MULUND COLLEGE OF COMMERCE

S.N.Road, Mulund-west, Mumbai-80

Academic year
2015-16

Topic-Recent trends on Loan Syndication.

Rohit Kiran Pooja Keluskar

Roll no-1510726

Semester-VI

Subject-cb

Faculty Name- Prof. Rajshree Deshpande.

Loan Syndication
WHAT IT IS:
Loan

syndication is

lending

process

in

which

group

of lenders provide funds to a single borrower.

HOW IT WORKS (EXAMPLE):

When a project is unusually large or complex, it may exceed the capacity of a
single lender. For example, the amount of the loan may be too large, the risks too
high, the collateral may be in different locations, or the uses of capital may require
special expertise to understand and manage it. In these cases, a financial institution
may bring other lenders into the deal.
Usually, the loan syndication limits the liability of each lender to its share of the
loan interest. In this way, each lender limits its loan amount to a manageable size,
and limits its risk exposure. Additionally, each lender may have a collateral interest
in a unique or specialized asset from the borrower, such as a piece of equipment.
Loan syndications involve a large amount of coordination and negotiation.
Typically, loan syndications involve a lead financial institution, or syndicate agent,
which organizes and administers the transaction, including repayments, fees,
reporting and compliance, and loan monitoring. Often, such transactions require
the services of a specialist who syndicates the loan on behalf of the borrower;
identifying lenders while negotiating terms and conditions, and even representing

the borrower throughout disbursements. Loan syndication fees can be expensive,

ranging from 5% to 10% of the loan principal.

WHY IT MATTERS:
Loan syndications can be a useful tool for banks to maintain a balanced portfolio
of loan assets among a variety of industries. If one loan is too large, it
may overweight the bank's portfolio. Therefore, banks may pursue a syndication
to accommodate a loan and keep its portfolio in balance. At the same time, loan
syndications may incur a large expense to the borrower. While the syndication fee
is usually financed, the burden of repaying the loan and syndication fee is
shouldered ultimately by the borrower.
Types of Syndications
Globally, there are three types of underwriting for syndications: an underwritten
deal, best-efforts syndication, and a club deal. The European leveraged syndicated
loan market almost exclusively consists of underwritten deals, whereas the U.S.
market contains mostly best-efforts.
Underwritten 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. This is easy, of course, if market conditions, or the credits fundamentals,
improve. If not, the arranger may be forced to sell at a discount and, potentially,

even take a loss on the paper. Or the arranger may just be left above its desired
hold level of the credit.
Arrangers underwrite loans for several reasons. First, offering an underwritten loan
can be a competitive tool to win mandates. Second, underwritten loans usually
require more lucrative fees because the agent is on the hook if potential lenders
balk. Of course, with flex-language now common, underwriting a deal does not
carry the same risk it once did when the pricing was set in stone prior to
syndication.
Best-efforts syndication
A best-efforts syndication is one for which the arranger group commits to
underwrite less than or equal to the entire amount of the loan, leaving the credit to
the vicissitudes of the market. If the loan is undersubscribed, the credit may not
closeor may need significant adjustments to its interest rate or credit rating to
clear the market. Traditionally, best-efforts syndications were used for risky
borrowers or for complex transactions. Since the late 1990s, however, the rapid
acceptance of market-flex language has made best-efforts loans the rule even for
investment-grade transactions.
Club deal
A club deal is a smaller loanusually $25100 million, but as high as $150
millionthat is premarketed 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.

RBI Guidelines on Syndication Advances

The concept of syndication advance has since gone many changes and most of the
large borrowers are now being financed by banks in syndication. Reserve Bank of
India had also issued revised comprehensive guidelines in June 1987 on this
subject.
Reserve Bank of India further constituted a Committee in January, 1993. under the
Chairmanship of Shri J.V. Setty, Chairman and Managing Director, Canara Bank,
to review the extant guidelines on lending under syndication arrangement and
suggest measures for improving the efficiency of banking system in delivery of
credit. Based upon the report submitted by the above Committee, Reserve Bank
announced important changes in die existing guidelines. Guidelines m applicable
to syndication advance are as under.1

The overall exposure to a single borrower should not exceed 25% 2 of the net
worth of the banking institution. For this purpose non fund based facilities shall be
counted @ 50%3 of limits sanctioned and added to total fund based facilities to
arrive at total exposure to the borrower.

