Modernizing corporate-loan operations

| Article

In 2022, the syndicated-loan market constituted approximately 10 percent1 of worldwide corporate-banking revenue. However, the importance and the risks of this market to banks might not be apparent from the strategies they employ to enhance their loan operations. Long-standing challenges persist in the realms of processes, data management, implementation of technology platforms, and operating models. And attention-grabbing regulatory fines have shed light on the considerable impact of operational deficiencies within the corporate-loan sector. Neglecting investments in loan operations can also result in subtler yet equally costly declines in customer satisfaction and operational efficiency, diminishing the potential profitability of this crucial business segment.

Although banks are making substantial investments in their overall operations, our recent conversations with senior loan operations heads at leading banks make it clear that fundamental issues in loan operations receive only surface-level attention. As deal volumes scale up, banks prioritize customer acquisition. But enhancing customer experience, managing operational risk, and optimizing end-to-end process efficiency do not appear to be on the leadership agenda at most banks. This trade-off elevates the risks, especially with regard to loan backlogs of unreconciled transactions, potentially putting banks in a precarious position.

Market dynamics

Syndicated loans play a pivotal role in the global economy as a vital financing mechanism, enabling substantial borrowing for corporations, governments, and other entities while presenting an appealing investment for lenders. These loans constitute a distinctive, relatively undigitized financial product. There is no exchange or other platform connecting banks, so the efficacy of syndicated loans relies on the intricate web of interbank relationships. With some syndicated deals having from 100 to 300 lenders, operational processing becomes even more complex.

In recent years, there have been incremental efforts to tackle these issues, alongside attempts to take a more strategic leap forward by adopting ledger technologies. But the absence of consensus has hindered any real advancement.

Historically, the syndicated-loan market has demonstrated relative stability and resilience, although it is not immune to fluctuations. While the market has shown a slight overall increase in volume over the long term, it experienced a substantial decline in 2020, primarily due to the COVID-19 pandemic. But even as the global economy continues to experience volatility, syndicated-loan activity has rebounded to prepandemic levels with clear growth prospects. On a global scale, corporate and commercial syndicated-loan-issuance volumes have grown at a CAGR of 4 percent since the pandemic-induced slowdown. The United States now accounts for approximately 53 percent of global deal volume, which reached $5.1 trillion as of 2022 (Exhibit 1).

US syndicated-loan-issuance volumes have grown 4 percent annually since 2015.

The growth in leveraged loans has several factors: continuing strong demand from high-yield investors, rating downgrades stemming from the recent economic downturn, and the resulting increase in sub-investment-grade issuances. Meanwhile, as of the third quarter of 2022, the amount of outstanding loans continues to rise because of short-term maturity fixes. Many facilities have undergone short-term extensions, with issuers betting on improving conditions. An increase in the use of revolvers (as much as 50 percent, up from 20 to 25 percent in 2020) and in transaction and cash events for facilities (propelled in part by an increasing number of lenders per deal) has added to the overall boost in loan processing activity. We expect further impetus from Europe’s carbon credit trading and financing market and sustainable finance, as well as from the continuing effects of US dollar LIBOR2 cessation.

Over the last decade, the number of lenders in the syndicated-loan market overall has slightly climbed, growing 1.3 percent per year between 2015 and 2022. That increase can be attributed to the search for yield, portfolio diversification, and rising borrower demand. This has increased the pressure on commercial-loan divisions. Many banks have not allocated enough resources toward the technology, infrastructure, and staff training critical to the efficiency of back-office loan operations. This creates substantial manual workloads for the back office, often accompanied by cumbersome “swivel chair” activities, resulting in operational inefficiencies, elevated costs, and an increase in operational risks. Furthermore, occasional costly errors can occur because of these limitations.

A lack of cohesive investment comes home to roost

McKinsey discussions with senior loan officers in spring 2023, combined with insights from our work with leading banks, surfaced four persistent friction points for both banks and clients across process and data, technology platforms, operating model and talent, and the risk and regulatory environment (Exhibit 2).

Process and data, technology, operating model/talent, and risk and regulatory capabilities challenge commercial syndicated loan servicing operations.

Process and data

Syndicated-loan agreements can vary widely in structure and documentation. The lack of industry-standard data formats and terms makes it difficult to perform data analysis and automate processes. Inefficient processes and data constraints in commercial syndicated-loan operations manifest in various ways. Several banks, for instance, are contending with substantial servicing backlogs as a result of industry-wide growth in volume—especially spikes in servicing volume at the end of each month and each quarter.

To address this challenge, leading loan operations establish governance and operational structures specifically for volume peaks, which incorporate a central governance mechanism, servicing SWAT teams, and dedicated surge capacity.

