45046861 Corporate Banking

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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.