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Loan syndication
 

Loan syndication

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    Loan syndication Loan syndication Document Transcript

    • TOPIC: - 1
    • DECLARATION I MR.CHANDNI GALA student of T.Y.B.COM (BANKING AND INSURANCE) (SEMESTER V) of SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS hereby declare that I have completed the project on LOAN SYNDICATION in the academic year 2007-2008. The information submitted is true and original and to the best of my knowledge. Sign of student (CHANDNI GALA) CERTIFICATE I Mr.NISHIKANT JHA hereby certify that MISS.CHANDNI GALA of T.Y.B.COM (BANKING AND INSURANCE) Semester V of SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS has completed the project on LOAN SYNDICATION in the academic year 2007-2008. The information submitted is true and original and to the best of my knowledge. Sign of Project guide (NISHIKANT JHA) 2
    • Acknowledgement Completing a task is never one man’s effort. It is often the result of invaluable contribution of number of individuals in direct or indirect way in shaping success and achieving it. I would like to extend our sincere gratitude and appreciation to Prof.Nishikant Jha who guided me in the study of loan syndication. It has indeed been a great learning, experiencing and working under him during the course of the project .We would like to thank prof. (Mrs.) Malini Johari (Principal) and Prof (Mr.) Nishikant Jha (co-ordinator), Shri Chinai College of Commerce and Economics- Andheri for their their support and assurance throughout this project. We would like to thank the librarian of our college for helping us in finding out the relevant material for our project. We would like to appreciate all our college friends and family members who gave us all support and backing and always came forward whenever a helping hand was needed. 3
    • INDEX SR.NO CONTENTS PAGE NO Executive summary 1. Introduction 1 2 Meaning Of Loan 3 3. Meaning Of Syndication 4 4. Introduction To Loan Syndication 5 5. Features Of Loan Syndication 9 6. Stage In The Loan Syndication Process 11 7. Reasons/Purpose For Syndicated Lending 13 8. Advantages Of Syndicated Lending 14 9. Project Finance And Loan Syndication 16 10. Parties And Their Role Within The Syndication Process 19 11. Loan Syndication Financial Institutions 21 12. Loan Depot 23 13. The Syndicated Loan Market 25 14. Overview of ICICI Bank 29 15. History Of ICICI Bank 30 16. ICICI Syndication 32 17. Syndication Advisory And Other Services 35 18. Conclusion 42 19. Bibliography 43 4
    • INTRODUCTION Banks play an important role in the economic development of a nation. banks provide a number of functions. The term bank comes from the word ’BANCO’ which means a bench. In earlier days European money lenders used to display coins of different countries in big heaps on benches or tables for the purpose of lending or exchanging.It receives money from those who want to save in the form of deposits and lends the money to those who need it.The primary functions of the bank are known as banking functions and the secondary functions of the bank are known as non-banking functions. A Bank is a financial institution which deals with deposits and advances and other related services. The term banking has undergone tremendous changes over the years. The traditional and commercial banking activities of accepting deposits and lending have been replaced by the concept of universal banking and now international banking. Banks are expanding their operations, entering new markets and trading in new asset types. The change in financial system has created new opportunities along with new risks. The banks plays a vital role in modern business without banks, it would be highly difficult to conduct business activities in a smooth manner. A bank is a vital aid-to-trade. Thus bank is an evolutionary concept. It acts as a connected link between borrowers and lenders of money. For the past three decades India’s banking system has several outstanding achievements to its credit. The most striking feature is its extensive reach. It is no longer confined to metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote countries of the world. This is the main reason of India’s growth process. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are the days when the most efficient bank transferred money from one branch to another in two days. Now it is simple as instant 5
    • messaging or dial a pizza. Money has become the order of the day. The modern day banking consist of all activities viz .accounts of non residents, financing exports and imports, financing in foreign currencies, cross border financing, syndication of loans and many other activities. With the introduction of new products and services in the banking sector it has made the life of a common man more simple and easy. Innovation in banking:- TECHNOLOGY FOR VALUE CREATION 1) Internet Banking 2) Mobile Banking 3) Payment and Settlement Systems(RTGS) 4) Benefits of Technology in Banking RURAL INDIA CATCHING UP 1) Micro Finance and Self Help Groups BANKING BEYOND BANKING 1) Personal Banking 2) Retail Banking 3) NRI Services 4) Bancassurance 5) Any Branch Banking THE CHANGING FACE OF BANKING 1) Universal banks 2) Smart Cards 3) Outsourcing BPO The banking sector is an upcoming sector in the market these days with the innovation of new techniques and opening up of new branches around the country. Their main aim is at consumer satisfaction. It is a sector of great importance to the common man and it continues to expand in leaps and bounds everyday. The banks are rightly called as “nerve centers of business” and backbones of modern industries and commerce. 6
    • Meaning of the term Loan A loan is a type of debt. All material things can be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. It is also defined as:-  Something lent for temporary use.  A sum of money lent at interest.  For example: - An act of lending; a grant for temporary use: asked for the loan of a garden.  A temporary transfer to a duty or place away from a regular job: an efficiency expert on loan from the main office.  Loans represent the majority of a bank’s assets. a bank can typically earn a higher rate of interest on loans than on securities. Loans however, come with risk. If a bank makes bad loans to consumers or businesses, the banks may suffer on defaulter of repayments. -Loan is an advance paid by the bank to the customer either with security or without security is called as loan. If a loan is given without security it is called as an advance. It is given for a fixed period of time and aggregate rate of interests. Repayments are spread over from a period of 1-5 years. It is also known as demand loan and it is repayable on demand. -The loans are granted to meet long term working capital needs and for expansion and modernization. Interest is charged on the actual amount sanctioned, whether withdrawn or not. Loans may be short- term, medium-term or loan term. Long term loans are generally for meeting the working capital requirements. Such loans are also called as term loans. When a loan is meant for meeting both fixed and working capital requirement of a borrower, it is called as a “Composite loan”. 7