Data collection and quality issues throughout the loan servicing process result in the absence of a definitive source of truth. The mounting volumes of unstructured data—originating from nonstandardized notices, diverse systems, and multiple data entry points—are complicating automation efforts and servicing workflows. Additionally, the process of aggregating data from both internal sources (such as the front and middle offices) and external sources (such as syndicate members and customers) necessitates labor-intensive manual verification to ensure seamless data handovers across the credit and lending organizations.

Some banks have proactively invested in enhancing their API capabilities to facilitate easier interaction with data exchanges, including third-party systems for real-time data transmission such as ClearPar and Versana. But the increasing complexity of data and legacy architectures prevents many banks from fully embracing modern data architectures. Furthermore, APIs are not a universal solution, as they may not comply with all transaction types (for example, payments through the Clearing House Interbank Payments System). Some banks are focusing on strengthening their data infrastructure and upgrading their data capabilities to address their evolving needs.

Both banks and nonbanks are cautious about sharing loan deal information openly, primarily due to security concerns. Consequently, they restrict their operations to closed, internal networks. However, the establishment of a neutral, decentralized data-powered exchange platform for loan syndication could create a dependable and efficient process, ensuring accurate and real-time data exchanges. While the initial cost of developing such a shared data utility might dissuade banks from collaborative investment, industry leaders have emphasized the importance of making a substantial effort to integrate data within upstream front- and middle-office systems within each organization.

In the absence of an exchange, leading loan operations establish a “single source of truth” through a common data ontology and introduce upstream data enrichment and automated data routines.

Banks’ extensive reliance on manual processes and workflows, with extensive manual data inputs and verifications involving multiple handoff points, leads to suboptimal servicing efficiency. Coordinating with syndicate members and customers to address missing notices, extract data, and populate core banking systems entails significant and time-consuming work, for example. Efforts to expand the use of optical-character-recognition (OCR) technologies face challenges because of the nonstandardized notice templates. This inefficiency is pronounced in situations where the bank operates as both the agent and the member, as workflows are rarely optimized to accommodate this dual role.

Successful loan operations invest in straight-through processing (STP), use automation and analytics to address reconciliation issues, and use advanced algorithms to identify potential matches.

The lack of operational process reporting to monitor essential metrics—such as STP rates, instances of breaks, and delayed reconciliations, as well as individual productivity—also prevents banks from effectively diagnosing and solving process issues and allocating workloads. However, leaders can establish standardized management reporting, including metrics to measure the effectiveness and efficiency of the end-to-end loan process in near real time, and establish rigorous governance, including regular review cadences and dedicated joint discussions with varying levels of management.

Overall, the syndicated-loan-operations process is in dire need of streamlining and harmonized automation throughout the loan life cycle, from the management of incoming demand and the execution of processing activities to reconciliation and reporting. To truly modernize syndicated-lending operations, banks must adopt a comprehensive approach that enhances both processes and data capabilities. Key aspirations should include standardized workflows, robust centralized data capabilities, seamless integration across systems, and intelligent automation to eliminate manual interventions.


In the past decade, most banks made limited investments in automation and their loan tech platforms. Persistent errors in loan disbursements and staggering regulatory fines then forced some banks to launch multiyear tech platform upgrades or full replacements.

However, even in these cases, banks have looked to vendor tech platforms as a panacea. They have therefore missed an opportunity to apply an end-to-end approach to using technology and automation to transform processes, improve operational controls, and change the way loan operations professionals work. The lack of a holistic strategy results in an STP rate gap across banks and the continued reliance on manual processes and controls. A select few best-in-class institutions achieve remarkable STP rates of 80 to 90 percent in reconciliations, thanks to the deployment of low-code or no-code workflow tools and machine learning technologies that are overlaid on their core loan processing platforms and expediting manual transaction matching. But most banks’ STP rates often fall below 50 percent because they rely on dedicated teams for manual data enrichment and discrepancy reconciliation.

From an efficiency standpoint, the automation of data intake and the rapid identification of deal exceptions through model agreements reduce friction. The implementation of workflow tools for tasks such as notice reception, data extraction, and direct population into processing systems contributes to higher STP rates. Additionally, the exchange of data between the credit application and booking system plays a pivotal role in minimizing errors arising from duplicated data entry steps. Using incoming wire metadata for reconciliation purposes enhances auto-match rates, while automated tools prove valuable in downstream reconciliation, incorporating workflow management, bots, and queue allocation in the servicing process. Moreover, the generation of downstream reports and invoices can be automated within the borrower portal. Finally, the use of a system-based workflow to track cases throughout the loan servicing process and enable systematic control tracking is indispensable for streamlined operations.

