When an MSME owner receives a sanction letter, the first reaction is usually relief and excitement —“Loan approved!”
But here’s the truth: the sanction letter is not just a loan confirmation. It’s a rulebook that defines your relationship with the bank for years to come. Inside those pages are clauses that can either protect you or silently restrict your business growth.
In this blog, let’s understand sanction letters like a banker and uncover the hidden clauses every borrower must know.
What Is a Sanction Letter?
A sanction letter is the formal communication from the bank that your loan is approved, subject to certain terms and conditions. It includes:
- Loan amount sanctioned
- Interest rate & repayment terms
- Security and collateral requirements
- Conditions you must fulfill before and after disbursement
While it sounds straightforward, the devil is in the details.
The Hidden Clauses You Cannot Ignore
1. Prepayment Penalties
Many sanction letters include penalties if you repay early. For an MSME expecting better cash flows, this could block refinancing opportunities.
Tip: Always check if your loan allows partial prepayment without charges.
2. Restrictive Covenants
Some clauses limit your business activities — for example:
- You cannot take additional loans without prior bank approval.
- You cannot change business ownership structure.
These restrictions, if unnoticed, can trap your business during expansion.
3. Inspection & Monitoring Rights
Banks often include clauses that allow them to inspect your books, stock, or premises anytime. While standard, it can become intrusive if not understood properly.
4. Cross-Default Clauses
If you default on another loan, even from a different lender, your current loan can be declared in default.
This is a clause many MSMEs miss — it links your obligations across lenders.
5. Margin & Drawing Power Adjustments
For working capital loans, sanction letters specify how much margin you must maintain. If stock or receivables fall, your drawing power reduces — creating sudden fund shortages.
6. Insurance & Guarantees
Some banks make it mandatory to buy specific insurance policies or personal guarantees. These commitments can stretch personal risk if not carefully negotiated.
Borrower’s Checklist Before Signing
- Read every clause, not just the loan amount.
- Ask for clarity on ambiguous terms.
- Negotiate on prepayment penalties or restrictive covenants.
- Keep a copy of all sanction conditions for future compliance.
- Seek professional advice if terms are complex.
Why Bankers Add These Clauses
From a banker’s perspective, these clauses are not “traps” but risk protection tools. They ensure:
- Borrowers remain disciplined in loan usage.
- Banks can monitor risk proactively.
- Default chances are minimized.
As an MSME, your role is to balance these protections with your business freedom.
Final Thought
A sanction letter is like a marriage contract between you and your bank. The honeymoon phase of loan approval quickly fades if you miss the fine print. By understanding these hidden clauses, you not only safeguard your business but also build credibility with your banker.
Takeaway: Don’t just celebrate your sanction letter. Read it. Question it. Negotiate it.
Want to go deeper?
🎧 Listen to the full discussion in Episode 9 of Smart Credit Bytes on Spotify- https://open.spotify.com/episode/7rMFPay07a5QAhlxqGG9PX?si=wx6rDM2iTpuxrvoo_2G9_A and youtube- https://youtu.be/8_4Gmlw5MNk?si=DDSdpLaKFVLAzTvh.
Share this blog with any business owner preparing for a loan — it could save them lakhs in the long run.
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