Exposure limit to group has also now been stipulated. The overall exposure to
a group should not exceed 50%2per cent (60%2 in case of infrastructure projects
consisting of power, telecommunication, roads and ports) of the net worth of the
banking institution.

(a)

The borrowers who are already having multiple banking arrangements and enjoy
fund based credit limits of Rs.50.00 crores or more must necessarily be brought

under syndication arrangements. The bank that is having the largest share in the
credit facilities would automatically become the leader of syndication and would
ensure that syndication arrangements are finalised immediately.
(b) The borrowers who are already having multiple banking arrangements and enjoy
fund based credit limits of less than Rs.50 crores should also be brought under
formal syndication arrangements at the time of further enhancements which would
take the aggregate limits to Rs.50 crores or more. The enhancements in such cases
would be considered jointly by the financing banks concerned and the bank which
takes up the largest share of fund based limits shall be the leader of the syndication.
(c) These provisions would also be applicable to new units which approach more than
one bank for sanctioning of working capital limits of Rs.50 crores or more.
The net effect of these provision amounts to that no borrower will be allowed to
have multiple banking arrangement if the total fund based credit limit sanctioned to
him amounts to Rs.50 crores or more. A formal syndication will have to he
constituted in such cases and the bank having largest share in fund based credit
limits will automatically assume the status of the leader of the syndication.
Reserve Bank has since withdrawn its instructions for obligatory formation of
syndication. It will thus not be obligatory on the part of banks to form
syndication even if the credit limit per borrower exceeds Rs.50 crore. The
need based finance required by the borrowers may, therefore, be extended by the
banks either entirely on their own, subject to observance of exposure limits, or in
association

with

other

banks.

As

an

alternative

to

sole/multiple

banking/syndication arrangement, banks may adopt loan syndication route,

irrespective of the quantum of credit involved.

There is no ceiling on number of banks in a syndication, whether it is

obligatory (fund-based credit limits of Rs.50 crates and above from more than one
bank) or voluntary (fund based credit limits below Rs.50 crores from more than
one bank) in nature. However, the share of a bank as member of syndication should
he a minimum of 5 per cent of the fund based credit limits or Rs.1 crore whichever
is more. This provision would itself restrict the number of banks in a syndication.
To illustrate this point let us consider these two examples:
(a) In a syndication for total fund based credit limits of Rs.3 crores, the minimum
share should be Rs1.00 crore.

(b)

In a syndication for total fund based credit limits of Rs.50 crates, the minimum

share should be Rs.2,50 crores.

The banks who have sanctioned term loans to a unit or who have also
participated in term loans sanctioned in syndication with term lending financial
institution should also provide working capital facilities to such a unit. 'These
banks may, however, associate other banks, if so warranted, to provide working
capital finance.

The borrower who is being financed under a formal syndication arrangement

should not avail any additional credit facility by way of bills limits/
guarantees/acceptances, letters of credit etc. from any other bank outside the
syndication. It has been stipulated by Reserve Bank of India that any bank outside
the syndication should not extend any such facility or may not even open a current
account without the knowledge and concurrence of the syndication members.

This stipulation is applicable to even those borrowers who are enjoying total fund
based credit limits of above Rs.50 crores from a single bank or under syndication
without a syndication arrangement.

In case of borrowers enjoying aggregate fund-based credit limits of Rs.1 crore

and above but below Rs.50 crore from more than one bank, and where there is no
formal syndication arrangement, banks should obtain full details of the credit
facilities (including ad hoe facilities) availed of by such borrowers from the
banking system, each time any fresh facility/enhancement is sought. Also the banks
should ensure timely exchange of information and co-ordinated approach in the
interest of overall health of advance made to such borrowers. Further, in the case of
borrowal accounts enjoying fund-based credit limits below Rs.50 crore from more
than one bank, the concerned banks will be free to enter into a syndication
arrangement at their option.

Banks/consortia treat borrowers having multidivisional/ multi-product

companies as one single unit, unless there is more than one published balance
sheet. Similarly, in the case of merger, the merged unit will be treated as a single
unit. In case of split, the separated units will be treated as separate borrowal
accounts provided there is more than one published balance sheet.

