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Presenter: Prof. Vighneswar
Our Focus of discussion:
The Nature of Corporate Banking Developments in Corporate Banking Consortium Finance Multiple Banking Arrangements Loan Syndication
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 dollar/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.
In this pressure-packed environment, wholesale bankers have two basic choices – either ensure their current operation at peak efficiency so as to effectively meet its customers’ needs, or develop alternative strategies outside their current operations environment.
Corporate customers are: •consolidating treasury activity.DEVELOPMENTS IN CORPORATE BANKING Significant changes are underway in corporate banking. Many are also subsequently setting up ‘payment factories’ or ‘shared service centers’ to rationalize the payment settlement process. Some corporate customers are transferring account administration to ‘inhouse banks’ to provide cash pooling structure services normally supplied by external banks to business units in order to effectively centralize their liquidity. which was previously dictated by banks. that selected business and imposed charges at will. enabling them to profit from cash reserves to an unprecedented extent. The corporate customers are now altering the nature of the relationship. and •integrating financial processes. •reducing their transaction costs. .
Research by MOW* on Corporate Banking Research by MOW suggests that the capacity and capital are leaving the sector permanently. and banks remaining active in this sector were able to do so only with much greater discipline around defining core relationships. 3. The most significant changes in Corporate segment are as follows: 1. *Mercer Oliver Wyman. The initial enthusiasm – and subsequent disillusionment – with integrated corporate lending and investment banking strategies. 2. The rapid development of secondary markets-especially the credit derivative market. . The attendant development of active loan portfolio management as the primary means by which banks re-engineer the composition of their loan books.as additional channels to manage and offload risk. a consultancy specializing in financial services strategy and risk management consulting.
via the Internet Business: Being able to manage a relationship-based client management model across product/service lines.Business Drivers in Corporate Banking Technology: The ability to provide access to systems across the enterprise. . the Internet).e. with a delivery channel that demands the provision of an integrated service (i.
Areas for Success in Corporate Banking .
Corporate Banking Consortium Finance Multiple Banking Arrangements Loan Syndication .
Corporate Banking Funded Services: Working Capital Finance Bill Discounting Export Credit Short Term Finance Structured Finance Term Lending Non-Fund Services: Letters of Credit Collection of Documents Bank Guarantees .
Also.Long-term Commercial Loans A loan that is structured and supported specifically by the operation and performance of a specific business or enterprise is called a commercial loan. These loans are based on the proven successful or projected performance of the business itself. . from purchases of major equipment and plant facilities to business expansion or acquisition costs. besides. and are totally dependent on the historical profitability of the specific operation. The purposes for longer commercial loans vary greatly. loans secured by real estate can carry an extended term. The asset being acquired is usually used as security for these loans. financial loan covenants are regularly required. Business loans (or lines of credit) are generally issued directly to the borrowers by banks who can actually become partners in the cash flow of the operation.
This practice is also known as participation financing or joint financing. Commercial banks in India have started granting advances on a consortium basis not only to public food procurement agencies but also to various public and private companies . similar terms and conditions and exchange information with regard to credit proposals. This participation of banks enables them to apply uniform standards. The participating banks acquire common interest and share the advance and securities in the predetermined proportions. Consortium is entered into for project financing (long term and working capital requirement). deferred payment guarantees etc. Consortium banks are specialist banks that are jointly owned by other banks and operate in the wholesale financial markets.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.
CREDIT MONITORING ARRANGEMENT CONSORTIUM DOCUMENTATION FACILITATOR PROJECT PROPOSAL MoU LEAD BANK (AGENT) LOAN DISBURSEMENTS REMITTANCES .
Different types of Consortia • Several banks join in financing one borrower for working capital • Several financial institutio ns and/or banks join in financin g fixed assets • When borrower with different units each engaged in separate line of production and each unit is financed by subconsortium of banks under the consortium of banks for the borrower as a whole. .
Three banks say A. B and C join together and sanction the limit of Rs. Of late banks in India not only advance consortium finance for working capital but also for project finance. obligations and other investment instruments. The provided financial means are invested in shares. goods in progress and finished machinery.50 crore in equal or agreed proportions against the security of entire raw materials. an industrial company manufacturing heavy machinery requires an advance limit of Rs. which are securities representing a share in the shares fund assets. These certificates are marketable. Participation loans mean joint finance by more than one bank to the same party against a common security. For example. whose value is expected to grow from a long-term point of view. Investment corporations that also manage them establish these funds. The borrowing company and the security are thus common.50 crore. All the participating banks have a pari passu charge (a charge ranking equally in priority) on the security. * Participation loans should be differentiated with participation certificates.Consortium loans are called Participation* loans in US and are very popular. .
Bank of India. .250 crore last year by a consortium consisting of Punjab National Bank. which plans to launch mobile phone services by the end of 2009. Central Bank of India and Vijaya Bank. Oriental Bank of Commerce. was lent Rs 1.Unitech Wireless. Canara Bank.
CONSORTIUM FINANCE Processing a Proposal Term of Advance Documentation Balance Confirmation Letters Stock Statements Insurance Review Difference of Opinion among Participation Banks Participation with Financial Institutions Other than Banks .
