Modes of Credit Delivery
Sole Banking arrangement
Under this arrangement entire credit needs of a borrower unit are meet by a single bank.
Multiple Banking
Under this, the borrower approaches various banks and avails credit facilities across banks. Each bank undertakes their own assessment of risk, decide the mix of credit facilities and stipulate their own terms and conditions. Each of the banks takes the security and gets the charges registered with the ROC in their favour. Practically there is no co-ordination between the banks and they compete with each other to protect their business and interests. Borrower under multiple banking arrangement, should furnish from time to time detail of borrowings from banking system to all the banks where they have credit limit.
Consortium Lending
Under this the banks come together and collaborate with each other in assessing the credit requirements of the borrower duly sharing the credit facilities. Normally, the bank which has larger exposure act as leader who conduct meetings, assess the credit requirements of the borrower and share all the information with member banks from time to time.
Guidelines on Consortium Lending
Maximum 10 participating bank when Fund Base Working Capital limits up to 100 crore
Maximum 15 participating bank when Fund Base Working Capital limits beyond 100 crore
Minimum Share of each bank is 5% or 5 crore whichever is more
Member bank can’t leave until 2 year from date of disbursement
Member bank have Submit quarterly information to lead bank
Syndication
Syndication is an arrangement where group of banks which may not have any business relationship with the borrower, participate for a single loan. It is an arrangement between two or more lending institutions to provide credit facilities using common loan documentation. The regulator encourages syndication as a platform for spreading the risk. Banks is the syndicate share the risk of large indivisible investment project. Sometimes it will only involves tying up the finance to ensure a financial closure without the active role of lead arranger in respect of credit delivery. Typically in cases of syndication loans, there is a lead bank or underwriter of the loan, known as arranger, the agent or the lead lender. This lender may put up a proportionally bigger share of the loan or may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks.
Duration: 3 to 10 year
Size of Advance: Minimum Rs.50 Cr.
Tombstone: The information about agreement of loan upon signing is published through an advertisement in financial newspapers, which is commonly known as Tombstone.
Types of Syndication
Best Effort
Under this arrangement the lead agent does not commit or guarantee the entire amount of the loan . If the loan is undersubscribed, the borrower may be forced to accept lower loan amount or the loan agreement is cancelled entirely
Club Deals
In club deal undertaken by a limited group of banks and financial institutions. Without lead manager such deals are called private placement.
Firm Commitment / Underwritten Deal
Under this arrangement the lead agent or underwriter guarantees and syndicates the entire loan. If the loan has not been fully subscribed, the lead agent opt to absorb the undersubscribed portion
Domestic and International loans
In domestic syndication currency of the loan is that of borrower’s country. In international syndication currency of the loan is other than that of borrower’s country.