How a bank assesses a term loan proposal
A detailed project report (DPR) connects the proposed investment to the cash needed to service debt. For a new plant, equipment upgrade or warehouse, explain what will be built, what it will cost, how it will be financed, when it will operate and how it will repay. Support assumptions with evidence such as quotations, capacity studies, approvals, contracts and working capital experience. A techno-economic viability (TEV) study supports that appraisal where required.
Distinguish an ordinary business term loan from an exposure covered by the RBI project finance framework. For covered projects, Chapter IV of the RBI Commercial Banks – Credit Facilities Directions calls for documented financial closure and the original date of commencement of commercial operations (DCCO) before disbursement, a stage-linked disbursement schedule and a realistic repayment plan reflecting early cash flows. The repayment tenor, including any moratorium, is capped at 85% of the project's economic life under that provision. Check the applicable directions, their transition provisions and the lender's sanction terms; these rules do not set a common DSCR, promoter contribution or leverage threshold for every manufacturing loan.
What goes in the detailed project report
- Project cost: Budget land and registration, site development, buildings and civil works, plant and equipment, freight, non-recoverable duties, installation, utilities, engineering and applicable approvals. Distinguish initial working capital and its financing margin from capital assets. Include a quantified contingency based on the risks in supplier quotations and implementation. Document pre-operative cash costs and interest during construction (IDC) separately. For an Ind AS reporter, Ind AS 23 requires capitalisation of directly attributable borrowing costs for a qualifying asset when its criteria are met; other borrowing costs are expensed. A budgeted pre-operative cash outlay is not automatically an accounting asset.
- Means of finance: Match promoter equity, committed internal accruals, subordinated debt, term loans and any eligible subsidy to the expenditure schedule. Test the funding gap if a subsidy is delayed or unavailable; do not treat an unapproved incentive as cash on hand. Document any foreign currency borrowing and model currency exposure. Label debt separately even where the bank gives subordinated promoter funding credit in its appraisal.
- Operating forecast: Link capacity, volumes, sales mix, selling prices, operating costs, depreciation and tax. Reconcile forecast profit and loss, balance sheet and cash flows. Keep book and tax depreciation schedules separate.
- Debt and liquidity: Model drawdowns, interest, moratorium terms, repayments, inventory and receivable days, creditor terms and cash balances. Include a monthly or quarterly schedule around start-up, when annual averages can hide a cash shortfall.
- Risks and sensitivities: Show the effects of delayed commissioning, cost overruns, interest rate changes and lower sales. Record the sources of the assumptions and explain the mitigating measures.
Five metrics to show the lender
| Metric | Calculation | How to use it |
|---|---|---|
| Debt service coverage ratio (DSCR) | Cash available for debt service divided by scheduled principal and interest for the period | Report low periods and the covenant method. A value below 1.00 means a shortfall on the cash definition used. |
| Project internal rate of return (IRR) | Discount rate at which the NPV of project cash flows equals zero | Compare with a consistent project hurdle such as the weighted average cost of capital (WACC). |
| Break-even | Relevant fixed costs divided by contribution at the reference volume | State whether the target is operating profit, profit before tax or operating cash. |
| Debt-to-equity | Debt divided by equity, both defined for the analysis | Disclose how sponsor loans and any adjustments to tangible net worth are treated. |
| Current ratio | Current assets divided by current liabilities | Use the definitions and threshold agreed with the lender, and review the quality and liquidity of the assets. |
Debt service, returns and break-even
A gross DSCR proxy is (profit after tax + depreciation + term loan interest deducted in arriving at that profit) divided by (term loan interest due + principal due). Adding back depreciation reverses a non-cash charge; it does not prove that cash is available. Bridge profit to actual cash available for debt service (CFADS), including working capital movements, cash taxes and maintenance capital expenditure as appropriate. Match the debt and cash flow perimeter to the facility terms. During a principal moratorium, interest may still be payable; if interest is deferred or capitalised, follow the agreed schedule and do not count it twice. If there is no debt service in a period, report the ratio as not applicable.
