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Consortium Lending

Consortium Lending - A Collaborative Approach to Financing

This section explores the concept of consortium lending, outlining its evolution, benefits, and key guidelines established by the Reserve Bank of India (RBI)

Guidelines for Consortium Advances

Consortium form of lending means financing of a single borrower jointly by two or more banks with or without financial institutions.

The concept of consortium lending is a dynamic one and not arising from a mere exigency.

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It's a concept that promotes collective application of banking resources.

The consortium approach was perhaps initially resorted to owing to the wild swing in the position of the banks from one of excess liquidity to one of excruciating credit stringency.

But over a period of time, the consortium system of lending has brought about deliberate refinements in the banks approach to credit appraisal and lending, which has resulted in a better regulation of credit flow to the borrowing units.

Consortium approach should therefore be accepted as a culture and philosophy of banking by which banks are not merely enabled to pool their resources but also collectively apply their expertise in contribute to the growth of progressive banking.

Consortium arrangement

Presently, the following consortium arrangements are in vogue:

A) Involuntary Consortium

Consortia are formed at the instance of government/RBI. For financing large credit requirements such as Food Corporation of India, Jute Corporation, Cotton Corporation and such government corporations.

B) Voluntary Consortium

i. Public corporations (Centre/State)

Having regard to the size of these borrowers in the large quantum of their credit needs, it may be difficult for one bank to sanction their financial requirements singly. State Bank of India, which was meeting the credit requirements of these corporations exclusively for a long time, began to find it increasingly difficult to continue to fulfill their credit needs of these corporations. Singly on account of the increase in the number of such corporations and their growing credit needs, with the phenomenon of competing claimants on its resources.

Consequently, the formation of a consortium of banks for meeting the credit needs of these corporations became necessary. Financing of the units like BHEL. Electricity boards, etcetera are typical examples of this trip.

ii. Private Sector Borrowers:

Years back, banks considered it a privilege to finance exclusively large private sector multinational companies and prosperous and growing domestic giant companies in the private sector. Well, the entire credit needs of the respective borrowers were met by their banks. The banks were being pressurized to extend more and more concessions and interest and other service charges, which began to affect the profitability of the banks.

The banks often face the. Flight of their good borrower accounts from their books to the other banks which made competitive counter offers. Due to the scarcity of credit that emerged and the timely intervention of the RBI to restrain and healthy competition amongst banks, a favorable climate for the formation of the consortium method of finance emerged.

Guidelines of the Reserve Bank for formation of consortium

1. Wherever multiple banking arrangements exist, efforts should be made to form a consortium regardless of the size of credit limits made available to the borrowers.

2. Where the total borrowing credit limits to a single borrower exceeds rupees 5 crores. It is obligatory to form a consortium. Where the existing credit limits together with the proposed enhancement is likely to cross this limit, the concerned bank will consult. Consultation with the borrower should look for a partner or partners to form a consortium without delay.

3. Where the aggregate of the credit limits sanction to a single borrower by a bank exceeds 1.5% of its total deposits, it is obligatory on the part of the bank to form a consortium for such an advance. In other words, lending by a bank to a single borrower shall not exceed 1.5% of the deposits of the bank. And the excessive if any should be offered to another bank, thereby inviting it to join the consortium.

4. The bank lending, the largest share of the second largest lending bank in the consortium, normally plays the role of the leader of the consortium.

5. The participation is normally restricted to four or five banks so as to make it administratively convenient for the members to work as a team. In cases of very large borrowers, the number of participants may be more than this.

6. The working capital advances may be shared in any agreed proportion between the member banks. The absence of any such agreement is generally shared in the same ratio as the sharing of the term loan, if any. If there is no term loan, then there should be a specific arrangement for sharing the working capital limits.

7. Banks participating in term loan requirement of a unit have a right to seek participation in working capital finance.

8. Meager or token participation is generally discouraged. The share of each member bank should not normally be less than 10% of the aggregate working capital limits sanction to the borrower, except in the case of very large consortium.

9. Normally, the consortium banks expect their lending through operative cash credit limits instead of keeping mere debit raised dormant accounts, accepting an exceptional cases strictly subject to agreement and to facilitate borrowers convenience.

10. The amounts drawn by the borrower from each participating bank should normally be in proportion to the percentage share in the consortium, particularly when the full sanctioned limits are not drawn. For example, if the borrower is drawn only rupees 800 lakhs, out of rupees 1000 lakhs. The amount should be drawn out from each of the participating banks in proportion to their share of participation. The borrower is not expected to draw the amount required by them from a few banks and leave out the others.

11. Participating banks are expected to exchange or relevant information relating to the borrower with other banks such as the outstandings, other business routed Commission, exchange earned foreign exchange, business handled security and adverse feature if any noticed the format for such an exchange of information. Between the member banks is given in Annexure