    • Advantages of the loan system are as follows;-  Financial discipline on the borrower  Periodic review of local Account  Profitability  The system is quite simple  It is given for a fixed period and specific purpose. Meaning of syndication  An association of individuals formed for the purpose of conducting a particular business or a joint venture.  Pooling of resources by financial institutions in a financing project to spread the risk. Individual return from the investment is proportionate to the degree of risk or amount of funds that each has put up or underwritten.  A syndicate is a general term describing any group that is formed to conduct some type of business. For example, a syndicate may be formed by a group of investment bankers who underwrite and distribute new issues of securities or blocks of outstanding issues. Syndicates can be organized as corporations or partnerships.  A Syndicated loan (or’syndicated bank facility’) is a large loan in which a group of banks work together to provide funds for a borrower. There is usually one lead bank (the "Arranger" or "Agent") that takes a percentage of the loan and syndicates the rest to other banks. A syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one lender (often a bank or financial institution.  A syndicate only works together temporarily. They are commonly used for large loans or underwritings to reduce the risk that each individual firm must take on. 8
    •  It can also be termed as an association of people or firms formed to engage in an enterprise or promote a common interest or an association of people or firms authorized to undertake a duty or transact specific business.  The cost of a syndicated loan consists of interest and a number of fees-management fees, participation fees, agency fees and underwriting fees when the loan is underwritten by a bank or a group of banks. Spreads over LIBOR depend upon borrower's credit worthiness, size and term of the loan, state of the market (e.g. the level of LIBOR, supply of non-bank deposits to the EURO banks,) and the degree of competition for the loan. INTRODUCTION TO LOAN SYNDICATION  Loan syndication refers to services rendered by an organization in arranging and procuring credit from financial institutions, banks, other lending and investment companies for financing the project or meeting the working capital requirements.  The loan syndication work involves identification of sources where from funds would be arranged, approaching these sources with requisite application and supporting documents and complying with all the formalities involved in the sanction and disbursal of loan.  In loan syndication there is a leader bank who undertakes all the duties and functions of finance. The fees charged by merchant banker for undertaking loan syndication varies upto one percent of the total loan amount. 9
    •  Syndicated loans provide borrowers with a more complete menu of financing options. In effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond market.  Loan syndications is responsible for arranging co-financing with commercial banks and other financial institutions directly or indirectly with export credit agencies (ECA’S).  Loan syndications has chosen a flexible and market oriented approach.  Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans may be obtained from a single financial institution or a syndicate or consortium.  Merchant bankers provide help to corporate clients to raise syndicated loans from commercial banks. Merchant bankers help corporate clients to raise syndicated loans from commercial banks.  Merchant banking is an institution which covers a wide range of activities such as portfolio management, credit syndication, and corporate advisory services. They help clients approach financial institutions for term loans.  The Loan Syndications team includes dedicated professionals in Chicago, New York, Toronto and London who are active in the bank market and have an in-depth knowledge of the current trends in loan pricing, structure and trading activities.  As the size of the individual loans increased, individual banks found it difficult to take the risk single handed- regulatory authorities in most countries limit the size of the individual exposures. Hence the practice of inviting other banks to participate in the loan, to form a syndicate, came into being; thus the term “Syndicated loans”  A loan syndicate refers to the negotiation where borrowers and lenders sit across the table to discuss about the terms and conditions of lending. At present Large groups of banks are forming syndicates to arrange huge amount of loans for corporate borrowers. 10
    •  The need for syndication arises as the size of the loan is huge and a single bank cannot bear the whole risk of lending. Also the corporate going for the issue is not aware about the banks which are willing to lend. Hence syndication assumes significance.  In the case of syndication the risk gets diversified. The process of syndication starts with an invitation for bids from the borrower. The borrower mentions the funds requirement, currency, tenor etc. the mandate is given to a particular bank or an institution that will take the responsibility of syndicating the loan by arranging for financing the banks.  Syndication is done on a best effort basis or on underwriting basis. It is usually the lead manager who acts a syndicator of loans. The lead manager has dual tasks i.e. formation of syndicate documentation and loan agreement.  Common documentation is signed by the participating banks on the common terms and conditions.  The advantages of syndicated loans are the size of the loan, speed and certainty of funds, maturity profile of the loan, flexibility in repayment, lower cost of funds, diversity of currency, simpler banking relationships and possibility of renegotiation.  Syndicated loans are loans made by two or more lenders and administered by a common agent using similar terms and conditions and common documentation.  According to Business Credit, most loan syndications take the form of a direct-lender relationship, in which the lead lender is the agent for the other lenders in the origination and administration of the loan, and the other lending banks are signatories to the loan agreement.  In the last several years the popularity of this type of loan has exploded. By 2000, the total annual volume of syndicated loan 11
