Corporate Credit

References: Gopinath, Banking

Principles & Operations
Why would a corporate require credit facility ?

How does Corporate Credit differ from Retail

Credit ?
 Why would a corporate require credit
facility ?
• To Acquire the Fixed Assets
• For Working Capital requirements

Working Capital Requirements form major

portion of corporate financing
 Nature of Corporate Banking
• Corporate or Wholesale banks normally supply capital for business

ventures and construction activities on a long-term basis. Wholesale

banking is an umbrella term encompassing the products and services

that a commercial bank provides to its corporate customers.

• Historically, wholesale banks focused primarily on large and medium-

sized businesses because the average rupee value of transactions in

these segments was high.

• Large corporate customers and downstream correspondents demand

increasingly sophisticated products from their banks at the lowest

possible cost.

• Technology has become the key enabler and differentiator for many

products and services.

Factors affecting the credit decision for
Banks
Out of various factors, following ‘5 Cs ‘are more
traditional and popular in Banking
• Character
• Capacity
• Capital
• Collateral
• Condition
 Few Terminologies related to
corporate credit
• Margin
– Loan to Value Ratio (LVR ratio)
• Debt Vs Equity ratio
• Security
– Primary or Main Security, Additional or Collateral
security
• Charge
– Pledge
– Hypothecation
– Mortgage( Legal Mortgage and Equitable Mortgage)
– Assignment ( Legal and Equitable)
– Lien
Cautions for the possession of Security
Protection of Security
– Storage of Documents
– Insurance of charged asset
– Statements and Inspection
– “Credit Enhancement”
• Third party guarantee
• First loss default guarantee FLDG
• Letter of Comfort
• Cash escrowing
• Credit guarantee by institutions
 Types of Credit Facilities
• Overdraft
• Cash credit
• Packing credit
• Demand Loans/Lines of Credit
• Business Card
• Cheque Purchase
• Bill Purchase
• Bill Discount
• Letter of Credit LCs
• Bank Guarantees
 Corporate Credit

Funded Services Non--Fund Services

Non
Letters of Credit
Working Capital Finance
Collection of Documents
Bill Discounting
Bank Guarantees
Export Credit
Short Term Finance
Structured Finance
Term Lending
 Financing Arrangements
Corporate
Credit

Consortium Multiple Banking Loan

Finance Arrangements Syndication
 CONSORTIUM FINANCE
• The necessity of consortium/participation lending arises when the amount
involved is very large and beyond what a bank would like to risk under
ordinary circumstances for a single borrower beyond the prudential
exposure norms.

• Consortium is entered into for project financing (long term and working
capital requirement), deferred payment guarantees etc.

• This participation of banks enables them to apply uniform standards,

similar terms and conditions and exchange information with regard to
credit proposals. The participating banks acquire common interest and
share the advance and securities in the predetermined proportions.
 Different types of Consortia
• Several banks join in financing
one borrower for working
capital
• Several financial institutions
and/or banks join in financing
fixed assets
• When borrower with different
units each engaged in separate
line of production and each
unit is financed by sub-
consortium of banks under the
consortium of banks for the
borrower as a whole.
 Example of Loan Consortium
• An Industrial company manufacturing heavy machinery requires an
advance limit of Rs.50 crore.

• Three banks say A, B and C join together and sanction the limit of
Rs.50 crore in equal or agreed proportions against the security of
entire raw materials, goods in progress and finished machinery.

• The borrowing company and the security are thus common. All the
participating banks have a pari passu charge (a charge ranking
equally in priority) on the security.
 Benefits of a Consortium
• Spread of Risk (Bank’s Point of view)
• Collective Wisdom of Banks is applied
• Even Smaller banks could join the consortium and have the
benefits of the borrower clientele.
• Speed of transaction, Individual approach.
• Reduced administration for the client - the whole sum is
drawn through one Agent bank (Lead Bank)
• Positive publicity for the client.
 Role of the Lead Bank
• The appraisal of credit proposal is done by the lead bank.

• The borrower has to submit all the necessary papers and data regarding appraisal of its

proposed limits to the lead bank, which in turn will arrange for preparation of necessary

project appraisal report and its circulation to other member banks.

