CORPORATE BANKING

Presenter: Prof. Vighneswar

CORPORATE BANKING
Our Focus of discussion:

The Nature of Corporate Banking Developments in Corporate Banking Consortium Finance Multiple Banking Arrangements Loan Syndication

Nature of Corporate Banking

Corporate or wholesale banks normally supply capital for business ventures and construction activities on a long-term basis. Wholesale banking is an umbrella term encompassing the products and services that a commercial bank provides to its corporate customers.

Historically, wholesale banks focused primarily on large and medium-sized businesses because the average dollar/rupee value of transactions in these segments was high. Large corporate customers and downstream correspondents demand increasingly sophisticated products from their banks at the lowest possible cost.

Technology has become the key enabler and differentiator for many products and services.
In this pressure-packed environment, wholesale bankers have two basic choices either ensure their current operation at peak efficiency so as to effectively meet its customers needs, or develop alternative strategies outside their current operations environment.

DEVELOPMENTS IN CORPORATE BANKING

Significant changes are underway in corporate banking. The corporate customers are now altering the nature of the relationship, which was previously dictated by banks, that selected business and imposed charges at will. Corporate customers are: consolidating treasury activity, reducing their transaction costs, and integrating financial processes. Some corporate customers are transferring account administration to inhouse banks to provide cash pooling structure services normally supplied by external banks to business units in order to effectively centralize their liquidity. Many are also subsequently setting up payment factories or shared service centers to rationalize the payment settlement process, enabling them to profit from cash reserves to an unprecedented extent.

Research by MOW* on Corporate Banking

Research by MOW suggests that the capacity and capital are leaving the sector permanently, and banks remaining active in this sector were able to do so only with much greater discipline around defining core relationships. The most significant changes in Corporate segment are as follows: 1. The initial enthusiasm and subsequent disillusionment with integrated corporate lending and investment banking strategies. 2. The rapid development of secondary markets-especially the credit derivative market- as additional channels to manage and offload risk. 3. The attendant development of active loan portfolio management as the primary means by which banks re-engineer the composition of their loan books.

*Mercer Oliver Wyman, a consultancy specializing in financial services strategy and risk management
consulting.

Business Drivers in Corporate Banking

Technology:
The ability to provide access to systems across the enterprise, via the Internet Business: Being able to manage a relationship-based client management model across product/service lines, with a delivery channel that demands the provision of an integrated service (i.e. the Internet).

Areas for Success in Corporate Banking

Corporate Banking

Consortium Finance

Multiple Banking Arrangements

Loan Syndication

Corporate Banking

Funded Services:
Working Capital Finance Bill Discounting Export Credit Short Term Finance Structured Finance Term Lending

Non-Fund Services:
Letters of Credit Collection of Documents Bank Guarantees

Long-term Commercial Loans

A loan that is structured and supported specifically by the operation and performance of a specific business or enterprise is called a commercial loan.

These loans are based on the proven successful or projected performance of the business itself, and are totally dependent on the historical profitability of the specific operation.
Business loans (or lines of credit) are generally issued directly to the borrowers by banks who can actually become partners in the cash flow of the operation. The purposes for longer commercial loans vary greatly, from purchases of major equipment and plant facilities to business expansion or acquisition costs. The asset being acquired is usually used as security for these loans; besides, financial loan covenants are regularly required. Also, loans secured by real estate can carry an extended term.

CONSORTIUM FINANCE
The necessity of consortium/participation lending arises when the amount involved is very large and beyond what a bank would like to risk under ordinary circumstances for a single borrower beyond the prudential exposure norms.

