The Role of Loan Syndication in Project Financing

Loan syndication (or syndicated loans) is a method of financing in which one or several banks (referred to as the syndicate) grant loans to the same borrower and for the same project.

Syndicated loans have the following common features:

• Involves a large amount of loan and for a longer term.
• Distributes the risk of the loan disbursal among several banks.
• All parties agree to a single loan agreement.
• Reduces the cost of debt to the borrower due to risk sharing.

Loan syndication is common when it comes to funding for large-scale energy and infrastructure projects. Loan syndication usually involves aleadlender bank, who administers the project loan, along with other lending banks who are signatories to the project loan agreement.

Loan syndication provides the following benefits to the involved parties:

• Diversification of risk

This is probably the biggestbenefittothe lendingbanks, as each bank can reduce its financial risk by joining the syndicate. This can also limit the borrower’s tendency to default on the loan, due to the multiple lending model. Even in the scenario of the project failure, the risk is borne by all the participating lenders, and according to their contribution to the overall loan. The resulting losses can be negated by returns from other successful projects.

• Fund mobilization

This is particularly useful when raising funds for large-scale projects like railway infrastructure, universities and road networks. All the financing may be not available from any single bank. Even if the bank has limited (or no) exposure to financing projects in a particular industry sector, they can be part of the syndicate for such projects that require a high credit facility.

• Makes the project bankable

Project advisors from the lending banks can determine the overall viability of the project and risk management. In addition, lenders have access to the borrower’s assets and current cash flow, in order to ensure that the project will generate enough revenue for loan repayment.

• Competitive price bids

This is a benefit to the borrower, as competitive bidding among the prospective lenders can result in the best loan terms for the project. This can ease the loan repayment schedule for the borrower.

• Reduced marketing costs

Banks participating in loan syndication do not need to market themselves extensively for future projects, thus reducing their marketing costs.

There are a number of corporate advisory services available in India, that offer a variety of project loan syndication service to their clients. With India poised for large-scale development in the areas of infrastructure development and energy generation, loan syndication can play a vital role in project financing.

Hello Friends, I am a senior content writer at Ark Advisors. I love to write.