Project IRR uses unlevered cash flows (FCFF); equity IRR uses cash flows to shareholders (FCFE), including debt drawdowns and repayments and any applicable tax effect of financing. Match nominal or real and before- or after-tax cash flows to a consistent hurdle. For equally spaced cash flows, use IRR; for irregular payment dates use XIRR. Include the initial outlay at time zero in NPV; Excel's NPV function discounts its first input as an end-of-period cash flow, so add the time-zero cash flow separately. Where cash flow signs switch more than once, IRR may be ambiguous; use NPV and inspect the cash flows.
Contribution is net sales less variable costs. With a constant unit contribution and product mix, break-even as a share of capacity is the relevant fixed cost divided by contribution at full capacity. EBIT break-even includes depreciation and excludes financing costs. Operating cash break-even excludes both depreciation and interest; a separate cash threshold can include interest. Neither operating cash break-even nor cash break-even after interest shows whether the business can repay principal or finance working capital.
Seven worked case studies
These illustrations use assumed terms and figures. They are not records of sanctions, credit committee decisions or software results.
Case 1: ₹25 crore automotive casting plant
Apex Precision Engineering plans a Pune plant with annual capacity of 12,000 metric tonnes. Its indicative cost and funding are:
| Project cost | ₹ crore | Source of funds | ₹ crore |
|---|---|---|---|
| Industrial land and site development | 3.50 | Promoter equity | 6.50 |
| Factory and civil works | 5.50 | Subordinated promoter debt | 1.50 |
| Imported induction furnaces and plant | 11.20 | Senior rupee term loan | 16.00 |
| Utilities and effluent treatment | 1.80 | Assumed state capital subsidy | 1.00 |
| Pre-operative outlay including eligible IDC | 0.80 | ||
| Contingency (5% of ₹22 crore base) | 1.10 | ||
| Working capital margin | 1.10 | ||
| Total | 25.00 | Total | 25.00 |
Promoter funding totals ₹8.00 crore (32% of cost), of which ₹6.50 crore is equity (26% of cost). Total debt to equity is ₹17.50 crore ÷ ₹6.50 crore, or 2.69:1. Senior debt to promoter funding is 2.00:1; it is a separate measure. Confirm eligibility and timing of the subsidy and cover any funding gap before relying on it.
Case 2: Eight-year quarterly repayment and DSCR
Assume a ₹16 crore term loan is outstanding at the start of the model, annual nominal interest of 10.25%, four equal-length quarters per year and interest on each quarter's opening principal. Year 1 is an operating ramp-up with an interest-only principal moratorium; the earlier construction IDC in Case 1 is a separate budget item. Repay principal in 28 equal quarter-end instalments of ₹16 crore ÷ 28 over Years 2–8. Profit after tax (PAT) and depreciation are assumed operating inputs; PAT already reflects the interest shown. This schedule tests senior debt only, with no payment of subordinated debt assumed during the eight years. Monetary amounts are in ₹ crore. The calculations use unrounded figures.
