Regulation of Bank Finance^385
Short-term Loans from Financial Institutions
The Life Insurance Corporation of India, the General Insurance Corporation of India,
and the Unit Trust of India provide short-term loans to manufacturing companies with
an excel≠lent track record.
Eligibility
A company to be eligible for such loans should satisfy the following conditions:
l It should have declared an annual dividend of not less than 6 per cent for the
past five years. (In certain cases, however, this condition is relaxed provided
the company has paid an annual dividend of at least 10 per cent over the last
three years.)
l The debt-equity ratio of the company should not exceed 1:5:1.
l The current ratio of the company should be at least 1:33.
l The average of the interest cover ratios for the past three years should be at
least 2:1.
Features
The short-term loans provided by financial institutions have the following features:
l They are totally unsecured and are given on the strength of a demand promissory
note.
l The loan is given for a period of 1 year and can be renewed for two consecutive
years, provided the original eligibility criteria are satisfied.
l After a loan is repaid, the company will have to wait for at least 6 months
before availing of a fresh loan.
l The loans carry an interest rate of 18 per cent per annum with a quarterly rest,
which works out to an effective rate of 19.29 per cent per annum. However,
there is a rebate of 1 per cent for prompt payment, in which case the effective
rate comes down accordingly.
Rights Debentures for Working Capital
Public limited companies can issue ìrightsî debentures to their shareholders with the
object of augmenting the long-term resources of the company for working capital
requirements. The key guidelines applicable to such debentures are as follows:
l The amount of the debenture issue should not exceed (a) 20 per cent of the
gross current assets, loans, and advances minus the long-term funds presently
available for financing working capital, or (b) 20 per cent of the paid-up share
capital, including preference capital and free reserves, whichever is the lower
of the two.