More and More Banks Entering Loan Syndication Market

September 17, 2009: Union Bank of India, Bank of India, Allahabad Bank, Corporation Bank, UCO, United Bank of India are among the banks entering this space. Traditional players will now have to chase customers given the increase in competition. State-owned banks such as Union Bank of India, Bank of India, Allahabad Bank, Corporation Bank, UCO, United Bank of India are gradually making inroads into this domain and giving the traditional leaders in the loan syndication market such as SBI Capital Markets, Axis Bank, IDBI Bank, a run for their fee income. The prospect of earning an attractive fee income by leveraging their corporate relationships is luring banks to set up loan syndication desks.

In the case of plain vanilla loan syndication, a bank earns a fee ranging between 25 and 50 basis points (of the loan amount), depending on the size of the loan. If a bank chooses to underwrite the syndication then it can earn anywhere between 50 basis points and 100 basis points. Unlike the leaders, who routinely syndicate loans in excess of Rs 1,000 crore for large corporates, the aspiration of the new entrants is modest. They are looking to arrange sub-Rs 1,000 crore loans for mid-size corporates. Given that newer players are entering their turf, past achievements alone will no longer assure business for the traditional leaders in the loan syndication market. They cannot hope for walk-in business and will have to chase customers instead.

When the loan requirement of a corporate is large, then its lead bank undertakes to syndicate the loan. The lead bank on its part takes a large credit exposure to the corporate even as it maintains a prudent and manageable credit exposure by roping in other banks which take a portion of the loan on their books. In a bid to diversify its revenue stream, Allahabad Bank set up its syndication desk about two months ago. So far the bank has completed two transactions and another five to six are in the pipeline. "Loan syndication is a good source of fee income for banks. Our bank is focusing on mid-segment customers. The average size of these transactions is in the Rs 100-400 crore range," said Mr K.R. Kamath, Chairman and Managing Director, Allahabad Bank.

Corporate customers are more comfortable when the entire loan syndication deal is handled by a single bank rather than approaching several banks themselves. "We can give value in terms of convenience and quick delivery of service to corporate customers going in for syndication," Mr Kamath explained. Corporation Bank recently set up a syndication cell in a bid to grow its fee income. "We have just made a beginning. We have a couple of credit and marketing officers in the syndication cell actively scouting for business," said a senior bank official.

Bank of India is in the process of setting up a dedicated loan syndication desk. A bank official said "instead of knocking on the doors of various banks for funds, it will be advantageous for a corporate to assign the mandate in this regard to a single bank. It is easier for a bank, which has already done due diligence on a corporate, to talk to other banks and tie up resources." Union Bank of India has already set up a large syndication desk comprising about 15 credit officers specialising in different sectors of the economy. Most of the credit officers either have engineering-MBA (finance) background or are Chartered Accountants. A senior official said the bank has made a beginning by undertaking loan syndication of small ticket size, around Rs 500 crore.

Once it gains requisite experience in the market, the bank plans to arrange big ticket loans for India Inc. The buoyancy in the loans syndication business can be gauged from the fact that SBI Capital Markets, the investment banking subsidiary of State Bank of India, has helped 24 companies, most of them in the core sector, tie up funds aggregating Rs 72,500 crore from banks in the first three months of the current financial year. This is against around Rs 95,000 crore for 54 companies it arranged in the whole of the last financial year.