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?
- ABoth Statement-I and Statement-II are correct and Statement-II explains Statement-I
- BBoth Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
- CStatement-I is correct, but Statement-II is incorrectCorrect
- DStatement-I is incorrect, but Statement-II is correct
Explanation
Statement-I is correct. Syndicated lending involves a group of lenders (a syndicate) providing a single loan to a borrower. This structure is typically used for large loans that a single bank might be unwilling or unable to provide on its own. By having multiple lenders, the risk of borrower default (i.e., the risk that the borrower fails to repay the loan) is distributed among them, reducing the exposure for any individual lender. This diversification of risk is a primary benefit of syndicated lending.
Statement-II is incorrect. A syndicated loan can indeed be structured as a fixed amount/lump sum (e.g., a term loan), but it can also be structured as a credit line (e.g., a revolving credit facility). A revolving credit facility allows the borrower to draw down, repay, and redraw funds up to a certain limit over a specified period, similar to a corporate credit card. Many large corporations use syndicated revolving credit facilities for their working capital needs. The statement incorrectly claims it cannot be a credit line.
Therefore, Statement-I is correct, but Statement-II is incorrect.
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