Types of Finance provided by banks
1. Take-Out Financing: Banks usually lend for short-term.
It is because their source of funds for financing comes from deposits which are
usually for a maximum period of 3 to 5 years. However, presently banks are
encouraged to provide finance for long-term projects like infrastructure
industry.
Hence when a bank, say, lend for 10 years
against a 4 years deposit, there is a problem of continuing the loan after 4
years. It is possible that the bank will continue to get deposits every year.
Yet, the fact today is a 10-year loan has been made based on a 4- year deposit
which is a risky affair. In such a situation, few banks will come together and
under an agreement each one of them will take up the loan portfolio in turn,
for a fixed period of time till the loan matures.
For example, if Bank A has provided a 10 year
loan, with an arrangement with Bank B and Bank C whereby, after the end of the
4th year, Bank B will finance the loan for next 3 years and Bank C will finance
the loan during the last 3 years.
2. Revolving Credit Facility: Under a
Revolving Credit Facility a bank fixes up a credit limit to a borrower for
certain period, say Rs.10 crore for 3 years period. The borrower will get a
maximum credit facility of Rs.10 crore at any point of time once the loan is
repaid. The borrower's facility automatically gets renewed up to Rs.10 crore
during the 3 year period any number of times. In other words, the credit
facility revolves around with a maximum of Rs.10 crore outstanding at any
point of time over a 3 year period. In principle, under a Revolving Facility
there is no formal repayment period. The borrower is allowed to draw, repay and
again draw throughout the loan period.
3. Ever greening of Loan: Sometimes a bank provides a second
finance facility to a borrower to help him to pay back the original loan. It is
because when a borrower defaults on payment of interest/principal to the bank
as per prudential norms, the loan account will become an NPA and the bank has
to make provisions. To avoid such an unpleasant situation and to show a rosy
picture of bank's loan portfolio, sometimes banks do resort to ever greening.
RBI does not permit this type of replacement credit.
4. Syndicated Loan: It is a loan facility provided to a
single borrower by a group of banks. As the loan is extended by a group of
lenders, the size of syndicated loan is normally large and a single lender/
banker may not have been in a position to extend such a facility. Since, the
bankers involved in providing such loan facility are many; usually co-ordination
work is done by a 'lead manager' who acts as an intermediary between the
lenders and the borrower. Also under this arrangement one bank in the syndicate
acts as an agent for collecting interest and other payments from borrower and
distributes to other banks.
5. Bridge Loan: Bridge
loan is a short-term temporary loan extended by financial institutions to help
the borrower to meet the immediate expenditure pending disposal of requests for
long- term funds or regular loans. Here, the bridge loan is not against any
main loan arrangement but against anticipated cash flow. Again, if an individual
is negotiating the sale of his asset, say a house, a bridge loan may be
extended by a bank to meet the seller's immediate cash requirements. The loan
will be paid off when the borrower realizes his sale proceeds.
6. Consortium Finance: Under
consortium finance a large credit facility may be jointly arranged by a combination
of several banks. Usually, one of the banks in the group will act as the leader
for the credit. The consortium leader will extend a larger share of the credit
as compared to other banks in the consortium. The word consortium here refers
to 'a combination of many banks who have agreed to extend the credit facility'.
The share of credit agreed to be extended will be decided by the banks in the
beginning. The borrower need not deal separately with all the banks in the
group. A bank is however not permitted to extend credit beyond 25 per cent of
its net owned funds or 25 per cent of borrower's net owned funds (whichever is
lower) to a single borrower.
7. Preferred Financing: In the
highly competitive world of banking today, banks are reaching out to customers,
particularly high net worth or wealthy customers. One area of lucrative finance
for bankers is consumer finance, more particularly car finance. A preferred
financier is a lender or a bank, which provides large consumer loans like car
loan under an arrangement with the car manufacturer. Because of the tie-up, the
manufacturer agrees to provide some concession in the car price and some
additional facilities in the car. Thus, the manufacturer makes available for
two reasons. One, purchase price is assured and second it gives some push for
the demand of that car. Preferred Financier also benefits. He gets wealthy
customers. Default in the consumer finance sector is minimum because most of
the customers have regular income.
8. Guarantee Services/Non-fund Based Business: Non-fund
based business is not a credit facility or a financial assistance. However, the
banks make sizeable income out of non-fund based business, mainly from
guarantee services. Banks offer 'Guarantee Services' to valued customers.
Guarantee service refers to a legal undertaking by the bank to pay a certain
sum of money to a third-party or a creditor in the event of the bank's
client/customer fails to fulfill his part of obligation. The obligation may be
to pay some money or to perform certain duties like a contract job. The guarantee
from bank enhances the certainty of performance or payment.
Usually, banks issue guarantees on behalf of
their customers in favour of Government Departments like Customs authority
saying if the customer does not perform under a contract or does not pay the
required sum, the bank will pay the money or damages. This function of issuing
a guarantee is done for certain amount of fees. Hence, it is called fee-based
services of banks. Under a guarantee a bank does not provide any credit
facility to the customer. Hence, this type of services by banks is called non-fund
based business. Other examples are issue of Travelers' Cheques, Demand Drafts,
remittance facilities, arrangement of foreign currency loans, etc.