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.

Security For Bank Advances/Lending

                           

A security is an interest or a right in property given to the creditor to convert it into cash in case the debtor fails to meet the principal and interest on loan . It is an insurance against unforeseen development and the last avenue through which the bank can get its money recouped should things turn sour. It provides bankers with succour if every other things fails. Apparently, good security does not guarantee that loans will not be bad and neither does its absence impair the chance of success of the investment.

Bankers hold various kinds of securities as a cover of advances to their customers. The securities offered to the banks vary in rating.Securities which can be converted into cash without loss of value are ranked higher than that whose value fluctuate widely and tends to become frozen under adverse economic conditions . The main types of security offered against the loans are stocks and shares, title deeds, life policies, bills of exchange, bills of sale, and promissory notes. The banks also sometimes extend credit to their trusted customers on their personal securities or on the guarantees of responsible parties. The guiding principles of accepting securities are that they should be adequate, stable easily realizable e. t. c

Virtues of a good banking security

A good banking securities therefore must have the following essential attributes, viz,

1. Sufficiency
A good security must be adequate to cover the bank's entire exposure. To be on a safer side, the value of the pledge security should be 100% or more of the loan seek.

2. Objective and Stable value
A good banking security must be capable of being valued in a relatively objective rather than sentimental way. And apart from this,  its value must not be volatile but stable in the market.

3. Easily realizable
This attribute has to do with high marketability of the security. This implies that the pledged assets must be in high demand and easy to be sold off without loss in value.

4. Ease of assignment
The security must be capable of having its title legally passed to the bank with little problem. It must also be easy for the bank to re-transfer it back to the customer on liquidation of the debt.

5. Not Onerous
The security must not pose undue liabilities or inconvenience on the bank. For example, a basket of tomatoes.

6. Prime Asset
At best, security must be the borrower's prime asset  i. e an asset that the borrower hold in high esteem and would not like to lose. Borrowers normally have psychological attachment to their prime assets hence they will have the urge to liquidate their debt and take back the asset.

7. Legal binding
The security must be legally water tight so as to make it legally binding and enforceable.

8.Good Title
A good security must have unquestionable title. Registered land without encroachment and encumbrances obviously have good title.