In case of borrowers enjoying fund-based credit limits of Rs.50 crore and

above, the concerned single bank and/or the leader of the existing syndication, will
be free to organise a 'syndication' of the credit limits.

In cases, where banks/consortia/syndicates am unable to adhere to the

recommended maximum time-frames for disposal of loan applications/ proposals,
borrowers will be free to bring in a new bank or new banks to form/ to join a
syndication/syndicate. Within seven days of sanction of any credit facility, such
new banks should inform the existing syndication/syndicate/ regular banks/(s) and.

should not disburse the limit without obtaining 'no objection'. In case such 'no
objection' certificate is not received within next ten days, it would be doomed that
existing consortia/syndicates/regular bank/(s) have no objection to the new bank/
(s) joining/forming consortia/syndicates.

In the cases of existing consortia, if a member-bank is unable to take up its

enhanced share, such enhanced share in full or in part could be reallocated among
the other existing willing members. In case other existing member-banks are also
unable to take up such enhanced share of an existing & member-bank, a new bank
willing to take up the enhanced share may be inducted into the syndication in
consultation with the borrowers.

While a member-bank may be permitted not to take to up its

enhanced/incremental shares it cannot be permitted to leave a syndication before
expiry of at least two years from the date of its joining the syndication. An
existing member-bank way be permitted to withdraw from the syndication after
two years provided other existing member-banks and/or a new bank is willing to
take its sham by joining the syndication.

In cases whore the other existing member-banks or a new bank an unwilling

to take over the entire outstanding of an existing member desirous of moving out
of the syndication after the expiry of above-mentioned period of two years, such
bank may be permitted to leave the syndication by selling its debt at a discount
and/or furnishing an unconditional undertaking that the repayment of its dues
would be deferred till the dues of other members are repaid in full.
Note : It would be open to a borrower to choose his bank/(s) for obtaining credit
facilities as also for the bank/(s) to take a credit decision on the borrower.
However, once a syndication (obligatory or voluntary) is formed, on" of a new
member into a syndication should be in consultation with the syndication.

Quite often non-availability of data or submission of incorrect data or

non-receipt of required financial statements results in banks/consortia being not
able to take decisions within a stipulated period of time. These data/

statements include, among other, audited financial results for the last two
years, estimated and projected results for' the current and subsequent years
respectively. More often than not borrowers require an average time of at least six
months to obtain audited financial statements. Considering all these aspects as also
available technology, the following maximum time-frames are prescribed for
formal disposal of loan proposals provided applications/proposals are received
together

with required details/information supported by requisite financial and

operating statements :
Proposals for sanction of fresh/enhanced credit limits

60 days (45 days)

Proposals for renewal of existing credit limits

45 days (30 days)

Proposals for sanction of ad hoe credit facilities

30 days (15 days)

Note: Figures in brackets are the maximum time frames for sanction of export
credit limits.

Further, individual banks/ syndicates should review the borrowable accounts

during the first quarter of the current year on the basis of audited statements for the
year before lust, provisional statements (where audited statements are not
available) for the last accounting year, provisional estimates for the current
accounting yew and forecast for the next year. Consequently, individual
banks/consordia/syndicates, at their discretion, may release 50 per cent of the

additional credit requirement during or before the second quarter of the current
accounting year. The remaining 50 per cent could be released consequent to
submission of audited results provided there is no significant difference between
the provisional estimates and the audited results.

No bank will be allowed to move out of the syndication in case of sick/weak

units since in such cases all the banks are required to associate themselves with
rehabilitation efforts.

The appraisal of credit proposals will be done by the lead bank.

The customer has to submit all the necessary papers and data regarding appraisal of
his limits to the lead bank who will in turn arrange for preparation of necessary
appraisal note and its circulation to other member banks. Lead bank must complete
the entire work relating to appraisal within the maximum time frame. Reporting to
and attending to any correspondence with Reserve Bank of India shall also be the
responsibility of lead bank.

there may sometimes be disagreement between the member banks on the

quantum of permissible bank finance, terms and conditions or any other matter. In
such cases, decision of the syndication will be binding on the lead bank as also
other members. Lead bank will however, enjoy the freedom to sanction an
additional credit up to a pre-determined percentage in emergent situations. The
lead bank should however, inform other members immediately together with their
prorate share.