Consortium is entered into for project financing (long term and working capital requirement), deferred payment guarantees etc. This participation of banks enables them to apply uniform standards, similar terms and conditions and exchange information with regard to credit proposals. The participating banks acquire common interest and share the advance and securities in the predetermined proportions.
Consortium banks are specialist banks that are jointly owned by other banks and operate in the wholesale financial markets. This practice is also known as participation financing or joint financing. Commercial banks in India have started granting advances on a consortium basis not only to public food procurement agencies but also to various public and private companies

CREDIT MONITORING ARRANGEMENT CONSORTIUM

DOCUMENTATION
FACILITATOR PROJECT PROPOSAL MoU

LEAD BANK (AGENT) LOAN DISBURSEMENTS REMITTANCES

Different types of Consortia

Several banks join in financing one borrower for working capital Several financial institutio ns and/or banks join in financin g fixed assets
When borrower with different units each engaged in separate line of production and each unit is financed by subconsortium of banks under the consortium of banks for the borrower as a whole.

Consortium loans are called Participation* loans in US and are very popular.
*
Participation loans should be differentiated with participation certificates, which are securities representing a share in the shares fund assets. Investment corporations that also manage them establish these funds. The provided financial means are invested in shares, obligations and other investment instruments, whose value is expected to grow from a long-term point of view. These certificates are marketable. Participation loans mean joint finance by more than one bank to the same party against a common security.

For example, an industrial company manufacturing heavy machinery requires an advance limit of Rs.50 crore. Three banks say A, B and C join together and sanction the limit of Rs.50 crore in equal or agreed proportions against the security of entire raw materials, goods in progress and finished machinery. The borrowing company and the security are thus common. All the participating banks have a pari passu charge (a charge ranking equally in priority) on the security. Of late banks in India not only advance consortium finance for working capital but also for project finance.

Unitech Wireless, which plans to launch mobile phone services by the end of 2009, was lent Rs 1,250 crore last year by a consortium consisting of Punjab National Bank, Canara Bank, Bank of India, Oriental Bank of Commerce, Central Bank of India and Vijaya Bank.

CONSORTIUM FINANCE
Processing a Proposal

Term of Advance
Documentation Balance Confirmation Letters Stock Statements

Insurance
Review
Difference of Opinion among Participation Banks Participation with Financial Institutions Other than Banks

Benefits of a Consortium
Spread of Risk

Collective Wisdom of Banks

Smaller banks could join the consortium and have the benefit of the borrower clientele.
Consortium approach would enable to put an end to the unhealthy approach of the banks snatching away good borrowal accounts

Speed of transaction, individual approach.

Due to a larger volume of a transaction the margin is usually lower.

Reduced administration for the client - the whole sum is drawn through one Agent bank. Positive publicity for the client. Flexibility of draw down and repayment schedule.

ROLE OF THE LEAD BANK

The appraisal of credit proposal is done by the lead bank. The borrower has to submit all the necessary papers and data regarding appraisal of its proposed limits to the lead bank, which in turn will arrange for preparation of necessary project appraisal report and its circulation to other member banks. Lead Bank will also be responsible to submit the proposal to RBI for post sanction scrutiny under Credit Monitoring Arrangement on behalf of the consortium members and will further attend to correspondence with RBI in this regard. Lead Bank will however enjoy the freedom to sanction an additional credit up to a pre-determined percentage in emergency situations.

The Lead Bank should however inform other members immediately together with their pro-rata share.

MULTIPLE BANKING ARRANGEMENTS Joint financing or consortium financing distinguished from multiple banking. should be

The borrower borrows from a number of banks under separate agreements and securities are charged to them separately. Borrowers can avail any credit facilities from any number of banks without a formal consortium arrangement.
Where there are multiple banking arrangements it is possible that security over an asset may be given to more than one lender (either deliberately or accidentally) and where this has occurred, care must be taken to ensure that the issue of priorities is properly addressed.
Apart from the paripassu charge, the individual banks may stipulate other securities/collateral securities/third party guarantees as may be necessary. Under multiple banking arrangements each bank should report under the CMA, the facility extended by it to the borrowers enjoying total fund based working capital credit limits of Rs.10 crore and above

LOAN SYNDICATION
Syndicated loans are available for large established public limited companies. Loan syndication can be used to raise project finance as is done in Eurodollar market and also for working capital needs. It offers a good avenue to get the appropriate level of credit as determined by requirements of the unit rather than policy posture and price determined by credit rating of the borrower. Loan syndication is an alternative to consortium financing. Syndicated loans are most often for medium-term periods, which can mean from three to ten years. However, loans may be for longer periods that can range upto 20 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.

