A Loan Sanction letter is issued by a Bank or a Non-banking financial institution to a borrower or applicant who has applied for a loan. This letter validates that the applicant is eligible to avail of a certain amount of loan from its lender bank or the financial institution subject to them complying to some specific terms and conditions, stated by the lender in its Sanction Letter.
Additional Reading: Know About Your Home Loan Sanction Letter
Authorization for Issuing Sanction Letter
Before issuing a sanction letter, certain documents are required to check the credit history and repayment capacity of the applicant. These documents are-
- The Applicant’s credit history
- Sources of income
- Applicants Repayment capacity
- The authenticity of the provided documents
- Legal documents of the property to be mortgaged
- The market value of the property to be mortgaged
Banks levy a processing fee for the sanction letter, which is non-refundable even if the loan is not approved.
Documents required for issuing of Sanction Letter
- Passport size photograph of the applicant
- Aadhar/ PAN/ Passport/Driving license
- Residence proof -Telephone bill, rent agreement
- Salary slips of past 3 months
- Bank statement of the past 6 months
- Outstanding loan letter – if there is an existing loan
- Any debt funds as PPF, FD, RD, shares, mutual funds, etc.
- Allotment letter of property
- Memorandum & Articles of Association
- Certificate of incorporation and commencement of business
- Land Documents
- Revaluation certificate of fixed assets
- Latest Audited financial statements
- Projected financial statements
- Statement of the shareholding position of the company
- Undertakings of the directors
- Business Plan of the company
- Feasibility Study Report (for the new company)
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Terms of Loan Sanction Letter
Contracts which comes along with the loan agreement are –
Negative Pledge: The borrower undertakes to abstain from raising finances from other sources.
- Cross default clause: A cross-default clause is included in loan agreements which states that any defaults on any of its loans, will constitute a default of his borrowing too.
- Pari passu clause: A pari passu clause ensures that all the named parties shall share the assets equally.
- Maintaining Key Financial Ratios: A number of key ratios such as Gearing ratio, Interest Cover Ratio, and Business Net worth are included which the borrower must meet at a minimum.
- Limitation on additional indebtedness: Further indebtedness of the company can be limited unless it meets certain conditions.
- Limitation on restricted payments: This agreement 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.
- Events of Default: A breach of the agreement or the failure to pay on the due dates amounts to default. Grace periods are allowed within the agreements stipulated time frame, but if the borrower remains in default, the loan is immediately repayable.
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
A sanction letter for a loan is not legally endorsed. For getting loan disbursement a borrower has to produce further documents that are required after issuing a 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.