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Chapter VIII
Corporate Banking
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Flow of the presentation
1. Nature of Corporate Banking
2. Developments in Corporate Banking
3. Consortium Finance4. Multiple Banking Arrangements
5. Loan Syndication
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Corporate (or Wholesale) banking
Corporate or Wholesale banking is an umbrella termencompassing the products and services that acommercial bank provides to its corporate customers.
Specific products fall into one of the two categories: commercial credit
Non-credit fee-based services
Historically, wholesale banks focused primarily on large
and medium-sized businesses because the averagedollar/rupee value of transactions in these segmentswas high.
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Commercial loans
Definition: A loan that is structured and supported specifically bythe operation and performance of a specific business or enterpriseis called a commercial loan
There are 2 types of commercial loans:
Business loans (or lines of credit): Loans to support the day-to-dayoperations of the business.
Long-term commercial loans: The purposes for long-term commercialloans vary greatly, from purchases of major equipment and plantfacilities to business expansion or acquisition costs.
For larger loans, a single bank may not be able to finance the loan.In such situation, the loans are availed through:
consortium finance
multiple banking arrangements and
loan syndication
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DEVELOPMENTS IN CORPORATE BANKING
Relationship was previously dictated by banks,that selected business and imposed charges atwill
Today, corporates are becoming increasinglydemanding. Corporates looks for: standardized services all round the year and round the
clock from banks across all delivery channels and alllocations
ability to provide a full range of integrated productsand services
Technology: The ability to provide access to systemsacross the enterprise, via the Internet
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CONSORTIUM FINANCE
Participation loans/Consortium Finance mean joint finance by more thanone bank to the same party against a common security.
Under consortium financing, several banks (or financial institutions)finance a single borrower with common appraisal, commondocumentation, joint supervision and follow-up exercises
This participation of banks enables them to apply uniform standards,similar terms and conditions and exchange information with regard tocredit proposals.
All the participating banks have apari passu charge (a charge rankingequally in priority) on the security and in the predetermined proportions.
There are different types of consortia. To name a few:
Several banks join in financing one borrower for working capital. Several financial institutions and/or banks join in financing fixed assets.
When borrower with different units each engaged in separate line ofproduction and each unit is financed by sub-consortium of banks under theconsortium of banks for the borrower as a whole.
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Need for Consortium Finance
Banks finance on a participation basis due to following
reasons:
a) resources of the banks do not permit large advances,
particularly in the light of the credit control measures adoptedby the RBI. (Banks cant lend more than 40% of their Net
Worth and plus 10% for infrastructure as per current RBI
Norms)
b) banks are able to diversify their risk by participating in big
advances
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Processing a Proposal
Borrower discusses the proposal with the
participating banks
Collection and processing of information Sanctioning of proposal subject to terms &
conditions same for every bank
Once borrowers limits are decided, one bankacts as the Lead Bank, draws draft of the
joint agreement, to execute the instrument
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Term ofAdvance
A condition of the joint advance is that
borrower will draw on his accounts with
respective banks in same proportion as the
limits sanctioned
Transfer of pro rata business in the form of
remittances, bills, foreign exchange
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Following information is exchanged
periodically between banks:
The maximum and the minimum balance
during the week/fortnight
The balance on the last day of theweek/fortnight/month
Any other business including foreign exchange
business passed by the borrower to any of the
participating banks
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Agreement with terms & conditions executed
between participating banks stipulates
The maximum period of the joint finance
If at any point of time the drawings in the accountare notpro rata may call upon others to make
necessary adjustment in this regard One of the concerned banks will be responsible
for the recovery of the entire advance for thebenefit of all
The loss if any will be shared between theparticipating banks in the ratio of the amountssanctioned and disbursed
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Balance Confirmation Letters - obtained by each bank every half
year or at such intervals
Stock Statements - The borrowers should send the periodical
stock statements to each of the participating banks
simultaneously
Insurance - The insurance policies are kept with one of the banks
Inspection - Usually each bank inspects the stocks by rotation Review - The working of the account and the limits should be
reviewed from time to time
Difference ofOpinion among Participation Banks - differences
that may arise are resolved by mutual consultation. In case of adissident bank, the bank may recall the debit balance due to it
from the borrower and the borrower will have to consider an
alternative source of finance
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Participation with Financial Institutions Otherthan Banks - advances by term lending
institutions (TLIs) have become popular graduallydue to large investments in industrial projects.Participation between TLIs and banks wouldprovide following benefits - close contact thebank has with the borrower and the availability ofthe branch network.
Large loans involving the IDBI, ICICI, IFCI and LIC,have joint financing arrangements. The mainforum for coordinating the operation of these
institutions in this respect is the monthly inter-institutional meeting of the senior executivesunder the auspices of the IDBI.
