Term Loans :
Term loans are repayable in instalments spread over a period of time vexcluding the moratorium period, if granted. The moratorium period is
assessed by the lender based on future cash flows and requirements of borrower. However, if there is a default in compliance with terms and conditions by the borrower, the bank has the right to demand repayment of the entire loan outstanding, before due date. The amount and periodicity of repayment is fixed at the time of sanction and is duly recorded in the loan documents. The amount and the periodicity may be uniform throughout the life of the loan, or either or both of them may differ from instalment to instalment.
Besides, repayment schedule may either be drawn only for the principal amount in which case periodic interest has to be paid by the borrower
separately as and when due, or a schedule may be fixed with ‘equated monthly instalments’ which also includes the amount of interest likely to be applied to the account during its entire tenure at the rate of interest applicable at the time of sanction/documentation/first disbursement. The disbursal may happen in one tranche or more than one tranches as per the requirements of the borrower. The cheque books are not issued under this facility.
The interest rate for loans may be either on ‘fixed’ terms’ in which event the rate contracted originally holds good during the entire currency of the
loan, or it may be on ‘variable’ terms; which means that the rate may undergo changes at unspecified periods on happening of certain events as outlined in the loan agreement. This aspect is a subject matter of negotiation between the bank and the borrower. Interest is charged on reducing balance method.
The term loans are generally extended for the following purposes:
For setting up of plants, acquisition of fixed assets like land and building, plant and machinery, furniture, vehicles, implements, houses, consumer
durables, etc.
For meeting expenses on education / medical treatment of self/dependants.
For meeting other personal expenses.
For meeting deficit in the net working capital requirements as assessed by the bank.(WCTL)
For Marketing / Launching / Branding etc.
Banks may give general purpose loans also i.e. without stipulating any end-use of funds, on the strength of a suitable collateral security (normally
mortgage of immovable properties), or even without security based on the credit worthiness of the borrower.