Syndication Advance, Loan Syndication

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

Qualitative Judgment

 

If   an y   u nc e rtai nt y   or   doubt   a ris es   in   res pe ct   of   r e cov er y   of   a n y   C ontinu ous   Lo an ,

Dem and Lo an  o r  Fix e d  Te rm  Lo an,  t he  s ame  will  h av e  to  b e  clas sifi ed  o n  the  b asis  o f qualit ativ e judgment be it classifiable or not on the basis of objective criteria.The concerned bank will classify on the basis of qualitative judgment and can declassify theloans if qualitative improvement does occur.But if an y loa n is cl assi fi ed b y t he In spe ction T eam o f Ba n glad es h Bank, th e s a me ca n bedeclassified with the approval of the Board of Directors of the bank. However, before placingsuch case to the Board, the CEO and concerned branch manager shall have to certify that theconditions for declassification have been fulfilled

LOAN CLASSIFICATION AND PROVISIONING

Basis for Loan Classification :

01. Objection Criteria

02. Qualitative Judgement

All good loans are treated as Unclassified and Overdue loans have been classified into 4 categories

01. Special Mention (SM) Account

02. Sub-Standard (SS)

03. Doubtful (DF)

04. Bad & Loss (BL).

Objective criteria for determining the preliminary classification status is as under : For Continuous Loans & Demand Loans :

Period of Arrears                                                               Classification Status a) Less than 3 months                                                                        UC

b) 3 months or more but less than 6 months                                      SM c) 6 months or more but less than 9 months                                      SS d) 9 months or more but less than 12 months                                    DF e) 12 months or more                                                                         BL

Term Loans upto 5 years :

Period of Arrears                                                               Classification Status

a) Less than 3 months                                                                        UC b) 3 months or more but less than 6 months                                      SM c) 6 months or more but less than 12 months                                    SS d) 12 months or more but less than 18 months                                  DF e) 18 months or more                                                                         BL

Term Loans for more than 5 years :

Period of Arrears                                                               Classification Status

a) Less than 3 months                                                                        UC b) 3 months or more but less than 12 months                                    SM c) 12 months or more but less than 18 months                                  SS d) 18 months or more but less than 24 months                                  DF e) 24 months or more                                                                         BL

Term Loans for more than 5 years :

Period of Arrears                                                               Classification Status

a) Less than 3 months                                                                        UC b) 3 months or more but less than 12 months                                    SM c) 12 months or more but less than 36 months                                  SS d) 36 months or more but less than 60 months                                  DF e) 60 months or more                                                                         BL

Provision for Classified Loans : 

04. Bad & Loss                                                          -          100%

Maintenance of provision:

(a) (i) Banks will be required to maintain General Provision in the following way :( 1 )  @  1 %  a g a i n s t a l l  u n c l a s s i f i e d  l o a n s  ( o t h e r t h a n  l o a n s  u n d e r S m a l l  E n t e r p r i s e  a n d Consumer Financing and Special Mention Account.)(2) @ 2% on the unclassified amount for Small Enterprise Financing.(3 )

@  5 %  o n  t h e  u n cl a s s i f i e d  a m o u n t  f o r  C o n s u m e r  F i n a n c in g  w h e r e a s  i t  h a s t o  b e m a i n t a i n e d  @ 2 % o n t h e u n c l a s s i f i e d  a m o u n t  f o r ( i ) H o u s i n g  F i n a n c e  a n d  ( i i ) L o a n s  f o r  Professionals to set up business under Consumer Financing Scheme (4)  @  5%  on  t he outsta ndin g am ount o f lo ans ke pt in the 'S pe cial Me ntion A cco unt ' aft e r netting off the amount of Interest Suspense.(b )  ( i )  B a n k s  w i l l  m a i n t a i n  p r ov i s i o n  a t  t h e  f o l l o w in g  r a t e s

i n   r e sp ec t   o f   c l a ss i f i ed Continuous, Demand and Fixed Term Loans:(1) Sub-standard 20%(2) Doubtful 50%(3) Bad/Loss 100%(ii) P rovisi o n in r esp ect of S hort -t erm A gric ultur al and Micr o - Credit s   is   to   be   m aint ain ed   at the  following  rates:( 1)   All   c r edits   ex c ept   'Ba d/ Loss '(i .e .

