Two Loan Structures for a Dairy Cooperative
A dairy cooperative society seeks ₹15,00,000 for a pasteurisation unit. The bank offers two structures. Option A: 10% per annum on reducing balance for 60 monthly instalments; processing fee 1% plus 18% GST. Option B: 9.25% per annum on reducing balance for 72 monthly instalments; processing fee 1.75% plus 18% GST, and a 10% margin deposit locked for three years. The society's projected monthly surplus before the new loan is ₹42,000, and it already pays an existing EMI of ₹11,500. It has ₹1,20,000 cash. A ₹1,50,000 subsidy is expected after 24 months and can be used only to prepay principal. The bank's internal norm is a minimum monthly debt-service coverage ratio of 1.10. The board asks whether either option is immediately viable and what the least disruptive condition would be.
1. Calculate the approximate monthly EMI and upfront cash needed for each option. State assumptions.
Read the worked answer
Use EMI = P × i × (1+i)^n / ((1+i)^n − 1), with i = annual rate/12.
Option A: P=₹15,00,000; i=10%/12=0.008333; n=60; (1+i)^60≈1.6453. EMI≈₹15,00,000×0.008333×1.6453/0.6453≈₹31,870. Processing fee=1%×15,00,000=₹15,000; GST=18%×15,000=₹2,700; upfront≈₹17,700.
Option B: i=9.25%/12=0.007708; n=72; (1+i)^72≈1.7382. EMI≈₹15,00,000×0.007708×1.7382/0.7382≈₹27,225. Fee=1.75%×15,00,000=₹26,250; GST=₹4,725; fee total=₹30,975. Margin deposit=10%×15,00,000=₹1,50,000. Upfront≈₹1,80,975.
Assumptions: EMI paid at month-end, no other charges, margin deposit is fresh cash, and the subsidy is not available at disbursement.
2. Assess whether either option is immediately viable under the 1.10 DSCR norm and recommend the least disruptive condition.
Read the worked answer
Monthly debt service = existing EMI ₹11,500 + new EMI. DSCR = projected surplus ₹42,000 / total debt service.
- Option A: 42,000/(11,500+31,870)=42,000/43,370≈0.97, below 1.10. It is upfront-cash feasible (₹17,700 < ₹1,20,000), but it fails the servicing norm.
- Option B: 42,000/(11,500+27,225)=42,000/38,725≈1.08, still below 1.10. It also needs ₹1,80,975 upfront, leaving a cash shortfall of about ₹60,975. To meet 1.10, maximum total debt service=42,000/1.10≈₹38,182, so maximum new EMI≈₹26,682. Option B is close: its EMI is about ₹543 too high. A loan reduction of roughly 543/27,225≈2.0%, or about ₹30,000, brings the EMI near the cap, but the 10% margin still requires extra cash. The least disruptive route is therefore not automatic approval: either (a) reduce the Option B loan to about ₹14.70 lakh and arrange roughly ₹58,000–₹60,000 more upfront cash, or (b) if cash cannot be raised, use Option A with a larger loan cut to about ₹12.5 lakh. The board should not certify viability until the cash and DSCR conditions are both met.
3. How should the ₹1,50,000 subsidy affect the decision? Should it be included in the first-year DSCR?
Read the worked answer
No. It is expected only after 24 months and is restricted to principal prepayment, so it cannot pay the first 24 EMIs. Including it in first-year DSCR would overstate repayment capacity. Its legitimate effect is to reduce principal outstanding after month 24, lowering later interest and possibly shortening the tenor. The bank should document the subsidy as a contingent accelerant, not as cash flow for initial debt service, and should stress-test the loan if the subsidy is delayed or disallowed.