Loan Syndication – Multiple Lenders for Big Projects
Introduction
Suppose Reliance needs ₹10,000 Crore for a refinery.
- Single bank (say SBI) can't lend it (Risk exposure limit).
- So, SBI calls 10 other banks to lend together. This is Loan Syndication.
1. How it works
- Lead Arranger: The main bank (SBI) that structures the deal.
- Participants: Other banks that contribute funds.
- Single Agreement: Common loan agreement signed by all.
- Borrower: Deals primarily with the Lead Arranger.
graph TD
B["Borrower<br/>(e.g., Reliance)"] <--> L["Lead Arranger<br/>(e.g., SBI)"]
L <--> P1["Participant 1<br/>(PNB)"]
L <--> P2["Participant 2<br/>(BoB)"]
L <--> P3["Participant 3<br/>(HDFC)"]
Loan Syndication Structure
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2. Benefits
- For Borrower: Gets huge amount without approaching 10 banks separately.
- For Banks: Risk is shared. If Borrower fails, no single bank collapses.
- Compliance: Helps banks stay within "Single Borrower Exposure Limits" set by RBI.
3. Difference: Syndication vs Consortium
- Syndication: More formalized market practice. Arranger takes a fee. Participants have transferable interests.
- Consortium: Loose association. Common appraisal but separate relationship.
Summary
- Motto: "United we Lend".
- Driver: Risk Diversification & Regulatory limits.
- Key Role: Lead Arranger.
Quiz Time! 🎯
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