail a bank loan or bank finance for a business, you typically need to follow a structured process that involves providing the bank with essential documents and information. Banks assess various factors before granting a loan to ensure the business has the ability to repay it.

Steps to Avail a Bank Loan for a Business:

1. Determine Loan Type and Purpose:
   • Identify the type of loan you need (working capital loan, term loan, machinery loan, etc.).
   • Clearly state the purpose of the loan (expansion, inventory purchase, equipment, etc.).
2. Prepare Documents: Banks will ask for several documents to assess your business. These may include:
   • Business plan: A detailed plan explaining the nature of your business, revenue model, and future growth projections.
   • Financial statements: Balance sheets, profit & loss statements, and cash flow statements for the past 2-3 years.
   • Bank statements: Past bank transactions to show the financial health of your business.
   • Income tax returns: Tax filings for the business and its owners for the past few years.
   • Collateral details: Information on assets that can be used as security, if the loan is secured.
   • KYC documents: Identification documents (Aadhaar card, PAN card, etc.) and business registration certificates.
3. Creditworthiness Check: Ensure that your business and personal credit scores are good. Banks use these scores to assess the risk associated with lending to you.
4. Submit Loan Application: Submit the loan application form to the bank with the required documents. Be clear about the loan amount and tenure you seek.
5. Review and Approval Process: The bank will review your application, documents, and financial history before deciding. If approved, the bank will give you the loan terms (interest rate, repayment schedule, etc.).

Key Points Banks Consider Before Granting a Business Loan:

1. Creditworthiness (CIBIL Score):
   • Banks check the CIBIL score(credit score) of both the business and the owner. A score of 700 or above is usually considered good.
   • This score reflects your past loan repayment behavior, and a high score increases your chances of loan approval.
2. Business Financial Health:
   • Banks look at your financial statements, like profit & loss accounts and balance sheets, to assess the overall health of the business.
   • They check if the business is making profits and has steady cash flow to ensure the loan can be repaid on time.
3. Purpose of the Loan:
   • Banks want to understand why you need the loan and how the funds will be used. A well-defined business planhelps convince them of the loan’s necessity.
4. Repayment Capacity:
   • Your ability to repay the loan is crucial. Banks check your debt-to-income ratio, which compares the amount of debt you have to your income.
   • They ensure you have sufficient income to cover the loan repayment along with other expenses.
5. Collateral/Security:
   • For large business loans, banks often require collateral(like property, equipment, or inventory) to secure the loan. If you default, the bank can seize the collateral.
   • In the case of unsecured loans, banks might charge higher interest rates to cover the higher risk.
6. Business Experience and Stability:
   • Banks prefer lending to businesses with a proven track record. If you have been in business for several years with consistent performance, it gives the bank confidence in your ability to manage and repay the loan.
7. Industry Risk:
   • The bank evaluates the industryin which your business operates. High-risk industries (e.g., startups or highly competitive sectors) may face stricter lending conditions.
8. Owner’s Profile:
   • Banks assess the owner’s background, including experience in the industry, education, and financial track record. Strong leadership can increase the chances of loan approval.

By preparing these documents and understanding what banks evaluate, you can increase your chances of successfully obtaining a business loan.

 

CASH CREDIT (CC), TERM LOAN AND OVERDRAFT- WHAT ARE THESE AND WHEN TO AVAIL THEM?

Cash Credit (CC), Term Loan, and Overdraft are different types of bank financing options that businesses use for various purposes. Here’s a breakdown of each type and when to avail them:

1. Cash Credit (CC):

• What it is: A cash creditis a short-term financing facility provided by banks to businesses to meet their working capital needs (like buying inventory or raw materials). It allows businesses to borrow money up to a specified limit based on their inventory, receivables, or stock.
• How it works: The business can withdraw funds from the cash credit account as needed, up to the sanctioned limit. Interest is charged only on the amount utilized, not the full limit.
• Collateral: Usually secured by stock, receivables, or other business assets.
• Repayment: It’s a revolving credit, so the business can repay and borrow multiple times within the sanctioned period, typically for one year, and renew as needed.

When to Avail a CC:

• When your business has regular short-term working capital needs.
• When you need to fund operational expenses like raw materials, labor costs, or day-to-day business operations.
• If your business has fluctuating cash flows and needs access to funds at different times throughout the year.

2. Term Loan:

• What it is: A term loanis a lump-sum loan that is typically used for long-term purposes, such as buying equipment, real estate, or expanding a business. It is paid back in fixed installments over a set period (e.g., 5, 10, or 15 years).
• How it works: The business receives the entire loan amount upfront and repays it over time with fixed interest. Term loans can be short-term (up to 3 years)or long-term (3+ years).
• Collateral: Often secured by the asset purchased or other business assets.
• Repayment: Fixed monthly, quarterly, or annual installments (principal + interest), and the interest rate can be fixed or floating.

When to Avail a Term Loan:

• When you need to finance long-term projects like purchasing machinery, property, or expanding business operations.
• When the business has a clear repayment plan and steady cash flow to cover monthly or quarterly installments.
• When you have a specific capital expenditure (CapEx) in mind that requires a large, upfront investment.

