CREDIT/LOAN SYNDICATION

BY G.VENKATACHALAM ASST.PROF/FINANCE JIT/THOPPUR

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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

CREDIT/LOAN SYNDICATION
MEANING AND SCOPE :

Loan syndication or credit syndication refers to the services rendered by the merchant bankers in arranging and procuring credit from financial institution , banks, other lending and investment organization for financing the clients project cost or meeting working capital requirements. Syndication is an arrangement where a group of banks, which may not have any other business relationship with the borrower, participate for a single loan." "A syndicated facility is a lending facility, defined by a single loan arrangement, in which several or many banks participate." A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers.
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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

INSTITUTIONAL LENDERS
IFCI INDUSTRIAL FINANCIAL CORPORATION OF INDIA IDBI INDUSTRIAL DAVELOPMENT BANK OF INDIA ICICI INDUSTIRAL CREDIT AND INVESTMENT CORPORATION OF INDIA 4. IRBI - INDUSTRIAL RECONSTRUCTION BANK OF INDIA 5. SCICI SHIPPING CREDIT AND INVESTMENT COMPANY OF INDIA 6. SFC STATE FINANCAIL CORPORATION 7. SIDC STATE INDUSTRIAL DAVELOPMENT CORPORATION 8. SIIC - STATE INDUSTRIAL AND INVESTMENT CORPORATION 9. LIC LIFE INSURANCE CORPORATION 10. UTI UNIT TRUST OF INDIA 11. GIC GENERAL INSURANCE CORPORATION OF INDIA 12. CB - COMMERCIAL BANKS 1. 2. 3.
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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

TYPES OF SYNDICATED LOANS

Loans for setting up new projects Loans for expansion, modernization, diversification of projects Participatory loans Loans for making investment in corporate securities (to subscribe public issue, private placements etc.) Consortium loan Refinancing loans(IDBI) Rediscounting loans(IDBI)
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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

CONSORTIUM LOAN ARRANGEMENT

In cases where the requirement of the funds for working capital is quite big and a single bank does not want to advance the limit , consortium approach is envisaged and a few banks are approached to join with the lead bank. Under such situation , the banks follows the directives of the Reserve Bank of India (RBI). It is very essential for the all banks to be followed the guideline declared by the {RBI}.

G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

CREDIT SYNDICATION SERVICES OF MB

Ascertaining promoters details Ascertaining of Project cost details Comparison of cost details- Through Benchmark Identification of funding sources- short, medium, long term Ascertainment of loan details Furnishing beneficiary details(Borrower)** Making application- to lending institutions Project appraisal** Compliance for loan disbursement** Documentation and creation of security Pre- disbursement compliance
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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

FURNISHING BENEFICIARY DETAILS

General information:- Like name of company, date of incorporation,
nature, location of registered office etc. Promoters information:- Brief account of activities, past performance, Certified copies of MOA, Articles of Association ,Audited B/S, P/L a/c for last five years. Company information:- brief history of company, expansion diversification, nature, size and status of project, list of subsidiaries(% of subsidiary), Holding (%), BODs, Tax status of companies, Licensed capacity etc. Project profile information:- plant capacity, plant process, plant technical arrangements, plant mgt, plant assets, plant labor etc.

Project cost information Project financing information Project marketing information Cash flow information

ROLE OF MERCHANT BANKER FOR PROJECT APPRAISAL

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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

Technical appraisal- assessment of technical

and engineering soundness of the project. supervision of construction and installation; ability of consultants and their costs for services 2. Ecological appraisal- taken all possible steps for preventing air, water and soil pollution arising out of the industrial project proposed to be undertaken. 3. Financial appraisal- analyzing the financial viability of the project under consideration. Analysis of the need for fixed capital and working capital is also carried out.
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CONTD.

G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

4. Financial tools- cost of the project as relating to

acquisition of capital assets, interest cost on loans obtained for promotional, organizational, training and other purposes. Promoters contribution-include own equity, managed equity from special funds such as Risk Capital/venture Capital Funds or Seed Capital from IDBI through SFCs, etc. and foreign equity, deposits contributed by promoters, etc Economical appraisal- The project involves making an analysis of the expected contribution of the project to the particular sector, besides its contribution to the development of the national economy.
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5.

6.

CONTD.

G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

7. Commercial appraisal- determination of commercial viability of the project in terms of arrangements for buying, transporting and marketing the product. 8. Managerial appraisal- the evaluation of effectiveness and efficiency of the managerial personnel who are vested with the responsibility of organizing the available resources of the project.
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COMPLIANCE FOR LOAN DISBURSHMENT

The MB to ensure Compliance of terms and conditions to have the loan facility disbursed by the bank. The compliance is required in respect of the following: Compliance with the provisions of MOA Compliance with the provisions of Acts Compliance with the provisions of loan arrangement

G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

Statutory complaints:The companies Act, 1956: Industries (Development and Regulation) Act, 1951. Foreign Exchange Management Act (FEMA). Securities Contracts (Regulation) Act, 1956 (SCRA): FTDRA (Foreign Trade Development and Regulation Act), 1992 11

G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

DOCUMENTATION AND CREATION OF SECURITY

The MB provides the following details with regard to the security for the loan: First Mortgage and charges- all immovable assets of both present
and future of borrower company.

First charge by way of hypothecation:All movables such as stocks of RM, Semi FG, Consumable stores and such
other movables as may agreed On specific items of immovable items

Personnel guarantee

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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

STEPS IN LOAN SYNDICATION

1. Preparing the project details and estimating capital requirement of the applicant. 2. Locating the sources of finance i.e. the lenders or the suppliers of the funds 3. Selection of the suppliers of the funds. Preliminary discussions with the suppliers of funds to ascertain possibilities of the getting credit. 4. Preparation of the loan application. 5. Filing the loan application with the financial institution/bank and follow up action. 6. Rendering assistance in project appraisal with the financial institution/bank. 7. Obtaining sanction letter of intent from the lenders. 8. Assistance in compliance of the terms and condition for the avail of the loan. 9. Assistance in documentation and creation of security. 10. Assistance in obtaining disbursement of the loan
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LOAN SYNDICATION FOR WORKING CAPITAL FROM BANKS

G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

Depends upon
1. Nature of the finance 2. Types of the bank finance for the working capital 3. Fund based facility 3.1 Cash credit facility 3.2 Bill finance 3.3 Overdraft facility 3.4 Demand loans 4. Non fund based facility 4.1 Letter of guarantee 4.2 Letter of credit

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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

NEED OF SYNDICATION
WHEN DOES A CORPORATE GO FOR SYNDICATION? Corporate opt for syndication when: The borrower wants to raise large amount of money quickly and conveniently . The amount exceeds the exposure limits or appetite of any one lender .

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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT

BENEFITS OF SYNDICATION
1.Syndicated loans provide borrowers with a more complete menu of financing options. 2.In effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond markets.

3.This has resulted in a more competitive corporate finance market, which has permitted issuers to achieve more market-oriented and cost-effective financing.
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DISADVANTAGE OF SYNDICATION
1. Managing multiple bank relationships is no small feat. Each bank needs to come to an understanding of the business and how its financial activities are conducted. 2. A comfort level must be established on both sides of the transaction, which requires time and effort. 3.Negotiating a document with one bank can take days. To negotiate documents with four to five banks separately is a time-consuming, inefficient task.
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G.Venkatachalam M.Com, MBA, M.Phil,(Ph.D) AP/Finance/JIT