A term loan appraisal is a specific type of project appraisal that focuses on evaluating a particular loan, whereas a project appraisal is a broader assessment of a project’s overall feasibility.
Term Loan Appraisal
Definition:
Term loans can be classified as either short-term or long-term, with repayment periods typically ranging from one to twenty years. The repayment amount includes both principal and interest, which may be fixed or variable, depending on the loan terms.
Types of Term Loans:
- Secured Loans: Require collateral, such as property or assets, to secure the loan.
- Unsecured Loans: Do not require collateral but often have higher interest rates due to increased risk for lenders.
Key Aspects of Term Loan Appraisal:
- Appraisal of the Borrower:
- Honesty and integrity
- Financial standing
- Business capacity and managerial competence
- Financial resources relative to the project size
Sources of Information for Borrower Appraisal:
- Personal interviews and credit investigations
- Trade circle inquiries and market reports
- Existing bank reports and CIBIL reports
- Statements of assets and liabilities
- Income tax and wealth tax assessment orders
- Reports from credit rating agencies
- Assistance from venture capitalists (e.g., UTI Ventures, ICICI Ventures)
- RBI defaulter list, media reports, and employee feedback
- Appraisal of the Project:
- Technical analysis and risk assessment
- Evaluation of repayment ability
- Financial structure and technical feasibility
Repayment Considerations:
Term loans are generally repayable within 10-15 years, with exceptions such as housing loans that may extend beyond this period. Repayments are made from cash generated through business activities.
Project Appraisal
Definition:
Project financing is used to fund long-term projects such as infrastructure, industrial ventures, mining, oil and gas, and real estate. It focuses on the project’s cash flow rather than the balance sheets of sponsors.
Key Aspects of Project Appraisal:
- Market Analysis:
- Assessment of demand for the project’s products or services
- Identification of potential competition
- Technical Analysis:
- Evaluation of project feasibility within the specified budget and timeframe
- Economic Analysis:
- Determination of economic viability to ensure profitability and return on investment
- Financial Analysis:
- Assessment of financial feasibility based on the borrower’s capacity to finance the project
Special Considerations:
Infrastructure projects are often financed through Special Purpose Vehicles (SPVs), requiring specialized appraisal skills from lending agencies. Project appraisal involves identifying risks, evaluating risk mitigation measures, and assessing the creditworthiness of contracting entities to ensure they can fulfill obligations.
Conclusion
While both term loan appraisal and project appraisal focus on financial viability, term loan appraisal is more loan-specific, whereas project appraisal provides a holistic evaluation of all aspects of a project to determine its overall feasibility and long-term success.
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