| Year | Utilisation | Opening debt | PAT | Depreciation | Interest | Principal | Debt service | Cash proxy | DSCR | Closing debt |
|---|---|---|---|---|---|---|---|---|---|---|
| 1 | 20% | 16.00 | 0.20 | 0.80 | 1.64 | 0.00 | 1.64 | 2.64 | 1.61 | 16.00 |
| 2 | 60% | 16.00 | 1.85 | 1.80 | 1.55 | 2.29 | 3.84 | 5.20 | 1.36 | 13.71 |
| 3 | 70% | 13.71 | 2.70 | 1.65 | 1.32 | 2.29 | 3.60 | 5.67 | 1.57 | 11.43 |
| 4 | 80% | 11.43 | 3.65 | 1.50 | 1.08 | 2.29 | 3.37 | 6.23 | 1.85 | 9.14 |
| 5 | 85% | 9.14 | 4.40 | 1.38 | 0.85 | 2.29 | 3.13 | 6.63 | 2.11 | 6.86 |
| 6 | 88% | 6.86 | 4.50 | 1.25 | 0.61 | 2.29 | 2.90 | 6.37 | 2.19 | 4.57 |
| 7 | 90% | 4.57 | 4.60 | 1.15 | 0.38 | 2.29 | 2.67 | 6.13 | 2.30 | 2.29 |
| 8 | 90% | 2.29 | 4.70 | 1.05 | 0.15 | 2.29 | 2.43 | 5.90 | 2.42 | 0.00 |
The lowest annual gross DSCR is 1.36 in Year 2. The loan-life coverage ratio is 1.90 (total cash proxy divided by total debt service); the simple mean of the eight annual ratios is 1.93. State which measure the lender requires. The first year's interest-only ratio should not be compared with amortising years without showing the change in debt service.
Case 3: Project IRR versus equity IRR for cold storage
Assume ₹18 crore of initial cost for a cold-chain logistics park and ten annual end-of-year cash flows, including an assumed net exit or residual receipt in the final project cash flow. Initial borrowing is ₹12.50 crore, with interest at 10% on opening annual principal and ₹1.25 crore of annual principal repayments. Initial equity is ₹5.50 crore. Assume no usable incremental tax shield on interest. Equity cash flow after time zero is therefore project cash flow less interest and principal; a negative equity flow is additional funding needed. Figures are in ₹ crore.
| Year | Project cash flow | Interest | Principal | Equity cash flow |
|---|---|---|---|---|
| 0 | -18.00 | — | — | -5.50 |
| 1 | 2.00 | 1.250 | 1.25 | -0.500 |
| 2 | 2.80 | 1.125 | 1.25 | 0.425 |
| 3 | 3.50 | 1.000 | 1.25 | 1.250 |
| 4 | 4.00 | 0.875 | 1.25 | 1.875 |
| 5 | 4.30 | 0.750 | 1.25 | 2.300 |
| 6 | 4.50 | 0.625 | 1.25 | 2.625 |
| 7 | 4.70 | 0.500 | 1.25 | 2.950 |
| 8 | 4.80 | 0.375 | 1.25 | 3.175 |
| 9 | 5.00 | 0.250 | 1.25 | 3.500 |
| 10 | 7.00 | 0.125 | 1.25 | 5.625 |
At an 11% WACC, project NPV is ₹4.99 crore. Project IRR is 16.22%, or 5.22 percentage points above the assumed WACC. Equity IRR is 22.97%; compare it with the shareholders' required return. The equity shortfall in Year 1 still needs funding.
Case 4: Operating, cash and pre-tax break-even
At full capacity, Sterling Auto Components forecasts ₹40 crore sales and ₹24 crore variable costs. Contribution is ₹16 crore, or 40% of sales. Of the ₹7.04 crore fixed costs, ₹2.24 crore is depreciation, ₹1.28 crore is interest and ₹3.52 crore is cash operating fixed cost. At a constant selling price and unit variable cost:
- Operating cash break-even: ₹3.52 crore ÷ ₹16 crore = 22% of capacity.
- EBIT break-even: ₹5.76 crore ÷ ₹16 crore = 36%.
- Cash break-even including interest: ₹4.80 crore ÷ ₹16 crore = 30%, before principal, cash tax and working capital.
- Profit before tax break-even: ₹7.04 crore ÷ ₹16 crore = 44%. At expected utilisation of 60%, the headroom is 16 percentage points of capacity, or 26.67% of expected sales at constant prices.