• Lead Bank will also be responsible to submit the proposal to RBI for post sanction scrutiny

under ‘Credit Monitoring Arrangement’ on behalf of the consortium members and will

further attend to correspondence with RBI in this regard.

• Lead Bank will however enjoy the freedom to sanction an additional credit up to a pre-

determined percentage in emergency situations.

• The Lead Bank should however inform other members immediately together with their

pro-rata share.
MULTIPLE BANKING ARRANGEMENTS
• The borrower borrows from a number of banks under separate
agreements and securities are charged to them separately.

• Borrowers can avail any credit facilities from any number of

banks without a formal consortium arrangement.

• Where there are multiple banking arrangements it is possible

that security over an asset may be given to more than one
lender (either deliberately or accidentally) and where this has
occurred, care must be taken to ensure that the issue of
priorities is properly addressed.

• Apart from the pari passu charge, the individual banks may
stipulate other securities/collateral securities/third party
guarantees as may be necessary.
 LOAN SYNDICATION
Syndicated loans are available for large established public limited
companies and for a very large value of loans.

Loan syndication is an alternative to consortium financing.

Syndicated loans are most often for medium-term periods,
which can mean from three to ten years.

However, loans may be for longer periods that can range up to

20 years.

Banks engage in syndicated lending as they need to diversify

their loan portfolio in respect of country, sector etc., both as
a matter of commercial prudence and to comply with
regulatory Capital Adequacy requirements.
 Procedure of Syndication
A syndicated credit is an arrangement between two or more lending institutions to provide a borrower a
credit facility using common loan documentation.

Loan syndication is done when a borrower wants to raise a relatively large amount of money quickly and
conveniently and if the amount exceeds the exposure limits of any one bank and the borrower does
not want to deal with a large number of lenders.

A prospective borrower intending to raise resources through this method awards a mandate to a bank
commonly known as the ‘Lead Manager’ as against the nomenclature of ‘Lead Banker’ used for the
leader of the consortium.

The mandate details out the commercial terms of credit and the prerogatives of the mandated banks in
resolving contentious issues in the course of transactions.

The lead bank seeks to create a lending facility, defined by a single loan agreement, in which several or
many banks participate.

The major benefits reaped by corporates in syndication are amount, tenor and price.

Syndications make for efficient pricing and easy administering. As long as the banks do not lend below the
minimum lending rate and restrict syndications to only certain top grade companies, this method of
financing does not come into conflict with established banking practices.

The SBI and Canara bank are the major Indian public sector banks that have vast experience in
international loan syndications.
A TYPICAL SYNDICATION PROCESS
 Process further explained…
• In loan syndication, the borrower approaches several banks, which might
be willing to syndicate a loan, specifying the amount and tenor for which
the loan is to be syndicated.

• On receiving a query, the syndicator or the lead manager or the arranger

searches for banks that may be willing to participate in the syndicate.

• The lead manager assembles a management group of other banks to

underwrite the loan and to market its shares to other participating banks.

• The mandate to organize the loan is awarded by the borrower to one or

two major banks after a competitive bidding procedure.
 The Role of an Arranger
• The arranger is responsible for syndicating the loan

• Hence it must know the borrower well enough to

answer questions from potential participants who
have no information about the borrower.

• The arranger bank also plays a crucial role in pricing

the loan. It must ensure that the financial aspects
of the loan are correct and attractive enough to
complete the syndicate.

• The arranger helps the borrower choose the banks

to be invited into the syndicate.
SYNDICATION Vs CONSORTIUM
• Though in terms of dispersal of credit risk, syndication is
similar to consortium, but the freedom the borrower has in
terms of competitive pricing, the convenient mode of
rising long-term credit under syndicated credit is absent in
consortium financing.
• Syndicated credit is a convenient mode of raising long-term
funds by borrowers.
• Syndication process may not carry the pari passu condition.
 Working Capital Financing
• Maximum Permissible Bank Finance MPBF
Method (Tondon Committee)
• Turnover Method
• Cash Budget System
 Selection of Clients
• Evaluation of Promoters and Management
Team
• Market Enquiries
• Unit Visit
• Evaluation of security
• Financial Statements Analysis
• Industry study
• Credit Rating
 Further reading…(Gopinath Book)
• Delinquency Management(page 393)
• Asset Classification and Income
recognition(page 394) and provisions(398)
• Regulatory guidelines (pg. 416)