Jahangirnagar

University

Assignment ON
Assignment No-05
Loan Syndication

Course Code: FNB-406

Course Title: Strategic Banking

Submitted To
Md. Alamgir Hossen
Assistant Professor
Institute of Business Administration
Strategic Banking

Submitted By

ID: 1916
Department of Finance & Banking
BBA Program (6th Batch)

1 Date of Submission :04-07-2018

Loan Syndication

Loan syndication is the process of involving a group of lenders to fund various portions of a loan for a
single borrower. Loan syndication most often occurs when a borrower requires an amount too large for a
single lender to provide or when the loan is outside the scope of a lender's risk exposure levels. Thus,
multiple lenders form a syndicate to provide the borrower with the requested capital.

Necessities of Loan Syndication

Loan syndications have become an increasingly important part of the financial landscape. A syndicate is a
group of banks making a loan jointly to a single borrower. Several factors are responsible for the desire to
share a large loan among several lenders, chief among them the banks’ need to achieve diversification in
their loan portfolios. Limitations on interstate banking closely link the fortunes of small and mid-sized
banks to those of their local and regional economies. Participating in syndicated loans can give these banks
a chance to lend to borrowers in regions and industries to which they might otherwise have no convenient
access. Capital constraints also promote loan syndications. Banks that find themselves with capital-asset
ratios below or close to regulatory minimums may not want to increase assets by adding large loans to their
balance sheets and may choose, instead, to share them with other banks by syndicating them. Furthermore,
banks are limited in the size of the loan they can make to any one borrower. Typically, a bank may not lend
to any one borrower an amount in excess of 15 percent of its capital. Participating in a syndicated loan thus
allows a small bank to make a loan to a large borrower it could not otherwise make.

While considerations of capital and diversification encourage the development of syndications, they may
pose an increased risk for the banking system. Lead banks in syndications are responsible for providing
credit information and loan documentation to participating banks. To the extent that lead banks may behave
opportunistically and withhold unfavorable information from participating banks, the latter may be misled
into making loans that are riskier than they had though. 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 penalty. Syndicated facilities bring businesses the best prices in aggregate and
spare companies the time and effort of negotiating individually with each bank. Loan terms can be
abbreviated. Increased feedback. 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."

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Parties of Loan Syndication

The parties to a syndicated loan transaction usually include:

 Arranger/Lead Bank - responsible for structuring the loan

 Underwriting Bank (optional) - guarantees that the entire loan amount would be made available to
the Borrower

 Participating Banks/Lenders - lend a fraction of the total amount required

 Facility Agent - responsible for the administration of the loan e.g. disbursements, repayments etc

 Borrower - seeks the loan and is responsible for repayment of principal and interests

 Security Trustee responsible for holding the security for the loan on behalf of the lenders

Mechanism of Loan Syndication

As a syndicated loan is a collection of bilateral loans between a borrower and several banks, the structure of the
transaction is to isolate each bank's interest whilst maximizing the collective efficiency of monitoring and
enforcement of a single lender. The essence is to make loans on similar terms to make a bundle of loans into a
single agreement. This draws upon Loan Market Association documents.[3] Correspondingly, three key actors
operate within a syndicated lending:

 Arranger
 Agent
 Trustee
These actors utilize two core legal concepts to overcome the difficulty of large-cap lending, those being Agency
and Trusts. A single bank may not on its own be willing or able to advance the whole amount. The essence of
syndication is that two or more banks agree to make loans to a borrower on common terms governed by a single
agreement. This agreement not only regulates the relationship between the lenders and the borrower but
importantly between lenders. Most loans are documented using LMA precedents, in England, this will not be on
the lenders' 'written standard terms of business' for the purposes of UCTA 1977.
The distinction in the lending agreements, and use of the three aforementioned actors is primarily to avoid the
creation of a partnership, avoid lenders from inadvertently acting as guarantors to one another - or to prevent Set-
off.[5] The borrower is sometimes given a "Yank the bank" power to force a transfer of a lenders interest in
repayment (a chose in action) if the lender does not consent to a waiver or amendment. Lenders are traditionally
limited in their decision-making by overlapping clauses requiring voting and collective decision-making. This
acts as a disincentive for individual lenders to act in their own interests over the collective group. It has been
suggested that the historical cooperation within the London loan market helped produce efficiency insolvency
work-outs through the London Approach.

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Practice of Loan Syndication

Bangladesh’s syndicated loan market is growing fast, as more private local banks in a group
have come forward to lend different organizations because of the less risk in such banking
product, according to bankers. The 2008 data from major market playing banks show a
60% rise in such lending over the last year. The total syndicated loan this year stands
around Tk.2,500 crore, while it was Tk.1,500 crore in 2007.

