How banks decide how much long-term finance to sanction for capital expenditure, projects and assets. This guide covers every major type of term loan, the key appraisal parameters (DSCR, FACR, Debt-Equity Ratio), the full appraisal process, a worked example, and a free DSCR & EMI calculator — explained simply for laymen, students and bankers alike.
A Term Loan is credit sanctioned for a fixed period (usually beyond 1 year) to finance the acquisition of fixed assets — land, building, plant & machinery, vehicles or a project — and is repaid in scheduled instalments out of the future cash flows the asset itself is expected to generate. Term Loan Assessment is the credit-appraisal exercise banks follow to size the loan, fix its tenure and repayment schedule, and satisfy themselves that projected cash flows can service it comfortably.
Think of a bakery owner buying a new oven costing ₹10 lakh. She doesn't have that much cash upfront, so the bank lends it to her — to be repaid over, say, 5 years out of the extra profit the oven itself helps her earn. That long-tenure loan tied to an asset or project is a term loan.
Because repayment is spread over several years and depends on the future performance of a business or asset — not on liquidating stock or debtors — term loan appraisal is fundamentally a forward-looking, cash-flow based exercise, distinct from the balance-sheet based working capital assessment.
Banks classify term loans by purpose, tenure and the nature of the underlying asset. Every type below is assessed under the same broad framework, but with a different emphasis depending on what is being financed:
Finances purchase or modernisation of machinery for an existing business — the most common form of term loan.
Funds setting up a new unit or a major expansion, appraised on projected project cash flows rather than existing operations.
Long-gestation financing for roads, power, ports & telecom — typically structured with a Debt Service Reserve Account (DSRA).
Converts a portion of a stressed or growing cash-credit limit into an amortising term facility, or funds the permanent WC component.
General-purpose long-term finance for established corporates, appraised largely on credit rating and balance-sheet strength.
Business or personal finance secured by mortgage of immovable property, sized on Loan-to-Value (LTV) and rental/cash-flow capacity.
Finances commercial vehicles or movable equipment, with resale/scrap value and end-use as key underwriting checks.
Funds a builder's project cost, disbursed in stages against construction progress and monitored via an escrow of sale proceeds.
Long-term finance in foreign currency (or External Commercial Borrowing), suited to importers/exporters with a natural currency hedge.
Whatever the type, every term loan proposal is tested against the same core set of financial parameters:
Measures whether projected cash accruals (PAT + Depreciation + Interest) comfortably cover annual loan instalment + interest. The single most important term-loan metric.
Benchmark: Avg ≥ 1.5, Min ≥ 1.2Compares the term loan to the promoter's own long-term funds (equity + reserves). A lower ratio means the promoter carries more of the project's risk.
Benchmark: 2:1 to 3:1 (sector-dependent)Value of fixed assets charged to the bank, divided by the term loan amount — the cushion available if the asset must be sold to recover dues.
Benchmark: ≥ 1.25The portion of project cost the promoter funds from own sources — "skin in the game" that aligns the promoter's interest with the bank's.
Benchmark: 20–30% of project costThe output/sales level at which total revenue equals total cost. A lower BEP (as % of installed capacity) signals a safer, more resilient project.
Preferably below 60% of capacityInternal Rate of Return must exceed the project's cost of capital; payback period shows how quickly the initial investment is recovered from cash flows.
IRR > Cost of CapitalNo appraisal is complete without stress-testing DSCR and IRR against adverse scenarios — a 10% cost overrun, a 5% fall in sales price, or a delay in commercial production — to confirm the project remains viable even if assumptions don't play out exactly as projected.
Banks follow a structured, sequential process before sanctioning any term loan:
Itemise the total project cost (land, building, plant & machinery, preliminary & pre-operative expenses, contingency, margin for working capital) and match it against the means of finance (promoter's equity, term loan, unsecured loans, subsidy) to confirm the funding plan is complete and balanced.
