Types of Finance provided by banks
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.
: 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.
: 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.
: 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.
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.