Appraising a greenfield tool room seeking CGTMSE-covered facilities
Precision Edge Tooling Pvt Ltd was incorporated five months ago by two first-generation promoters - a tool-and-die technician and a chartered accountant - to machine aerospace and pump components on two CNC machining centres. Project cost is ₹1.90 crore: imported machinery ₹1.15 crore (15% advance, letter of credit at sight, 45-day lead time), leased shed and civil work ₹30 lakh, working capital margin ₹15 lakh, contingency and pre-operative expenses ₹20 lakh, and LC margin ₹10 lakh. The promoters can bring ₹20 lakh. The request is for a term loan of ₹1.30 crore over seven years with a six-month moratorium and a cash credit limit of ₹40 lakh. Projected cash accrual is ₹29.9 lakh a year against debt service of ₹26.7 lakh. The only order in hand is a ₹2.80 crore letter of intent from one aerospace buyer over 18 months, expressly conditional on a trial batch passing inspection. Break-even is projected at 62% of rated capacity. The promoters offer personal guarantees and seek CGTMSE cover in lieu of collateral.
1. Assess the viability of the project on the figures presented and state whether the term loan can be supported as requested.
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The headline DSCR is 29.9 / 26.7 = 1.12. That is thin for a greenfield unit, where the usual comfort level for a first-generation promoter with no collateral is at least 1.50. A 10% shortfall in projected accrual takes it to about 1.00, and a 15% shortfall leaves the unit unable to service debt.
Check the financing structure. Promoter contribution is ₹20 lakh, which is 10.5% of a project cost of ₹1.90 crore - well short of the normal 25% for a term-financed greenfield project, a shortfall of about ₹27 lakh. This is not a minor point: low equity, high leverage and no collateral means the bank carries nearly all the downside.
Check the order book. The only order is a conditional letter of intent. A trial-dependent order is not a firm order, and 100% concentration in one aerospace buyer adds a customer risk on top of execution risk on imported machinery with a 45-day lead time.
Conclusion: the project may be viable but not financeable on these terms. Do not sanction ₹1.30 crore against ₹20 lakh of promoter money. Either ask the promoters to raise contribution to ₹45-50 lakh and bring in a firm purchase order, or reduce the term loan to about ₹1.00 crore with a longer repayment, and treat the machinery LC as a separate, fully margined facility.
2. If the branch still wants to support the unit, what sanction structure and covenants would you recommend?
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Reduce the exposure and tie disbursement to milestones, because the risk is about execution, not intent.
Sanction a term loan of about ₹1.00-1.10 crore, with promoter contribution of ₹45 lakh (25%) brought in proportionately. Disburse in stages: 40% on proof of promoter money and LC opening for the machinery, 40% on installation and commissioning, and 20% only after a successful trial batch. Keep back 10% of the term loan as retention until three months of commercial production. Raise a cash credit of ₹30 lakh instead of ₹40 lakh, and review the assessed working capital need after six months of operation.
Covenants: monthly shortfall statements and quarterly stock statements; escrow of receivables from the aerospace buyer; assignment of the letter of intent and a tripartite arrangement requiring payments to come to the bank; recovery extended to 8-9 years with the moratorium limited to the commissioning period; insurance of imported machinery with bank clause; personal guarantees of both promoters and their spouses; no dividend or withdrawal of capital without the bank's consent; and a covenant that no further debt is raised without consent. Review at every 90-day interval, with a right to recall if 60% of projected capacity utilisation is not achieved within nine months of commissioning.
3. What should the branch check about CGTMSE cover before relying on it, and what gaps remain even with a guarantee?
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CGTMSE is a credit guarantee, not collateral. Confirm that the enterprise is an eligible micro or small enterprise in manufacturing under the current definition; that the activity (machining of components) is not in the excluded list; and that both the term loan and the cash credit fall within the guarantee ceiling and the guarantee cover percentage applicable to the category. The guarantee fee and the annual service fee are payable upfront and annually, and the lender's share of any loss must be honoured.
Guarantee does not remove appraisal risk. Before relying on it, check that CGTMSE does not automatically cover a loan that becomes a wilful default or is vitiated by fraud; that the guarantee is invoked only after the bank has exhausted recovery from the primary security and from the promoter; and that timely reporting of the account in SMA to the repository is a condition of the claim. The bank still bears a portion of the loss.
Practical gaps: the imported machinery will remain the primary security, so a lien must be recorded with the supplier and the LC restricted to the branch; the leased shed gives no immovable security, so the guarantee is the only backstop; and the LC margin of ₹10 lakh must be kept intact and not funded from the term loan. Get the CGTMSE application processed before the first disbursement, not after.