Overview
Loan agreements structure the most fundamental financial relationship in commerce: the extension of credit. A lender provides capital; a borrower commits to repayment with interest; covenants constrain the borrower's conduct to protect the lender's position; security provides recourse if commitments are not met. These elements combine into documentation of varying complexity, from simple bilateral facilities to multi-tranche syndicated structures.
The loan agreement must balance the lender's need for protection against the borrower's need for operational flexibility. Overly restrictive covenants can make normal business operations technically impossible. Insufficient protections can leave lenders exposed when borrower circumstances deteriorate. This balance is struck through negotiation informed by the borrower's creditworthiness, the transaction economics, and market practice.
Indian lending practice combines local regulatory requirements with international market standards. RBI guidelines affect interest rate structures, security requirements, and exposure norms. The SARFAESI Act provides powerful enforcement mechanisms for secured lenders. Stamp duty considerations affect documentation structure. These elements must be integrated into commercially negotiated terms.
Key Considerations
Facility Structure
Term loans, revolving facilities, working capital arrangements, and hybrid structures suited to borrower needs.
Pricing
Interest rate structures, margins, fees, and the mechanics of rate determination and payment.
Covenants
Financial covenants (ratios, minimums) and operational covenants (restrictions on activities) protecting lender position.
Security Package
Collateral structure, security documentation, and perfection requirements.
Events of Default
Circumstances triggering acceleration and enforcement rights, with appropriate cure periods.
Representations
Statements about the borrower's position that form the basis for lending.
Applying the TCL Framework
Technical
- Understanding the borrower's business and cash flow dynamics
- Assessing financial projections and covenant compliance capacity
- Evaluating security assets and valuation
- Reviewing existing debt and intercreditor issues
- Understanding operational requirements for covenant design
Commercial
- Negotiating pricing appropriate to risk
- Structuring facilities to match borrower needs
- Balancing covenant tightness against operational flexibility
- Addressing prepayment and repricing opportunities
- Managing syndicate dynamics in larger facilities
Legal
- Ensuring RBI compliance and regulatory requirements
- Creating enforceable security interests
- Drafting covenants that are clear and monitorable
- Addressing intercreditor and subordination issues
- Building effective enforcement mechanisms
"Loan documentation is written for the downturn, not the good times. When the borrower is performing, the agreement sits in a drawer. When circumstances deteriorate, every word matters. Draft for the scenario you hope never happens."
Common Pitfalls
Covenant Ambiguity
Financial covenants with unclear definitions that create disputes when tested.
Security Gaps
Security interests that are not properly created, perfected, or maintained.
Cross-default Cascades
Cross-default provisions that trigger unintended acceleration across facilities.
MAC Misuse
Material adverse change provisions that are either too vague to enforce or too broad to be fair.
Enforcement Complications
Documentation that creates obstacles to enforcement when needed.
Lending Regulation Framework
Bank lending in India operates within RBI's regulatory framework. Master Directions govern various aspects of lending including exposure norms, interest rate determination, and security requirements. The SARFAESI Act provides secured creditors enforcement powers outside court process for specified security interests. Stamp duty varies by state and affects documentation. Registration requirements under the Companies Act apply to charges. Foreign currency lending involves additional FEMA compliance. Insolvency and Bankruptcy Code affects enforcement strategy and creditor priorities.
Practical Guidance
- Model covenant compliance before agreeing to specific metrics.
- Ensure security documentation is complete and properly perfected.
- Build in appropriate headroom in financial covenants for normal business variation.
- Address cure rights and notice periods fairly for both parties.
- Understand intercreditor dynamics before agreeing to subordination or sharing.
- Plan for enforcement scenarios even while hoping never to use them.
Frequently Asked Questions
Related Practice Areas
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