    • issuance had risen to $1.2 trillion, a $100 billion increase over the year before. The businesses that are choosing this option to finance their growth have expanded beyond the Fortune 500 companies that were its first users.  They have now become a flexible funding source for both mid-sized companies and smaller companies that are on the cusp of moving into mid-sized status.  The simple reality is that "Companies can given these obstacles, business owners and executives often express interest in syndicated loans, which offer consolidation of effort and the possibility of making new banking contacts. Lenders support their use as well. Lenders like syndications because they permit them to make more loans, while limiting individual exposures and spreading their risk within portfolios more widely. "Moreover, administration of the loan is extremely efficient, with the agent managing much of the process on behalf of the participants."  Borrowers taking out syndicated loans pay upfront fees and annual charges to the participating banks, with interest accruing (on a quarterly, monthly, or semiannual basis) from the initial draw-down date. "One advantage of syndication loans is that this market allows the borrower to access from a diverse group of financial institutions,” In general, borrowers can raise funds more cheaply in the syndicated loan market than they can borrowing the same amount of money through a series of bilateral loans.  Syndicated loans are a special category of loans in which an arranger, or group of arrangers, forms a group of creditors on the basis of a mandate to finance the debtor. The debtor is usually a company with an excellent rating. The debtor chooses this type of loan primarily because the required loan volume exceeds the possibilities of one creditor through bilateral financing, both from the perspective of a risk analysis of the debtor’s position as well as the creditor’s strategy. Despite the fact that the debtor and creditors only enter into 12
    • one contract, the creditors’ rights and obligations are several and independent of each other. Features of syndicated loans The syndicated loan is a financing method evolved from bilateral loan. Under the arrangement of syndicated loan, one bank or several banks (as the arrangers) organize other banks to grant loans to the same borrower under one loan agreement according to agreed terms. Syndicated loans have the following features:  Huge amount and long term loans.  Less pressure on banks and diversified risk.  As for the borrower, syndicated loans provide large amounts of loans with longer term and easy operation management (only need to contact with the agent bank). 13
    •  Fewer restriction on the use of proceeds (compared with government loans and export credit)  Easier management (Compared with loans borrowed separately from different banks)  Syndicated loans can be structured to incorporate various options. As in the case of FRS, a drop lock feature converts the floating rate loan into a fixed rate loan if the benchmark index hits a specified floor. A multi-currency option allows the borrower to switch the currency of denomination on a rollover date. Security in the form of government guarantee or mortgage on assets is required for borrowers in developing countries like India.  Syndicated loan is more suitable as compared to a simple loan from single or multiple banks.  The borrower does not have to deal with a large number of lenders.  It has permitted the issuers to achieve more market-oriented and cost-effective financing.  Loan syndications are a cost-effective method for participating institutions to diversify their banking books and to exploit any funding advantages relative to agent banks.  Syndicated loans have increasingly become the corporate financing choice of large- and mid-size firms. As a result, syndicated lending has become a major component of today's financial landscape.  Syndicated lending also allows banks to compete more effectively with public debt markets for corporate borrowers. To a large extent, the development of the loan syndication market has stemmed, if not reversed, the trend toward disintermediation of corporate debt by reducing the differences between intermediated and public debt markets. 14
    • STAGES IN SYNDICATION 15 PRE-MANDATE STAGE PLACING THE LOAN AND DISBURESEMENT POST-CLOSURE STAGE
    • Broadly there are three stages in syndication, viz., Pre-mandate phase, Placing the loan and disbursement and post-closure stage. 1) PRE-MANDATE STAGE: - This is the initiated by the prospective borrower. It may liaise with a single bank or it may invite competitor’s bids from a number of banks. The borrower has to mandate the lead bank, and the underwriting bank, if desired. Once the lead bank is selected and mandated by the borrower, the lead bank has to undertake the appraisal process. the lead banks needs to identify the needs of the borrower, design an appropriate loan structure, and develop a persuasive credit proposal. 2) PLACING THE LOAN AND DISBURSEMENT: - At this stage, the lead bank can start to sell the loan in the marketplace i.e. to prospective participating banks. this means that the lead bank needs to prepare an information memorandum, prepare a term sheet, prepare legal documentation, approach selected banks and invite participation. A series of negotiations with the borrower are undertaken if prospective participants raise concerns. To conclude this stage the lead bank must achieve closing of the syndication, including signing. If need be, underwriting bank has to sign the balance portion of the loan. Loan is disbursed in phases as agreed in the loan contract. Loan is disbursed in ‘no-lien’ account i.e. a bank account created exclusively to disburse loan. This account and its withdrawals are monitored by banks. This is to ensure that the loan is used only for the purpose defined in the loan agreement and that the funds are not diverted to any other purpose. 3) POST-CLOSURE STAGE:- This is monitoring and follow-up phase. It has many times done through an escrow account. Escrow account is the account in which the borrower has to deposit it’s revenues and the agent ensures that the loan repayment is given due priority before payments to any other parties. Hence in this stage, the agent handles the day-to-day running of the loan facility. 16
    • Reasons/Purpose for syndicated lending Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank might believe that it is likely that 5% of all borrowers may go bankrupt. If the bank's cost of funds is a hypothetical 5%, the bank needs to charge more than 10% interest on the loan to make a profit. In general, banks and the financial markets use risk-based pricing, charging an interest rate depending on the risk of the loan product in general or the risk of the specific borrower. The problem with larger businesses loans, however, is that there are fewer of them. So, if the bank has the only large business loan and if that business happens to be one of that defaults, then the bank loses all its money. For this reason, it is in the best interest of all banks to split, or "syndicate" their large loans with 17
    • each other, so each get a representative sample in their loan portfolios. A second, often criticized reason for syndicating loans is that it avoids large or surprising losses and instead usually provides small and more predictable losses. Smaller and more predictable losses are favored by many management teams because of the general perception that companies with "smoother" or more steady earnings are awarded a higher stock price relative to their earnings (benefiting management who is often paid primarily by stock). Critics, such as Warren Buffett however, say that many times this practice is irrational.If the bank could still get a representative sample by not syndicating, and if syndication would reduce their profit margins, then over the long term a bank should make more money by not syndicating. This same dynamic plays out in the investment banking and insurance fields, where syndication also takes place. To avoid that the borrower has to deal with all syndicate banks individually, one of the syndicate banks usually acts as an Agent for all syndicate members and acts as the focal point between them and the borrower. Advantages/Benefits of Syndicated Loans In addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include:-  Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.  Flexibility in structure and pricing. Borrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techniques, and prepayment rights without 18