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Benefits of a Consortium
Collective wisdom of banks in credit appraisal
Smaller banks to benefit from borrower clientele
For borrower:
Speed of transaction
Due to a larger volume of a transaction themargin is usually lower
Reduced administration for the client - the wholesum is drawn through one Agent bank
Flexibility of draw down and repayment schedule.
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ROLEOF THELEAD BANK
Appraisal of credit proposal done by lead bank
To submit proposal to RBI for post sanction scrutinyunder Credit Monitoring Arrangement
Decision of consortium will be binding on the LeadBank, in case of differences
Freedom to sanction an additional credit up to apre-determined percentage in emergency
Quarterly operative limits fixed in assocn. with nextlargest bank and communicated to member banks
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BANKEXPOSURENORMS BY THERBI
In the year 1978, RBI issued guidelines to the banks inconjunction with the formation of consortium andmade it obligatory where the aggregate credit limitssanctioned to a single borrower amounted to Rs. 5
crore or more. But later in October 1993, this thresholdlimit was raised to Rs 50 crore
In Oct 96 following policy of deregulation of financialsector, RBI decided that whenever a consortium isformed either on a voluntary or on an obligatory basis,the ground rules of the consortium arrangement wouldbe formed by the participating banks on their own,subject to the exposure norms prescribed.
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Rules
Number of participating banks
Minimum share of the bank
Entry/exit from the consortium
Sanction of additional/ad hoc limit in emergencysituations/contingencies by Lead /other banks
The fee to be charged by the lead bank for
services rendered by it Grant of any facility to borrower by non-member
bank
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Bank exposure norms prescribed by RBI
The exposure ceiling should be fixed in relation to banks capital funds andshouldnt exceed 25% of capital funds in case of individual borrowers and 50% incase of a group. Group exposure may exceed to extent of 10% provided additionalexposure is on account of investment in. power generation, telecom, roads, ports
Capital funds for the purpose will comprise paid up capital and free reserves.R
eserves, if any, created by revaluation of fixed assets etc., not to be included In case of foreign banks, ceiling shall be related for the present to foreign funds
deployed in Indian business by such foreign banks
Exposure shall include fund & non-fund based credit limits and underwriting andin similar commitments including investments. The sanctioned limit oroutstandings whichever are higher shall be reckoned for arriving at exposure limit.However for non-fund based limits only 50% of such limits or outstandingswhichever is higher shall be reckoned for arriving at exposure limit
Further these ceilings stipulated by the RBI should be considered as a part ofprudent credit management system and not a substitute for efficient creditappraisal, monitoring and other safeguards
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Lead banks should have the authority from other banks to make available
their share of the credit limit, if they do not convey their decision to the
Lead Bank in time.
After first disbursement of loan, a customer should be allowed to operate
the accounts with different banks according to his requirements
The borrower should execute only one document with the Lead Bank
There should be an interest agreement among banks of the consortium to
share the security and the rights and responsibilities of the Lead Bank
After the receipt of draft scheme, leader of the consortium should call for
a consortium meeting to discuss and indicate the working capital
assessment, the limits to be sanctioned and allocated among the
members of the consortium
After finalization of scheme by BIFR in the case of sick units, formal
approval of the sanctioning authority should be obtained
Before making any disbursement, the lead bank should ensure that
disbursements are made only after complying with terms and conditions
stipulated in the rehabilitation package
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Single Window Concept ofLending
On recommendation of Mahadevan Committee
(Apr, 1988), Reserve Bank revised guidelines in
relation to consortium advances by introducing
single window concept for lending (SWCL), to
minimize delay & inconvenience to borrower
SWCL brought into operation in 2 areas term
loans and working capital finances Disbursement of rehabilitation term loan and
additional working capital
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MULTIPLE BANKINGARRANGEMENTS
Borrower borrows from a number of banks underseparate agreements and securities are chargedto them separately
Generally adopted while extending WC limits Bank which takes up the largest share of the is
deemed to be the leader of consortium
In case existing bank is unable to continue theadvance, the borrowing company should make itsown arrangements - by finding a new bank orrequesting other banks to take over such liability
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Security
In multiple banking security over an asset maybe given to more than one lender (issue ofpriorities to be properly addressed)
For working capital limits, the stock in tradeand other current assets held by the companyshould be obtained as security
Since it is possible that such security is
charged to other financing banks, it should beensured that the bank gets theparipassucharge among other financing banks.
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LOANSYNDICATION
A syndicated credit is an arrangement between two or more lending
institutions to provide a borrower a credit facility using common loan
documentation
Loan syndication is an alternative to consortium financing.
Syndicated loans are most often for medium-term periods, which canmean from three to ten years.
