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?

Question

Question

This question was previously asked in

UPSC CSE Prelims 2024: General Studies Official Paper

Both Statement-I and Statement-II are correct and Statement-II explains 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

Answer 1

The correct answer is Option 3

Key Points

The purpose of syndication is to spread the risk of lending a large sum of money across multiple financial institutions.
- Syndicated lending refers to a loan that is provided by a group of lenders (called a syndicate) and is organized by one or more lead banks.
- This way, no single lender is exposed to the full risk if the borrower defaults because syndicated lending is specifically designed to distribute risk among multiple lenders. Hence,Statement-I is correct
The syndicated loan can be a fixed amount/lump sum of funds and a credit line.
- It is incorrect to say that it cannot be a credit line.
- A syndicated loan can indeed be a fixed amount or lump sum, which is commonly referred to as a "term loan" in a syndicated deal.
- In fact, syndicated loans can take various forms, including revolving credit facilities (which are essentially credit lines) where the borrower can draw down funds as needed up to a specified limit and repay them over time.
- A syndicated loan can indeed be a fixed amount or lump sum, which is commonly referred to as a "term loan" in a syndicated deal.Hence,Statement-II is incorrect.