The role of the banks in the
modern financial system
has become indispensable. Without adequate lending by
the banks, commercial, industrial, economic and financial
transactions would come to grinding halt in the form of credit crunch.
In the financial world, it is primarily the banks which provide the
necessary lubricant (i.e., cash or money) for running the
whole gamut of economic transactions. The Non-Banking Financial
Companies (NBFC), mutual funds, pension funds and certain
other participants play their part to a lesser extent.
While banks offer a range of other financial services such
as merchant banking, factoring, etc., their role is to accept surplus
cash from some entities and lend it to the other entities that are in
need. However, due to the factors stipulated capital adequacy norms,
the risk involved in lending and the huge volume of loan amount
demanded by the large borrowers such as MNCs, banks may not
be in the position to satisfy such credit requirements on their
own. In such a scenario, they form an alliance with other banks to
offer syndicated loans. Thus, a group of banks form a conglomerate
to pool their funds together and
offer a syndicated loan to a borrower.
There is only one loan agreement between the borrower
and the group of banks so formed. When borrowers have to
raise very large amount of money at a minimum cost and within a
given timeframe they usually go for syndicated loans. Various
lenders come together to form a syndicate and grant the loan at the
invitation of a lead bank with whom the borrower has placed the
request for the loan. |
