(b) "Leverage Ratio, Loan to Value Ratio and Debt Service Coverage Ratio are the three important Ratios while analysing "Term Loan Proposals" of Business Firms by the Banks. Explain the importance of these Three Ratios.

The Banks rely on three Ratios while sanction Term Loans to know a viability of Business Firm. They are: (i) Leverage Ratio: Leverage ratio is calculated by dividing Total Business Liabilities by Total Business Equity. Leverage Ratio over 4 to 1 would significantly reduce the chances of securing a Bank Term Loan. The Basic idea is that lender doesn't want to simply Borrow in order to grow the Business. A high leverage ratio indicates that a firm relies heavily on debt financing, which increases financial risk. Banks prefer firms with moderate leverage as it suggests a balance between debt and equity financing. This ratio helps assess a firm's long-term solvency and its ability to meet long-term obligations. A lower leverage ratio implies greater financial stability and lower default risk. It indicates the firm's capacity to take on additional debt. Firms with lower leverage are often in a better position to obtain new loans as they have more room to accommodate new debt. (ii) Loan to Value Ratio (LTV): Loan to Value Ratio is calculated by the Total amount of the loan divided by the appraised value of Collateral. Most Banks require the appraised value of Collateral to be higher than the loan amount. The lender is looking at this Ratio to see how much breathing room they have. If the business is to default on the loan and the bank ends up with the Collateral, the bank wants to make sure they can sell the collateral for a value high enough to recover the entire balance of the loan. A lower LTV ratio indicates that the loan is well-collateralized. It provides the bank with a buffer against potential declines in asset value, reducing the risk of loss if the borrower defaults. Higher LTV ratios are associated with higher credit risk as they suggest that the borrower has less equity in the asset. Banks typically prefer lower LTV ratios to minimize risk exposure. LTV ratios can influence the terms of the loan, including interest rates. Lower LTV ratios often qualify borrowers for more favorable loan terms and lower interest rates because the risk to the lender is lower. (iii) Debt Service Coverage Ratio (DSCR): This Ratio is important when applying for a Term Loan. Calculate Debt Service Coverage Ratio by Dividing Annual Net Income by Annual Debt Service. Debt Service is a way of saying Term Loan Instalment Payments. This Ratio tells the lender, how many times could make the loan payment with Net Income. If firm could make the loan payment 10 times with firm Net Income each year, firm have plenty of Leverage. If only wake the loan payments 1.25 times per year, the bank is going to be nervous that if there is any negative downtrend with firm business, firm won't be able to make firm's loan instalment payments. A higher DSCR indicates that the firm generates sufficient income to cover its debt payments, signifying strong repayment capacity. Banks typically look for a DSCR greater than 1, meaning the firm has more income than is required to service its debt. This ratio provides insight into the overall financial health and operational efficiency of the firm. It indicates whether the firm's core business operations are profitable enough to support debt payments. A low DSCR suggests higher risk, as the firm may struggle to meet its debt obligations. This could lead to loan default. Banks use the DSCR to ensure that the firm's cash flow is stable and sufficient to cover future debt payments.