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Check eligibilityWhat an end-use restriction is
Indian banks and NBFCs lend for a purpose, not as a general pool of cash. An end-use restriction has four working parts.
1
Stated purpose: the sanction letter names what the facility is for, such as a specific machine, a project or working capital.
2
Controlled release: term loans are often paid straight to the supplier or released against invoices and progress.
3
Monitoring: lenders check use through stock statements, bank account reviews, site visits and end-use certificates.
4
Default trigger: using the money for another purpose, known as diversion of funds, is usually an event of default.
Working capital lines are meant for stock, receivables and running costs. Using a cash credit or overdraft limit to buy long-term assets is a common way businesses breach end-use terms.
When it applies
End-use restrictions come with most borrowed money. Funds the business already owns can be used as it decides.
WHAT CHANGES
With a restriction
Without one
Typical sources
Bank and NBFC term loans, cash credit
Internal accruals, fresh equity
How money is released
Against invoices, often to the supplier
As the board decides
Reporting to others
Stock statements, end-use certificates
Normal board and audit oversight
If plans change
Lender consent needed
Free to redeploy
How lenders enforce it
The purpose is written into the sanction letter and the loan agreement, which list misuse of funds among the events of default. Lenders then track whether the money went where it was meant to, through the life of the facility.
Monitoring.
Expect stock and book-debt statements for working capital lines, invoices and asset checks for term loans, and certificates from your chartered accountant that funds were used as sanctioned.
Consequences.
Diversion can lead to penal charges, a halt on further drawings or recall of the loan. Serious cases can feed into RBI rules on wilful defaulters and affect future borrowing.
Read the purpose clause in each sanction letter before moving money between facilities.
Where it shows up
A QSR chain funding four new outlets
ILLUSTRATIVE
A QSR chain has a ₹10 crore cash credit limit sanctioned against stock and receivables. It plans four new outlets needing ₹2.4 crore of kitchen equipment and fit-outs. Drawing that from the cash credit line would use working capital funds for long-term assets, which the sanction does not allow. The CFO can ask the bank for a term loan for the capex, or lease the equipment and fit-outs. In a lease the lessor pays the supplier for the listed assets, so there is no loan to divert and the cash credit line stays free for stock and running costs.