3. Overdraft:

• What it is: An overdraftis a credit facility linked to a business’s current account that allows the business to withdraw more money than it has in the account, up to a pre-agreed limit.
• How it works: Like a cash credit, an overdraft facility lets the business use funds as needed, but it’s more flexible as it’s linked to the current account. Interest is charged only on the amount overdrawn, and the limit is usually set based on the business’s creditworthiness or collateral.
• Collateral: It can be secured or unsecured, depending on the arrangement with the bank.
• Repayment: The overdraft facility is generally repayable on demand or has to be renewed annually.

When to Avail an Overdraft:

• When your business needs a flexible short-term solutionto manage temporary cash flow mismatches.
• When you need access to extra funds for unforeseen expenses or emergencies (e.g., supplier payments, unexpected repairs).
• If you have irregular income streams and need to cover expenses during lean periods.

Key Differences:

Feature	Cash Credit (CC)	Term Loan	Overdraft
Purpose	Short-term working capital	Long-term capital expenditure	Short-term liquidity management
Loan Type	Revolving (borrow and repay repeatedly)	Lump-sum loan with fixed installments	Revolving (borrow and repay repeatedly)
Repayment	Flexible (within limit)	Fixed monthly/quarterly installments	Flexible (within limit)
Interest	Charged only on the amount utilized	Charged on the full loan amount	Charged only on the amount overdrawn
Collateral	Stock, receivables	Assets purchased, property, etc.	Can be secured or unsecured
Tenure	Usually 1 year, renewable	1 year to 15 years	1 year, renewable

When to Choose Which?

• Cash Credit (CC):
  • If your business regularly requires funds to cover working capital needs such as inventory, stock, or receivables.
  • When you need a revolving credit line to manage day-to-day operations.
• Term Loan:
  • If you have a long-term investment requirement such as buying machinery, vehicles, or real estate.
  • When the loan purpose is clear, and you have a steady cash flow to repay in fixed installments over time.
• Overdraft:
  • If you need a flexible option to manage temporary cash flow mismatches or emergencies.
  • When you want a short-term cushion for unexpected expenses, without a fixed repayment structure.

Each option serves a different financing need, so it’s important to match the loan type to your specific business requirement.

 

WHAT IS WORKING CAPITAL?

Working capital refers to the money a business needs for its day-to-day operations. It’s the difference between a company’s current assets (like cash, inventory, and money owed by customers) and its current liabilities (like bills and short-term debts).

In simple terms, working capital is the money a business has available to cover its regular expenses, such as paying suppliers, employees, and handling other short-term costs.

Formula:

Working Capital = Current Assets − Current Liabilities

• Current Assets: These include things like cash, inventory (goods for sale), and accounts receivable (money owed by customers).
• Current Liabilities: These include short-term debts like bills, loans, and payments due within a year.

Example:

• If a business has ₹1,00,000 in current assets and ₹60,000 in current liabilities, its working capital is ₹40,000 (₹1,00,000 – ₹60,000).

Why is Working Capital Important?

• Smooth Operations: It helps keep a business running by covering everyday expenses.
• Financial Health: Positive working capital means the business can pay its bills, while negative working capital might signal financial trouble.

In short, working capital is the lifeblood of a business, ensuring it can function smoothly.

 

WHAT ARE THE MAJOR COMMITTEE RECOMMNEDATIONS THAT BANKS USUALLY FOLLOWS BEFORE GRANTING A LOAN?

When banks evaluate a business plan for a loan, they often rely on several committee reports and recommendations that help guide their lending policies, particularly for sectors like small and medium-sized enterprises (SMEs), working capital financing, and agriculture. Some of the key committee reports and recommendations banks consider are:

1. Tandon Committee Report (1974) – Working Capital Financing:

• This report provided guidelines on how banks should finance the working capital needs of businesses. It introduced norms for inventory and receivables management and set limits on how much businesses could borrow for short-term needs.
• Impact on Loans: Banks still follow its recommendations, like the concept of Maximum Permissible Bank Finance (MPBF), which limits how much working capital a business can borrow based on their assets.

2. Nayak Committee Report (1991) – SMEs Lending:

• This report focused on improving the availability of finance to small-scale industries (SSIs) and SMEs.
• Recommendation: It suggested that banks should provide working capital finance up to 20% of the projected annual turnover of small businesses.
• Impact on Loans: Banks use this recommendation as a guideline to assess SME creditworthiness and determine the amount of working capital they need.

3. Chore Committee Report (1979) – Working Capital for Large Borrowers:

• This report provided guidelines for improving the management of bank lending to larger corporate borrowers, especially in terms of working capital.
• Impact on Loans: The recommendations focused on regulating how much of a company’s working capital needs should be funded by banks, pushing for better self-financing by businesses.

