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The practice of loan syndication has existed since the 1900s. Syndicated loans feature large loan amounts typically over ₹1000 crores which are lend out to corporations. The unique feature of this loan is that unlike traditional loans there is a syndicate of lenders involved in arranging the loan amount.

Loan syndication is done mostly when businesses need to fund large operations like acquiring another business entity, participate in an international trade fair, import a batch of expensive machinery for production, etc.

What is syndicated loan/syndicated financing?

A syndicated loan is a corporate loan issued by a group of financial institutions. When a finance company gets a loan request of above ₹1000 crores, the lender forms a consortium of lending institutions to pool resources and share the risk.

For example, you want to acquire an international firm and the total valuation of the firm is ₹3000 crores. Since this is a large amount, you approach Indian Bank and apply for a business loan. Indian bank is willing to give you the loan, but they don’t have enough financial resources.

Therefore, they invite other lenders including ICICI Bank, Federal Bank of India, Tata Capital, Axis Bank and Kotak Mahindra Bank to join the loan agreement. These parties will pool the money and create a business loan agreement that is suitable for all the lenders involved in the activity.

Benefits of syndicated loans

There are several benefits of syndicated loans:

  • Huge loan amounts are sanctioned
  • Issued for funding mergers and acquisitions, importing machinery, setting up an international branch or handling any other large business expense
  • Gives borrower better access to capital
  • Borrower can enjoy competitive interest rates since multiple parties are involved
  • Less time is required as the main lender who the company has applied to will meet other lenders, discuss and decide the terms. The borrower need not meet any of the lenders.
  • The borrower will gain a positive reputation in the market as getting a syndicated loan sanctioned is something that gets national media attention.

How does loan syndication work?

Have a look at the loan syndication process:

Step 1: Borrower approaches a bank/lender for a ₹2000 crore loan

Step 2: The bank decides to approach other lenders to pool money to spread the risk of investment

Step 3: The lenders evaluate the loan proposal given by the lead bank and agrees to share the risk

Step 4: Lenders discuss and draw up a loan contract

Business Loan

Step 5: Lenders pool the money and send the money to the lead bank

Step 6: Borrower signs a single contract containing the names of every member of the syndicate and their contribution to the loan

Step 7: Loan is advanced to the borrower

Once the repayment period starts, the borrower pays his business loan EMI to the lead bank which is then shared between the members of the syndicate according to their contribution.

A real-life example of syndicated loan

In 2022, REC Limited, a finance company run by the Ministry of Power that finances and promotes power projects across India, got a syndicated loan sanctioned in the international bank loan market. it It raised $1175 million from a consortium of seven banks.

According to Economic Times, this is the single largest syndicated loan raised in the international bank loan market by any Indian NBFC. The syndicate was formed by Axis Bank, Bank of Baroda, Bank of India, Canara Bank, DBS, MUFG and SMBC.

Interest rates and eligibility for syndicated loan

There are no fixed interest rates for a syndicated loan. Since it is a consortium of different financial institutions there will be flexible terms and conditions regarding loan tenure, repayment, interest rate, etc.

Usually, the interest on a business loan depends on the lender, the type of loan, the borrower’s creditworthiness, the loan amount, and the loan term. For a syndicated loan the lenders will most likely consider the collateral for the loan, the amount requested, the project proposal, the returns that can be expected from the project, and the reputation of the company in the market to determine the interest rate.

Your eligibility criteria will depend on the terms and conditions of the bank in such cases. Most probably your firm will be judged based on audited balance sheets and profit and loss accounts, loans taken in the past, credit score, the value of collateral you have put down and the track record of your company in the market. They will also consider the viability of the project you are funding using the syndicated loan which is similar to the eligibility criteria for a business loan.

How to apply for a syndicated loan?

You will have to directly approach a bank to apply for a syndicated loan. Since a normal business loan will have a cap on the loan amount, you will not be able to ask for a large amount by filling in a normal business loan application.

Approach one of the banks you hold a good banking relationship with for a syndicated loan. If they like the loan proposal, they will form a consortium with other interested lenders and send you a loan contract.

Currently, syndicated lending in India is governed by the regulatory norms of RBI and doesn’t have any specific norms. Therefore, the parties are free to structure the syndicated lending as per their requirements.

Banks usually follow the RBI credit exposure norms for syndicated lending. According to these exposure norms, the maximum exposure limit for banks is 15% of the capital funds for a single borrower. However, if the loan is to fund an infrastructure project, the maximum limit of exposure can be extended to 20%.

Priyanka Babu

Priyanka is a seasoned content marketing professional with more than 6 years of experience crafting various forms of business and technology sector content. Her insightful writing tackles critical issues faced by small-scale manufacturing businesses. Priyanka’s clear and concise communication empowers businesses to make informed decisions and thrive in today’s dynamic business environment.