    • penalty.  Syndicated facilities bring businesses the best prices in aggregate and spare companies the time and effort of negotiating individually with each bank.  Syndicate banks sometimes are willing to share perspectives on business issues with the agent that they would be reluctant to share with the borrowing business.  Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that "For commercial paper issuers, rating agencies view a multi-year syndicated facility as stronger support than several bilateral one-year lines of credit." Benefits to the borrower  Raising a loan which would exceed the capacity of a single bank.  Cutting down on management capacity since the borrower communicates only with the arranger/agent.  Broadening the financing base through the participation of other banks.  Typically less costly than numerous lines through multiple institutions.  It helps to enhance broader financial relationships.  Deals with a single bank.  Quicker and simpler than other ways of raising capital. E.g. Issue of equity or bonds. Benefits to the investor  Establishing direct relationships with new customers.  Enables much broader risk diversification without significant additional marketing efforts.  Due to uniform documentation there is a better chance for a subsequent placement on the secondary market.  Contract documents and information provided at no expense. Benefits to the lead banks 19
    •  Fund arrangement and other fees can be earned without committing capital.  Enhancement of bank’s reputation.  Enhancement of bank’s relationship with the client. Benefits to the participating banks  Access to lending opportunities with low marketing/ processing costs.  It triggers more opportunities to participate in future syndications as network of the banks establishes a level of comfort with each other.  In case the borrower runs into difficulties, participant banks have equal treatment. PROJECT FINANCE AND LOAN SYNDICATION Working Capital Finance Working capital finance is done in order to meet the entire range of short- term fund requirements that arise within a corporate’s day-to-day operational cycle. The working capital loans can help the company in financing inventories, managing internal cash flows, supporting supply chains, funding production and marketing operations, providing cash support to business expansion and carrying current assets. 20
    • The working finance products comprise a spectrum of funded and non- funded facilities ranging from cash credit to structured loans, to meet the different demands from all segments of industry, trade and the services sector. Funded facilities include cash credit, demand loan and bill discounting. Demand loans are considered also under the FCNR (B) scheme. Non-funded instruments comprise letters of credit (inland and overseas) as well as bank guarantees (performance and financial) to cover advance payments, bid bonds etc. Project Finance In general, project finance covers Greenfield industrial projects, capacity expansion at existing manufacturing units, construction ventures or other infrastructure projects. Capital intensive business expansion and diversification as well as replacement of equipment may be financed through the project term loans. Project finance is quite often channeled through special purpose vehicles and arranged against the future cash streams to emerge from the project. The loans are approved on the basis of strong in-house appraisal of the cost and viability of the ventures as well as the credit standing of promoters. Corporate Term Loan The corporate term loans can support the company in funding ongoing business expansion, repaying high cost debt, technology up gradation, leveraging specific cash streams that accrue into the company, implementing early retirement schemes and supplementing working capital. Corporate term loans can be structured under the FCNR (B) scheme as well, with the option of switching the currency denomination at the end of interest periods. This will helps to take advantage of global interest rate trends vis-à- vis domestic rates to minimize your debt cost. The bank’s corporate term loans are generally available for tenors from three to five years, synchronized with your specific needs. 21
    • The corporate term loans carry fixed or floating rates, as befits the exact requirement of the client and the risk context. Again, these rates will be linked to the bank’s prime lending rate. The corporate term loans can have a bullet or periodic repayment schedule, as required by the client. The repayment mode may be linked to the cash accruals of the company. The Bank’s expert credit crew gauges the applicant’s particular fund requirements and evaluates the company’s credit worthiness, factoring in the cash flows generated by it. Structured Finance The structured finance involves assembling unique credit configurations to meet the complex fund requirements of large industrial and infrastructure projects. Structured finance can be a combination of funded and non-funded facilities as well as other credit enhancement tools, lease contracts for instance, to fit the multi-layer financial requirements of large and long- gestation projects. Channel Financing Channel financing is an innovative finance mechanism by which the bank meets the various fund necessities along the supply chain at the supplier’s end itself, thus helping to sustain a seamless business flow along the arteries of the enterprise. Channel finance ensures the immediate realization of sales proceeds for the client’s supplier, making it practically a cash sale. On the other hand, the corporate gets credit for a duration equaling the tenor of the loan, enabling smoother liquidity management. 22
    • PARTIES AND THEIR ROLES WITHIN THE SYNDICATION PROCESS The lead bank and participating banks are the main parties involved in loan syndication. In large loan amounts, sometimes there are four parties involved, other than the borrower, in the syndication process. These are arranger {lead manager/ bank}, underwriting Bank, Participating Banks and the facility manager {agent. their roles are defined as follows:- 1. Arranger/lead manager:- It is a bank which is mandated by the prospective borrower and is responsible for placing the syndicated loan with other banks and ensuring that the syndication is fully subscribed. This bank charges arrangement fees for undertaking the role of lead manager. Its reputation matters in the success of syndication process as the participating banks would agree or disagree based on the credibility and assessment expertise of this bank. In other 23
