Holding more players than you can pick
Portuguese clubs recruit widely, often earlier than clubs in wealthier leagues, and the arithmetic quickly produces more promising players than a first team can use. Loans solve that: a player stays under contract, gains competitive minutes elsewhere, and returns either better or easier to sell. Done well, it is one of the more rational structures in European football.
It also spreads risk. A young signing who needs two seasons to be ready is a smaller problem if those seasons are spent playing somewhere rather than training with a reserve group.
What a serious loan looks like
The clubs that get value from this write the loan around football rather than around a fee. There is a conversation about the receiving coach's style and about who the player is expected to be selected ahead of, and someone at the parent club is named as responsible for watching him. Without that last part the whole arrangement becomes guesswork in June.
Level matters less than role. A player who starts every week in a smaller league usually returns further ahead than one who spent a season as a substitute at a bigger name, because responsibility is the thing that develops players.
The failure mode
The danger in a large loan network is that the club becomes a holder of assets rather than a developer of footballers. Once too many players are elsewhere, nobody inside the building has an informed view of most of them, and decisions get made on the basis of highlight clips and agents' phone calls.
The clubs that avoid this keep the network smaller than they could, and treat each loan as a coaching decision with an owner attached. It is unglamorous administration, and it is most of the difference between a pipeline and a warehouse.