Loan Syndication

1. Meaning and Scope2. Institutional lenders3. Steps in loan syndication4. Loan Syndication for working capital from banks5. Consortium arrangement6. Types of Syndication7. Need of Syndication8. Benefits of Syndication9. Disadvantage of Syndication10. Fee Structure of Financial Institution for loan syndication

MEANING AND SCOPE : Loan syndication or credit syndication refers to the services rendered by the merchant bankers in arranging and procuring credit from financial institution , banks, other lending and investment organization for financing the client’s project cost or meeting working capital requirements. Syndication is an arrangement where a group of banks, which may not have any other business relationship with the borrower, participate for a single loan." "A syndicated facility is a lending facility, defined by a single loan arrangement, in which several or many banks participate."

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers.

1. IFCI – INDUSTRIAL FINANCIAL CORPORATION OF INDIA2. IDBI – INDUSTRIAL DAVELOPMENT BANK OF INDIA3. ICICI – INDUSTIRAL CREDIT AND INVESTMENT

CORPORATION OF INDIA 4. IRBI - INDUSTRIAL RECONSTRUCTION BANK OF INDIA5. SCICI – SHIPPING CREDIT AND INVESTMENT COMPANY OF

INDIA 6. SFC – STATE FINANCAIL CORPORATION7. SIDC – STATE INDUSTRIAL DAVELOPMENT CORPORATION8. SIIC - STATE INDUSTRIAL AND INVESTMENT CORPORATION9. LIC – LIFE INSURANCE CORPORATION10. UTI – UNIT TRUST OF INDIA 11. GIC – GENERAL INSURANCE CORPORATION OF INDIA12. CB - COMMERCIAL BANKS

STEPS IN LOAN SYNDICATION1. Preparing the project details and estimating capital requirement of

the applicant.2. Locating the sources of finance i.e. the lenders or the suppliers of

the funds3. Selection of the suppliers of the funds. Preliminary discussions

with the suppliers of funds to ascertain possibilities of the getting credit.

4. Preparation of the loan application.5. Filing the loan application with the financial institution/bank and

follow up action.6. Rendering assistance in project appraisal with the financial

institution/bank.7. Obtaining sanction letter of intent from the lenders.8. Assistance in compliance of the terms and condition for the

availment of the loan.9. Assistance in documentation and creation of security.10. Assistance in obtaining disbursement of the loan

Depends upon

1. Nature of the finance2. Types of the bank finance for the working capital3. Fund based facility3.1 Cash credit facility 3.2 Bill finance3.3 Overdraft facility3.4 Demand loans4. Non fund based facility 4.1 Letter of guarantee4.2 Letter of credit

In cases where the requirement of the funds for working capital is quite big and a single bank does not want to advance the limit , consortium approach is envisaged and a few banks are approached to join with the lead bank. Under such situation , the banks follows the directives of the Reserve Bank of India (RBI). It is very essential for the all banks to be followed the guideline declared by the {RBI}.

Underwritten deal Club deal

An underwritten deal is one for which the arrangers guarantee the entire commitment, then

syndicate the loan. If the arrangers cannot fully subscribe

the loan, they are forced to absorb the difference, which they may later try to sell to investors.

Best-efforts syndication

A best-efforts syndication is one for which the arranger group

commits to underwrite less than the entire amount of the loan,

leaving the credit to the vicissitudes of the market. If the

loan is undersubscribed, the credit may not close—or may

need major surgery to clear the market.

A club deal is a smaller loan—usually $25-100 million, but as

high as $150 million—that is pre marketed to a group of

relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or

nearly a full cut, of the fees.

WHEN DOES A CORPORATE GO FOR SYNDICATION? Corporate opt for syndication when: -

· The borrower wants to raise large amount of money quickly and conveniently .

· The amount exceeds the exposure limits or appetite of any one lender .

· The borrower does not want to deal with a large number of lenders

1.Syndicated loans provide borrowers with a more complete menu of financing options.

2.In effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond markets.

3.This has resulted in a more competitive corporate finance market, which has permitted issuers to achieve more market-oriented and cost-effective financing.

1. Managing multiple bank relationships is no small feat. Each bank needs to come to an understanding of the business and how its financial activities are conducted.

2. A comfort level must be established on both sides of the transaction, which requires time and effort.

3.Negotiating a document with one bank can take days. To negotiate documents with four to five banks separately is a time-consuming, inefficient task.

1. Front end fee – It is taken on the basis of a. In respect of loans under project finance {1%}b. In respect of the direct subscription to equity {2.5}c. In respect of the direct subscription / {4%)

Private placement of the debentures.d. In respect of the shares/debentures {2.5%} under written.e. In respect of the sanctioned amount of {1%} the equipment to be procured /sold

2.Processsing fee.

3.Appraisal fee.

4. Legal charges.

5. Guarantee commission

6. Loan syndication fee.

7. Fee for financial services.