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Syndication of Loans

What is Syndication of Loan?

Syndication of loan is the process of associating a group of moneylenders in financing various portions of a loan for an individual borrower. Loan syndication commonly arises when a borrower needs an amount too large for a single lender to grant or when the loan is outside the reach of a lender's risk exposure levels. Thus, multiple lenders establish a syndicate to accommodate the borrower with the required capital.

The agreements between bankers and loan recipients usually need to be executed by a corporate risk manager to conquer disagreements and to impose contractual obligations. The primary banker conducts most of this due diligence, but lax oversight can enhance corporate costs. Company legal adviser may also be required to make loan covenants and obligations of the lender.

For instance, the company goes to JPMorgan for a bank loan. The bank decides to form a loan syndicate as the loan amount is outside the bank's risk tolerance capacity. JPMorgan acts as the lead agent and brings together other banks to participate.

What are the stages of the loan syndication process?

Three stages of the loan syndication process are discussed in detail below:

* Stage 1

The first stage is the pre-mandate stage initiated by the borrower. The stage involves the borrower's contact with a single lender or inviting competitor bids from multiple lenders. The borrower has to instruct the lead bank. They will start the appraisal process once the lead lender is chosen. The lead bank will develop a credit proposal according to the needs and design a loan structure for the borrower.

* Stage 2

The next stage involves placing the loan and disbursement by the lender. The lead lender initiates the process to sell the loan at the marketplace, for which it will prepare legal documentation, term sheet and information memorandum. The lead bank will approach other banks for participation. The loan amount is disbursed once the loan contract is finalized,

* Stage 3

The final stage is the post-closure stage which involves monitoring through an escrow account. An escrow account is nothing but the account where the borrower will deposit the revenue. It's the agent's responsibility to ensure that the repayment of the loan is the top priority and the payment is made before making payments to any other parties. In the post-closure stage, it's the agent's job to manage the operating and running of the loan facility regularly.

Syndication of Loans in Corporate Financing

Syndication of loan is often used in corporate funding. Firms seek corporate credits for numerous business purposes that include funding for buyouts, mergers and acquisitions, and other capital outgo projects. These projects often demand a high amount of capital that typically beat a single moneylender's resource or underwriting capability.

Loan syndication allows any single lender to provide a jumbo loan while preserving a more reasonable and manageable loan exposure because the associated risks are distributed with other lenders. Each lender's liability is confined to their share of the loan concern. Generally speaking, except for collateral requirements, most of the terms are uniform among bankers. Collateral assignments are usually attached to different assets of the borrower for each lender. Typically, there is only one agreement for the complete syndication of the loan.

Financial Institution Coordinates Loan Syndication

For most loan syndications, a lead financial institution is used to organise the transaction. This lead institution is known as the syndicate agent. This agent is also responsible for the initial transaction, charges, agreement and compliance reports, repayments throughout the loan, loan monitoring, and overall reporting for all lending parties.

A third party or additional experts may also be applied throughout various phases of the loan syndication or repayment process to help with several aspects of reporting and monitoring. Loan syndication services require a high amount of fees because of the comprehensive reporting and coordination needed to complete and manage the processing of the loan.

Merits of Loan Syndication

There are multiple benefits of Laon syndication:

* Saves Time and Effort

- The arranger does the major work in the syndication process to keep the effort and time of the borrower. On the one hand, the borrower meets the lead bank. On the other side, the arranger does the extensive job of establishing the syndicate process, bringing other lenders on board, managing the execution, creating documentation, etc.

* Heterogeneity of Loan Terms

- The loan can be structured in different loans and securities since multiple lenders contribute to the loan amount. For instance, offering diverse types of fixed or floating interest rates can provide flexibility to the borrower. Also, the borrower can avail of the loan in different currencies to be protected from various currency risks.

* Large Borrowings

- The funding of large borrowings for capital intensive projects is a significant benefit of loan syndication. Government or corporate entities can avail of borrowings through this process for setting new projects, expanding existing tasks, mergers, acquisitions, leasing, and financing transactions requiring a considerable amount of money.

* Good Market Image

- The borrower's loan by the multiple lenders creates a favorable market image of the borrower. Further, borrowers with a successful historical record of payment ofsyndicated loans create goodwill among lenders and make availing of credit facilities easier for them.

* Efficient Management

- The lead bank takes care of the syndication process and carries out the process efficiently. This results in the professional management of funds within a fixed period. Also, the agent is responsible for ensuring the execution of the process and ensuring the completion of the process.

* Competitive Rates

- Since multiple lenders are involved, the borrower gets the best market rate among the lenders. The lead bank makes sure that the loan to the borrower is provided at the most competitive rates.

We at MAG can help you by assisting and preparing required documentation, agreements and reports needed for syndication of the loan. We can provide complete syndication of loan services to fulfill your debt requirement in Delhi.

If you are seeking syndication of loan in Delhi or loan syndication advisory services in Delhi, please reach us at

Frequently Asked Questions

Generally, one agreement is enough to cover all the terms and conditions of the syndicated loan. It is not necessary to enter into separate contracts. 
A syndicate agent is a lead bank that manages and overviews the complete transaction in loan syndication. It also has to report to all the lenders involved in the transaction. 
Do banks syndicate a loan on different terms and conditions?
The Reserve Bank of India issues guidelines from time to time to regulate loan syndication. 
Yes, loan syndication and consortium financing are two different terms. In loan syndication, only one bank leads and supervises the complete transaction. On the other hand, all the lenders oversee and organise the loan transaction jointly in a consortium. 

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