4. Rangarajan Committee (1989) – Financial System Reforms:

• The Rangarajan Committee was tasked with restructuring the banking system and emphasized better management of credit flow, especially to the priority sectors like agriculture and small businesses.
• Impact on Loans: Banks consider its recommendations for improving credit risk management and promoting lending to underserved sectors.

5. Khusro Committee (1989) – Agricultural Credit:

• This committee focused on the delivery of agricultural credit and recommended measures to increase rural lending.
• Impact on Loans: Banks use this report when evaluating business plans related to agriculture and rural sectors, ensuring that enough financing is available for these areas.

6. Vijay Kelkar Committee (2002) – Financial Sector Reforms:

• The Kelkar Committee recommended reforms to strengthen the financial system, especially around improving access to finance for SMEs and priority sectors.
• Impact on Loans: This report is particularly useful for banks when looking at lending to underserved sectors like rural businesses, SMEs, and agricultural ventures.

7. M. Narasimham Committee (1991, 1998) – Banking Sector Reforms:

• These reports aimed at transforming India’s financial sector by recommending reforms for better capital adequacy, risk management, and improved financial health of banks.
• Impact on Loans: While the Narasimham Committee focused on broad reforms in the banking sector, it also had implications for how banks assess credit risk and financing for businesses.

8. K.V. Kamath Committee (2020) – COVID-19 Related Debt Restructuring:

• In the context of the COVID-19 pandemic, this committee was set up to recommend ways to restructure loans for businesses affected by the pandemic.
• Impact on Loans: Banks may use these guidelines to restructure loans and assess the viability of businesses affected by crises.

9. U.K. Sinha Committee (2019) – MSME Sector:

• This committee focused on improving the financing and performance of the Micro, Small, and Medium Enterprises (MSME) sector.
• Recommendation: It recommended easier credit access for MSMEs and changes to the way banks assess the creditworthiness of small businesses.
• Impact on Loans: Banks rely on these recommendations when assessing loans for the MSME sector.

10. Prudential Norms for Capital Adequacy (Basel III Recommendations):

• Banks also refer to the international standards set by the Basel IIIframework, which provides guidelines for risk management and capital adequacy in lending. Although these are not specific to business plans, they impact how much risk banks can take when providing loans.

Conclusion:

Banks typically consider the Tandon, Nayak, and Chore Committee Reports for working capital and SME loans, along with specific recommendations from committees like Narasimham, Kelkar, and Kamath depending on the type of business or sector. These reports help banks assess risk, determine loan eligibility, and ensure that the loans they grant are sustainable and in line with regulatory norms.

 

THE TANDON COMMITTEE REPORT ON BANK FINANCE:

The Tandon Committee Report was a set of recommendations made in 1974 to improve how Indian businesses manage their working capital (the money needed for daily operations). The committee, led by P.L. Tandon, was set up by the Reserve Bank of India (RBI) to bring more control and discipline in the way banks give loans for short-term business needs.

Key Points of the Tandon Committee Report:

1. Limit on Bank Loans: The committee wanted to reduce the over-dependence of businesses on bank loans for working capital. They recommended that businesses should use more of their own money and less of the bank’s money.
2. Managing Inventory and Receivables: The report advised businesses to keep their inventory(the goods they keep in stock) and receivables (money owed to them by customers) under control. This would make sure they don’t borrow too much money unnecessarily.
3. Three Ways of Financing: The report suggested three methods for companies to borrow money:
   • First Method: Companies should provide at least 25% of their own money for working capital and take 75% from the bank.
   • Second Method: Companies should use 25% of their total assets for working capital and borrow less from the bank.
   • Third Method: Companies should contribute 33.3% of their working capital needs, while banks would provide the rest.
4. Maximum Loan Limit (MPBF): The committee introduced the idea of a Maximum Permissible Bank Finance (MPBF), which set a limit on how much a business could borrow based on its assets and financial strength. This was to prevent companies from borrowing more than they could handle.
5. Encouraging Self-Financing: Businesses were encouraged to use long-term sources of money, like investments or profits, rather than depending too much on short-term bank loans for everyday operations.
6. Regular Financial Reporting: The committee made it necessary for companies to submit regular financial reports to banks. This helped banks keep track of the company’s financial health and decide how much they should lend.

Impact of the Tandon Committee Report:

• Better Control Over Loans: The report helped banks avoid risky lending by making sure businesses didn’t borrow more than they needed.
• Less Dependence on Banks: By encouraging businesses to rely more on their own money, the report helped make them more financially stable.

In simple terms, the Tandon Committee aimed to ensure that businesses were not borrowing too much from banks and were using their own funds more responsibly. This helped both the banks and businesses manage money better.

 

At M/s Corporate Panacea, we specialize in creating comprehensive business project reports that are meticulously tailored to help businesses secure financing through loans. Our reports are based on committee recommendations, ensuring they meet the highest industry standards. Our team of experts guides clients through the entire loan process, from arranging meetings with financial institutions to ensuring the successful disbursement of the loan. We also provide valuable advice on how business owners can navigate their operations effectively, ensuring long-term success and financial stability. Whether you’re starting a new venture or expanding an existing one, we are here to support you at every step.