2. Loan Syndication – Overview

The Loan Syndication modules of Oracle FLEXCUBE address loan operations of a bank or a financial institution that enters into Loan Syndication contracts with borrowing customers (borrowers).

The loan syndication modules are the Syndication Facility (LN), Syndication Borrower (LS) and Syndication Participant (LL) modules.

2.1 Loan Syndication

A syndication agreement is reached between a borrower and a bank (or a financial institution), which arranges the syndication. The arranger bank identifies one or more banks or financial institutions that pool funds to meet the borrowing requirements. These banks or institutions are known as participants.

The arranger bank actually disburses the loan, after receiving the contributions of the other participants. The participants in the syndication share the interest and other income accruing from the loan, in the ratio of their participation that was agreed upon at the time of drawing up the Loan Syndication agreement.

This section contains the following topics:

2.1.1 Process of Disbursing Syndicated Loan

The process in which the loan is disbursed (or the customer avails the loan) under a syndication agreement depends upon many factors. The most important factor is the nature of the requirement of the customer. The other factor is the identification of the participants who would share the load of funding the borrowing.

The customer could choose to avail the loan:

The identification of the participants who would share the load of meeting the borrowing requirements depends upon all these factors.

Accordingly, it is possible, due to the nature of the borrowing requirement,

2.1.2 Tranches

Each instalment of the syndicated loan that is made available to the borrower is funded by a set of participants. Each such instalment is known as a tranche. Therefore, under a tranche, a specified portion (or the entire amount, depending upon the arrangement) of the total loan is made available to the borrower.

The tranche takes the form of a commitment on the part of each of the participants to grant, in principle, the provision of funds for the amount being made available under the tranche. It also involves a commitment on the part of the customer to avail the funds made available under the tranche.

When the terms of a tranche are finalized, the schedules for the actual loans to be made available to the customer under the tranche are also finalized, according to the requirement of the borrower. The participants are directed to fulfil their commitments whenever a schedule is due.

2.1.3 Draw Down Loans

When the commitments are fulfilled, the borrower may avail the funds made available under a tranche as draw down loans. Depending upon the requirement, the borrower may avail of the tranche amount in a specified number of draw down loans. These loans may have a term or tenor that is independent of the tranche tenor.

The tenor of the draw down loans will fall within the period between the start date and the end date of the main syndication contract. Also, the tenor of the draw down loans will begin within the tenor of the tranche.

Therefore, the main borrowing requirement (or total principal) in a syndication contract may be disbursed to the borrower through one or many tranches (instalments), and each tranche may be split down into a specified number of draw down loans. A tranche amount could also be disbursed through a single draw down loan, if so required by the borrower.

This chapter explains each of the features of the Loan Syndication module of Oracle FLEXCUBE, enabling you to understand how you can use the system to process syndicated

2.1.4 Defining Products

In Oracle FLEXCUBE, any service or scheme that you want to make available to your customers can be defined as a product. For instance, your bank may be entering into lending agreements with other lending banks, to disburse loan requests as a syndicate. This facility of disbursing syndicated loans can be defined as a product.

Going further, your bank could be offering borrowing customers loans through any tranche of a syndication contract framework. To recall, a tranche is a channel through which a borrowing customer could receive the required loan as a draw down. This facility that you want to offer to your customers, of availing loans through a ‘tranche’ arm of the syndicate agreement, could also be defined as a tranche product.

Defining products simplifies the task of disbursing syndicated loans. Typically, you would need to specify the following information about a tranche product each time you process a draw down under the tranche:

You can define a product with all the specifications listed above. Each time you enter a draw down under the product into Oracle FLEXCUBE, they will be automatically applied to it, and you need not specify them afresh.

In Oracle FLEXCUBE, you can define two levels of products for syndication contracts:

2.1.5 Processing Tranche or Draw Down Contracts

Oracle FLEXCUBE processes syndication contracts by allowing you to capture contracts at both the tranche level as well as the draw down level under a tranche.

Tranche Processing

When you open a tranche under a syndication contract, you input a commitment contract for the borrowing customer. Based on this, the system creates a commitment contract for each of the participants.

The borrower tranche contract involves the borrower tranche product that you have defined. The participant commitment contracts involve the participant commitment products you have defined.

Though the tranche contracts may involve different products, all the contracts involved in a particular tranche are processed simultaneously.

The tranche contracts may be revolving or non-revolving, according to the requirement of the borrower. In a revolving commitment, the commitment amount is reinstated when it is fulfilled. Therefore, the commitment amount pledged to a borrower is reinstated once the draw down loan availed has been repaid by the borrower. If the commitment is non-revolving, the commitment amount is not reinstated on repayment of the draw down loan availed.

Draw Down Processing

After a tranche comes into effect (i.e., on and after the value date of the borrower tranche contract), the draw down loan contract for the borrower can be entered into the system.

When you input a draw down loan contract for the borrowing customer under a tranche, the system creates a deposit contract for each of the participants

The borrower draw down loan contract involves the borrower draw down loan product that you have defined. The participant deposit contracts involve the participant deposit products you have defined.

2.1.6 Processing Repayments

Repayments as well as interest payments on a borrower draw down loan are distributed to the participants.

A common Loan Syndication pool is maintained to which contributions towards the borrower loan principal would be credited, and from which the borrower avails draw down loans. Repayments of principal are also credited into this common syndication pool, from where they are distributed to the participant nostro accounts.

A common Loan Syndication interest pool is maintained to which repayments of interest due on the loans are credited. From this pool, the interest due to each participant is distributed to the participant nostro accounts. You can maintain a GL in Oracle FLEXCUBE that would serve the purpose of a common syndication pool, as well as another to serve the purpose of a Loan Syndication interest pool. These GLs would be known as Bridge GLs.

2.1.7 Sharing of Fee or Charge Income

The participants share income from the liquidation of charges or fees that are applicable to borrower contracts, according to the ratio of participation agreed upon when the syndication contract is drawn up.

You can liquidate these charges or fees online in Oracle FLEXCUBE and apportion the liquidated fee income to the participants, net of tax.