Loan Syndication

Loan syndication is an arrangement where more than one financial institutions come together and pool resources to jointly finance a customer's project, utilising common documentation, common security and being bound by a common agreement. The lead bank is usually the bank to the debtor and it will be the one inviting other banks to participate. The lead bank is respossible for ensuring that the conditions precedent and covenants through out the life of the loan are strictly adhered to.

Parties to loan syndication 

i.  The lead bank
ii.  The managing bank (which could still be the lead bank )
iii.  The participating banks and
iv.  The borrower.

Advantages of loan syndication

i. Through this method, viable projects that are highly capital-intensive are financed with benefits to the economy.
ii. Banks are able to finance viable projects while still complying with single obligor limits.
iii. There is the benefit of more expert/professional advice.
iv. The customer is saved from the problem of raising the funds in bits.
v. Since there is only one joint security, no bank has any priority over the others.
vi. The customer is also saved from the problem of signing different agreements.
vii. There is uniformity of pricing.
viii. There is better appraisal of the project by participating banks.
ix. It ensures the spread of risks among all the participants.
x. It may lead to growth in banker-customer relationship.

Disadvantages of loan syndication

i. The process of raising funds through syndication can be very slow.
ii. It could also be more expensive as it could involve other charges like management charges.

Duties of the lead bank 

Typically the lead bank or underwriter of the loan, also known as the arranger, agent, or lead lender, apart from possibly putting up a proprtionally bigger share of the loan,  it perform other duties such as,
i. Lead bank prepares the information memorandum about the customer and the project.
ii. It gets the mandate of the customer to invite other banks to participate.
iii. It arranges consortium meetings between all participating banks.
iv. It ensures the perfection of securities.
v. All participating banks channel their contribution through the lead bank.
vi. All participating banks channel their contributions through the lead bank.
vii. The lead bank ensures, through proper supervision, that the customer does not divert the loan to other uses.
viii. The lead bank must disclose all information necessary to other participating banks.