. Flexibility of draw down and repayment schedule. individual approach. Consortium approach would enable to put an end to the unhealthy approach of the banks snatching away good borrowal accounts Speed of transaction.the whole sum is drawn through one Agent bank. Due to a larger volume of a transaction the margin is usually lower.Benefits of a Consortium Spread of Risk Collective Wisdom of Banks Smaller banks could join the consortium and have the benefit of the borrower clientele. Positive publicity for the client. Reduced administration for the client .
The borrower has to submit all the necessary papers and data regarding appraisal of its proposed limits to the lead bank.ROLE OF THE LEAD BANK The appraisal of credit proposal is done by the lead bank. . 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. The Lead Bank should however inform other members immediately together with their pro-rata share. Lead Bank will however enjoy the freedom to sanction an additional credit up to a pre-determined percentage in emergency situations. which in turn will arrange for preparation of necessary project appraisal report and its circulation to other member banks.
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. Borrowers can avail any credit facilities from any number of banks without a formal consortium arrangement.MULTIPLE BANKING ARRANGEMENTS Joint financing or consortium financing distinguished from multiple banking. Apart from the paripassu charge. the individual banks may stipulate other securities/collateral securities/third party guarantees as may be necessary. the facility extended by it to the borrowers enjoying total fund based working capital credit limits of Rs. Under multiple banking arrangements each bank should report under the CMA. should be The borrower borrows from a number of banks under separate agreements and securities are charged to them separately.10 crore and above .
However. . loans may be for longer periods that can range upto 20 years..LOAN SYNDICATION Syndicated loans are available for large established public limited companies. both as a matter of commercial prudence and to comply with regulatory Capital Adequacy requirements. It offers a good avenue to get the appropriate level of credit as determined by requirements of the unit rather than policy posture and price determined by credit rating of the borrower. Loan syndication can be used to raise project finance as is done in Eurodollar market and also for working capital needs. which can mean from three to ten years. Syndicated loans are most often for medium-term periods. sector etc. Loan syndication is an alternative to consortium financing. Banks engage in syndicated lending as they need to diversify their loan portfolio in respect of country.
tenor and price. Syndications make for efficient pricing and easy administering. The major benefits reaped by corporates in syndication are amount. this method of financing does not come into conflict with established banking practices. in which several or many banks participate. . The lead bank seeks to create a lending facility. The SBI and Canara bank are the major Indian public sector banks that have vast experience in international loan syndications. 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 cost of syndication would vary with the credit of the borrowers and a higher credit standing provides better terms. 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. 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.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. As long as the banks do not lend below the minimum lending rate and restrict syndications to only certain top grade companies. The syndication method reverses the current practice where the corporate borrower faces rigid terms in a “take it or leave it” situation. defined by a single loan agreement.
A TYPICAL SYNDICATION PROCESS .
specifying the amount and tenor for which the loan is to be syndicated. •The lead manager assembles a management group of other banks to underwrite the loan and to market its shares to other participating banks. the syndicator or the lead manager searches for banks that may be willing to participate in the syndicate. •The mandate to organize the loan is awarded by the borrower to one or two major banks after a competitive bidding procedure. the borrower approaches several banks. •On receiving a query.Loan syndication process •In loan syndication. . which might be willing to syndicate a loan.
the loan agreement is negotiated.Loan syndication process … Two main phases that precede the signing of a syndicated loan are: •The first is the negotiation of the relationship between the borrower and the bank to arrange the syndication. usually called the arranger. •The second stage is the syndication process itself. contacts other banks in the Euromarket and obtains commitments to join the loan. . and signed. During this stage. The mandated bank. which culminates in the borrower awarding a letter of mandate to that bank. finalized.
The Role of an Arranger The arranger is responsible for syndicating the loan. The arranger bank also plays a crucial role in pricing 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 helps the borrower choose the banks to be invited into the syndicate. It must ensure that the financial aspects of the loan are correct and attractive enough to complete the syndicate. .
Steps in Loan Syndication Source: United Nations Institute for Training & Research .
syndication is similar to consortium. the freedom the borrower has in terms of competitive pricing. the convenient mode of rising long-term credit.SYNDICATION VS. and the discipline that is sought to be achieved through fixed repayment period under syndicated credit is absent in consortium financing. Syndicated credit is a convenient mode of raising long-term funds by borrowers. CONSORTIUM Though in terms of dispersal of credit risk. .
•Consortium loans are the loans that are jointly granted by more than one bank to the same party against a common security. . b) banks are able to diversify their risk by participating in big advances. particularly in the light of the credit control measures adopted by the RBI.SUMMARY •Wholesale banking is an umbrella term encompassing the products and services that a commercial bank provides to its corporate customers. •Consortium banks are specialist banks that are jointly owned by other banks and operate in the wholesale financial markets. •Banks finance on a participation basis due to following reasons: a) resources of the banks do not permit large advances.
While syndicates have many variations. . •Under multiple banking a borrower borrows from a number of banks under separate agreements. such as construction loans. the basic structure involves a lead manager (the agent bank) that will represent and operate on behalf of the lending group (the participating banks). export finance loans. and securities are charged to them separately. can also be syndicated. •A syndicated loan can be defined as two or more (often a dozen or more) lending institutions jointly agreeing to provide a credit facility to a borrower. •More specialized facilities. particularly for large firms and increasingly for mid-sized firms.. •Syndicated loans have become an important corporate financing technique. in contrast to the fixed-rate instruments found in debt markets.SUMMARY . The interest rate of syndicated facility is a floating one. and bridge finance facilities.
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