Loan syndication is a methodology in which two or more lenders come in collaboration for giving the amount to a single borrower. Sometimes the amount of loan is so much that a lender alone cannot give that much amount to the borrower. Here, the borrower can be the government and big corporate entities. The lenders are the banks who may be otherwise competitors, but they come in collaboration to meet the big amount that is required by the borrower.
An agent is also required in such cases, who will act as a mediator between the lenders and the borrower.
We will tell you when lenders, as well as the borrower, can make use of the loan syndication.
- In most of the cases, banks are the lenders.
- There are so many projects that are undertaken by the government as well as by the corporate entities. For example, loans required for the making of roads and other such projects that caters for the public convenience.
- The amount of loan is bigger and a single bank cannot meet that requirement.
- Two or three banks come in collaboration and an agreement is formed in between them at a specified rate of interest.
- In most of the cases, again the borrowers are the government, corporates who need funds for the completion of the big projects.
- The amount is higher and that requirement can only meet through loan syndication.
- The banks who come in collaboration can give that loan for the duration of the project. In such cases the amount is higher as well as the duration of the completion of the project is also long. When two or three banks come in collaboration it becomes easy for the borrower to obtain that amount.
Advantages of Loan syndication
- The advantage of two or three banks coming in collaboration is that there will not be any burden on the single bank.
- It helps borrowers in expanding their source of fund. Moreover, it makes the loan market more reliable for the funds that the borrower will need in the future coming projects.
The money given in the form of loan syndication by the banks can be treated as an investment because once the returns will start coming from the borrower, the bank will not only gets the principal amount but also an additional amount in the form of interest charged on the amount of loan from the borrowers.