Sometimes a single bank is unwilling or unable to lend the amount needed by a particular corporation or government agency. In this case, a syndicate of banks may be organized. Each bank within the syndicate participates in the lending in order to reduce the risk exposure of any one lending institution.So a syndicated loan is a loan extended to a single customer by multiple financial institutions, which are formed into a group, or "syndicate", for that purpose. A lead bank is responsible for negotiating terms with the borrower. Then the lead bank organizes a group of banks to underwrite the loans.There is only one loan agreement and the same terms and conditions apply to all of the lenders in the syndication.
Generally this is a large amount of loan granted to a commercial borrower. Usually it is known as bridge financing in finance literature.
Normally:
- A lead FI agrees to extend credit to the business firm.
- The lead FI invites other FIs having similar line of business.
- After reaching into a contact, the lead financial institutions enter into the formal credit agreement with the client firm.