Part 03 — Products

Term & Machinery Loans

Term loans finance assets or projects whose benefits arrive over several years: machinery, vehicles used in business, factory sheds, solar rooftop, technology upgrades, franchise fit-outs, cold storage, clinical equipment, printing presses, CNC machines, packaging lines and business expansion capex. Unlike working capital, a term loan should amortise from incremental cash flow or durable operating surplus. The first credit question is not “what collateral is available?” but “will the asset generate enough cash before it becomes obsolete?”

The RBI MSME Master Direction recognises a composite loan limit up to ₹1 crore so that micro and small enterprise (MSE) entrepreneurs can meet both working-capital and term-loan requirements through a single-window structure (RBI MSME Master Direction, para 4.2). Banks may also use CGTMSE cover for eligible collateral-free term loans, and CGTMSE confirms that term loan alone, working capital alone or both can be covered if other parameters are met (CGTMSE Credit Facilities FAQ).

Product Parameters

Product	Typical ticket	Tenor	Margin / LTV	Pricing in 2026 practice	Security
Small business term loan	₹2 lakh-₹1 crore	12-60 months	10%-30% promoter contribution	Banks 10%-18%; NBFCs 14%-28%	Personal guarantee, hypothecation, sometimes CGTMSE
Machinery finance	₹5 lakh-₹10 crore	3-7 years	15%-35% margin on invoice value	9.5%-18% depending borrower and machine	Hypothecation of machine; collateral or guarantee as policy
Project/capex loan	₹25 lakh-₹50 crore	5-10 years	25%-40% debt-equity contribution	Risk-rated bank spread	Project assets, mortgage, escrow/covenants
Equipment leasing / vendor finance	₹2 lakh-₹5 crore	2-5 years	0%-25% upfront	Often higher than bank term loan	Lender/vendor structure; repossession value matters
Solar/energy-efficiency MSME loan	₹5 lakh-₹5 crore	3-7 years	15%-30%	Sometimes subvented or blended	Equipment, receivables from savings, collateral

Ticket size depends heavily on asset resale value. A standard truck, compressor, diagnostic machine or branded CNC line can be valued and resold. A custom fabrication line welded into a leased shed has weaker secondary recovery. Lenders therefore differentiate between invoice value, eligible machine value, soft costs and loan-to-cost. Freight, GST, installation, civil work, imported spares, software and training may or may not be financeable.

Appraisal Method

A machinery loan file usually contains supplier quotation, proforma invoice, borrower margin proof, last 2-3 years financials, GST returns, bank statements, existing debt schedule, projected capacity utilisation, power connection, site verification, insurance and machine valuation where used equipment is financed. For imported machines, the lender also checks letter of credit (LC), bill of entry, foreign exchange risk, installation delay and supplier support.

Worked example: a plastic packaging unit with ₹8 crore turnover and ₹72 lakh cash profit wants a ₹90 lakh pouching machine. Landed and installed cost is ₹1.05 crore. The bank finances 75% of eligible cost, so loan is ₹78.75 lakh. At 11.5% for 60 months, EMI is about ₹1.73 lakh, or ₹20.8 lakh yearly. Existing term-loan obligations are ₹18 lakh yearly. Post-machine projected cash accrual is ₹1.05 crore. Debt service coverage ratio (DSCR) is:

DSCR = cash available for debt service / annual debt service = 105 / (20.8 + 18) = 2.71x

That looks strong, but the credit manager still asks whether orders exist, whether the borrower has operator skill, whether the machine creates customer concentration, and whether working-capital limits are enough to fund additional raw material and receivables. Capex loans fail when lenders finance the machine but ignore the working-capital cycle it creates.

Moratorium and Disbursement

Term loans often have moratorium during construction, installation or stabilisation. A 3-6 month principal moratorium is common for machinery; larger projects may need 6-12 months. Interest during moratorium can be serviced monthly or capitalised as pre-operative interest if policy permits. Disbursement is ideally direct to supplier, in tranches linked to borrower margin. Used machinery requires extra caution: ownership proof, age, serial number, valuation, no prior charge, and physical inspection.

For systems, store asset-level details: supplier, invoice number, GSTIN, make, model, serial number, year, location, insurance policy, hypothecation status, inspection date and whether the asset is essential or auxiliary. The loan account should not merely say “business expansion”.

Subvention and Subsidy Structures

Subvention means someone other than the borrower bears part of the interest or capital cost: manufacturer, anchor, government scheme, state industrial policy or platform partner. Machinery vendors may advertise “0% interest” but the economic cost may be embedded in machine price, processing fee or shorter repayment period. Government-linked subsidy may be capital subsidy reimbursed after installation and inspection, not money available on day one.

In a bank file, subsidy should be treated carefully:

Structure	How it works	Credit treatment
Interest subvention	Borrower pays full EMI or net interest; subsidy reimbursed periodically	Do not underwrite as if subsidy is guaranteed unless sanction and claim mechanics are clear
Capital subsidy	Government reimburses part of eligible project cost after proof	Treat as receivable only after eligibility and timing are verified
Vendor subvention	Vendor discounts interest or funds a subvention pool	Check whether invoice price is inflated and who pays if loan prepays/defaults
Anchor-supported equipment	Anchor recommends asset for its supplier/dealer	Anchor data helps, but borrower still carries debt unless legal support exists

Common Failure Modes

The most common mistake is funding capex from a short-term overdraft. The account then remains overdrawn because the machine’s payback is five years but the facility is repayable on demand. The second mistake is using a generic unsecured BL for machinery when a hypothecated equipment loan would have lower pricing and better tenor. The third is ignoring installation risk: imported machine delayed at port, inadequate power load, missing pollution consent, leased premises dispute, or operator unavailability.

CGTMSE can improve lender comfort for eligible collateral-free MSE term loans, but it is not a replacement for asset appraisal. As of April 1, 2025, CGTMSE covers eligible fund and non-fund credit facilities up to ₹10 crore per borrower, with guarantee cover generally 75% and higher cover for specified categories such as women entrepreneurs and micro loans up to ₹5 lakh (CGTMSE coverage, CGTMSE credit ceiling).