Let me start this blog with a simple question- What do you do when you immediately need a big sum of money? Perhaps you might go to your family, friends or in the last case you go to a bank. In all these scenarios, the lender lends you the money based on the terms of your agreement. Such a type of loan agreement where there is a single lender and single borrower is often referred to as a bilateral loan.
What happens when you are a company and you need a sum which cannot be provided by a single lender or by a single bank? This is where syndicate lending helps.
A syndicated loan is an arrangement where several financial institutions form a group(syndicate) and lend money to one borrower. It consists of a single loan agreement between the borrower and all the lenders of the syndicate. Each lender will contribute a part of the loan amount and share the lending risk with the other members. Syndicate lending allows lenders to distribute risk and take part in opportunities that would have been too large for their individual capital base or when the total loan amount is outside the scope of the lender’s risk exposure.
In a syndicated loan, the borrower could either be a company, a large project, or a country’s government.
The process involves an arranging bank that takes the charge to organize funds based on loan terms agreed upon between the borrower and the bank. The arranging bank is the major lender in the load and is mandated to acquire other parties willing to participate in the syndicate. The arranging bank is also referred to as the arranger, the agent, or the lead lender. It often serves as the link between the borrower and the other lenders of the syndicate.
What are the current challenges?
The exchange of data in syndicate banking is a manual process, requiring a sheer number of man-efforts and time. This manual intervention results in poor documentation and a slower turnaround time. Additionally, there is a lack of transparency among stakeholders which often generates reconciliation issues and longer settlement cycles.
Now imagine a scenario, where a single platform is created using Corda, on which all the stakeholders could log in to see their personalized views about the loan. Corda is designed in such a way that an easy integration with the siloed platforms belonging to each stakeholder is very well feasible. The single platform operates with the blockchain network that runs behind the scene and constitutes all the stakeholders as participants. Assets could be registered on the ledger of this network and traded as per the rules of the established contracts. The inherent capabilities of DLT would provide proof of ownership and asset tracking throughout the lifecycle.
The DLT (Distributed Ledger Technology) platform could hold the immutable transactions that happen throughout the lifecycle of the syndicated lending deal. The lenders have real-time access to deal data including transparency into accruals and interest rates, that come directly from the creators of this data – the agent banks. The lenders thus have the information in a structured, timely, and transparent manner. Each lender could have a personal view of the deals they participate in and a timestamped audit trail. The platform would give the lenders faster and more trusted access to a real-time credit agreement, accrual balances, position information, and detailed transactions.
Depending on the requirements, a shared KYC (Know Your Customer) in such a case could further reduce compliance costs.
To summarize, a DLT-enabled solution could eliminate the intensive manual labor hours, increase efficiency and data accuracy, reduce operational risks and improve transparency for all the stakeholders as well as regulators.
But as it is said – it is much easier to propose than execute. And like my earlier blog, I will direct you to a real-life implementation for the mentioned case. Here is a quick talk on how Publicis Sapient is using Corda for a solution in Syndicated Lending and Digital Assets.
I hope you enjoyed reading this blog. If you have any comments about this article, please leave them below. I will be glad to know your views.
Stay tuned for my next blog on DLT in this series of Blockchain in Capital Markets. Until then…. Happy learning!