Loan Agreements in India: Business Financing Contracts
A Loan Agreement is a legally binding contract between a lender and borrower that defines the terms of lending—principal amount, interest rate, repayment schedule, security, and default consequences. In India, business loans are governed by the Indian Contract Act, RBI regulations, and the SARFAESI Act for secured lending. Whether you are taking a term loan from SBI, securing venture debt from InnoVen Capital, or raising an inter-corporate deposit from a group company, the loan agreement protects both parties.
Indian MSMEs often rely on working capital loans, term loans, and promoter loans. A clearly drafted loan agreement prevents disputes and ensures compliance with RBI lending norms.
Essential Clauses in Indian Loan Agreements
Interest Rate and Calculation
Fixed or floating (linked to MCLR/repo rate). Specify calculation method (reducing balance vs flat rate), reset frequency, and spread. RBI mandates transparent disclosure of all-in cost including processing fees.
Security and Collateral
Primary security (asset being financed), collateral security (additional assets), and personal guarantees. For charges on company assets, file CHG-1 with MCA within 30 days. CERSAI registration required for movable assets.
Covenants
Financial covenants (debt-to-equity ratio, DSCR, minimum net worth) and non-financial covenants (no change of management, no additional borrowing without consent). Breach triggers default provisions.
Events of Default
Non-payment, covenant breach, insolvency, cross-default (default on other loans). Consequences include acceleration (entire loan becomes due), increased interest, and enforcement of security.
TDS and Stamp Duty on Business Loans
Interest on loans attracts TDS under Section 194A at 10% (threshold ₹5,000 for non-bank lenders). For banks, TDS threshold is ₹40,000 (₹50,000 for senior citizens). Stamp duty on loan agreements varies by state—Maharashtra charges 0.1% of loan amount (capped at ₹10 lakhs), while Gujarat charges ₹100 flat for loans below ₹10 lakhs. Inter-corporate loans between group companies must comply with Section 185/186 of the Companies Act regarding lending restrictions.
Key Takeaways
- ✓ Specify interest calculation method—reducing balance is fairer than flat rate
- ✓ File CHG-1 with MCA within 30 days for charges on company assets
- ✓ Include prepayment clause—negotiate waiver or cap on prepayment penalty
- ✓ Ensure stamp duty compliance—varies significantly by state
- ✓ For inter-corporate loans, comply with Section 185/186 of Companies Act
Frequently Asked Questions
What is the maximum interest rate for business loans?
Banks follow RBI guidelines linked to MCLR. NBFCs can charge higher rates but must disclose all-in cost. For inter-corporate loans, interest should be at arm’s length to avoid transfer pricing issues.
Can a company give loans to its directors?
Restricted under Section 185 of Companies Act. Loans to directors or their relatives require special resolution and compliance with conditions. Violation attracts imprisonment and fine.