Verify the technology, plant capacity, location and input/output logistics are sound, and assess the promoters' track record, integrity and managerial competence to execute and run the project.
Study projected Profit & Loss, Balance Sheet and Cash Flow statements over the full loan tenure — checking profitability, liquidity and solvency ratios for reasonableness against industry norms.
Fix the tenure, moratorium period (if any) and instalment structure — equal or stepped-up — such that Average and Minimum DSCR meet the bank's benchmark throughout the repayment period.
Determine primary security (hypothecation/mortgage of the asset financed), any collateral required, and confirm the promoter's margin contribution — together forming the FACR cushion.
Stress-test DSCR and viability under adverse assumptions before the credit committee finalises terms, covenants and monitoring/reporting conditions in the sanction letter.
Enter the loan amount, interest rate, repayment period and your average annual cash accrual (Profit after Tax + Depreciation + Interest). The calculator computes Average, Minimum and Maximum DSCR and plots them on the chart below.
Assumes equal annual principal repayment — the reducing loan balance is the standard method banks use for term loan amortisation schedules.
For guidance only. Actual DSCR depends on the bank's amortisation method and year-wise cash-flow projections.
How your average annual cash accrual compares with the average annual debt service obligation, and where your Average DSCR sits on the lending scale.
For retail-type term loans (vehicle, equipment, LAP) — enter loan amount, rate and tenure to instantly estimate the Equated Monthly Instalment.
A manufacturing unit plans to buy new machinery. The cost of project and means of finance work out as follows (₹ in lakh):
The term loan of ₹300 lakh is sanctioned at 9% p.a., repayable over 5 years (after a 1-year moratorium), with projected average annual cash accrual of ₹110 lakh:
Checking the extremes: in Year 1 (interest on the full ₹300L), debt service = 60 + 27 = ₹87L, giving Minimum DSCR = 110 ÷ 87 = 1.26; in the final year (interest on the last ₹60L only), debt service = 60 + 5.4 = ₹65.4L, giving Maximum DSCR = 110 ÷ 65.4 = 1.68. With Average DSCR at 1.50 and Minimum DSCR at 1.26, the proposal comfortably meets the bank's benchmark of Average ≥ 1.5 and Minimum ≥ 1.2.
| Type | Typical Tenure | Typical Margin | Key Appraisal Focus |
|---|---|---|---|
| Plant & Machinery TL | 5–8 yrs | 20–25% | DSCR, FACR |
| Project Finance | 8–15 yrs | 25–30% | DSCR, IRR, Sensitivity Analysis |
| Infrastructure TL | 10–20 yrs | 20–30% | DSCR, Concession terms, DSRA |
| Working Capital TL (WCTL) | 3–7 yrs | Nil–10% | Cash flow, restructuring viability |
| Corporate / General Business TL | 3–7 yrs | 15–25% | Debt-Equity Ratio, Credit rating |
| Term Loan Against Property | 10–15 yrs | 25–40% (LTV 60–75%) | LTV, rental/cash-flow capacity |
| Vehicle / Equipment TL | 3–7 yrs | 10–25% | Resale value, end-use |
| Construction / Real Estate TL | 3–5 yrs | 25–30% | Project stage, sales velocity, escrow |
| Foreign Currency TL (FCTL/ECB) | 3–10 yrs | Varies | Hedging, natural currency cover |
Matches the repayment schedule to the actual gestation and cash-generation pattern of the asset or project.
A robust Average and Minimum DSCR is the single best predictor of a term loan not slipping into stress.
Ensures adequate security value remains even after normal depreciation or a moderate fall in asset prices.
Borrowers are typically required to maintain DSCR, D/E and asset-cover levels, with periodic monitoring throughout the loan tenure.
Read our companion guide on Working Capital Assessment, check the Current Ratio (CR), calculate your monthly limit with the Drawing Power Calculator, try our other EMI, FD & SIP calculators, or browse the full JAIIB / CAIIB library on AskBanker.in.