UPSC Prelims 2024 Q52: Indian Economy – Banking & Financial Sector
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?
- (a) Both Statement - I and Statement - II are correct and Statement - II explains Statement - I
- (b) Both Statement - I and Statement - II are correct, but Statement - II does not explain Statement - I
- (c) Statement - I is correct, but Statement - II is incorrect
- (d) Statement - I is incorrect, but Statement - II is correct
Answer: (c) Statement - I is correct, but Statement - II is incorrect
Explanation
Syndicated lending
A syndicated loan is one loan given by a group of lenders (the syndicate) to a single borrower.
A lead bank (the arranger) puts the group together and manages the loan.
| Statement | Verdict | Reason |
|---|---|---|
| I. Syndicated lending spreads the risk of borrower default across multiple lenders | Correct | Each lender holds only a share of the loan, so no single bank bears the whole loss |
| II. The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line | Incorrect | It can be a term loan (fixed amount), a revolving credit line, or a mix of both |
Key features:
| Feature | Detail |
|---|---|
| Why it is used | The loan is too large or too risky for one lender |
| Typical borrowers | Large companies, infrastructure projects, governments |
| Lead bank | Arranges the syndicate, sets the terms and collects repayments |
| One agreement | All lenders sign the same loan contract |
Statement I is right and Statement II is wrong.
Answer: (c) Statement - I is correct, but Statement - II is incorrect.
Why each option is right or wrong
- (a) Incorrect. Statement II is false; a syndicated loan can be a credit line.
- (b) Incorrect. Statement II is not correct at all, so the question of explaining does not arise.
- (c) CORRECT. Risk is shared among lenders, and the loan can be a credit line.
- (d) Incorrect. Statement I is true; spreading default risk is the main purpose of a syndicate.
Key point
Syndicated loan: many lenders, one borrower, one agreement, led by an arranger bank; may be a term loan or a revolving credit line; spreads default risk.
Remember
Syndicated loan = many lenders share one big loan; term loan or credit line.
Common mistakes
- Accepting Statement II because it sounds technical; watch the word 'cannot'.
- Confusing syndicated lending with consortium lending or with loan securitisation.
- Thinking a syndicate removes risk; it only spreads the risk among lenders.
Exam tip
Extreme words such as 'cannot' and 'only' in finance statements are usually wrong. Loans come in many forms.
Sources
- Reserve Bank of India — Master Direction on External Commercial Borrowings (syndicated loans)
- Loan Market Association — Guide to Syndicated Loans