Definition of Loan Sanction Letter
Loan/Finance Sanction Letter is a letter issued by a bank or financial institution to a borrower/applicant who has applied for the loan. This letter authorizes the applicant that the applicant is eligible to avail a certain amount of loan from its lender i.e bank, the financial institution subject to the fulfillment of certain terms and condition as mentioned by the lender in its Sanction Letter. This letter doesn’t issue to the applicant immediately.
Compliance before issuing loan Sanction Letter
Before issuing a sanction letter, the bank or financial institution asks for a list of required documents to check the credit history and repayment capacity of the applicant. Here is the list of some quarries that may be raised by the lender before issuing sanction letter:
- The credit history of the applicant
- Sources of income of the applicant
- Repayment capacity of the applicant
- Whether provided documents is authenticate
- Legal documents of property which will be mortgaged
- The current and anticipated market value of the property which will be mortgaged
In most cases, the banks charge a processing fee for all the efforts that they put in to get the sanction letter ready. Note that most often this processing fee is not refunded even if the loan is not approved.
Documents required for issuing Finance Sanction Letter
- Passport size photograph of the applicant
- National ID/ Passport/Driving license
- Residence proof (Telephone bill, other agreement with landlord)
- 3 months salary slips
- 6 months latest bank statement of salary account
- Loan outstanding letter with the track record (If you have any existing loan)
- Processing fees payable to the lender
- Applicant’s contribution details such as FD, PPF, recurring deposits, shares, mutual funds, etc.
- Flat booking allotment letter (if any)
- Memorandum & Articles of Association
- Certificate of incorporation
- Certificate of commencement of business
- Land Documents
- Revaluation certificate of fixed assets
- Latest Audited financial statements (Balance sheet, Income Statement, Cash flow Statement etc,)
- Projected financial statement (Projected Balance sheet, Projected Income Statement, Projected Cash flow Statement)
- Statement of the shareholding position of the company
- Undertakings of the directors
- Business Plan of the company
- Feasibility Study Report (for the new company)
- Other documents are required time to time
Terms of Loan Sanction Letter
Covenenants within the loan agreement are as follows:
- Negative Pledge: The borrower undertakes to refrain from raising other finance on which it grants better security.
- Cross default clause: A cross-default clause is included in most loan agreements and states that if the borrower defaults on any of its loans, then this will constitute a default of this borrowing as well.
- Pari passu clause: A pari passu clause ensures that any lender is granted the same level of security as given to any new lending.
- Maintaining Key financial Ratios: It is possible to include in the loan documentation a number of key ratios such as gearing ratio, Interest Cover Ratio, and Business Net worth which the borrower must meet at a minimum.
- Limitation on additional indebtedness: There may be a restriction on the company that limits the ability to take on further indebtedness unless it meets certain conditions.
- Limitation on restricted payments: This covenant limits the company’s ability to pay dividends or repurchase its own capital.
- Disposal Proceeds of Assets sales: This ensures that the company cannot sell assets unless they receive a fair market value and unless a specified percentage of the consideration is received in cash. A further extension to this clause is often that the monies received are used to Reapy senior debt, Reinvest within the business within one year and Repay the debt.
- Events of Default: A breach of the covenants or the failure to pay the coupon or principal on the due dates are covenants of default. While within the agreement there may be an allowance for “grace periods.” If the borrower remains in default, the loan is immediately repayable.
Contents of Finance Sanction Letter
The items included in the sanction letter are as follows:
- The total amount of loan sanctioned
- The tenure for repayment of the loan
- Interest rate type i.e fixed or floating rate
- The actual prevailing and applicable interest rate for the disbursed loan
- The base rate at which the interest is being calculated
- EMI amounts
- Sanction letter validity period
- Terms and conditions of the bank regarding the loan
Sanction letter is not a legal approval of the loan. For getting loan disbursement a borrower have to produce further documents that are required after issuing sanction letter. If the borrower failed to produce the required documents, the lender may stop the disbursement. The typical validity of the sanction letter is about six months and if the loan is not availed during this time, the sanction will lapse.
To ensure faster processing the borrower have to produce required documents as the lender ask to produce.