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INTRODUCTION

Once the client company has decided about the project proposed to be undertaken, the next step is looking for the sources wherefrom the funds could be procured to implement the project . Merchant banker has to locate the sources of funds and comply the formalities required to procure the funds . This service rendered by the merchant banker in arranging and procuring credit from financial institutions, banks and other lending and investment organizations for financing the clients project cost or meeting working capital requirement is referred to as loan syndication or credit syndication.

Meaning
Loan Syndication refers to assistance rendered by merchant banks: to get mainly term loans for projects from a single development finance institution or a syndicate or consortium. Merchant banks provide assistance to corporate clients tor aise syndicate loans from commercial banks.

Loan Syndication (Domestic borrowing)


Loan syndication in case of domestic borrowings is with the institutional lenders and banks.
Long & Medium Term Loans Long and medium term funds are obtained from the 1. All India Financial Institutions like IFCI,IDBI etc., 2. state level financial bodies like SFC, SIDC etc., 3. commercial banks,4. mutual funds etc. Small Term Loan Short term requirements or working capital needs can be from: 1. Internal sources like internal accruals from working or operations and short term loans from friends and relatives; 2. External sources like short term borrowings from banks etc.

Organization in India Involved in Loan Syndication


Since 1948, Development Finance Institutions (DFIs) or development banks with: 1. Industrial Finance Corporation of India 2. State Finance Corporations assist the promotion and financing of term loans of industrial units . DFIs have been the integral part of the capital market and have played significant role in financing the investment activity . These institutions: 1. Provide credit and other facilities for development of industries. 2. Provide term loans in Indian and foreign currencies

Financial Institution
All Indian Development Banks

IDBI IFCI ICICI SIDBI IIBI

All Indian Financial Institution

Specialized Financial Institution

IVCF ICICI Venture TFCI LIC

Investment Institution

UTI GIC

State Level Institution

State Financial Corporation (SFCs)


Small Industrial Development Bank of India (SIDBI)

General Consideration By Merchant Bank :


Identify Financial Institution for borrowing
Merchant Banks help the clients to approach the financial institution for term loan Identification of financial institution depends upon : 1. Nature of industry 2. Location of unit 3. Size of project cost

Project may be financed by one or more institutions depending on the size of loan.

Appraising the term loan


1. Determine the amount of loan to be raised. 2. Adherence to the guidelines for financing of industrial projects. Priority in financing is given to: Projects contributing to infrastructural and rural development. Project significantly contributing to infrastructural facilities in centrally declared backward areas, project located in backward areas etc. Project related to negative lists should be avoided.

Preliminary Meeting
After verification , a preliminary meeting should be fixed with the financial institutions. Loan Application: 1. Promoters Background, technical skills, relevant experience and financial soundness.2. Market research study3. Aspects on technical, financial, and economic appraisal4. Cash flow statement for seven to ten-year period5. The land for project, plans for building and quotations for the machinery from twomanufacturers6. Actual production process has to be depicted7. Working capital requirements Memorandum of association Article of Association Certificate of incorporation Latest annual report and statement of accounts if any

Debt-Equity Ratio/ Debt Service Coverage Ratio


Dept-equity ration: Large and medium firms(2.1) Small firm(3.2) Debt service coverage ratio: 1.6 to 2 times

Security Margin
Security margin represents the excess value of fixed asset over the term loan . The term loan is 75 percent of the value of fixed assets. The security margin is 25 percent.

Payment of stamp duty and fees


Stamp duty and registration fees have to be paid. Subscribed and paid-up capital to be brought in by the promoters.

Disbursement
Disbursement of loan is made on the basis of assets created at site. Balance after the security margin is paid by the DFI.

Loan Syndication Process


Actors:
Borrower Arranger / Lead Bank Participants

Documents :
Mandate Letter Placement Memorandum Syndicate Document

Loan Syndication Process


Pre-Mandate Stage
1

Borrower

Banks

Post-Mandate Stage
3 Arranger / Lead Bank 6 Borrower 7 7 4 5

Participants

Loan Syndication Process


Pre-mandated stage
1.The borrower solicits competitive offers to arrange and manage the syndication with one or more banks, usually , its main banks.
2.From the proposals it receives, the borrower chooses one or more arrangers that are mandated to from a syndicate and negotiates a preliminary loan agreement.

Post-mandated stage
3. Once the lead bank/ syndicator receives the mandate from the borrower, a placement memorandum is prepared by the lead bank. 4. The loan is then marketed to other banks who may be interested in taking up the shares.

Loan Syndication Process


5. On the basis of the data in the placement memorandum, banks make a reasonable appraisal of the credit before deciding about their participation in the loan. 6.Once the bank decides to become a member of the syndicate, it indicates the amount and the price it is likely to charge on the loan. 7.Based on the information received from all participating banks, the lead bank prepares a common document to be signed by all the members of the syndicate and the borrowing company.

Post- signed stage


When the deal becomes active and the loan is operational, binding the borrower and the syndicate members by the debt contract.

Benefits of Loan Syndication


Borrowers
Reduction in total borrowing cost Wider diversity in funding sources Greater efficiency and flexibility in financing

Investors
Wider diversity and opportunity in asset holding Dispersal of loan portfolio risk

Arrangers Greater flexibility in dispersal Optimization of risk and return Streamlining balance sheet New sources of fee earning. Clear understanding Of the necessity of debt IR

Improvement in operating environment

Effect for all participants

News Report
Four Indian Banks , including State Bank of India and IDBI Bank , figure amongst the top five bank sin the Asia Pacific region for arranging syndicated loans in 2010 . Amongst Asia-Pacific countries ,Indian entities have be enmost active in raising funds mostly from infrastructure projects in the power and airports segments . Small amounts were raised for creating industrial capacities by corporates ,SBI, the country largest lender ,with a mandate for five deals raised $1.58 billion followed by IDBI Bank ($1.41 billion in three deals ) , Axis bank ($980 million) and ICICI Bank ( $686 million)

Conclusion
Union Bank of India, Bank of India, Allahabad Bank, Corporation Bank , UCO, United Bank of India are among the banks entering this space. Traditional players will now have to chase customers given the increase in competition. State-owned banks such as Union Bank of India, Bank of India, Allahabad Bank , Corporation Bank , UCO , United Bank of India are gradually making inroads into this domain The prospect of earning an attractive fee income by leveraging their corporate relationships is luring banks to set up loan syndication desks.