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

(d) Statement-I is incorrect, but Statement-II is correct

Correct Answer: (c) Statement-I is correct, but Statement-II is incorrect

Explanation:

Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders. This is correct because syndicated loans involve multiple lenders pooling their resources to provide a large loan to a single borrower, thereby distributing the risk among the lenders .
Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line. This is incorrect because syndicated loans can indeed be structured as a credit line, such as a revolving credit facility, in addition to being a fixed amount or lump sum .

Dealing with all options:

Option (a): Both Statement-I and Statement-II are correct and Statement-II explains Statement-I. This is incorrect because Statement-II is not correct.
Option (b): Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I. This is incorrect because Statement-II is not correct.
Option (c): Statement-I is correct, but Statement-II is incorrect. This is correct because Statement-I accurately describes the risk distribution in syndicated lending, while Statement-II incorrectly states that syndicated loans cannot be credit lines.
Option (d): Statement-I is incorrect, but Statement-II is correct. This is incorrect because Statement-I is correct and Statement-II is incorrect.

Definition: A syndicated loan is a loan provided by a group of lenders (syndicate) to a single borrower, typically for large-scale projects or substantial financial needs .
Participants: The syndicate includes multiple lenders, with one acting as the lead arranger or agent, responsible for structuring the loan and managing the syndicate .
Types of Loans: Syndicated loans can be structured as term loans, revolving credit facilities, or a combination of both. Term loans are fixed amounts, while revolving credit facilities allow borrowers to draw, repay, and reborrow funds .
Risk Distribution: The primary purpose of syndicated lending is to distribute the risk of borrower default across multiple lenders, reducing the exposure for any single lender .
Advantages for Borrowers: Borrowers benefit from access to larger pools of capital, flexible repayment terms, and the expertise of multiple lenders .
Advantages for Lenders: Lenders benefit from risk diversification, participation in larger transactions, and potential for higher returns .
Administrative Role: The lead arranger or agent handles administrative tasks, such as disbursing funds, monitoring compliance, and coordinating communication among lenders .
Documentation: Syndicated loans involve complex documentation, including loan agreements, intercreditor agreements, and security documents, which require careful negotiation and legal oversight .