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.
Financial Institution
All Indian Development Banks
Investment Institution
UTI GIC
Project may be financed by one or more institutions depending on the size of loan.
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
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.
Disbursement
Disbursement of loan is made on the basis of assets created at site. Balance after the security margin is paid by the DFI.
Documents :
Mandate Letter Placement Memorandum Syndicate Document
Borrower
Banks
Post-Mandate Stage
3 Arranger / Lead Bank 6 Borrower 7 7 4 5
Participants
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.
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
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.