 In 2007 Prime Bank lend to Syndicated loan 200 crore, Eastern Bank lend to Syndicated
loan 300 crore & Standard Chartered Bank lend to Syndicated loan 766 crore.
 In 2008 Syndicated loan increase from 2007, Prime Bank Lend to Syndicated loan 300
crore, Eastern Bank lend to Syndicated loan 380 crore, Standard Chartered Bank lend to
Syndicated loan1139 crore.

Grameenphone was founded in 1996 lend Syndicated loan:

Total amount – 90 billion taka ($1.3 billion)

Institutions/Bank- Grameenphone singed the syndicated loan agreement with 16 local

financial institutions.

Lead Bank – Standard Chartered Bank.

Mobile phone services have expanded rapidly in Bangladesh, which introduced them in
1992. The number of subscribers rose to nearly 25 million in 2007 from 200,000 in 2001,
and is expected to pass 50 million by 2009 as competition in the sector heats up, analysts
have said:

Emirates Cement Bangladesh Ltd was held by Syndicated loan in Bangladesh

Key:

Total amount- Tk 555 million ($1 = 68.70 taka)

Institutions/Bank – Pubali Bank, IFIC Bank, Bay Leasing & Investment, Industrial &
Infrastructure Development Finance Company (IIDFC), International Leasing & Financial
Services (ILFSL) and Bangladesh Industrial Finance Cornpany(BIFC).

Lead Bank – Bank Asia (Source: Subrata Kumar Bhowmich FCA and Ratna Dutta
ACA “Syndication Loan”)

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The Performance of Syndicated Loan in Prime Bank Limited (1999-2010)

Prime Bank Limited (PBL) is becoming a local giant in the syndication market by
competing with the foreign banks. Earlier, Lead Arranger for any syndication deal denotes
only Foreign Banks. Now, the local Banks are coming with this biggest noble task of
arranger for smooth industrialization of Bangladesh. Among the local banks, Prime Bank’s
role is pioneer in syndication market.

Total exposure handling by SSFU:

At present, PBL is also working as agent for 16 (sixteen) number of syndicated deals and
handling total credit portfolio of Tk 170433.00 lac of more than 35 (thirty five) syndicated
customers, where Prime Bank’s exposure is Tk 93411.00 lac (funded 76591.00 lac and
non-funded Tk 16820.00 lac) (approx.) (Source:Bangladesh Bank,18 April, 2010
“Decade of Loan Syndications”

Prospects of Syndicated Loan in Bangladesh

Term loans provided by the financial system in Bangladesh amount to only about US$250-
300 million per year, equivalent to about 1.5 percent of Gross Domestic Product (GDP),
while private and public investment amounts to about 16 percent of GDP. A major
constraint to the provision of term loans is the lack of a well-developed long-term savings
market. Nationalized Commercial Banks (NCBs) fund their term loans mainly with their
deposits creating a maturity mismatch.

Proper Syndication Loan Procedure examines the needs of both borrowers and lenders
involved in the design, origination, arrangement, distribution and management of
syndicated loans and link the process of executing a successful deal to the optimal design
of a syndication unit. For the following reason financial institutions can go syndicated loan
market.

 The entry of financial institutions into the corporate loan market has helped improve the
transparency and liquidity of the secondary loan market, at the expense of increased overall
loan borrowing costs.
 As the large investment is increasing day to day, borrower needs fund without minimum
transaction hassle with minimum funding cost. Government also restricted the funding
limit of the financial institutions. In this situation loan syndication seems a better solution
for both the borrower and loan provider.
 Most important issue is the risk associated with big projects. These types of risks can be
minimized by evaluating properly and monitoring regularly the projects and with the
borrowers.

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  Most prospective and large investment sectors in Bangladesh are Power, Telecom Textile
Industries, Steel Mills, Cement, Sugar Mills, Private Container Terminal, Gas Evaporation
Project, Infrastructure Development Projects, School & Hospital through foreign joint
venture, Information & Communication Technology etc.
 After phasing out of Multi Fiber Agreement (MFA) our country is realizing more intensely
the importance of backward linkage industry to support and sustain our garments sector in
the face of emerging harsh competition because through this phase out garments industry
will loose their protected market to other competitors of the region. Garments sector
contributes 36 % of the total export-earnings of the country.
 Investment banks are relatively new entrants into the commercial lending business and lend
to less profitable, more leveraged firms than do commercial banks.
 The presence of a dual market maker is found to increase liquidity in the secondary market
for syndicated bank loans. (Jahan, A. and Akter, B., (2006))