Vinu: Manu, while appraising term loan projects, where do bankers usually go wrong?

Manu: The first mistake is trusting the project cost and estimates blindly, without validating quotations, capacity and market reality.

Vinu: Can you give a simple example?

Manu: A borrower proposes a project of ₹3 crore, but machinery quotations are inflated by ₹40 lakh. The bank ends up funding excess cost with no real asset support.

Vinu: What is the next major mistake?

Manu: Over-optimistic sales and profit projections. Many DPRs show turnover jumping from ₹4 crore to ₹8 crore in one year without capacity or market justification.

Vinu: How does that affect appraisal?

Manu: It inflates cash accruals and improves DSCR on paper, but actual repayment capacity remains weak.

Vinu: Do bankers also make mistakes in promoter contribution?

Manu:  Yes. Accepting unsecured loans or temporary funds as promoter margin is a serious error. Real cash contribution must be verified.

Vinu: What about repayment structuring?

Manu: Another common mistake. Repayment often starts before the project stabilises. If a unit needs 12 months to reach normal operations, EMI starting in month six creates stress.

Vinu: Is security given too much importance?

Manu: Very often. Strong collateral cannot compensate for weak project viability. Cash flow should always be primary.

Vinu: Any mistake related to working capital?

Manu: Yes. Sanctioning term loan without linking working capital. A unit with a new plant of ₹2 crore but no adequate working capital will still fail.

Vinu: Do bankers underestimate implementation risk?

Manu: Frequently. Delays in installation, approvals or power connection can push the project by 3–6 months, affecting cash flow.

Vinu: So what is the final lesson?

Manu: Don’t appraise projects from a report—appraise them from business reality.

Vinu: That clearly explains why good projects still turn into bad loans.

Manu: Exactly. Most term loan failures start with avoidable appraisal mistakes.

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