Loan syndication: Concept, types, and more
What's the story
Loan syndication is a process where a group of lenders comes together to provide a loan to a single borrower. This is especially useful for large-scale projects where the amount of money required is too much for one lender to bear. In India, loan syndication has become an important tool for financing infrastructure projects, as it allows risk-sharing among multiple financial institutions. Here are the different types of loan syndication in India.
#1
Bilateral syndication model
In a bilateral syndication model, two parties are involved - a borrower and a lender (or a group of lenders acting as one). The terms are negotiated directly between the parties, making it flexible and tailored to specific needs. This model is usually used for smaller projects where the amount involved is manageable by one or two lenders.
#2
Club deal syndication
A club deal syndication involves a small group of banks or financial institutions coming together to fund a project. The amount required is too high for one bank but manageable for a few. This type of syndication offers better pricing and terms as the lenders share risks and rewards equally.
#3
Underwritten syndication
In an underwritten syndication, one or more lead banks underwrite the entire amount required before inviting other banks to participate in the deal. The lead banks take on the risk of funding the entire amount until enough participants are found. This type provides certainty to borrowers but may come with higher costs due to underwriting fees.
#4
Best-efforts syndication
In a best-efforts syndication, lead banks commit to raising funds from other lenders but without any guarantee on the total amount raised. They make their best efforts to fill the gap based on market conditions and investor interest. This model is more flexible but may leave borrowers exposed if demand falls short.