A basis point is one hundredth of a percentage point, so 100 basis points is one percentage point. On a project loan, that single point is often treated as a rounding matter. The arithmetic says otherwise.
A worked illustration
Take a project with a sanctioned facility of ₹100 crore. Because the loan is drawn in stages and repaid from sales, assume the average amount outstanding is ₹60 crore over a three-year construction period. The figures below use simple interest and are an illustration, not a quotation.
| Interest rate | Interest each year on ₹60 crore | Interest over three years |
|---|---|---|
| 12% | ₹7.2 crore | ₹21.6 crore |
| 13% | ₹7.8 crore | ₹23.4 crore |
| Difference | ₹0.6 crore | ₹1.8 crore |
On these assumptions, one percentage point costs ₹1.8 crore. That amount comes straight out of the project's profit, because nothing about the building, the price or the sales effort has changed.
Why structure can matter more than the rate
The rate is only one of the terms that decide what a loan really costs. Several others move the total as much or more:
- Drawdown schedule: interest runs only on money drawn, so a facility released in line with construction costs less than one drawn early.
- Repayment terms: the share of each sale that must go to the lender decides how quickly the balance falls.
- Moratorium: a period before repayments begin protects cash flow in the early months of construction.
- Fees and charges: processing fees, prepayment charges and penal interest add to the effective cost.
- Conditions: sales or construction milestones attached to each release can delay funds when they are most needed.
What a developer can do
Compare offers on the total cost over the life of the project rather than on the headline rate. Present lenders with evidence of sales and collections, since lenders price the risk they can see. And approach more than one category of lender, because a bank, a finance company and a fund will each structure the same project differently.
This note is general information from Wallnut Real Estate Services and is not financial, investment or legal advice.