In general, the technology landscape remains highly fragmented across the industry, encompassing a mix of vendor packages and proprietary systems, often coupled with legacy core banking and data systems. Most banks rely on standard industry platforms, which in recent years have mostly transitioned to cloud infrastructure for enhanced scalability. Conversely, a select few use homegrown solutions or employ customized modules and workflows tailored to their specific institutional context, but they continue to grapple with heavy manual interventions.

Leaders tend to prefer standardized vendor solutions over hybrid and proprietary ones for loan booking but typically layer workflow solutions and OCR technologies onto the vendor solution to increase the STP rate across the entire transaction life cycle. In this context, the introduction of an online portal that enables clients to upload documents, monitor the underwriting process, track collateral exceptions, and eventually manage their loan servicing could confer a competitive edge to a bank.

The origination and servicing of syndicated loans requires extensive communication and collaboration among all stakeholders, yet the tools in use are of limited effectiveness. Surprisingly, email communication remains prevalent in the world of syndicated loans, and spreadsheets are widely employed for financial modeling and data analysis. Furthermore, customer relationship management systems support the management of corporate-client relationships. Although there are a few vendor platforms and software solutions offering communication and collaboration tailored to the loan market, none have become standard among syndicate members.

Overall, the lack of coherent technology stacks supporting the end-to-end loan operation process has created a pressing need for comprehensive modernization and automation in alignment with improved data capabilities.

Operating model and talent

The operating model and talent strategy are vital for addressing the considerable challenges within process, data, and technology, as well as for sustaining a transformed end-to-end loan servicing life cycle.

Attracting and retaining talent is the preeminent challenge. During and after the pandemic, our industry pulse check revealed that several banks faced attrition rates ranging from 20 to 70 percent among onshore, US-centric loan operations talent, leading to a substantial loss of institutional knowledge.

Loan operations demand a profound understanding of financial markets, products, regulations, and often institution-specific knowledge. Ideally, these knowledgeable professionals would be engaged in quality assurance tasks rather than mundane reconciliation activities. However, in banks with limited automation and lower STP rates, the operations workforce is heavily burdened with a substantial volume of manual tasks. Also, low productivity among new hires decreases overall team efficiency as it places demand on current full-time-equivalent workers for training.

This misalignment between expertise and task assignments, coupled with what loan operations professionals describe as a lack of recognition and enticing career paths, has resulted in significant attrition.

Leaders can develop attractive career pathways for newly hired as well as homegrown talent to keep attrition in check. Some banks are also using intern rotation and employee referral programs to build up a talent pipeline. Additional support is often deployed for onboarding, training, and performance management.

In loan operations, the time to productivity for new hires can be one to two years. Only a few banks are tackling this with dedicated training programs that include self-study guided-case programs and practitioner-led teaching sessions, shadowing, and reverse shadowing. These efforts are supported with further peer training for back-office administrators ramping up on cases, starting with smaller caseloads and advancing to full loan administration capacity as they learn the nuances of servicing different loans. Individual performance metrics help organizations understand where their talent needs training or additional support.

Our industry pulse also looked at sourcing and location strategy and revealed that the cyclical focus on cost cutting had led a growing number of banks to pursue onshore, nearshore, and far-shore operating model mixes, which often split the end-to-end process between different locations and thus increased the complexity of reconciliation (Exhibit 3).

Most banks operate with at least two, if not three or more, back-office locations for their loan operations in North America.

Full-time-equivalent workers in loan servicing are based out of consolidated hubs, typically in lower-cost US locations, enabling processing within the same time zone. Large global banks often supplement their onshore hubs with captive or third-party-capacity resources in offshore locations to optimize costs, diversify talent, and reduce attrition risk (Exhibit 4). Again, multiple time zones and poor connectivity between teams increase operating complexity.

Many banks have instead relied on increased use of outsourcing to increase capacity while lowering costs.

To address the heightened complexity introduced by sourcing and location strategies, top-performing banks create cross-functional teams. These teams are commonly structured into hubs, with the onshore hub primarily staffed with agency personnel and based in cost-efficient US locations. They focus on complex deals (for example, bilateral loans) or on clients with reputational importance (as in funds finance and leveraged financing). The offshore hub tends to operate with a generalist model. This arrangement allows it to provide real-time processing support.

Firms that use offshoring to a significant degree should maintain strong connectivity with senior managers in offshore locations through daily manager huddles. Other key success factors include the implementation of productivity dashboards featuring vendor service-level agreements and the establishment of robust operating cadences across organizational levels. These cadences serve as a driving force behind informed decision-making processes.

