Bank Management

FIN 303

Assignment on:
Overview of Loan Syndication

Submitted to:
Md. Alamgir Hossain
Assistant Professor
IBA, JU

Submitted by:
Tashahudul Islam
ID: 1943
Batch: 28th (5th Semester)

Date of Submission: March 11, 2022

Institute of Business Administration

Jahangirnagar University
Loan Syndication
Loan syndication refers to the process of a group of lenders backing different parts of a loan for a
single borrower. Loan syndication is most commonly used when a borrower needs a loan amount
that is too large for a single lender or when the loan falls outside of a lender's risk exposure
guidelines. Many lenders join forces to form a syndicate to provide the necessary funds to the
borrower.

Functions of Loan Syndication

Loan syndication's primary purpose is to meet borrowers' need for long-term loans. People who
require funds for new projects in areas such as power, highways, telecommunications, and
transportation typically take out a syndicated loan.

Syndicated loans are typically granted for ten to twenty years for large-scale projects. A long-term
project lasts three to ten years, while a short-term project lasts three to ten years. The interest rate is
determined by considering the requirements of diverse borrowers. Keep lending rate policies, loan
agreement regulations, and other restrictions in mind while determining interest rates.

Process of Loan Syndication

Each of the three processes in the loan syndication process is outlined below.

The pre-mandate stage of loan syndication begins when a borrower starts the process. He contacts a
single lender or a debt syndication and devises a plan to obtain the needed debt. After getting
clearance from the lead bank, the information memorandum, together with the sanction, is
distributed to several potential lenders. The next phase is loan syndication, which comprises
presenting the IM and the Lead lender's sanction letter to multiple potential lenders. Coordinating
with all potential lenders, presenting information, and following up until a final agreement with
acceptable terms is achieved are all part of the process.

The final stage of the procedure is the post-sign language phase, often known as the Execution
stage. The complete loan is assigned to multiple lenders during this phase, joint papers are written
and executed, pre-payout requirements are met, needed Trust and Retention Accounts and
subaccounts are founded, corporate authorizations are secured, and the first disbursement is
received. Debt syndicators would hold the borrower's hand till then to ensure a smooth distribution.
Advantages of Loan Syndication
● The borrower is not required to meet with all of the syndicate's lenders to discuss loan
terms. The borrower only needs to meet with the arranging bank to discuss and agree on the
loan terms. The arranger next takes on the more difficult work of building the syndicate,
which entails recruiting the cooperation of other lenders and discussing loan terms with
them to determine how much credit each lender is willing to extend.
● A syndicated loan can be organized into various kinds of loans and securities due to the
participation of multiple lenders. Varied loan types have different interest rates, such as
fixed or variable rates, giving the borrower more options. Borrowing in multiple currencies
also protects the borrower from currency risks brought on by exogenous variables such as
inflation and government action.
● Loan syndication allows borrowers to borrow large amounts of money to fund
capital-intensive projects. Telecommunications, petrochemicals, mining, oil, transportation,
and other industries can all benefit from a large loan to cover substantial equipment leasing,
mergers, and financing transactions. Because a single lender would be unable to fund such
projects, assembling a group of lenders to provide funds allows them to be completed.
● The fact that numerous lenders are interested in a borrower's project indicates that the
borrower has a good market reputation. Borrowers who successfully repay syndicated loans
gain a positive reputation with lenders, making it easier for them to receive credit in the
future.

Drawbacks of Loan Syndication

● The process is time-consuming because negotiating with the bank can take several days. As
a result, the syndication of loans is a time-consuming process.
● Borrowers could be harmed by syndicated loan agreements.
● Borrowers may find it challenging to satisfy all banks at the same time if a problem arises.
● Managing the relationships of a large number of parties is difficult, and the smallest bank
will withdraw its capital if profitability is not achieved.
Current Scenario of Loan Syndication is Bangladesh
Loan syndication is primarily used to reduce the lender's risk. The "Single Borrower Exposure
Limit" requirements of the central bank apply to this system. Lender risks are spread out since a
group of institutions arranges to finance for the borrower. Among the lending institutions in the
group, a lead arranger is always assigned. At the same time, the borrower can establish
relationships with the many institutions involved in the loan syndication. The term loan syndication
is the most popular type of syndication in Bangladesh. Syndicated loans can also be used to finance
working capital, foreign currency, and L/C facilities. GPH Ispat Limited, for example, signed a
syndicated term loan deal of Taka 1,200 crore in 2016 with UCB and 11 other banks.
Grameenphone received a Tk 846 crore loan from 15 financial institutions in 2012, which was
another example of huge syndicated loans.

Future Prospects
Data digitization, streamlined information exchanges between brokers and lenders, and improved
collaboration via cloud services all contribute to a brighter future for loan syndication. Loan
syndication is only likely to grow in the future, as it is a major source of finance for multinational
firms. In Bangladesh, businesses are encouraged to take out syndicated loans, which bodes well for
the future.