Syndicated Lending – The Need of the Hour

29 August 2011

In the aftermath of the recent financial crisis, governments and regulators have responded by strengthening financial regulation, supervision and market infrastructure. Banks and lenders are striving to strike a balance between risk management, scalability and profitability. The recent market turmoil acted as a wake-up call for the industry and created the need to reconsider the overall risk management system. The immediate challenge for the industry, regulators and government is to reinstall confidence in the banking sector.

The crisis in the banking industry was preceded by a decade of strong growth and expansion. The era witnessed the banking sector growing leaps and bounds on the back of innovative product offering and growth opportunities available in the industry. However, a parallel focus required on building scalability and strong risk management system was missing which led to the recent collapse of banking sector.

The banks are on the slow road to recovery post the meltdown. Government and Regulators have taken steps to boost the faster recovery of the sector in the form of injecting liquidity, regulatory changes for sustainable growth and so on. The Banks have also realized the challenge and taken steps towards reforming the overall risk management framework.. The emphasis is on simplifying the operations and going back-to-basics.

Looking at the situation on hand, one of the better alternatives with the bank is to go for more of Syndicated arrangement. The main advantage of Syndicated Lending is that it allows sharing of credit risk between various financial institutions. Syndicated Lending offers a win-win situation for both borrowers and lenders where borrowers are saved from the mammoth task of managing multiple bank relationships and lenders also are able to arrange for huge sums of money with sharing of credit risk amongst financial institutions. Other advantages of syndicated loans include:

• Flexibility in structure and pricing.
• The borrower can leverage on market information put forth my multiple banks as part of Syndicated arrangement.
• The lenders can also leverage upon the collective assessment of proposal by various financial institution being part of the syndicated arrangement.

With increased demand in syndicated loans, banks all across are looking to invest in IT support for syndicated lending. Syndicated arrangements typically involve huge administrative efforts in terms of managing notices, regulatory requirements, coordinating for drawdowns from various participants, managing assignment and sell down by participants and so on. These complexities had made Syndicated Lending less common so far. Due to lesser focus and handful number of deals, the Banks had been managing the operational aspect of the Lending arrangements without much of technological support through tools like spread sheets etc. However, with the increased focus on syndicated arrangements, the banks have been forced to evaluate their existing infrastructure. There is an increased need for technological support to meet the voluminous operational aspects of syndicated lending. Banks are continuously revisiting their operations for streamlining processes and also approaching IT companies for products specifically to support syndicated loans. IT companies are also welcoming the trend as this has led to a new market for Syndicated Loans products which had been riding on the back seat so far.

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