Loan sanction letters, Insurance policies, warranty papers are some of the ‘great’ documents which run into several pages, in small prints and are full of legal/commercial jargons. Very rarely do people read these documents but I am definitely sure that the terms are not familiar to the readers. The people are also aware that the terms and conditions are difficult to adhere to in the normal course of business. In essence, these kind of ‘fine documents’ are one-sided, mostly favoring the service provider.
One such document is the Loan sanction letter for working capital facility from a bank. When it comes to terms and conditions, both nationalized and private banks compete with each other to make the borrower’s life difficult! In this article, I have listed out the terms of one such sanction letter.
The sanction letter opens with a positive note – “We have pleasure in advising that the competent authority has approved the proposal in your favour, subject to the stipulated terms and conditions given in the annexure to this letter” (this second part of the sentence is the problem!)
Working Capital Facility – You may be aware of working capital facility. This line of credit is given to meet the day-to-day running of the company. The company maybe holding the stock of goods, amount receivable from their customers, etc. in their books. To bridge the gap of cash flow issues till the stocks are sold and amount is received from the customers, working capital facility is extended by the banks.
Tenure of the loan and Renewal – The loan facility is given for a period of 12 months and it has to be renewed thereafter. The borrower should submit the requisite data for renewal of limit atleast 45 days before the expiry.
Primary and collateral security – The primary security is the current assets of the company such as stocks, debtors, loans and advances, etc. The collateral security is the immovable property belonging to the company or its directors/shareholders.
Guarantee – Apart from primary and collateral security, the bankers will also ask for the personal guarantee of the directors of the company.
Rate of Interest – will be at 3 or 4% above Base Rate. There will be an interesting line “Interest will be applied and will be payable at the end of each calendar month. The rate of interest would be subject to review and change from time to time at the sole discretion of the Bank” (Note: Will the banker inform the borrower as and when the rate of interest is increased? Or any intimation/ approval is sought from the borrower before / after levying increased interest? This aspect is not clear in sanction letter)
Margin – The banker will fund 60% on receivables and stock. The receivables up to 90 days will be eligible for drawing power calculations. (Note: if you have debtors (customers) over 90 days it won’t be considered for calculating your eligibility to draw the funds)
Stock Statement – The stock and book debt statement as on the last day of each financial quarter is to be submitted by 10th of next month. (Note: To provide this statement, the books of accounts is to be updated regularly)
Processing Fee – 1% of the sanction limit will be charged as processing fee and this amount is to be paid upfront at the time of executing the loan documents. The important information is “The processing fee is non-refundable. On application being rejected by the bank or facility withdrawn or not disbursed due to non-compliance or for any reason whatsoever, the Bank shall not be entitled for refund of the same either in part or in full”
Pre-payment penalty – Penal charges are levied at 2% in case of pre-payment or take-over of working capital credit facilities by another banker. Pre-payment charges shall be levied on entire sanctioned limit, irrespective of the loan outstanding at the time of take-over. (Note: Once you have taken a loan from a bank, if you plan to move the account to another banker, you will end up in paying huge penalty. For a loan of Rs.2 Crore, one has to cough up Rs.4 Lakhs unnecessarily. So, it is not a good idea to shift the banker during the tenure of the loan)
Commitment charges – if the total availment of the facility is less than 50% of the sanctioned limit, commitment charges of up to 0.5% on the un-availed portion will be levied (Note: This kind of hidden charges will be automatically debited to the account without the knowledge of the borrower. So one has to review the bank account carefully and get the clarification for every debit)
Penalty for non-submission of audited balance sheet – If the audited balance sheet is not submitted within a period of 6 months from the end of financial year of the company, 1% p.a. on the outstanding amount is payable as penalty
Penalty for non-payment of interest on or before due date – 2% p.a. on the amount of overdue interest is payable as penalty
Insurance – The assets charged to the Bank are to be insured for full value covering all risks. The policy document has to be submitted to the bank.
Inspection – The banker at its own discretion will perform inspection on a half yearly basis. The bank will have the right to examine at all times the Company’s Books of accounts and to have company’s accounts, factories, offices and assets. The cost of such inspection or audit shall be borne by the Company/borrower.
Loan from other banks – The borrower shall be advised not to avail any credit facilities from any other banker without the consent of the primary banker.
Transactions – The borrower should give an undertaking that the majority of the business transactions will be routed through the loan account.
Credit rating – The banker will insist that the borrower get a credit rating done by a reputed rating agency. The cost of credit rating is to be borne by the borrower.
Utilization Certificate – The funds from the sanctioned credit facilities shall be used for only the purpose mentioned in the sanction letter and not for adjustment / payment of any debt deemed bad or doubtful for recovery or purchase of shares or extending loan to subsidiary companies or for making inter-corporate deposit. A Chartered Accountant’s certificate on ‘end use of funds’ to be submitted by the borrower every year to the bank.
New project or purchase of capital assets – During the currency of the bank’s credit facility, the borrower shouldn’t undertake any expansion or fresh project or acquire any fixed asset, without the knowledge of the banker!
Inform the banker about the operations – The borrower shall keep the Bank informed of the happening to any event, likely to have a substantial effect on their production, sales, profits, etc., such as labour problem, power cut, etc. and the remedial steps proposed to be taken by it.
Inform the banker about the status of the company – Micro/small etc. – The borrower shall immediately inform the bank in case of any change in its Micro/ Small Enterprise (MSE) status. The bank may at its sole discretion reassess/ reconsider / recall the credit facilities, in such an event.
Legal opinion and Valuation of the property – The borrower shall arrange for satisfactory title clearance report and valuation report of the property offered as security to the bank from the empaneled advocate and valuer of the bank. The cost of such reports to be paid by the borrower.
Apart from the above, there are many other conditions such as undertaking by the borrower that they are not related the directors of the bank, charge creation at Registrar of Companies (ROC), provide reports about statutory liabilities, etc.
The six pages list of conditions also mention that “The bank reserves the right to discontinue the facility and to withhold/stop any disbursement without giving any notice in case of non-compliance / breach of any terms and conditions stipulated herein and from time to time as also in the relevant documents or any information/ particulars furnished to us is found incorrect”
So, friends, please read the offer document (sanction letter) carefully before signing on the dotted lines!
Thought for the day
Stop worrying about what you have to loose and start focusing on what you have to gain.