IIBF MSME key terms

The structured assessment a lender performs before sanctioning a facility, covering the borrower's character, technical and economic viability, financial position, and repayment capacity to judge whether the loan will be repaid.

A classic framework for judging a borrower: integrity and track record, ability to repay from cash flow, own stake in the business, security offered, and the external environment affecting the unit.

A ratio comparing the cash available for repayment in a period with the total debt obligations due in that period, including interest and principal; a value above one indicates a margin of safety.

Earnings before interest and tax divided by interest expense, showing how many times operating profit covers the interest bill; it signals the cushion available before a unit struggles to service debt.

The sales level at which total revenue equals total cost, so neither profit nor loss arises; appraisers use it to judge how much sales can fall before the unit stops covering fixed costs.

The gap between expected or actual sales and the break-even sales, expressed as a percentage or value; a wider margin means the unit can absorb a demand shock without slipping into loss.

Forecast profit and loss, balance sheet and cash flow statements prepared for the loan tenure, built on stated assumptions about capacity utilisation, prices, costs and working capital, and tested for reasonableness.

A technique that recalculates project viability when key assumptions such as sales price, capacity utilisation or raw material cost change, revealing how much stress the repayment plan can withstand.

The portion of project cost funded by the promoter's own money rather than borrowed funds, showing personal stake and risk sharing; shortfalls here are a common reason for insisting on more equity.

Total borrowings divided by owner funds, indicating how much of the business is financed by debt; a high ratio means thin equity and greater vulnerability if cash flows weaken.

Current assets divided by current liabilities, measuring short-term liquidity; it shows whether the unit can meet obligations falling due within a year from assets it can convert into cash.

The time between paying for raw materials and collecting cash from sales, including holding periods for stock and receivables; a long cycle ties up funds and raises the working capital requirement.

The exercise of estimating the funds needed to finance day-to-day operations, using methods such as the turnover method for smaller exposures or detailed projection of current assets and liabilities.

The maximum amount a borrower may withdraw from a cash credit or overdraft account at any time, computed from paid stock and book debts after prescribed margins and excluding overdue or disputed items.

A working capital facility allowing the borrower to draw funds repeatedly up to a sanctioned limit against hypothecation of stock and receivables, with interest charged on the amount actually used.

A periodic declaration by the borrower listing quantities and values of raw material, work in progress and finished goods, submitted so the lender can verify the drawing power and monitor the security.

The portion of an asset's value the borrower must fund from own resources, so the lender does not finance the full cost; it creates a cushion against a fall in the value of the security.

A charge created when the borrower pledges movable assets such as stock and machinery as security while retaining possession and use, with the lender able to enforce the charge on default.

A charge over immovable property such as land or a building, created in favour of the lender as security for a loan, enforceable by sale of the property if the borrower defaults.

A bailment of goods as security where the lender takes actual possession of the movable asset and may sell it on default after due notice; common for commodities and warehouse receipts.

The loan amount expressed as a percentage of the assessed value of the security; a lower ratio means more borrower equity and better protection for the lender if values fall.

An internal score or grade assigned to a borrower using factors such as financial strength, business experience, repayment record and security, used to price the loan and set delegation limits.

A record from a credit bureau summarising a borrower's past and current borrowings, repayment history and defaults, used to check conduct and detect over-borrowing across lenders.

The formal written communication stating the approved facility, amount, interest rate, tenure, security, margin and covenants, which the borrower must accept before documentation and disbursement.

A condition imposed in the sanction requiring the borrower to do or refrain from certain acts, such as maintaining a ratio or not selling assets, breach of which can trigger recall.

The release of sanctioned funds to the borrower, usually in stages tied to progress, after documentation, margin contribution and pre-disbursement conditions have been verified.

Checks by the lender to confirm that funds were applied for the stated purpose, such as buying machinery or meeting working capital needs, rather than diverted to other uses.

Ongoing supervision after disbursement through periodic statements, inspections, stock checks and account conduct review, aimed at spotting stress early and keeping the lender's security intact.

Observable indicators of emerging borrower stress, such as irregular stock statements, frequent excess drawings, delayed payments, bounced cheques, declining sales or sudden changes in management.

An independent inspection of the borrower's inventory and records to verify quantity, quality and value of stock charged to the lender, and to confirm that drawing power is correctly computed.

The periodic review of a sanctioned facility, usually annual, where financials and operations are reassessed and the limit is renewed, enhanced or reduced; failure to review can make the account irregular.

A loan where interest or principal has remained overdue for more than ninety days, or where the account has been classified as such under the lender's income recognition norms, triggering provisioning.

A supervisory classification for accounts showing signs of incipient stress even before they become non-performing, such as overdue amounts beyond a threshold but within the time limits for NPA.

A specified occurrence, such as non-payment, breach of a covenant or insolvency, that entitles the lender to demand immediate repayment and enforce the security.

The process of realising dues from a defaulting borrower through negotiation, rescheduling, enforcement of security, legal action or settlement, aiming to minimise loss to the lender.

A modification of repayment terms, such as extending tenure, reducing interest or converting debt into equity, granted to a viable borrower facing temporary stress so the business can revive.

A negotiated resolution where the lender accepts a lump-sum payment, usually below the full outstanding, as final settlement of dues, typically for accounts where recovery prospects through normal means are poor.

A borrower classified as such after findings of deliberate default despite capacity to pay, diversion of funds, or disposal of secured assets without the lender's consent, attracting restrictive measures.

Use of borrowed money for purposes other than those sanctioned, such as routing funds to group companies or personal use; it is a serious conduct issue and a ground for classifying the borrower as a wilful defaulter.

An officer authorised under recovery legislation to issue demand notices, attach and sell assets of a defaulting borrower, and conduct the process for realising secured or public dues.