Procedure of Syndication
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 done when a borrower wants to raise a relatively large amount of money quickly and conveniently and 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 Lead Manager as against the nomenclature of Lead Banker used for the leader of the consortium. 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. The major benefits reaped by corporates in syndication are amount, tenor and price. The syndication method reverses the current practice where the corporate borrower faces rigid terms in a take it or leave it situation. The cost of syndication would vary with the credit of the borrowers and a higher credit standing provides better terms. Syndications make for efficient pricing and easy administering. As long as the banks do not lend below the minimum lending rate and restrict syndications to only certain top grade companies, this method of financing does not come into conflict with established banking practices. The SBI and Canara bank are the major Indian public sector banks that have vast experience in international loan syndications.

A TYPICAL SYNDICATION PROCESS

Loan syndication process

In loan syndication, the borrower approaches several banks, which might be willing to syndicate a loan, specifying the amount and tenor for which the loan is to be syndicated. On receiving a query, the syndicator or the lead manager searches for banks that may be willing to participate in the syndicate. The lead manager assembles a management group of other banks to underwrite the loan and to market its shares to other participating banks. The mandate to organize the loan is awarded by the borrower to one or two major banks after a competitive bidding procedure.

Loan syndication process

Two main phases that precede the signing of a syndicated loan are:
The first is the negotiation of the relationship between the borrower and the bank to arrange the syndication, which culminates in the borrower awarding a letter of mandate to that bank.

The second stage is the syndication process itself. The mandated bank, usually called the arranger, contacts other banks in the Euromarket and obtains commitments to join the loan. During this stage, the loan agreement is negotiated, finalized, and signed.

The Role of an Arranger

The arranger is responsible for syndicating the loan; hence it must know the borrower well enough to answer questions from potential participants who have no information about the borrower.

The arranger bank also plays a crucial role in pricing the loan. It must ensure that the financial aspects of the loan are correct and attractive enough to complete the syndicate.
The arranger helps the borrower choose the banks to be invited into the syndicate.

Steps in Loan Syndication

Source: United Nations Institute for Training & Research

SYNDICATION VS. CONSORTIUM

Though in terms of dispersal of credit risk, syndication is similar to consortium, the freedom the borrower has in terms of competitive pricing, the convenient mode of rising long-term credit, and the discipline that is sought to be achieved through fixed repayment period under syndicated credit is absent in consortium financing. Syndicated credit is a convenient mode of raising long-term funds by borrowers.

SUMMARY
Wholesale banking is an umbrella term encompassing the products and services that a commercial bank provides to its corporate customers. Consortium loans are the loans that are jointly granted by more than one bank to the same party against a common security.

Consortium banks are specialist banks that are jointly owned by other banks and operate in the wholesale financial markets.
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 adopted by the RBI, b) banks are able to diversify their risk by participating in big advances.

SUMMARY ..
Under multiple banking a borrower borrows from a number of banks under separate agreements; and securities are charged to them separately. Syndicated loans have become an important corporate financing technique, particularly for large firms and increasingly for mid-sized firms. A syndicated loan can be defined as two or more (often a dozen or more) lending institutions jointly agreeing to provide a credit facility to a borrower. While syndicates have many variations, the basic structure involves a lead manager (the agent bank) that will represent and operate on behalf of the lending group (the participating banks). More specialized facilities, such as construction loans, export finance loans, and bridge finance facilities, can also be syndicated. The interest rate of syndicated facility is a floating one, in contrast to the fixed-rate instruments found in debt markets.