Question
Q42 Consider the following statements:
Statement-I:
Syndicated lending spreads the risk of borrower default across multiple lenders.
Statement-II:
The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line.
Which one of the following is correct in respect of the above statements?
- Both Statement-I and Statement-II are Statement-II explains correct and Statement-I
- Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
- Statement-I is correct, but Statement-II is incorrect
- Statement-I is incorrect, but Statement-II is correct
Answer: 3
Detailed Explanation
Recent Context: In 2023, Country’s largest lender State Bank of India (SBI) concluded a $1 billion syndicated social loan facility. Shriram Finance raised a multi currency loan of $468 million via ECB in January, 2024.
• This is the largest widely syndicated loan transaction for a private NBFC from India in recent years. A syndicated loan is a form of financing that is offered by a group of lenders.
• Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class.
• Syndicating allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base.
• Syndicated loans involve large sums, which allows the risk to be spread out among several financial institutions to mitigate the risk in case the borrower defaults.
• Lenders are referred to as a syndicate, which works together to provide funds for a single borrower. Hence statement-I is correct.
• The borrower can be a corporation, a large project, or a sovereign government. The loan can involve a fixed amount of funds, a credit line, or a combination of the two. Hence statement-II is not correct.
