The world of finance and lending is rapidly evolving with ever demanding requirement of change. Loan syndication is one of the area in finance which has seen significant changes and it is the process of providing loan to borrower by many banks. As per Allied Market Research, loan syndication market will grow at a CAGR of 14.2% over 10-year time and will reach to $3798.4 bn by 2031.
Loan syndication occurs when multiple lenders/banks come together to provide the loan to a borrower. The need of loan syndication arises when the borrower requires large amount and only one bank cannot fulfil the requirement of borrower. In order to diversify the risk tolerance, multiple banks come together to fulfil the need of borrower. This process is used by industries like infrastructure development, real estate, corporate finance etc. A few scenarios where loan syndication can be used include mergers and acquisitions, buyouts, equipment purchasing for business expansion, to name a few.
A syndicate agent is the main entity who handles the entire process of loan syndication starting from taking loan to repayment of loan. Seldomly, third party or agent bank is also involved in the loan syndication process. Agent banks oversee the proper operation of the loan process, which makes the loan syndication process straightforward and seamless. The main duty of the agent bank is to serve as a liaison between the borrower and participating banks, facilitating the simple disbursement of loans from participating banks and ensuring that the borrower’s principle and interest are collected. As a group of lenders lend money, there are different interest rates that are being agreed upon by borrower and lenders.
Challenges in Traditional Loan Syndication
- Lack of transparency: Information about the loan terms, agreements, payments is not completely visible to all the participants that makes it difficult for all to have a clear view of the loan status.
- Overhead Costs: Origination fees are levied by lenders, and additional costs associated with participation in the loan syndication process raise the overall cost of loan administration.
- Time Consuming process: The manual procedure including paperwork, manual document verification, multiple intermediaries, and complex communication channels is a time-consuming process leading to inefficiency and delay in process.
- Security Issues: Confidential information is shared among multiple parties, increasing the risk of data breaches.
Blockchain is transforming the Loan Syndication
Blockchain technology is known for its decentralised and immutable nature that can transform the loan syndication industry in the following ways:
- Security: Data on blockchain is stored in the form of hash keys which is encrypted making it secure and reducing the possibility of unauthorized access or data manipulation. It helps prevent fraud and ensures the integrity of the data.
- Transparency: Using the distributed ledger to store data, data is recorded and accessed by authorised members in real time. There is authenticity of data as there is no intermediaries involved.
- Efficiency: By using smart contracts, the loan process like syndicated loan origination, interest payments, collateral management, disbursements etc. can be automated thus reducing the need for manual intervention leading to increase in efficiency.
- Liquidity and Accessibility: Blockchain can make it easier for investors to buy and sell loan assets on secondary markets, enhancing liquidity and potentially reducing the processing time.
Syndicated Loan processing on Blockchain
- Individual/Organizations who requires loan goes to the bank also known as Lead bank who upload the information on blockchain network where all other participants can see the information.
- Interested banks come together to form a consortium and negotiate for the terms and conditions with lead bank thereby finalizing the syndicate.
- Lead bank receives contractual agreement from all syndicate members which are then documented and signed off on blockchain.
- As per the agreed terms and conditions, the loan is disbursed and is monitored over blockchain.
- Subsequently, the repayments and further disbursements, if any, are recorded on the blockchain till the closure of the lending agreement.
Benefits of Blockchain in Loan Syndication
- Availability of real time customer information. Allowing participating banks to have a 360-degree view of customer information.
- Minimizing the operational costs and risks.
- Using smart contracts, creating automated framework to enable auto-disbursal of the principal & interest payment across the syndicate member banks.
- Automated Compliance checks for AML, Frauds etc.
- Real-time validation and verification of data by the syndicate participants before adding to the ledger.
- Adherence with regulatory requirements.
Blockchain technology is transforming the loan syndication process by enhancing transparency, security, and efficiency. Through transparency, automation, reduced costs, and increased security, blockchain could change the way lenders and borrowers collaborate, making the loan syndication process more efficient and accessible on a global scale.