Term loan sanction letter explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A sanction letter tells you that a lender is willing to lend. The loan agreement and the security documents tell you what you have promised in return. The promises, called covenants, last for the life of the loan, and a breach can allow the lender to stop lending or demand repayment early. Reading them before signing, with your own figures beside them, is the cheapest protection a borrower has.
Read the documents in order: sanction letter, loan agreement, security documents, guarantee. Separate what must happen before the first drawdown (conditions precedent) from what must be done afterwards, and test each financial covenant on your latest accounts. The clauses that bite most often are the ratio tests, the limits on further borrowing, dividends and change of ownership, and the events of default. Banks follow their regulator's directions and their own credit policy, which are not covered here; this is a general reading guide, not a specimen of any lender's document.
The documents, in order
- Sanction letter. The lender's offer: amount, purpose, interest basis, tenor, repayment, security and the main conditions. It is often countersigned as acceptance, so it is binding in effect even before the detailed documents are signed.
- Loan or facility agreement. The full terms: drawdown, repayment, representations, covenants, events of default, consequences.
- Security documents. Creation of charges on assets (see our specimen hypothecation agreement and, for land, the post on mortgage deeds).
- Guarantees. Promoters or group companies may be asked to guarantee the loan.
If you are being asked to sign several documents at once, our loan documentation support team can read them against the sanction letter and list what differs.
Conditions precedent and conditions subsequent
Conditions precedent must be satisfied before the lender releases the first rupee. Typical examples: board resolution authorising the borrowing, a certified copy of the constitutional documents, creation of the security, insurance, a satisfactory title check, equity contribution brought in. Conditions subsequent are tasks the borrower must complete within a stated time after drawdown, such as registering the charge, filing returns, or obtaining a licence. Put each on a calendar; missed conditions subsequent are an easy way to default by oversight.
Financial, information and negative covenants
Financial covenants are ratio tests, such as a minimum DSCR or a maximum debt-equity ratio, checked at stated dates on stated accounts (audited or management). Ask three questions of each: what is the exact formula, which accounts and which date, and what happens on a breach (a cure period, a waiver request or an immediate default)?
Information covenants require the borrower to send accounts, stock statements, compliance certificates and notice of significant events.
Negative covenants restrict actions without the lender's prior consent: more borrowing, creating further charges, paying dividends, changing shareholding or management, undertaking large capital expenditure, lending to group companies.
Events of default and other clauses
An event of default lets the lender act: stop drawdown, demand repayment, enforce security. Common triggers are non-payment, breach of a covenant, a statement that proves wrong, insolvency, and cross-default, where default on another loan also counts as default here. Prepayment terms say whether you can repay early and at what cost. A personal guarantee by promoters makes the individuals liable beyond the company; ask for its scope and for release when the loan is reduced.
What a borrower can ask for
| Clause | What it restricts | What a borrower can ask for |
|---|---|---|
| Conditions precedent | First drawdown | A realistic list and a timeline that fits the title and approval work |
| Financial covenant | Ratios tested at stated dates | Clear formula, test on audited accounts, a cure period, a first test date after the project starts earning |
| Information covenant | Reporting duty | Formats and dates the finance team can actually meet |
| Negative covenant: borrowing | New debt and charges | A permitted basket for ordinary-course items such as vehicle loans |
| Negative covenant: dividends | Distribution of profit | Permission when the financial covenants are met |
| Change in shareholding or management | Control changes | A carve-out for transfers within the family or among existing holders |
| Events of default | Right to call the loan | A notice and a cure period; no cross-default to trivial amounts |
| Prepayment | Early repayment | Prepayment from internal accruals without a premium |
| Personal guarantee | Promoter liability | A cap and a release trigger |
Treat the right-hand column as negotiating requests, not entitlements; what a lender agrees depends on its credit policy and your position.