Case 5: Testing the first amortising year
For a one-year sensitivity using the loan and base cash proxy from Case 2, assume ₹40 crore full-capacity sales, ₹24 crore variable costs including ₹16 crore steel, and 60% initial utilisation. Change one driver at a time and hold debt service, cash taxes, working capital and other assumptions fixed. A price cut changes revenue at the starting volume; a steel price increase changes only the steel component at that volume; lower utilisation changes contribution at the original unit margin.
| Year 2 scenario | Cash reduction (₹ crore) | Stressed cash proxy (₹ crore) | Gross DSCR |
|---|---|---|---|
| Base case | 0.00 | 5.20 | 1.36 |
| Selling price falls 5% | 1.20 | 4.00 | 1.04 |
| Steel costs rise 5% | 0.48 | 4.72 | 1.23 |
| Utilisation falls 10% relative (60% to 54%) | 0.96 | 4.24 | 1.11 |
These scenarios show how little headroom may remain in the first year of principal repayments. A full lender review should rerun the entire loan, cash tax and working capital schedules, combine plausible shocks and identify the resulting funding shortfalls. The ratios alone do not determine collateral requirements.
Case 6: Subordinated sponsor funding for a solar module line
Horizon Solar Tech models ₹20 crore in cost, a ₹15 crore bank facility, ₹3 crore paid-up equity and a ₹2 crore subordinated unsecured sponsor loan. Equity is 15% of cost and total sponsor funding is 25%. Total debt to equity is 5.67:1; senior debt to combined sponsor funding is 3.00:1. The promoter loan remains a liability where the instrument meets the liability definition. If the lender agrees to count it toward sponsor funding, document subordination, restrictions on interest and repayment, and any non-withdrawal undertaking in the facility terms.
Case 7: Linking historical accounts to a ₹12 crore expansion
A manufacturer with ₹35 crore turnover plans a ₹12 crore modernisation. Use three years of audited statements and seven years of projections for this illustration. Reconcile opening trial balances to audited accounts, distinguish the expansion from existing operations, and carry consistent classifications into the projections and the applicable Schedule III presentation. Use inventory, receivables and creditors to anchor the working capital assumptions. Reconcile any imported figures and check that balance sheet, cash flow and debt schedules agree before submitting the package. A workbook or finance platform can help build the schedules; the preparer remains responsible for the inputs and reconciliation.
Frequently asked questions
What is a good DSCR for an Indian bank term loan?
There is no common minimum for every bank term loan. Ask the lender which cash flows and debts to include, the required minimum in each period, and how it calculates any average. Test the weakest periods as well as the aggregate.
Why add back depreciation?
Depreciation allocates asset cost across its useful life and is not a current-period payment. Reconcile the adjusted profit to actual cash, including cash tied up in working capital and spending needed to maintain the asset.
What is the maximum debt-to-equity ratio?
There is no common maximum for the projects illustrated. The lender will define debt and eligible equity or tangible net worth, and consider the sector, cash flow, collateral and loan terms.
Can a promoter loan count toward the funding requirement?
It may count toward agreed sponsor funding if the lender expressly accepts its terms and subordination. It does not become paid-up capital by being called quasi-equity.
What is the difference between project IRR and equity IRR?
Project IRR measures the cash return from the underlying project before financing. Equity IRR measures the cash return on shareholders' contributions, after debt flows and the applicable tax effects. Leverage can amplify gains and losses.
How can a financial model help prepare a DPR?
Link capital spending, funding, working capital, cash tax, loan service and the forecast statements, then reconcile them. Use the applicable accounting rules and Companies Act Schedule II for book depreciation where relevant, and calculate tax depreciation separately under the law for the relevant period.
Sources
- RBI: Commercial Banks – Credit Facilities Directions, 2025, Chapter IV
- RBI Project Finance Directions, 2025, as originally issued (official copy hosted by UP RERA)
- Ministry of Corporate Affairs: Ind AS 23, Borrowing Costs
- India Code: Companies Act, 2013, Schedules II and III
- Microsoft: NPV for periodic cash flows
- Microsoft: IRR for periodic cash flows
- Microsoft: XIRR for dated cash flows