Features of Loan Syndication

Loan syndication is the term used in the context of banking and finance where loan syndication refers to arrangement between two or more banks to provide loan to single or group of borrowers. It can be better understood with the help of real life example suppose you are 5 friends and one of your friend is in deep financial crisis and all four friend decide to help him or her by giving money then it is a sort of loan syndication. The above example was quite simple and it does not require any legal formalities as it is a private arrangement however when it comes to corporate world it is much more complex and require lot of formalities, let’s look at some of the features of loan syndication –

  1. The amount involved in loan syndication is usually very large and it is due to the large amount involved that banks give loan through loan syndication; if loan amount is small then single bank can give it to the borrower hence loan syndication is characterized by huge amount of fund requirement by the borrower.
  2. There is no need for separate agreement between individual bank and borrower rather only one agreement is required which is between the group of banks which have agreed to join syndication and borrower.
  3. The amount of loan disbursed by each bank is predefined and hence there is no ambiguity involved regarding which bank will finance how much amount and also it is not necessary that each bank has to contribute equal amount, banks can lend according to their individual risk appetite.
  4. Borrower to whom money is lent is usually of high repute hence individuals are not given loan under loan syndication, it is meant for big corporate houses and also the length for which this arrangement is made is usually long and it may range from 3 to 15 years depending on the type of loan and agreement between the banks and borrower.
  5. The risk of banks are reduced in loan syndication because if the borrower goes into default then single bank does not has to bear the loss rather all banks which are in syndication group have to share the loss in proportion to loan amount sanctioned and hence one can say that in case of loan syndication the risk of bank is not primary but collective.

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