What is Loan Syndication? Types, Examples and Process

  • Published on: 23 May 2023
What is Loan Syndication? Types, Examples and Process

Loan syndication is a process where lender parties collectively provide credit facilities to a borrower. Such loans fund large and complex expenses, like:

  • Expansion of a business 
  • Infrastructural development by a company
  • Acquisition of other businesses
  • Merger with another company 

Knowing the loan syndication meaning and process can help you when you apply for such a loan. Read on to get a brief overview. 

What is a Loan Syndication?

It is not always possible for a bank or financial institution to fulfil an enormous financial requirement. Sometimes, these requirements can go beyond the bank’s risk tolerance. 

In such a case, more than one financial company can come together to provide the required capital and divide the risk involved among them. This is called loan syndication, which is when lenders collaborate under a financial institution to provide funds to a single borrower. 

The borrower may include a single business entity, individual, corporate company, or the government. 

Loan Syndication Process 

The loan syndication process includes several stages. Here are some details:

First stage

The first stage, the pre-mandate, involves initiating the loan request. You can either get in touch with a single lender or invite bids from different lenders. The appraisal process begins once you have selected the lead lender.  

Second stage

The lead lender creates a credit proposal for the loan. This initiates the second stage, which involves loan disbursal. For this purpose, the lead lender collaborates with other banks. The loan disbursal occurs after other lenders participate and finalise the loan terms.

Third stage  

The third stage of the loan syndication process is post-closure. This stage involves close monitoring of the escrow account where the borrower deposits the proceeds. The lead lender ensures seamless repayment to all the parties involved.

Example of Loan Syndication

Consider that a renowned company named ABC Pvt. Ltd. reaches XYZ Bank to get a loan of ₹80,000 crores to acquire another business entity. Based on ABC’s reputation, XYZ Bank decides to approve the loan.

As the amount is beyond the risk tolerance level of XYZ Bank, it decides to form a syndicate of several banks to finance this loan. XYZ, as the lead agent, provides ₹40,000 crores and four other banks join in with ₹10,000 crores each. 

With this arrangement, ABC Pvt. Ltd. gets the loan amount, and the participating banks divide the associated risks and potential returns among themselves.

Types of Loan Syndication

There are different types of loan syndication you should know about:

Underwritten deal

This deal puts the obligation of loan payment on the lead lender in case the borrower fails to repay it. In simple words, the lead lender is the guarantor of such loans. 

Best-offer syndication

Here, the lead bank participates with other lenders but does not take over the role of a guarantor. This can result in the under-subscription of the loan, forcing the borrower to accept a lower loan amount.

Club deal

Here all lenders pitch in an equal or almost equal amount for the loan. Subsequently, these lenders also receive an equal share of the fees. 
Knowing the loan syndication meaning and process a little better, you can apply for credit for large projects when you need to. At Fibe, you can get easy financing for regular and big-ticket expenses by personal loan up to Rs.5 lakh. Simply download our Personal Loan App to get started.

FAQs about Loan Syndication

How does loan syndication work?

Loan syndication involves more than one lender collaborating to provide you with the required capital. In this way, lenders can offer you a loan amount that is beyond their individual capacity. 

What is a loan syndication agent?

A loan syndication agent is a lead bank to which you give your mandate for getting other lenders on board. This agent can also be a guarantor of your loan. 

Who are the loan syndication participants?

The participants are the banks that join the loan syndication process. 

How is the loan syndication process structured?

In the first stage, you apply for a loan with a bank. Once approved, the lead bank then gets participating banks on board. The disbursal of the loan amount takes place when all loan terms are finalised. The lead lender oversees the management of your loan.

What are the features and benefits of debt syndication in India?

Debt syndication in India offers the following benefits and features:

  • Facilitates access to big-ticket credit for businesses with ease
  • Enables you to enjoy competitive interest rates due to the participation of different lenders
  • Makes loan management more efficient as it is supervised by the lead lender

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