What standardized forms or terms are commonly used to prepare bank loan documentation?
The Association of Indian Banks has issued standard documentation on syndicated loan facilities, which is followed by most Indian public sector banks. Usually, lenders follow their own individual formats for bilateral financing transactions; however, the clauses between banks are similar.
Private sector banks generally prefer to follow the documentation prescribed by the Asia Pacific Loan Market Association for syndicated transactions. Most of the larger corporate finance transactions are negotiated and documentation is amended accordingly.
Pricing and interest rate structures
What are the typical pricing or interest rate structures for bank loans? Do pricing or interest rate structures change if the bank loan is denominated in a currency other than the national currency?
Interest is calculated by reference to a bank rate. The Reserve Bank of India provides the formula that a bank should use to calculate its marginal cost of funds-based lending rates (MCLRs).
Under the Foreign Commercial Borrowing Regulations (ECB), the interest rate on a foreign loan granted in a foreign currency may be linked to the six-month LIBOR rate of different currencies or any other interbank interest rate at six months applicable to the borrowed currency. (eg EURIBOR) to determine the overall cost of the loan. The benchmark rate in the case of the rupee-denominated ECB should be the prevailing yield on government securities of the corresponding maturity. Lenders charge a spread beyond benchmark rates in accordance with prescribed thresholds.
Borrowing in foreign currency is generally cheaper than borrowing in Indian rupees. However, hedging costs and fluctuations in currency values can negate the initial price advantage obtained.
Have procedures been adopted in the documentation of bank loans in your jurisdiction to replace LIBOR as the benchmark interest rate for loans?
At present, the market practice is still unclear and many banks continue to use the LIBOR interest rate where applicable. Recently, the Indian Banking Association (IBA) wrote to businesses and industry organizations asking them to prepare for the phase-out of LIBOR. The IBA has also formed a working group on LIBOR transition and is in the process of developing a guidance note for banks.
Other determinants of loan returns
What other determinants of bank loan yield are commonly used?
The banks’ MCLR is used as a floor price for Indian rupee loans. The practice of giving a discount on the initial issue is generally not widespread in India.
Yield protection provisions
Describe any yield protection provisions typically included in bank loan documentation.
Almost all loan documents in India include provisions for increased costs, prepayment premiums, and increased withholding tax provisions.
The cost escalation provisions are standard clauses in a lending transaction, in which an obligation is imposed on the borrower to compensate for any additional costs incurred by the lender due to changes in laws and regulations and their compliance. .
Prepayment premium clauses are also often included as a measure to allow the lender to recover costs in the event that the borrower repays the loan before the due date. However, there are certain restrictions on the collection of the prepayment premium for variable rate loans by banks.
Indian businesses are generally not required to withhold tax while paying interest to banks in India. However, Indian banks do not insist on markup of withholding tax payments for other fees charged. Adequate tax certificates are provided to banks in this regard. When the loan transaction is between parties in different jurisdictions, tax surcharge provisions are included.
Accordion arrangements and sidecar financing
Do bank loan agreements generally allow additional debt that is secured on a pari passu basis with senior secured bank loans?
Loan agreements generally prevent the borrower from incurring additional financial debt without the prior approval of the lender. However, additional loans may be made on a pari passu basis with the primary secured lender depending on the purpose of the additional financing and the maintenance of adequate security coverage.
Financial maintenance commitments
What types of financial sustaining covenants are typically included in bank loan documentation, and how are these covenants calculated?
Financial covenants included in bank loan documentation typically provide for maintaining debt service coverage ratios, regulating cash consumption, maintaining minimum equity, maintaining EBITDA ratios, and financial restrictions. end use of borrowed funds. These restrictive clauses are generally stricter for loans granted to reception structures, which are very common in project financing operations. However, financial covenants are generally more flexible in general corporate financing in large companies that have multiple verticals and sources of income.
Describe any other covenants restricting the operation of the debtor’s business typically included in the bank loan documentation.
Some other common clauses included in standard loan documentation relate to:
disposal of assets;
restrictions on mergers and acquisitions;
changes in business;
changes in management or ownership;
changes in constitutional documents;
the payment of dividends; and
maintaining the credit rating.
What types of events typically trigger mandatory prepayment requirements? Can the debtor reinvest the proceeds from the sale of assets or a loss in his business instead of prepaying bank loans? Describe other common exceptions to mandatory prepayment requirements.
When an indebted borrower has received an influx of money due to the occurrence of an event – for example, the sale of a branch of the business, the sale of a property owned by the business or the proceeds insurance – the creditor can request compulsory prepayment of the loan from this product. The debtor is obligatorily obliged in such a case to allocate the proceeds of these events to the payment of the loan, although before the due date, and is not allowed to reinvest it in his business. Prepayment premiums are generally not imposed upon the occurrence of a mandatory prepayment event.
In some cases, such early payment may result in adverse tax consequences, in which case the mandatory early payment may not be applied.
Compensation of the debtor and reimbursement of costs
Describe generally the obligations to indemnify and reimburse the debtor’s expenses, with reference to any common exceptions to these obligations.
When a creditor incurs expenses or incurs liability on behalf of the borrower, the creditor may require the borrower to reimburse the expenses or compensate the borrower for any loss caused. These terms are usually included in the loan documentation and may include compensation for any default and reimbursement of transaction fees, modification fees, stamp duties, security guard or trustee fees, litigation fees. , etc., in connection with the loan transaction. The obligation of the debtor is waived only when the loss or cost is suffered by the creditor due to his own gross negligence or willful misconduct.