[This article offers process of credit facilities to film industry under cash budget & Line of credits (LOCs)]
The feature film production involves buying script, evolving screenplays, dialogs, scouting site location, film shooting, music recording, lab processing and post-production activities such as editing, dubbing, re-recording, mixing, taking final prints, obtaining censor clearance and release of prints for distribution etc. The distribution business involves searching for ideal dates for film releases, liaising with sales agents, publicists, advertising agencies, for the bigger reach of audiences. When the film is nearing to release, the distribution activities encompasses posters and billboard advertising, Cinema trailers, and TV advertisements, social media campaigns, Online marketing and Public relation activities to secure press reviews and interviews with the stars for film promotions etc. The private financiers, banks, and financial institutions extend credit facilities to film industries for the above purposes.
Source of funds for films production:
The film producer normally gets up to 40 per cent of agreed amount for distribution rights when the film is under production and the balance payment will be made to him at the time of the release of the film. Normal practice in this line of business is that the producer invests 25% of total budgeted cost of the film. The rest of the cost is met by advance payments from distributors and borrowing from institutional /private lenders. The sale of music Audio, video rights, CD/DVD internet rights, satellite rights, channel rights, international distribution rights etc. are the other sources of cash inflow to the producers.
The bank finance to film industry will be subject to the ceiling of the prudential exposure norms prescribed by RBI. For considering credit proposals, banks would call for detailed cost estimation for production and distribution of a film project and the means of projected finance for the same. The bank advance could be around 35-40% percent of the project cost which may go up to 50% in some cases depending upon the banker’s past experience with the producers and collateral security available to the bank. The average exposure to a production house is normally around Rupees Ten Crores. Banks may also internally prescribe a suitable limit to the particular project within their overall exposure to the film industry.
Method of releasing the bank finance:
The financing bank releases the loan/working capital only after the producer utilizes his share of contribution to the project along with the advance received from the distributors. The finance may sometimes be released side by side with the advance payments from the distributor once the producer has brought his full share of contribution to the project. The cash budget pattern is used for assessment of working capital finance to film industries where the requirement of finance may be peak during some calendar months and the realizations of sale proceeds take place at a length of time. Therefore, in Cash budget method, the bank finance is released on the basis of projected monthly cash flows estimated by the borrower and approved by the bank. The borrower company will be permitted to utilize the bank finance as per monthly budgeted cash deficit which arises when cash inflow during the month fall short of cash outflow during the month. In exceptional cases, excess drawings over the drawing power is allowed up to 10% if the need is considered by the bank as genuine. However, it is mandatory for the borrower to submit the statement containing actual cash receipts and payments to the bank within a week from the end of previous month. Thus, the system facilitates the banks not only to sanction the need based finance but also safeguards the end use of bank funds.
Line of Credits (LoCs):
In view of the high level of inherent risks involved in financing film industry, nowadays banks and financial institutions (FIs) are eyeing for small ticket sized line of credits (LOCs) for financing well -established successful film producers. The LOC facility is driven by the consolidated cash flows of the company and not on the success and failure of the specific project. This model of financing enables the film-makers simultaneously undertaking production of three-four films at a time. The multiple projects let squaring off the losses; even one or two films do not perform well. Thus, the company’s financial position will not be affected much on account of moderate losses and the company will still be able to fulfill repayment commitments to the bank.
Security for the finance:
- Hypothecation charge on all the tangible movable assets financed under the project.
- Assignment of all agreements and intellectual properties rights (IPR) including right in the negotiation of all IPRs, rights of Music Audio/Video rights, Satellite Rights, Channel Rights, etc. along with the negative rights in the form of laboratory letter through appropriate documentation. The documents may be vetted by legal experts.
- Collateral security of movable and immovable properties if the bank feels that prime security is not sufficient for its finance.
- Personal guarantee of the promoters and third party guarantee in case the bank desires so.