What to look for in a Bank’s Sanction Letter



When reviewing a bank's sanction letter, SME entrepreneurs and business owners in India often focus solely on the sanctioned loan amount and the applicable interest rate, neglecting other crucial details. However, it's vital to thoroughly understand the entire document before signing it. Here are essential aspects to consider beyond the loan amount and interest rate:

  1. Credit Limit Structure: Check for any sub-limits or usage restrictions within the sanctioned amount.
  2. Pricing: Determine if the interest rate is fixed or floating, the benchmark or reference rate used, and the interest rate reset mechanism.
  3. Commitment Fee: Understand if there are penalties for underutilization of the sanctioned amount.
  4. Security: Identify types of security (primary and secondary) and the priority (first charge, second charge, etc.).
  5. Guarantees: Review requirements for personal guarantees, corporate guarantees, and options for reducing guarantee obligations.
  6. Covenants: Be aware of financial ratios and other conditions that must be maintained to avoid penalties.
  7. Prepayment Penalty: Know the terms and conditions associated with early loan repayment to avoid unexpected costs.
  8. Drawing Power (DP) Parameters: For working capital loans, understand how DP affects fund availability and negotiate terms for better access to funds.
  9. Various Fees: Clarify and negotiate all types of charges and fees associated with the loan.
  10. Other Restrictions: Understand operational, financial, and strategic restrictions imposed by the bank.

In conclusion, it's crucial to carefully read and comprehend every aspect of the sanction letter to make informed decisions and avoid potential business disruptions or financial penalties in the future. For assistance visit us at BankKeeping or Contact us.

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