There also exists a provision for forming steering committee consisting of

leader bank and the bank with next highest share in the syndication. Normally
steering committee banks must have more than 5 1 % share. Wherever syndication
fails to reach the consensus, other member banks shall follow the decision of the
steering committee.

Earlier, the terms and conditions including rate of interest, margin etc.
finalised at the syndication meeting were uniformly applicable to all banks.
Reserve Bank has however, relaxed the guidelines in this regard with freedom
granted to banks to determine their own lending rates for advances above Rs.2 lacs.
The banks in a syndication will now be free to offer different rates of interest and
other charges on their shares.

The ancillary and non-fund based business should also be passed on by the
borrower to all the member banks in almost the same proportion in which funds
based limits are shared.

The inspection/verification of securities may be done by the lead bank or

members in rotation as per arrangement which may be finalised in the syndication.

The quarterly operating statements as required under Chore Corn mince for
fixation of quarterly operative limits will also be required to be sent to the lead
bank who shall in association with the bank having the next largest share in the
credit facilities should meet at quarterly intervals and fix the operative limits and
also individual bank's share thereof for the next quarter.

The information regarding quarterly operating limits fixed in such a manner

would be communicated by the lead bank to other member banks.

In a syndication, lead bank or the lead bank and the bank with the next highest
share will be the final authorities in case of differences of opinion and their views
will prevail in all cases of disputes among the member relating to terms and
conditions.
From the above discussion it will be appreciated that the borrower under the
syndication arrangements is required to deal with the lead bank and bank having
second largest share in total credit limits for an practical purposes. The borrowers
were, however, put to inconvenience for execution of varied types of documents

etc. with various banks in the syndication. On the recommendations of 'Mahadevan

Committee' who submitted its report in April, 1988, Reserve Bank revised
guidelines in relation to syndication advances and the ultimate ideal set for the
banking industry is to achieve 'Single Window Concept For Lending (SWCL), to
minimise delay and inconvenience to the borrowers. Single Window Concept has
now been brought into operation in respect of two important areas of lending in
syndication as under:
First Disbursement
Lead bank in all syndication will have the authority from each of the other member
banks to make available their shares of entire/enhanced limits if latter's decision is
not conveyed to the lead bank within the prescribed time of two months. The
borrower will thus be able to avail first disbursement from the lead bank itself, if
other member banks delay their decision. However, after first disbursement as
above, the borrower will be allowed to operate his accounts with different member
banks according to his requirements subject to the limits allocated to them.
Documentation
Important recommendations as accepted by Reserve Bank for implementation are
as given below:
(i)

The borrower should tie required to execute only one document, which will be
signed by the lead bank on its own behalf as well as on behalf of other members.

(ii)

The lead bank should complete the formalities connected with creation and
registration of charge etc. with the Registrar of Companies.

(iii)

As soon as the documents are executed, the lead bank shall send a confirmation in
this regard to other members by telex/telegram.

(iv)

The sharing of security and the rights and responsibilities of the banks, including
the lead bank, should be documented by means of an inter se agreement among the
members of the syndication.
To bring, in the uniformity in respect of type of documents to be obtained by
different banks. Indian Bank. Association has finalised model documents to be
adopted by all the banks uniformly. The document procedure as recommended by
IBA for implementation by the banks has been revised and now the execution of
following documents:

(i)

Resolutions to be passed by the borrower's Board of Directors authorising the

borrowing company to borrow under the syndication arrangement.

(ii)

Working capital syndication agreement.

(iii)

Joint deed of hypothecation.

(iv)

Revival letter for purposes of limitation.

(v)

Letter of undertaking from the borrower for creating a second mortgage on the
fixed assets.

(vi)

Agreement to be signed with the lead bank who signs on behalf of itself and on
behalf of other member banks.
Model forms for all these documents have already been circulated by IBA to all the
banks for implementation and borrowers may approach their bank to get copies of
these documents. In addition the banks are required to sign various inter
se agreements as per revised proformae adopted by IBA .

REFERENCE
1)www.banknet.com
2)www.rbi.org