Restructuring Syndicated Lending – A DLT Use Case

The blockchain technology, which falls under the larger distributed ledger umbrella, has been a popular topic over the past decade. It is now more mainstream than the niche crypto fanatics, and has become a major conversation item for experts and investors in the financial services and banking space.

Whether it’s Payments, P&C, (Property & Casualty) claims to process Insurance, Trade Finance, Capital Markets Settlement, or Post-trade settlement in Capital Markets, there are a multitude of disruptive use cases being piloted by large banks and financial institutions around the globe.

According to a Grand View Research, Inc. report, the global blockchain technology market is expected to grow at an 85.9% CAGR from 2022 to 2030.

According to allied market research, BFSI’s share of the pie was $277.1 million in 2018, and it is expected to grow at a CAGR 73.8% between 2019-2026.

This shows the potential global monetary impact Blockchain technology could have.

Challenges

Global syndicated loans are dependent on archaic back office operations, administration & paper, tax rules and regulations across border, transparency, trust issues, integration challenges between members of the syndicate, and transparency.

This results in a longer settlement time, higher overheads between different parties (banks, borrowers agencies, regulatory bodies) and high costs in terms of fees, intermediaries and documentation.

The nature of the business is a major factor in the challenges.

Syndicated lending can be a complicated structure that involves hundreds of lenders and borrowers in one project.

Secondary loan markets are even more complex because lenders can buy and sell loans using traditional fax machines that have multiple agents for multiple loans.

Due to operational inefficiencies, reconciling the positions of borrowers, lenders, or loan agents can be a nightmare.

Inconsistencies between the records of the agent and his lenders can cause position breaks.

All in all, banks lose larger and more lucrative syndicated deals because of the manual effort required and the time taken to execute these more complicated deals.

Potential for syndicated lending

Although the syndicated lending sector has not been able to take part in the technological revolution that is advancing other areas, attitudes within the sector are quickly catching up to current trends.

A Loan Market Association (LMA), study has shown that more than sixty percent of members see fintech as a way to transform key areas of syndicated lending, such as document management.

The Global syndicated lending business includes 40,000+ Borrowers in over 200+ countries and 100 currencies.

Global syndicated lending reached a staggering US$2.5 trillion in the first half 2021. This represents a 22% increase over the first half 2020.

Globally, the market is dominated by bigger players. With 50% of global syndicated lending volume managed by the top 10 banks (JP Morgan, Bank of America Merrill Lynch and Citi), Deutsche Bank and Barclays, the majority of the players originate from the US,

Blockchain addresses

Pain PointsBlockchain Benefits
Tampering with data from the syndication lifecycleThe ledger’s immutable nature
Rating Syndicate member banks are not trustedSmart contracts are used to create an automated common framework
Slower decision makingSmart contracts can be used to automate the Underwriting and Due Diligence process
Intermediaries slowing administrative & documentation workSmart contracts are used to automate document and administrative tasks, eliminating the need for intermediaries throughout the deal lifecycle.
Transparency in loan paymentsSmart Contracts allow auto-disbursal principal and interest payments across all Syndicate member banks
Long drawn manual compliance verificationAutomated Compliance Checks for AML (anti money laundering), Fraud and PEP/Sanctions
Insufficient data transparency in the syndicateBefore adding to the ledger, the participants in the syndicate validate and verify the data in real-time.
Disagreement among Syndicate stakeholdersSyndicate stakeholders reach agreement to transact together using consensus protocol
Limited data transparency between membersDue to the decentralized nature and sharing of information in the database, such as financial information of Borrower, KYC requirements and project details, members of the syndicate can share deal-related information.

Blockchain technology and its broader DLT umbrella are not panaceas. Instead, they should be seen as part of a larger toolbox (Biometrics Machine Learning / Predictive Analytics Cognitive computing Quantum Computing Distributed Leger Technology Cloud computing Robotics) that will assist in shaping the future financial services infrastructure.

Snapsmileshare Solution

Snapsmileshare helps you determine the depth of your Blockchain applications to ensure the highest ROI.

We have deep expertise in digital testing and assurance . We use the most up-to-date, competitive technologies to assist you with efficiency and cost-effectiveness.

Accelerate adoption: We examine how your blockchain application interacts externally with users, network, transactions and other factors. This allows us to leverage the technology platform and build a realistic application for users.

Process-Driven Design: We have established a Shift Left approach to early test automation, security testing and performance testing. A SMAC stack includes digital assurance services that offer enhanced CX and Risk-based testing with design failure modes, effects and criticality analysis (FMECA) and a SMAC stack with digital service virtualization.

We are tool-agnostic: Our IP leadership, robust operating models & automation frameworks assist clients in achieving their business goals by leveraging new technology.

Need assistance? Need help? Talk to our Blockchain Testing specialists for more information about restructuring syndicated lending, and how Snapsmileshare may be able to assist with making the blockchain compliant.

Leave a Reply

Your email address will not be published. Required fields are marked *