'Dou btful ', 'S ub -st and ard ', ir re gul ar a nd r e gula r c redit accounts) : 5%(2) 'Bad/Loss' : 100%5. Base for Provision :Provision will be maintained at the above rate on the balance to be ascertained by deductingthe amount of 'Interest Suspense' and value of eligible securities from the outstanding balanceof classified account

Purpose Oof provisioning:

1. loans are regularly reviewed and prudently classified in a manner that appropriately reflect credit risk;

2. loans which are not performing in accordance with contractual repayment terms are timely recognized and reported as past due ;

3. accrued but uncollected interest on loans is properly accounted for; and

4. timely and adequate provisions are made to the ―Provisions for Loan Losses Account‖ in order to ensure

that disclosed capital and earnings performance are accurately stated.

loans and advances will be grouped into following categories

Continuous 

Loans which are continuing having no definite repayment schedule but with a limit and expiry date are

called continuous loan. For example CC, OD etc.

Loans and advances without fixed repayment schedule but having an expiry date and a limit are called continuous loan such as CC, OD etc.

Demand

Loans which are payable on demand. Contingent or forced loan is also treated as demand loan. For

example, forced PAD, LIM, FBP etc. (i.e. without any prior approval as regular loan).

Demand loans are those loans which are repayable on demand such PAD, LIM, FBP.

Any contingent liability, if converted into loan under forced circumstances will also be               treated

as Demand Loan.

Fixed Term Loan :

Loans which are payable within a fixed repayment schedule are called Term Loan.

For example, House Building, Transport Loan.

 Short Term Agricultural Loans :

These short terms loans are given by banks at the instructions of Agricultural Credit Department of

Bangladesh Bank on yearly basis under agricultural loan scheme. Loans on agricultural sector repayable within 12 months are included in this category of loan. Short term micro credit will include any micro credits not exceeding Tk.25,000/- and repayable within 12 months are also treated as short term loan.

Overdraft :

Temporary financial accommodation with a certain limit granted in customer‘s SOD A/c. Interest calculated

on daily product basis.

Cash Credit :

Financial accommodation in a separate account with a certain limit and validity, secured by pledge or

hypothecation of goods.

Clean Loan/Unsecured Loan :

Loan which is granted to a borrower without obtaining any security from him is called Clean Overdraft or

Clean Loan.

What is Working Capital :

The capital left to work within running the company‘s day to day business i.e. the left over from a

company‘s paid up capital and reserves after all its fixed assets have been bought.

Micro-Credit :

Refers to small credit specially credit for the poor, agriculture, rural development and other types of credit

for poverty alleviation. NGOs in our country are engaged in financing micro-credit needs of the rural areas.

Consortium Advance : 

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.

Industrial Finance :

By „industrial finance‟ we mean financing money to various industries of the country for meeting their

multifarious needs and requirements. The term ‗project‘ for our purpose means the establishment of a new

enterprise or the introduction of something new into an existing product mix.

Factors to be considered while granting loan, Features of Good Securities

Features of loans

Liquidity

Safety

Loan purpose

 Profitability 

Types of security

Financial status of the borrower

Character of borrower

Loan to be given in diff sectors

Amount of loan 

National interest 

Guidelines of central bank 

Features of Good Securities 

01. Good title and easy transferability

02. Marketability

03. Ascertainable value

04. Stability of value

05. Worth storing

06. Low maintenance cost

07. Perishability

08. Free from liability

09. Acceptability

10. Ability

11. Ownership

12. Liquidity

13. Quality of the asset.