    • words , since the appraisal of the borrower and its proposed venture is primarily carried out by this bank, onus of default is indirectly on this bank. Thus this bank carries ‘reputation risk’ in the syndication process. 2. Underwriting bank:- Syndication is a process of arranging loans, success of which is not guaranteed. The arranger bank may underwrite to supply the entire remainder(unsubscribed) portion of the desired loan and in such a case arranger itself plays the role of “underwriting bank”. Alternatively a different bank may underwrite (guarantee) the loan or portion (percentage of the loan). This bank would be called the “underwriting bank”. It may be noted that all the syndicated loans may not have this underwriting arrangement .Risk of underwriting is obviously the “underwriting risk”. It means it will have to carry the credit risk of the larger portion of the loan. 3. Participating banks:- These are the banks that participate in the syndication by lending a portion of the total amount required. These banks charge participation fees. These banks carry mostly the normal credit risk i.e. risk of default by the borrower. As like any normal loan. These banks may also be led into passive approval and complacency risk. It means that these banks may not carry rigorous appraisal of the borrower and has proposed project as it is done by the lead manager and many other participating banks. It is this banker’s trust that so many high profile banks cannot be wrong. This may be seen in the light of reputation risk of the lead manager. 4. Facility manager/agent:- Facility manager takes care of the administrative arrangements over the term of the loan (e.g. Disbursements, repayments and compliance). It acts for and on behalf of the banks. In many cases the arranging/underwriting bank itself may undertake this role. In larger syndications co-arranger and co-manager may be used. 24
    • Loan Syndicating Financial Institutions  Union Bank of India, has entered into a Memorandum of Understanding [MOU] with IDFC, one of the leading Infrastructure Financing Institution and Bank of India, another leading Public Sector Bank for jointly Syndicating & Financing the large Infrastructure & core industrial projects, which are coming up in the country. This is the first time when a premier Infrastructure financing Institution and two large Public Sector Banks are coming together to share the skill sets developed over a period of time, to Syndicate/Underwrite the Debt and extend total financial solution for large projects coming up in the Public Private Partnership [PPP] domain as well as in the Private Sector. IDFC (Industrial Development Financial Corporation) is a premier Infrastructure Financing Institution having vast experience in 25
    • financing mega projects over a broad spectrum of industries. Union Bank of India & Bank of India are amongst the large Public Sector Banks having vast experience in providing Working Capital besides extending project finance. This arrangement will facilitate joint identification, marketing and appraisal of Syndicated Loans with underwriting arrangements. It is envisaged that the promoters in the PPP would largely benefit from this Tie-up, which would provide a total financial solution, Term Loan for the project as well as Working Capital. In fact, the benefits of Syndication would accrue to all the concerned parties especially the borrower: - Single point contact with the Lead Arranger. - Submission of papers only to the Lead Arranger. - Joint Appraisal leading to quick decisions. - Possibility of securing competitive terms.  Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfill the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development.  The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial institutions in the country. 26
    •  These financial institutions can be broadly categorized into All India institutions and State level institutions, depending upon the geographical coverage of their operations.  At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises, but they provide the same type of financial assistance as the national level institutions.  Other Financial Institutions Include: - NABARD (National Bank for Agriculture and Rural Development) EXIM (Export Import Bank of India) IFCI (Industrial Financial Corporation of India). LOAN DEPOT 27
    • The Loan Depot Inc was incorporated in Canada in October 1998 by a group of Finance and Real Estate professionals with experience in the Domestic and International Finance Markets and International Real Estate Hedge Markets for over 10 years. The main businesses of The Loan Depot are Domestic and International Finance, Loan Syndication from International Funding Agencies and Major World Banks, Project Financing, Real Estate Acquisition syndication and hedging. In 2000 the Corporation moved its head quarters from Ontario, Canada to Chattanooga, TN. In 2001, the company expanded its operations to include conventional and government guaranteed lending products. The Surviving Company is now know as "THE LOAN DEPOT, LLC", and is committed to provide the highest level of service to our customers, borrowers and brokers. Their Mission at The Loan Depot is to anticipate and successfully meet the changing needs of our client and match them with the requirements of the capital market. The standard of excellence is upheld through our innovative thinking, our unique competitive advantage, and most importantly, our dedication to our client. Their goal is to provide you attractive financing options that will best serve your individual financing needs. They have successfully laid a firm foundation for financing a broad range of loans. They look forward to working with people and helping them in their business. They pride themselves in being one of the most innovative, diversified group of financial service companies in the United States and Canada and plan on staying that way. Loan Depot offers a number of custom services to helps to achieve financial goals. 28
    • Mortgages Loan Depot offers a wide variety of options for all mortgage needs offer the best rates and with over 150 products we specialize in self employed and not so perfect credit situations(i.e.: bankruptcy, divorce). Their programs include 100% financing for purchase or re-finance to consolidate debt or for investment purposes. Auto Loans Offer a variety of finance plans for the purchase or re-finance of new and pre-owned vehicles. Loans Loan Depot is a full service loan placement firm. They offer secured and unsecured loans available to people in every credit situation. Their rates are competitive and all situations are welcome. Recreational Vehicles Loan Depot offers financing on all recreational vehicles they offer competive rates on boats, R.Vs and ATVs etc.Their programs allows to finance new or used purchase or to-re-finance the existing vehicle at a lower rate or better terms. Credit Cards Loan Depot offers a secure visa to help establish or re-establish credit with all the convenience and services one can access with a visa card. The Syndicated Loan Market  The syndicated loan market, a hybrid of the commercial banking and investment banking worlds, is globally one of the largest and most flexible sources of capital. Syndicated loans have become an important corporate financing technique, particularly for large firms and increasingly for midsized firms. The rapid development of the syndicated corporate loan market took place in the 1990s exploring the historical forces that led to the development of the contemporary U.S. syndicated loan market, which is effectively a hybrid of the investment banking and commercial banking worlds. Syndicated lending aims to increase the risks and benefits involved in taking part 29