The third challenge within the operating model setup revolves around suboptimal coordination among the front office, middle office, and loan servicing operations (often referred to as the back office) concerning deal guardrails, operational controls, and exception handling. In the context of syndicated loans, it is crucial for lenders and credit experts to structure each deal in accordance with their banks’ existing automation capabilities. Agreement on model terms and conditions ensures that deals remain within predefined guardrails during negotiations and helps identify nonstandard deals early in the process and ensure the appropriate operational controls are in place, particularly when exception-based manual processing is required. Key considerations when designing guardrails include pricing, billing, rate-setting schedules, and same-day borrowing notices, especially in the case of foreign exchange transactions. Ideally, loan transactions can be supported by the system of record or automated using additional workflow tools. When this is not feasible, collaboration between operations and lending teams can identify expected pain points and facilitate the development of procedures for approving loan deals with exceptional circumstances.

Risk and regulatory environment

Regulatory compliance in syndicated-loan operations can be complex due to the evolving nature of financial regulations and the intricacies of the syndicated-loan market. Banks experience heightened regulatory expectations about anti-money-laundering and know-your-customer requirements, data privacy and protection, operational risk management, and cross-border regulations among others.

Meeting anti-money-laundering and know-your-customer requirements is pivotal and involves rigorous borrower and syndicate member verification and transaction monitoring. Europe’s General Data Protection Regulation and other global data privacy laws set high data protection standards, calling for careful handling of sensitive customer information. Syndicated loans also face diverse regulatory-reporting mandates, including the Dodd-Frank Act in the United States and the European Market Infrastructure Regulation, which mandate accurate and timely submissions. International regulatory standards, such as Basel III, oblige banks to meet capital adequacy and risk measurement criteria. Furthermore, syndicated loans often cross multiple jurisdictions, necessitating compliance management across diverse regulatory landscapes. These loans entail intricate legal agreements, making adherence to contract terms, covenants, and requirements challenging—with deviations carrying legal and regulatory consequences. When using third-party vendors for syndicated-loan operations, it’s essential to ensure their adherence to pertinent regulations and data security standards.

The cessation of LIBOR in mid-2023 and the transition to the Secured Overnight Financing Rate is the regulatory challenge that will put the most operational pressure on loan operations divisions in the coming years. Banks must be ready for the transition to this benchmark and alternative reference rates, and for the resulting revisions to existing loan agreements and contracts and updates across operational systems and processes. This complex task requires massive coordination across business units and loan operations divisions, as well as a concerted change management effort to minimize disruption and maintain a seamless experience for customers.

In addition, consent orders and regulatory enforcement actions are placing demands on corporate-loan operations to establish effective governance structures (such as compliance committees), implement comprehensive corrective-action plans, and perform assessments of staffing, resources, and internal operational controls. Requirements regarding data, compliance risk management, and enterprise risk programs aim to improve the control environment, but they strain operations groups. Testing of operational controls has also been an area of heightened focus, creating further challenges as banks are expected to perform frequent, manual testing. This often causes questionable results on control effectiveness. In addition to regulatory requirements, management and boards mandate root-cause analyses. These produce operational load and further strain loan operations departments.

Leading banks build and operate within a comprehensive risk management framework supported by mature processes, systems, and controls that easily identify and mitigate risks and help establish a culture of effective, risk-adjusted decision making. Building such a risk and control environment for loan operations requires a detailed, activity-level understanding of prioritized servicing risks and thoughtfully designed controls, as well as a view of how critical business decisions change the risk profile. Once that visibility is created, structures, systems, controls, and infrastructure are needed to manage risk and comply with regulatory requirements.

The journey to modern loan operations

Rising operational volumes, the demand for efficiency, and a heightened regulatory landscape signal a turning point for modern corporate-loan operations. Banks that stick to fragmented and incremental approaches will find limited opportunity for market expansion and talent attraction. In our view, the more effective route is strategic and comprehensive investment in modernizing loan operations.

This approach revolves around four goals: expanding market share, enhancing servicing efficiency, elevating employee experience, and fortifying the risk and control framework. In our experience, a transformation of this kind can boost loan operations productivity by 20 to 50 percent (depending on the baseline), substantially improve employee experience, and bolster risk and compliance effectiveness.

The first step is a rapid diagnostic to assess the current position and maturity across all the dimensions discussed above, ideally using industry benchmarks, and spotlight areas for improvement. The bank can then develop a staged road map for transformation with a dedicated owner for each stream and start realizing benefits and efficiencies within as soon as six months. Breaking the transformation process down into manageable stages with a strong governing mechanism facilitates the rapid delivery of initiatives and ensures accountability.

Modernizing corporate-loan operations may not be the flashiest of transformation projects, but a successful overhaul can support business growth, help banks stay in line with regulatory requirements, and distinguish them from the competition through an improved experience for borrowers and employees.

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