Page 51 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 3.4.2 Bridge Finance

Bridge finance refers to loans taken by a company normally from commercial banks for a short
period, pending disbursement of loans sanctioned by financial institutions. Normally, it takes
time for financial institutions to disburse loans to companies. However, once the loans are
approved by the term lending institutions, companies, in order not to lose further time in
starting their projects, arrange short-term loans from commercial banks. Bridge loans are also
provided by financial institutions pending the signing of regular term loan agreement, which
may be delayed due to non-compliance of conditions stipulated by the institutions while
sanctioning the loan. The bridge loans are repaid/adjusted out of the term loans as and when
disbursed by the concerned institutions. Bridge loans are normally secured by hypothecating
movable assets, personal guarantees and demand promissory notes. Generally, the rate of interest
on bridge finance is higher as compared with that on term loans.

3.4.3 Loans from Commercial Banks

The primary role of the commercial bank is to short-term requirements of industry. Of late,
however, banks have started taking an interest in term financing of industries in several ways,
though the formal term lending is so far small and is confined to major banks only.
Term lending by banks has become a controversial issue these days. It has been argued that term
loans do not satisfy the canon of liquidity, which is a major consideration in all bank operations.
According to the traditional values, banks should provide loans only for short periods and for
operations, which result in the automatic liquidation of such credits over short periods. On the
other hand, it is contended that the traditional concept of liquidity requires to be modified. The
proceeds of the term loan are generally used for what are broadly known as fixed assets or for
expansion in plant capacity. Their repayment is usually scheduled over a long period of time.
The liquidity of such loans is said to depend on the anticipated income of the borrowers.
As a matter of fact, a working capital loan is more permanent and long-term than a term loan.
The reason for making this statement is that a term loan is always repayable on a fixed date and
ultimately, a day will come when the account will be totally adjusted. However, in the case of
working capital finance, though it is payable on demand, yet in actual practice it is noticed that
the account is never adjusted as such, and, if at all the payment is asked back, it is with a clear
purpose and intention of refinance being provided at the beginning of the next year or half year.
To illustrate this point let us presume that two loans are granted on January 1, 1996 (a) to A; term
loan of 60,000 for 3 years to be paid back in equal half yearly installments, and (b) to B; cash-
credit limit against hypothecation, etc. of 60,000. If we make two separate graphs for the two
loans, they may be something like the figure shown below.

Figure 3.1: Graphs for the Two Loans

Thousand
Thousand
70
60

Years Years

46 LOVELY PROFESSIONAL UNIVERSITY