Banks engage in syndicated lending as they need to diversify their loan
portfolio in respect of country, sector etc., both as a matter of commercial
prudence and to comply with regulatory Capital Adequacy requirements.
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Mechanics ofSyndication
Loan syndication is done when
a borrower wants to raise a relatively large amount of money quickly and
conveniently
if the amount exceeds the exposure limits of any one bank and the borrower
does not want to deal with a large number of lenders. A prospective borrower intending to raise resources through this method
awards a mandate to a bank commonly known as the LeadManager
The mandate details out the commercial terms of credit and the
prerogatives of the mandated banks in resolving contentious issues in the
course of transactions.
The lead bank seeks to create a lending facility, defined by a single loan
agreement, in which several or many banks participate.
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The syndication process
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On receiving a mandate from the borrower, the lead manager prepares a
placement (information) memorandum and the loan is marketed to other
banks that may be interested in taking up the shares.
The placement memorandum helps the banks
to understand the transactions
provides the information about the borrower.
The information memorandum provides the basis for each lending bank
making its own independent economic and financial evaluation of the
borrower, if necessary, by seeking additional supporting information from
other sources as well.
Thereafter the mandated bank convenes a meeting to discuss the
syndication strategy relating to coordination, communication and control
within the syndication process and finalizes deal timing, charges towards
management expenses and cost of credit.
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Role ofParticipants in Syndication
ProcessArranger/leadManager/agent Bank:
contact other banks and obtain commitments for the amount of the loan, i.e.
to arrange the syndication.
preparing the information memorandum and for organizing the completion of
the loan.
Participating bank:
a) Participates in the syndication by lending a portion of the total amount required.
Underwriting bank:
a) Underwriting bank commits to supplying the funds to the borrower if necessary,
from its own resources if the loan is not fully subscribed, it may be the arranging /
lead bank, or another bank.
b) Not all syndicated loans are fully underwritten
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Agent:
serves as an intermediary between the borrower and the other banks in the
syndicate. As paying fees, interest, or capital to each lender directly is impractical, the
borrower pays the agent bank, which then distributes the funds.
When the borrower wishes to borrow funds under the loan agreement, it
notifies the agent and the agent then requests funds from the other banks.
The agent bank plays a vital role in administering the loan efficiently and in
ensuring fairness in the relationship between the banks and the borrower.
Receives fees from the borrower and paying appropriate shares where
applicable to participating banks.
The functions of the agent bank not relating to the flow of money are:
Ensuring that conditions precedent are satisfied under the loan agreement before
advancing any part of the loan. Determining the LIBOR interest rate for each interest period.
Receiving notices relating to cancellation of any part of the loan.
Receiving notices relating to transfers by banks.
Calling an event of default, if necessary.
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Difference between Consortium
Finance and Syndicated Loan Each bank lends only the amount, known as the commitment, that it has
agreed to make available. Therefore, each banks obligation is separate or
in common law terminology several.
If a bank fails to lend its agreed amount of the loan to the borrower, the
other banks are not legally bound to make up the difference. The agent isoften the same bank as the arranger.
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ADVANTAGESOF ASYNDICATEDLOAN
The benefits to the borrowers:
a. As the borrower deals with a single bank there is an element of confidentiality he does not
have to disclose financial information to the general public.
b. Syndicated lending can be quicker and simpler than other ways of raising capital (e.g. issue of
bonds or equity). Typically the facility can be in place within 8-10 weeks.
c. The amount of money to be borrowed is usually larger than one can borrow from a singlebanker.
d. In case of borrowings from a syndicate, there are relative advantages like centralized
negotiations, single set of documentation, and one set of banking and other charges.
e. The syndication method reverses the current practice where the corporate borrower faces
rigid terms in a take itor leave itsituation.
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Benefits to the lead banks:
a) Fees can be earned without committing scarce capital,
b) Enhancement of bank's reputation and relationship with the client.Benefits to the participant banks:
a)Access to lending opportunities without the associated costs of marketing and
maintaining a high profile
b) Market exposure for the bank
c) Opportunities to participate in future syndications, possibly in a more senior role.
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TERMS AND CONDITIONS
Syndicated loans are available for medium term maturity. Sometimes transactions
can be made for shorter periods of three to five years or longer periods of ten
years or more.
Drawdown Facility:
facility allows the borrowers to drawdown the loan amount sanctioned to
them over a period of time instead of withdrawing the entire amount at a
time.
a commitment fee (usually 1/4 percent to 1/2 percent on undrawn balances)
is charged
The interest on the syndicated loans is expressed as a margin over the interbank
rate and the margin is expressed as basis points. LIBOR (London Interbank Offer Rate) is more prevalent
Some borrowers also negotiate their loans in LIBID (London Interbank Bid
Rate) or LIMEAN (the mean of LIBOR and LIBID).