    • in the syndicated loan market.  There has been a notable change in large corporate lending over the past decade, as the old bilateral bank-client lending relationships have been replaced by a world that is much more transaction-oriented and market-oriented. The Canadian syndicated loan market has been strongly influenced by its U.S. counterpart, but it is not yet at the same level of development. It also explores potential risk issues for the new corporate loan market, including implications for the distribution of credit risk in the system, risks in the underwriting process, the monitoring function, and the potential for risk arising from asymmetric information.  The development of the market for syndicated loans, and has shown how this type of lending, which started essentially as a sovereign business in the 1970s, evolved over the 1990s to become one of the main sources of funding for corporate borrowers. The syndicated loan market has advantages for junior and senior lenders. It provides an opportunity to senior banks to earn fees from their expertise in risk origination and manage their balance sheet exposures.  Throughout history, innovation has driven the development of the financial markets, and over the last 20 years, the syndicated loan market has provided particularly fertile ground for financial innovation. From a relatively esoteric field involving commercial banks syndicating lines of credit, financial innovations have helped it develop into a broad, dynamic market encompassing both an efficient primary market that originates syndicated credits and a liquid secondary trading market where prices adjust to reflect credit quality and market conditions.  The development of an efficient and liquid syndicated loan market in the U.S. has greatly impacted its capital markets. The syndicated loan market bridges the private and public fixed-income markets and provides borrowers with an alternative to high yield bonds and illiquid bilateral commercial bank loans. It provides much-needed credit to lower-rated companies and has strengthened the bankruptcy process in the U.S. through its facilitation of DIP (debtor-in-possession) lending. 30
    •  Today’s syndicated loan market benefits banks also; in times of adversity, they can sell portions of the syndicated credits into a relatively liquid secondary market and actively manage the risk in their loan portfolios. This allows banks to avoid unnecessary lending restrictions when the economy contracts and thus the impact of an inefficient “credit crunch.”  The development of the secondary market for syndicated loans has led to the creation of a new asset class with greater return per unit of risk than many other fixed-income assets and low correlations with most other classes of assets. The leveraged portion of the market, the part of the market where most innovation has occurred, receives special attention. Syndicated loans are an integral part of capital raising for these markets.  This analysis provides a primer to investors and other parties interested in a market that has, without great fanfare, been one of the most rapidly growing and innovating sections of the U.S. capital market in the past 20 years. It explores issues related to the main features of the primary market using the most recent data available and details the characteristics of the secondary market. Investment returns, as well as the risks of the asset class, particularly credit risk, receive special attention.  The syndicated loans market has grown rapidly in recent years, driven primarily by an increase in corporate takeovers, private equity transactions and infrastructure deals. Strong liquidity means there is plenty of cash to invest, and banks are willing lenders.  The leveraged loan market remains small compared with the investment-grade market and bankers said the investors and their attitudes were markedly different. The volumes in the Indian offshore syndicated loan market have grown enough in the past few years. How the market works  Major corporate clients will almost automatically consider a syndicated loan for sums above a few hundred million euros. 31
    • Syndication splits the lending risk between large number of investors, at price (margin and fees) determined by the market. It is an efficient way of raising funds quickly and on best terms. For borrowers the advantage is that they can raise larger amounts and expand their group of bankers whilst at the Same time only having to sign a single contract  For lenders, syndication allows a diversification of the lending portfolio from both a geographical and sectorial point of view. In addition, lenders get the benefit of the facility agent’s expertise in management of drawdowns and of other events in the lifetime of the loan after the facility agreement has been signed.  The syndicated loan market was originally developed in the USA in the 1970’s as a means of financing leveraged buy-outs (LBOs). It has since gone on to become the leading vector for all sorts of financing. In Europe the market expanded rapidly in the UK and then on the continent, particularly in France. The market’s rapid growth can be seen from the fact that in 1993 the total volume of the market worldwide was USD 1.4. trillion, whereas in 2005 it exceeded USD 3 trillion (dialogic)  The rapid growth in syndicated facilities is certainly due in part to the trend over the past fifteen years, across all sectors of the economy, towards industry consolidation. for a borrower, the choice between a syndicated loan and negotiable debt instruments often comes down in favour of the first. syndicated loans are the only means of raising, rapidly and with few formalities, sums greater than are available on other markets, like bonds and equities, or through private placements.  These loans may be used to cover a whole ranges of uses by the borrower: refinancing, undrawn lines of credit supporting commercial paper and treasury note programmes, acquisitions, LBO financing, project and other structured financing. The arrangement commission paid by the borrower is determined by the complexity of the deal: the most profitable deals for banks are leveraged acquisitions. 32
