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PROCEDURE FOR LOAN APPRAISAL -
October 15th, 2010
STEP I - SUBMISSION OF LOAN APPLICATION
The financial institutions require that an entrepreneur seeking financing assistance should furnish detail information about the project in a prescribed form the borrower submits an application form that seeks comprehensive information about the project. The application form covers the following aspects:
Particulars of the industrial concern
Particulars of the project (Capacity, process, technical arrangements, management, location, land and building, plant & machinery, raw materials, labour & implementation schedule)
Cost of the project
Means of financing
Marketing and selling arrangements
Profitability and cash flow
STEP II - INITIAL PROCESSING OF LOAN APPLICATION
When the application is received, an officer of the financial institution reviews it to ascertain whether it is complete for processing. If it is incomplete the borrower is asked to provide the required additional information. When the application is considered complete, the financial institution prepares a ‘flash report’ which is essentially a summarization of the loan application. On the basis of the ‘Flash Report’, it is decided whether the project justifies a detailed appraisal or not.
STEP III - APPRAISAL OF THE PROPOSED PROJECT
The detailed appraisal of the project covers the Marketing, Technical, Financial, Managerial, and Economic aspects. The appraisal memorandum is normally prepared within two months after site inspection. Based on that a decision is taken whether the project will be accepted or not.
STEP IV - ISSUE OF THE LETTER OF SANCTION
If the project is accepted, a financial letter of sanction is issued to the borrower. This communicates to the borrower the assistance sanctioned and the terms and conditions relating thereto.
STEP V - ACCEPTANCE OF THE TERMS & CONDITIONS BY BORROWING UNIT
On receiving the letter of sanction from the financial institution, the borrowing unit convenes its board meeting at which the terms and conditions associated with the letter of sanction are accepted and an appropriate resolution is passed to that effect. The acceptance of the terms and conditions has to be conveyed to the financial institution within stipulated period.
STEP VI - EXECUTION OF LOAN AGREEMENT
The financial institution, after receiving the letter of acceptance from the borrower, sends the draft of the agreement to the borrower to be executed by the authorized persons and properly stamped as per the Indian Stamp Act, 1899. The agreement, properly executed and stamped, along with other documents as required by the financial institution must be returned to it. Once the financial institution also signs the agreement, it becomes effective.
STEP VII – DISBURSEMENT OF LOANS
Periodically, the borrower is required to submit information on the physical progress of the projects, financial status of the project, arrangements made for financing the project, contributions made by the promoters, projected funds flow statement, compliance with various statutory requirements, and fulfillment of the pre-disbursement conditions. Based on the information provided by the borrower, the financial institution will determine the amount of term loan to be disbursed from time to time. Before the entire term loan is disbursed, the borrower must fully comply with all the terms and conditions of the loan agreement.
STEP VIII - CREATION OF SECURITY
The term loans (both rupee and foreign currency) and the deferred payment guarantee assistance provided by the financial institutions are secured through the first mortgage, by way of deposit of title deeds, of immovable properties and hypothecation of movable properties. As the creation of mortgage, particularly in the case of land, tends to be a time consuming process, the institutions permit interim disbursements against alternate security (in the form of guarantees by the promoters). The mortgage, however, has to be created within a year from the date of the first disbursement. Otherwise, the borrower has to pay an additional charge of 1 per interest.
STEP IX - MONITORING
Monitoring of the project is done at the implementation stage as well as at the operational stage. During the implementation stage, the project is monitored through:
1. Regular reports, furnished by the promoters, which provide information about placement of orders, construction of buildings, procurement of plant, installation of plant and machinery, trial production, etc.
2. Periodic site visits
3. Discussion with promoters, bankers, suppliers, creditors, and other connected with the project
4. Progress reports submitted by the nominee directors, and
5. Audited accounts of the company.
During the operational stage, the project is monitored with the help of:
(i) Quarterly progress report on the project
(ii) Site inspection
(iii) Reports of nominee directors
(iv) Comparison of performance with promise.
The most important aspect of monitoring, of course, is the recovery of dues represented by interest and principal repayment.