Apart from LIBOR, SIBOR (Singapore), PIBOR (Paris), NIBOR (New York) are also
used to compute the actual interest rates.
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The credibility of the borrower is most important in deciding whether to grant loan
on the basis of LIBOR or not. The more creditworthy the party is, the less is the
spread over Libor.
A syndicated loan would have two components:
a funded component or core component on which interest will be charged on
the loan being sanctioned
a standby line of credit, which would meet the adhoc increases in credit needs
of the borrower
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Phases in Syndication ProcessPre-mandate Phase: To prepare the groundwork for placing the loan in the market,
the lead bank will need to:
Identify the needs of the borrower.
Design an appropriate loan structure, including safeguards such as covenants.
Develop a persuasive credit proposal, both for internal purposes and for the
prospective participants.
Obtain internal approval from the banks credit committee.
Award of the Mandate
Placing of the loan: Now the lead bank can start to sell the loan in the
marketplace.
It will:
Prepare a placement memorandum, a sales and information tool, containingbackground information on the borrower. Where the loan is for a specific
project, this will include supporting commercial information on this.
Prepare a term sheet that defines the pricing characteristics of the loan (e.g.
lending margins, fee structure). The arranger may be allowed to exercise price
or market flex right to increase margins to ensure take-up of the loan
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Award of the Mandate (contd..)
Prepare legal documentation for the loan.
Approach selected banks and invite participation.
Closing of the Syndication, Including Signing Ceremony
Post-closure phase:
The file for the syndicated loan is handed over to the facility agent.
The agent now handles the day-to-day running of the loan facility
repayments, financial reporting and so on.
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Types of Loan Facility
There are several types of instruments in the syndicated loan market.
Term Loan: The most popular type is the term loan. It is a medium-term facilitywith a typical 6 or 7 years maturity.
Revolving credit facility: A revolving credit facility gives the borrower moreflexibility about how much principal is outstanding during the loans life. Astranches of the loan mature or are called, the borrower has the right to redraw up
until the loan matures. Evergreen facility: A loan that can be extended after pre-set periods. For example,
a five-year evergreen loan would be extendable every year for another year.
Backstop facility: A backstop facility protects a company against a liquidity crunch.It is a loan drawn as the last resort. Many borrowers regard backstops as insuranceso that in case they suffer a temporary shortfall in funds or a failure of one of theirnormal funding sources they can back on them. All issuers in the US commercial
paper market are required to have a stand-by facility. Swingline: Most backstops also include a swingline facility which gives the
borrower, the money on the same day. Enabling a firm to borrow up to a pre-specified amount usually over 1-5 years. As repayments of outstanding balancesare made, the loan facility is replenished.
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Pricing Structure
The main elements within the syndication pricing structure will be:
The interest due to participants usually expressed as a margin over some market
rate such as LIBOR.
Compensation fees
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Compensation (fees) in a Typical
SyndicationArrangement fee: Arrangement fee is a front-end fee. This is the total up-front fee
paid to the banks that are mandated to arrange syndication for its work in
structuring, syndicating and negotiating the documentation.
Division of the Arrangement Fee
Praecipium:Charged by mandated bank as a fee for designing the loan and selling
it to other banks
Underwriting fee: If a loan is underwritten as opposed to a best efforts placement,
then members of the underwriting group are paid a flat fee based on their initial
underwriting commitment prior to general syndication.
Participation fee: This is an up-front fee paid to participant banks joining a facility
in the syndication process and is payable on the amount of each banks finalcommitment to the loan.
Residual Pool: If there is a residual fee left after syndication this pool may also
be distributed to the underwriting group.
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Commitment fee: This is charged on the undrawn element of either a term loan or
revolving credit to compensate banks for the contingent liability. The commitment
fee is normally set at a level equal to half of the margin. However, it is unlikely that
the fee will exceed 0.5%.Agency fee: This is an annual service charge paid to the agent bank for processing
payments.
Utilization fee: This is a fee the borrower should pay when the drawn portion exceeds
50%.
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SYNDICATEDLOANS INTHE INDIAN
CONTEXT Some Indian public sector banks and financial institutions entered the Syndicated
Eurocredit markets in the early eighties
Other companies followed the PSUs and by late eighties, there were several issues
from even private companies
Due to events like Gulf War and Balance ofPayment issues, Euromarkets was
governed by the regulations provided by the External Commercial Borrowings
(ECB) regulations.
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Conclusion
Corporate Banking is all about building genuine and lasting relationships with
corporate customers.
The convergence of investment, commercial banking and insurance would bring in
real change and ease the pressures in the financial services industry.