    • By taking full advantage of the syndicated loan market, some banks have managed to make headway in increasing their returns and still offering the borrowers some of the finest terms and conditions ever seen. Features of the syndicated loan market such as transaction size, availability, speed of reaction and flexibility ensure that it continues to be one of the primary sources for issuers looking to raise capital from the markets. It will examine the needs of both borrowers and lenders involved in the origination, structuring, distribution and management of syndicated loans and link the process of executing a successful deal to the optimal design of a syndications unit. Banks have benefited from this broadening of the syndicated loan market in several ways. They are a cost-effective method for participating institutions to diversify and exploit any funding advantages relative to agent banks. To a large extent, the development of loan syndication market has stemmed, if not reversed, the trend toward disintermediation of corporate debt by reducing the differences between intermediated and public debt markets. Overview of ICICI Bank 33
    • ICICI Bank is India's second-largest bank with total assets of Rs. 3,446.58 billion (US$ 79 billion) at March 31, 2007 and profit after tax of Rs. 31.10 billion for fiscal 2007. ICICI Bank is the most valuable bank in India in terms of market capitalization and is ranked third amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation*. The Bank has a network of about 950 branches and 3,300 ATMs in India and presence in 17 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non- life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in Belgium. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). History of ICICI Bank ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market 34
    • sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee- based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity. 35
    • ICICI SYNDICATION 36
    • ICICI Bank arranges foreign currency loans for corporates. Foreign Currency credit is arranged through commercial loans, syndicated loans, bonds and floating rate notes, lines of credit from foreign banks and financial institutions, and loans from export credit agencies Backed by a vast network of 8 overseas offices and over 700 correspondent banks, ICICI Bank has an edge over others in its ability to arrange cross-border financing. With an established presence in all the major global financial centers and long experience in structured financing, ICICI Bank is strongly positioned to offer financial solutions that suit the specific requirements of the client. They have a primary focus on Indian clients and can provide with insightful credit information and help to extract more value from the transactions. They are very active in granting and arranging various forms of External Commercial Borrowing (ECB) facilities for the Indian corporates. Syndication Desk at ICICI Bank ICICI Bank has set up a dedicated syndication desk in its International Banking Group in India to pursue syndication business. The Syndication Group in India works in tandem with the Corporate Banking Relationship Managers to lease with the Indian corporates for arranging ECBs for them. ICICI Bank has also formed syndication teams in various overseas offices (USA, UK, Singapore and Bahrain). These teams consist of specialists who are veterans in international syndicated loans market and have strong understanding of the Indian ECB market. International presence has not only increased ICICI Bank's reach to the international investor community but also significantly enhanced the underwriting capability. Service Offering  Providing foreign currency loans to the Indian corporates. 37
    •  Arranging / underwriting External Commercial Borrowings for the Indian corporates by way of foreign currency loans, FRNs, bonds, etc.  Participating in the international loan syndications.  Granting loans backed by Export Credit Agencies.  Consultancy services on the cross-border funding through variety of sources.  Arranging credit facilities / financial packages for overseas projects of the Indian Companies. ICICI Bank services the financial sector for the entire set of banking requirements and provides a complete range of solutions. The Financial Institutions and Syndication Group (FISG) are responsible for ICICI Bank's relationship with the financial sector. Under this umbrella, the Bank caters exclusively to the needs of Domestic Financial Institutions. • Banks. • Mutual Funds. • Insurance Companies. • Fund Accounting. The FISG has built strong relationships through various interactive measures, like seminars, training programs, sharing of market information and views with clients, organizing the Bank CEOs' Forum, etc. The services provided to the clients are as follows:-  Transaction Banking The Bank delivers world class banking services to financial sector clients. Their current roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed for your convenience. Their comprehensive collection and payment services span India's largest CMS network of over 4,500 branches. They provide correspondent banking tie-ups with foreign banks to assist them in their India-related businesses. 38
    •  Loan Syndication The FISG is responsible for syndication of loans to corporate clients. They ensure the participation of banks and financial institution for the syndication of loans. Some of the products syndicated are 1. Project Finance 2. Corporate Term Loans 3. Working Capital Loans 4. Acquisition Finance, etc.  Sell Down:- ICICI Bank is a market leader in the securitization and asset sell-down market. From its portfolio, the FISG offers different products to its clients in this segment. The products are: • Asset-Backed Securities (ABS). • Mortgage-Backed Securities (MBS). • Corporate Loan Sell-down. • Direct Loan Assignment.  Resources:- The bank also raises resources from clients, for internal use by issuing a variety of products, which run from certificate of deposit(CD’s) to term deposits. SYNDICATION ADVISORY AND OTHER SERVICESSYNDICATION ADVISORY AND OTHER SERVICES  IDBI has set up a separate department called 'Sourcing and Syndication Department' (SSD) to take up various investment banking services so as to provide all types of financial and advisory services to the companies for their project and expansion activities, raising funds 39
    • from domestic and international market, growth plans by way of mergers & acquisitions, carbon credit activities etc. Important services offered by SSD are as under:  Debt syndication - Syndication of long term loan (Rupee loans as well as Foreign Currency loans), working capital loans, and non-fund based limits etc. Debt Syndication can be in form of structured loans, bonds/debentures etc.  Equity syndication - Syndication of equity funds by way of strategic investment, private placement including with private equity funds, preferential allotment, Qualified Institutional Placement (QIP) etc.  Public Issues / Right Issues - Managing Public Issues/Right Issues through Ibis’s subsidiary viz., IDBI Capital Market Services Ltd. (ICMS).  Merchant appraisals - Appraisal of projects including new projects, expansion, modernization, amalgamation/merger schemes which aids the companies to take a decision for investment. Merchant appraisals are also carried out for various projects in infrastructure sector for qualifying in the bidding process.  Arranging funding for overseas acquisitions - Several corporate aspire to acquire units abroad to achieve their global business plans and require funds to acquire the stake in the units to be acquired. SSD arranges for such funds through its strong relationship with all banks and financial institutions.  Acting as an Initial Public Offer (IPO) monitoring agency - As per guidelines of Securities and Exchange Bureau of India (SEBI), any IPO of the size more than Rs. 500 crore requires a financial institution to certify the end use of funds on semi annual basis.  Offering advisory and other services for Mergers/Acquisitions - Advising companies in their plans of mergers/acquisitions including identifying target companies, undertaking financial due diligence, working out the financial projections, structuring of purchase consideration etc. 40
