Term Loan Appraisal: DSCR and Margin Test at Chandpur Branch
The Chandpur branch is appraising a term loan of ₹90 lakh for Shreeji Textiles, a proprietary weaving unit, against machinery costing ₹1.20 crore, with the promoter bringing ₹30 lakh as margin. The loan is priced at 10.5% on a reducing balance over seven years, and the first-year principal repayment works out to ₹8.76 lakh. Projected first-year figures are: sales ₹2.40 crore, EBITDA at 15% of sales, depreciation ₹9 lakh, interest on the proposed term loan ₹9.45 lakh, interest on the existing working-capital limit ₹4 lakh, and tax at 25%. Credit policy requires a minimum first-year DSCR of 1.50, TOL/TNW not exceeding 3.00, and promoter contribution of at least 20%. Existing outside liabilities are ₹22 lakh of term debt and a ₹40 lakh working-capital limit (55% utilised); tangible net worth is ₹58 lakh, and the promoter's CIBIL MSME rank is 4 against a cut-off of 5. The unit also has ₹3.20 lakh of GST arrears outstanding. The promoter now asks for an additional ₹15 lakh, which would add ₹1.60 lakh of interest and ₹1.70 lakh of principal repayment in Year 1.
1. Compute the Year-1 DSCR for the proposal as originally submitted and for the revised request with the extra ₹15 lakh. State whether the 1.50 benchmark is met in each case, showing every step.
Read the worked answer
EBITDA = 15% × ₹2.40 crore = ₹36.00 lakh.
Original proposal (₹90 lakh)
- Total interest = ₹9.45 lakh (term loan) + ₹4.00 lakh (working capital) = ₹13.45 lakh
- PBT = 36.00 − 9.00 (depreciation) − 13.45 = ₹13.55 lakh
- Tax @25% = ₹3.39 lakh; PAT = ₹10.16 lakh
- DSCR = (PAT + depreciation + term-loan interest) ÷ (term-loan interest + principal)
- Numerator = 10.16 + 9.00 + 9.45 = ₹28.61 lakh
- Denominator = 9.45 + 8.76 = ₹18.21 lakh
- DSCR = 28.61 ÷ 18.21 = 1.57, above the 1.50 floor, with a cushion of only 0.07.
With the additional ₹15 lakh
- Term-loan interest 11.05 + working-capital interest 4.00 = ₹15.05 lakh
- PBT = 36.00 − 9.00 − 15.05 = ₹11.95 lakh; tax ₹2.99 lakh; PAT ₹8.96 lakh
- Numerator = 8.96 + 9.00 + 11.05 = ₹29.01 lakh; denominator = 11.05 + 10.46 = ₹21.51 lakh
- DSCR = 29.01 ÷ 21.51 = 1.35, a clear breach.
The extra ₹15 lakh therefore pushes debt service cover below policy even though absolute profit stays positive.
2. Test the proposal against the TOL/TNW and promoter-contribution norms, both originally and after the additional ₹15 lakh. What does the pattern tell you?
Read the worked answer
Original: TOL = ₹22 lakh (existing term debt) + ₹90 lakh (proposed) + ₹40 lakh (sanctioned working-capital limit) = ₹152 lakh. TOL/TNW = 152 ÷ 58 = 2.62, within the 3.00 ceiling. Promoter contribution = 30 ÷ 120 = 25%, above the 20% floor.
With ₹15 lakh more: TOL = ₹167 lakh, TOL/TNW = 167 ÷ 58 = 2.88 - still inside the ceiling. But the project cost does not change, so promoter contribution falls to 15 ÷ 120 = 12.50%, a direct policy breach, and the DSCR falls to 1.35.
The pattern is important: the leverage ratio still looks compliant because the denominator (net worth) is untouched, while the two tests that actually measure the borrower's skin in the game and repayment capacity both fail. A single-ratio check would have let a weak proposal through. Note also that ₹3.20 lakh of GST arrears indicates weak statutory discipline and should be cleared before disbursement, regardless of ratios.
3. Recommend the sanction decision to the branch's credit committee, with conditions, and explain how you would communicate the partial decline to the promoter.
Read the worked answer
Sanction ₹90 lakh and decline the additional ₹15 lakh as structured. Reasons, in order: the base proposal clears all three tests (DSCR 1.57, TOL/TNW 2.62, margin 25%); the enhanced request fails two of them (DSCR 1.35, margin 12.50%), and a marginal ₹90 lakh sanction already leaves thin headroom, so stretching it is not defensible.
Recommended conditions:
- Clear ₹3.20 lakh of GST arrears before first disbursement and produce the challan.
- Machinery hypothecation plus registered mortgage of the offered property, with insurance assigned to the bank.
- Quarterly stock and book-debt statements, with a right to inspect.
- No fresh borrowing without written consent; a covenant that DSCR be maintained at 1.50 or better each year.
- Route the working-capital enhancement request separately, after six months of satisfactory operation.
For the promoter, offer a route rather than a refusal: the extra ₹15 lakh can be reconsidered if he brings matching margin (₹15 lakh), which restores contribution to 25% and keeps DSCR above 1.50 - or the machinery can be part-funded through a supplier credit. Put both options in writing with a two-month review date.