Loan Syndication Blockchain Banking Sector Use Case

Loan Syndication is one of the important activity in which banks are involved. However, before understanding what is it about, let’s look at the dictionary meaning of the word Syndicate.

A Syndicate is a group of individuals or organizations combined to promote some common interest. Now, it’s easy to understand what exactly is Loan Syndication.

Loan Syndication is the process where various lenders are involved in providing various portions of loan, that is, different entities are involved in providing the loan to the borrower, as per their needs. Loan Syndication generally takes place in a situation where amount of loan is very high and it’s out of scope for a single lender/banking entity to provide such a big amount of loan requested by the borrower.

Loan syndication helps in taking a measured approach and removing the risk factors involved when a very large amount is asked for. This helps in easy maintaining a manageable credit exposure while fulfilling the needs of the borrower. Loan Syndication happens mostly when companies/institutions are borrowing for acquisitions, mergers, buyouts, and other projects which involve a large amount of funds.

For Loan Syndication process, there is an entity which handles and manages all the aspects of this activity, from initial transaction to repayments, covering aspects of fees, compliance reports. This lead financial institution, is known as the Syndicate Agent.

Generally, a third party or additional specialists may also be involved in maintaining all the aspects of the loan syndication process.

Now we know what Syndicate Banking is. Let’s see how we can make use of Blockchain Technology in this area.

Since Syndicate Banking involves a lot of communication between all the lenders and borrowers, Smart Contract created via Blockchain technology can take of it. Blockchain technology has everything to make this use case a successful one.

Using the Blockchain (Or Distributed Ledger Technology), banks can track all the activities of the borrowers by maintaining their credit score and meet the compliance requirements. In general, these are achieved but Banks struggle a lot as they have unique challenges of regulation of compliance and requirements of Know Your Customer (KYC), Bank Secrecy Act (BSA) and Anti-Money Laundering. Using Blockchain technologies, all these challenges are attacked in a single go. All this data can be stored in a Blockchain Ledgers. Now, even if all the participating or lender banks have different compliance requirements, all of them can be checked very efficiently. This reduces the cost of meeting the regulatory requirements.

This can help in creating a closed loop between the lending parties and the borrowers. This can help the banks in tracking the services/transactions provided/done at various points. No data duplication activity is needed, so as help the local country activities/ taxation regulatories. They all can pull the data from the Blockchain.

Using this, all the borrowing entities can fast process their transactions so as to help them to start their ventures/businesses faster.

Let’s take a case where a company A needs to invest 500 Million Dollars in their new venture, either for a Buyout/Acquisition/For their new research work. They have a good credit score, which has made them eligible for getting the loan. However, Bank ABC in which they have applied for the loan, doesn’t want to provide all the loan together. They consulted bank B and C, they are now ready for the performing the activity of Syndicate Banking for providing the loan the Borrowing company A. Without Blockchain, all of these banks will have to undergo their own procedures to identify if the company A meets the compliance requirements. With Blockchain, compliance requirements of all the banks (Regional/National/International) in the blockchain and with being all the KYC and other data needed for processing the loan is already present, it will become easy to carry out the activity. A Happy situation for all.

Benefits of using Blockchain in Syndicate Banking :

• Real Time Accounting/ Transactions

• Compliance with Regulations across the countries/regions depending on the participation of Banks

• Achieving the 360 degree view of each customer’s info

• Minimizing the operational costs and risks.