    •  Bank syndicates control the risk sector by downsizing the industry when market demand fails to meet the expectations  The market for syndicated loans is huge. The standard forces for why banks join forces in a syndicate are risk diversification. The banks in the syndicate share the risk of large indivisible investment projects. Syndicates may also arise because additional syndicate members provide informative opinions of investment projects. The motive for syndication is to control the risk of the loan portfolio, rather than sharing the risk.  Syndicated loan services include structuring, arranging and underwriting of loan facilities. The syndicated market is one of the largest and most flexible sources of capital in the international finance marketplace. SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS Survey for Project on Loan syndication NAME: DESIGNATION: SIGNATURE: 41
    • CONTACT NO: 1) Are you aware of the syndicated loan facilities provided by the bank? YES NO 2) To whom are they more beneficial? Financial institutions Public 3) Do you think the formalities involved in the process are? Simple Complex 4) What according to you is the demand for syndicated loans is? Increasing Decreasing 5) For what purpose would you like to take these loans? COMMENTS: 42
    • PROJECT GUIDE: Prof.Nishikant Jha Survey conducted by Chandni Gala Signature: T.Y.B.B.I Roll No: 18 Survey Report Analysis 1) Are you aware of the syndicated loan facilities provided by the bank? YES 80% NO 20% 43
    • YES NO 2) To whom are they more beneficial? Financial institutions 50% Public 50% FINANCIAL INSTITUTIONS PUBLIC 3) Do you think the formalities involved in the process are? Simple 75% Complex 25% 44
    • SIMPLE COMPLEX 4) What according to you is the demand for syndicated loans is? Increasing 65% Decreasing 35% INCREASING 1 2 ANALYSIS ON THE SURVEY 45
    • Analysis for the better understanding of the ICICI account holders was carried out. The purpose of analyzing was to know the customer satisfaction, awareness of the syndicated loan facilities provided by the bank and they would like to have any improvements suggested for better working of the bank and higher satisfaction. Questionnaire method was used to carry out the survey. Some interesting facts came up which will be dealt in a detail later. A set of around 7-8 questions was used in the questionnaire, which varied from objective types to descriptive type of questions. Questionnaire was formed and designed in such a manner that it could be filled within 5 minutes by the person thus saving the time of the interview. The sample size of the survey was taken out to be 50. Out of this 50 people 20 professional and the remaining from other categories. Questions ranged from getting information about the purpose of these loans, to whom are they more beneficial and the demand for these loans. Besides this the questionnaire, method information was also gathered by means of secondary data which involves collection of data through books, magazines, websites and journals.  ICICI Branches  ICICI Websites QUESTIONNAIRE FOR BANKER 46
    • A questionnaire is a device for securing answers to questions by using a form which the respondent fills in himself. Q.1) What are the fees charged by the banker for undertaking the work of loan syndication? ANS:- The fees charged by the banker for undertaking the work of loan syndication is 1% of the total loan amount. Q.2) To whom are these loans specially designed for? ANS:- It is specially designed for large and medium companies, government and municipalities and financial institutions. Q.3) What all does syndicated lending cover? ANS:- It covers short term transactions,export finance, subsidy management, capital market financing, structured financing, currency management, leasing and factoring. Q.4) Who are the main parties involved in loan syndication? ANS:- The main parties involved in loan syndication are lead bank and the participating bank. Q.5) If the business is internal are the syndicated loans beneficial? ANS:- YES, to a large extent. They have becoming a key for entering new markets. Q.6) How large is the syndicated loan market? ANS:- In the past 10 years, secondary loan trading volume has grown 1500%. In 2001,the total syndicated loan volume was $1.1 trillion, according to loan pricing corporation. Q.7) From what time has the demand for these loans start increasing? ANS:- The demand for these loans is increasing for over past fifteen years. 47
    • Conclusion Banking sector has seen lot of transformation in the past post liberalization period, it has become very important for bank to give services best to their capabilities. if the customers are not satisfied with the services provided by the bank, they will transfer their account to some other bank. result is loss of revenue for the bank and the loss of goodwill. New technology needs to be introduced in the banking sector as it is utmost clear that people are not only expecting normal banking services but they want to be as their business partners and help accordingly. Therefore, the bank has give more and more services to the people in order to have increased returns from fee-based function. Professionalism is getting the key word in banking sector. People now expect the privatized banks to become more and more professional rather that of earlier years where the staff has no sympathy or understanding for the time value of the customer. People today demand more working hours, more services to be provided at no extra cost or minimum cost. this has led to more professional attitude by the banking people. Perhaps the oldest form of services sector known to human is going through a radical change not only throughout the world but also in India. The greatest beneficiary of this change is none other than the human itself. Expectations from the study are that it may contribute to the real scenario of loan syndication demand and accordingly the banks can go for new innovative schemes. It will also specify some recommendations and based on that banks can make suitable arrangements in a particular sector. 48
    • BIBLIOGRAPHY  www.goggle.com  www.banknet.com BOOKS REFFERED 1) Syndicated Lending-: A Volume in Essential Capital Market Services- ANDREW FRIGHT. 2) Contributions Volume 3-: A Collection of Papers on Banking, Insurance and Finance. 3) The Book of Loan Syndication and Trading:- ALLISON TAYLOR A Special Thanks to :- Sandesh Patil (ICICI) Gloria Dias (ICICI) 49