Worked example: a corrugated-box maker tests two covenants
Invented facts: a company holds a sanction letter with two financial covenants, both the invented lender's own terms: a DSCR of at least 1.20 and a ratio of total borrowings to net worth of at most 2.50. Amounts are in ₹ lakh, rounded to two decimals; ratios to two decimals.
Latest accounts (assumed): profit after tax 48.00; depreciation 30.00; interest on term loans 22.00; term loan instalments due in the year 45.00. Term loans outstanding 260.00; working capital borrowings 90.00; share capital 50.00; reserves 120.00.
Test 1: DSCR. The definition in this example: PAT + depreciation + interest ÷ (interest + instalments).
| Line | ₹ lakh |
|---|---|
| Cash available for debt service = 48.00 + 30.00 + 22.00 | 100.00 |
| Debt service = 22.00 + 45.00 | 67.00 |
| DSCR = 100.00 ÷ 67.00 | 1.49 |
1.49 is above 1.20. Headroom: cash can fall to 1.20 × 67.00 = 80.40 before the test fails, a fall of 19.60, or 19.6 per cent of 100.00.
Test 2: borrowings to net worth.
| Line | ₹ lakh |
|---|---|
| Total borrowings = 260.00 + 90.00 | 350.00 |
| Net worth = 50.00 + 120.00 | 170.00 |
| Ratio = 350.00 ÷ 170.00 | 2.06 |
2.06 is within the 2.50 limit. Borrowings can rise to 2.50 × 170.00 = 425.00, which is headroom of 75.00.
Test 3: a planned new machine loan of 100.00. Borrowings would become 450.00, and 450.00 ÷ 170.00 = 2.65, above 2.50: a breach. To carry 450.00 at 2.50, net worth must be at least 450.00 ÷ 2.50 = 180.00, which is 10.00 more than now. (The new instalments would also enter the DSCR test, which should be re-run.)
The answer: DSCR 1.49 passes against 1.20; the borrowing ratio is 2.06 today but would be 2.65 after a 100.00 loan against a limit of 2.50. The owner has three choices: borrow no more than 75.00, bring in 10.00 of equity or retain more profit, or negotiate a larger limit or a consent in advance.
Where law touches the topic
Board and shareholder approvals for borrowing are in our post on sections 179 and 180; registration of the security is in section 77 on charges; how a breach of covenant affects the classification of the loan in the accounts is in this post on covenant breaches.
Common mistakes
- Signing the sanction letter as a formality and discovering the covenants only in the agreement.
- Not testing the ratio covenants on your own latest and projected accounts.
- Missing conditions subsequent because nobody owns the calendar.
- Accepting a dividend restriction without asking when it falls away.
- Giving a personal guarantee without asking its scope or release.
- Overlooking cross-default with other lenders when you borrow from more than one lender.
Need help reading a loan document before you sign it?
If you hold a sanction letter or a draft agreement, we can compare it with your projections, mark the clauses that need discussion and prepare the security documents. See our loan documentation support page.
Key takeaways
- Read sanction letter, agreement, security documents and guarantee together.
- Calendar every condition precedent and subsequent.
- Test each financial covenant on your accounts, and re-test before new borrowing.
- Negative covenants (borrowing, dividends, ownership change) limit decisions you will want to make.
- Events of default, cross-default and the personal guarantee deserve negotiation before signing.
Read next
- Term loan appraisal from the borrower's side: DSCR and the repayment schedule
- Sole banking, multiple banking and consortium lending compared
- Term sheet and share subscription agreement for a private company funding round
- Specimen hypothecation agreement for goods as security
Disclaimer: The figures, rates, multiples and names in the worked example are invented for illustration and are not market data. Where the article refers to law, it is based on the Companies Act, 2013 (MCA consolidated text) and the rules and live guides linked, as consulted on 6 October 2026; valuation for income-tax and FEMA purposes follows its own rules. This article is general information, not valuation, lending or legal advice; check the official text before acting.