Loan syndication has become an increasingly important part of corporate financing over the years. Syndication is a mechanism where in a group of banks fund the needs of a single borrower both funded and non-funded, for a wide variety of purposes. Initially developed to address the needs of huge, acquisition-hungry companies, they have now become a flexible funding source for both mid-sized companies and smaller companies that are on the cusp of moving into mid-sized status.
Several factors are responsible for driving the syndication business which include, the desire to share a large loan among several lenders to achieve diversification of loan portfolios, manage regulatory restrictions on the maximum exposure allowed for a single industry/borrower and capital constraints.
The whole syndication process/business is complex involving multiple parties probably across different geographies and exchange of lot of information. It starts with pre-syndication stage where a borrower approaches the lead manager/arranger for his specific requirements, who in turn negotiates the broad terms and advises on the probable time to market. Then the proposal is made and forwarded to different banks for subscription or participation. Based on the interest evinced by the banks, the deal is finalized, participant lenders are confirmed and shares allotted. Pre-syndication in itself involves lot of information exchange like sending the proposal, recording of subscriptions etc.
As multiple parties are involved in the whole deal, an agent bank, whose primary responsibility is to administer the deal/loan, now comes into picture. The agent would be the single point of contact for the borrower, monitoring compliance of the terms of the facility and, acting as the record keeper, paying agent.
In the whole process there is duplication of information at several places, exchange of lot of information and documents through channels like SWIFT or physical movement. Also, there could be lot of manual interventions for various transactions. All these could lead to reduction in efficiency, transparency and increase lead time.
One solution to minimize current challenges could be the adoption of distributed ledger or block chain technology for syndication.
By doing so, all parties of the syndicated deal, viz., corporate borrower(s), lead bank, agent bank, participant banks, payment bank etc. can be brought on to a single blockchain network. The agent bank can create and store this deal data, details of collaterals offered by the customer in the network so that all the participant banks can access the information from a single place. All parties in the network will have access to the deal data instead of just relying on the agent bank. If required, access restriction can be provided only to the required members of the network.
The borrower can send drawdown notice over the blockchain network and the agent bank can request the respective participants to contribute towards the drawdown request in the blockchain network itself.
Once the participant banks remit the funds for drawdown to the agent bank, participant banks can send confirmation over the blockchain network. Rate fixing or rate review notices can be communicated through the blockchain network. Any further notices like payment notice, and early payment notice can be stored in the blockchain network by the borrower and the same will be visible to all the participant banks.
The agent bank and participant banks can look at integrating their core banking systems (CBS) with the blockchain network for automation of various events and transactions. For example facility and tranche creations can happen through straight through processing of data from the network. When a participant receives a drawdown notice through the blockchain network from an agent bank, the information can be straight through processed to create a loan with the required details, drawdown of funds and the confirmation relayed back to the agent bank over the network which will update the drawdown contribution tracker in the agent bank’s system. The interest rates can also be updated directly from the rate fixing notice sent by the agent over the network.
The borrower can also integrate his ERP system with the network and initiate LC/BG requests from their system.
The blockchain technology is already being looked at for usage in trade finance business like bills collection, open accounts, letters of credit and also in the payments world. Syndication business also involves trade products, payments or movement of funds across geographies. So moving ahead, bringing syndication on to the blockchain network is likely to add value and compliment these areas.
Adoption of this technology could lead to benefits to all the parties involved in syndication from lead bank during pre-syndication to borrower during the life cycle.
Keeping in view the above, banks should definitely look at syndication as one of those areas where blockchain should be explored along with the current areas of interest like trade finance and payments.