Corp Banking

7/29/2019 Corp Banking

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CORPORATE

BANKING

Presenter:

Prof. Vighneswar


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CORPORATE BANKING

Our Focus of discussion:

The Nature of Corporate

BankingDevelopments in

Corporate Banking

Consortium FinanceMultiple Banking

Arrangements

Loan Syndication


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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.

Technology has become the key enabler and

differentiator for many products and services.

Large corporate customers and downstream correspondents

demand increasingly sophisticated products from their banks at

the lowest possible cost.

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.


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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 in-

house banks to provide cash pooling structure services normally supplied byexternal banks to business units in order to effectively centralize their

liquidity.

Many are also subsequently setting up paymentfactories or shared service

centers to rationalize the payment settlement process, enabling them to

profit from cash reserves to an unprecedented extent.


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Research by MOW* on

Corporate Banking

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

Research by MOW suggests that the capacity and capital areleaving 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 enthusiasmand subsequent disillusionmentwithintegrated 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.


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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 acrossproduct/service lines, with a

delivery channel that demands

the provision of an integrated

service (i.e. the Internet).


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Areas for Success in Corporate

Banking


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Corporate

Banking

Consortium

Finance

Multiple Banking

Arrangements

Loan

Syndication


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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


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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.


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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


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CONSORTIUM

LEAD BANK

(AGENT)

PROJECT

PROPOSAL

FACILITATOR

MoU

DOCUMENTATION

LOAN DISBURSEMENTS

CREDIT MONITORING ARRANGEMENT

REMITTANCES


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Different types of Consortia

Severalbanksjoin infinancing

oneborrowerforworkingcapital

Severalfinancialinstitutions

and/orbanksjoin infinancing fixedassets

Whenborrowerwith differentunits eachengaged in

separate lineof productionand each unitis financedby sub-consortium

of banksunder theconsortiumof banks forthe borroweras a whole.


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* Participation loans should be differentiated with participationcertificates, which are securities representing a share in the shares fundassets. Investment corporations that also manage them establish thesefunds. The provided financial means are invested in shares, obligationsand other investment instruments, whose value is expected to grow froma long-term point of view. These certificates are marketable.

Consortium loans are called Participation* loans in USand are very popular.

Participation loans mean joint finance by more than one bank to the sameparty 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 securityof entire raw materials, goods in progress and finished machinery. The borrowing

company and the security are thus common. All the participating banks have apari

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.


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Unitech Wireless,which plans tolaunch mobilephone services bythe end of 2009,was lent Rs 1,250crore last year by a

consortiumconsisting ofPunjab NationalBank, Canara Bank,

Bank of India,Oriental Bank ofCommerce, CentralBank of India andVijaya Bank.


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Processing a Proposal

Term of Advance

Documentation

Balance Confirmation Letters

StockStatements

Insurance

Review

Difference of Opinion among Participation Banks

Participation with Financial Institutions Other than

Banks

CONSORTIUM FINANCE


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Benefits of a Consortium

Spread of Risk

Collective Wisdom of Banks

Smaller banks could join the consortium andhave the benefit of the borrower clientele.

Consortium approach would enable to put an end tothe unhealthy approach of the banks snatching awaygood borrowal accounts

Speed of transaction, individual approach.

Due to a larger volume of a transaction themargin is usually lower.

Reduced administration for the client - thewhole sum is drawn through one Agent bank.

Positive publicity for the client.

Flexibility of draw down and repayment

schedule.


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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 regardingappraisal 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 theconsortium 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.


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MULTIPLE BANKING ARRANGEMENTS

Joint financing or consortium financing should be

distinguished from multiple banking.

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 ofbanks 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 theparipassu 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 fundbased working capital credit limits of Rs.10 crore and above


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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.


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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 andconveniently 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 LeadManager as against the nomenclature ofLeadBanker 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

itor

leave itsituation. The cost of syndication would vary with the credit of the borrowers and a higher creditstanding 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.


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A TYPICAL SYNDICATION PROCESS


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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 toparticipate 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


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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 obtainscommitments to join the loan. During this stage, the

loan agreement is negotiated, finalized, and signed.

Loan syndication process


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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.

The Role of an Arranger


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Steps in Loan Syndication

Source: United Nations Institute for Training & Research


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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 thediscipline 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.


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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.


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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.

SUMMARY ..


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Corp Banking

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Transcript of Corp Banking