Syndicated lending

Source-This post on Syndicated lending has been created based on the article “Shriram Finance raises multi-currency loan of $468 million via ECB” published in “The Hindu” on 3 June 2024.

Why in the news?

Shriram Finance Ltd. has recently announced it raised $425 million and EUR 40 million through a syndicated term loan. The funds will support small entrepreneurs and vulnerable groups in India.

About Syndicated lending

1) Description-A syndicated loan is financing offered by a syndicate made up of a group of lenders that work together to provide funds for a borrower. It involves large amounts of money, spreading the risk among several financial institutions to reduce the impact if the borrower fails to repay.

2) Key Participants-The borrower can be a corporation, a large project, or a sovereign government.

3) Types and Features of Syndicated Loans–
A) It can include various types such as fixed-rate, floating-rate, operating, and demand loans, each with different repayment terms. A pro-rata tranche within a syndicated loan consists of both a revolving credit facility and an amortizing term loan.

B) Revolving credit allows continued access to funds as the balance is paid off, while an amortizing loan requires regular payments that reduce both the principal and interest over time.

4) Advantages of Loan Syndication

A) Risk Diversification: For lenders, syndicating a loan allows them to spread the risk across multiple participants, reducing their individual exposure.

B) Access to Large Amounts of Capital: Borrowers can obtain significant funding that might not be available from a single lender, making it easier to finance large projects or investments.

C) Flexibility: Syndicated loans can be tailored to meet the specific needs of the borrower, with customized terms and conditions.

D) Market Access: For lenders, participating in syndicated loans provides an opportunity to be involved in financing major projects and to strengthen relationships with other financial institutions.

5) Disadvantages of Loan Syndication

A) Complex Negotiations: The loan syndication process involves multiple lenders, leading to complex negotiations and the potential for delays in finalising the loan agreement.

B) Higher Transaction Costs: Borrowers may face higher transaction costs due to the involvement of several financial institutions, legal firms, and other intermediaries in structuring and executing the syndicated loan.

C) Rigid Terms: Once a syndicated loan agreement is signed, it can be difficult for the borrower to make modifications or prepay the loan without facing penalties or obtaining unanimous approval from all lenders.

Read more-What relaxed ECB norms mean for companies?

UPSC Syllabus-Indian Economy