Loan syndication is the process of involving several lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that can manage lender's risk exposure levels. Thus, multiple lenders will work together to provide the borrower with the capital needed, at an appropriate rate agreed upon by all the lenders. It is common in mergers, acquisitions and buyouts, where borrowers need very large sums of capital.
In case of large loan, consortium/ syndication should be preferred. Consortium/ Syndication means joint financing by more than one bank to the same clients against a common security basically, to diversify the risk. All consortium/ syndicated banks have a pari passi charge on the security.
Consortium loan means joint finance by more than one bank to the same party against a common security. The entire security remains charged to all these banks for the total advances. All the consortium banks have a Pari Passu charge on the security.
Adv & Disadv:
Advantages of Syndicated Loans
In addition, economists and syndicate executives
contend that there are other, less
obvious advantages to going with
a syndicated loan. These benefits include:
Syndicated loan facilities
can increase competition for your business,
prompting other banks
to increase their efforts
to put
market information
in front
of you
in hopes of being recognized.
Flexibility in structure and
pricing. Borrowers
have a variety of
options in shaping their syndicated loan, including multicurrency options,
risk management techniques, and prepayment rights without penalty.
Syndicated facilities
bring businesses
the best prices in aggregate and spare companies
the time and effort of negotiating individually with each bank.
Loan terms can be abbreviated.
Increased feedback.
Syndicate
banks sometimes are willing to share perspectives on business issues
with the agent that
they would be
reluctant to share with the borrowing business.
Syndicated loans bring the borrower greater visibility in the open
market. Bunn
noted that "For commercial
paper issuers, rating agencies view a multi-year
syndicated facility as stronger support
than several bilateral
one-year lines
of credit."
Eligible Securities for advancing Loans :
100% of deposit
under lien against the
loan.
100% of the
value of government
bond/savings certificate
under line.
100% of the
value of guarantee given by Government
or Bangladesh Bank.
100% of the
market value of gold
or gold
ornaments pledged with
the
bank.
50% of the
market value
of easily marketable
commodities kept
under control of the bank.
Maximum
50% of the market value
of land and building mortgaged
with the bank.
50% of the average market value for last 6 months or 50% of the face value, whichever is less, of
the shares trader
in stock exchange.
Undesirable Securities and Prohibited Advances :
Unquoted shares
Shares
of private limited
company
Partly paid shares
Shares
standing in
the
thirty party‘s name
Temporary receipt for shares
Large block of shares
of any one company
Uncalled capital
Second mortgage
Sub-mortgage
Advances against capital assets
Goods
in godown having no independent
access
Goods where title and purchase price cannot be verified.
Insurance policies
taken out for
the benefit of the borrower‘s
wife and children
House property where original
title deeds
not available.
Hypothecation
advance against stock in process
Accommodation
bill
Truck
receipt of bank‘s unapproved
Transport
Agencies
Advance against truck receipt for unreasonably long period
Shares
of other banking companies
Advances
opposed to the lending
policy of the bank
Equitable assignment of debt.
Industrial Sickness :
An industrial
company (being a company
registered for not less than five years) which has at the end of any
financial year accumulated
losses
equal to or exceeding its
entire net worth.
Causes of Sickness :
01. Mismanagement or inefficient management.
02.
Faulty project planning
and site selection
03.
Inappropriate financial structure
04.
Inefficient
working capital
management and financial
budgeting
05.
Absence of costing and
pricing
06.
Inefficient
system
of record
keeping