A Comprehensive Guide to Loan Syndication in India
You’re definitely familiar with how normal loans work. There are important distinctions between the different types of loans like home loans, gold loans, personal loans, and credit cards. But, all these variants of loan have one important thing in common; they are all usually bilateral loans. This means that the loan agreement is between one lender and one borrower.
What is Loan Syndication?
When a borrower requires a huge amount of money, it is possible for them to apply for a syndicated loan. In this type of loan, many banks come together to fund one borrowing party. The collection of banks providing the loan is called a syndicate.
Why Go the Syndication Route?
When you approach a bank for a home loan, they would first assess the risk by appraising the property and your financial history. They also have a cap on the amount they can lend you, based on the value of the property.
In the same way, lenders have limits on how much money they can lend to one borrower. If the amount that the borrower is asking for is too high, it might breach this limit and the bank would be unable to approve the application. Loan syndication becomes a viable option in this case.
If you’re in the market for a home, you can apply for a normal bilateral Home Loan from Bajaj Finserv with low rates of interest.
Banks also benefit from syndication because the loan amount is divided amongst all the banks involved and each of the lender takes on less risk. This is important because of the huge sums involved in syndicated loans.
The Various Players
The role of the borrower is self-explanatory. They are the party that approaches a bank with the request for a syndicated loan. If you’re a borrower for a normal bilateral loan, Bajaj Finserv offers 5-minute online Personal Loan approvals! Simply click here to apply.
The arranger is the bank that the borrower first approaches. They communicate with the other lenders and set up the syndicate.
The co-arrangers are the first group of banks to agree to syndication.
The co-lenders are the various institutions that contribute towards the loan amount.
Since someone needs to look after the day-to-day running of the loan, an agent is appointed. They work for the lenders, but are paid for by the borrower. The agent’s job is to ensure that the borrower complies with all the terms and conditions of the loan agreement.
Stages of Loan Syndication
When the borrower requires funds, they approach a bank that can act as the arranger. The borrower needs to give the arranger a letter (called the mandate letter) that contains all the necessary details and commitments.
Once this is done, both the lender and the borrower will produce and send an information memorandum to other potential lenders. This document contains all the information about the syndication proposal and the borrower, including details about the project being funded.
Once the formalities are completed and the banks have formed a syndicate, all that is left to do is appraise the project, which is usually undertaken by an appraisal institution. Post that, the borrower is informed about the detailed terms and conditions, a loan agreement is signed, and the funds are released.
Example of Syndicated Loan
Let’s take a look at a loan syndication example to understand the scale of projects that would require a syndicated loan. If a corporation wanted to set up a dry-waste management plant, but lacks the required funds, they would approach ‘Bank A’ and ask for a loan. If Bank A doesn’t have the capital to finance the amount that the corporation is asking, it ropes in a number of other banks. They can then form a syndicate and release the funds to the company as per the agreed upon terms and conditions.
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