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Consortium vs Multiple Banking

 

"Multiple Banking: Multiple Banking is a banking arrangement where a borrowal avails of finance independently from more than one bank. Thus, there is no contractual relationship between various bankers of such borrower. Also in such arrangement each banker is free to do his own credit assessment and old security independent of other bankers."


"In multiple banking arrangement, a borrower gets freedom to deal with each bank separately and thus can negotiate borrowal terms one to one with each bank. As rider, such borrower also has to spend more time and effort in dealing with multiple banks. "


"Consortium Banking: As per the consortium lending approach, the group of banks would have a common agreement wherein a lead bank would assess the borrower's fund requirements, set common terms and conditions and disseminate information about borrower's performance to other lenders. Thus, the move is expected to keep a check on the high value frauds in the system as well, which ride high in case of multiple lending arrangement.

It is not uncommon to find a Borrower availing Term Loan as well as Working Capital limits from a number of Financial Institutions and Commercial Banks. A Term Loan to a Borrower may be sanctioned jointly by All India Financial Institutions and Banks. Similarly, Working Capital limits may also be availed by the Borrower from a number of Banks partly because of the large size of borrowing and partly to have a degree of flexibility in his operations with different Banks.

The Borrower may have a multiple Banking relationship where he has independent arrangement with each Bank, security offered to each Bank is separate and no formal understanding exists between different Banks financing the same Borrower. Under this arrangement Banks may not be exchanging information on the Borrower and limits might have been sanctioned on different terms and conditions. This arrangement may be preferred by the Borrower as it affords him a great flexibility in operating his accounts with different Banks but goes contrary to the expectations of Reserve Bank which desires that a wholesome view of entire operations of a customer must be taken by the Banks and the assessment of credit needs be also done in totality.

The other arrangement for sanctioning of credit limit to such a Borrower may be to form a Consortium of Banks to take care of the entire needs, of the Borrower. No definite guidelines on formation of consortium of Banks, however, existed in past and it was generally left to the Borrower to decide this issue.

The first attempt in this regard was made by Reserve Bank of India while it constituted a study group in December, 1973, headed by Shri G. Lakshmmaryanan, which submitted its report in July, 1974. The report was accepted by Reserve Bank.

RBI Guidelines on Consortium Advances

The concept of Consortium Advance has since gone many changes and most of the large Borrowers are now being financed by Banks in consortium. Reserve Bank of India had also issued revised comprehensive guidelines in June 1987 on this subject.

Reserve Bank of India further constituted a Committee in January, 1993. under the Chairmanship of Shri J.V. Setty, Chairman and Managing Director, Canara Bank, to review the extant guidelines on lending under Consortium arrangement and suggest measures for improving the efficiency of banking system in delivery of credit. Based upon the report submitted by the above Committee, Reserve Bank announced important changes in die existing guidelines. Guidelines m applicable to Consortium advance are as under.1

• The overall exposure to a single borrower should not exceed 25%2 of the net worth of the banking institution. For this purpose non fund based facilities shall be counted @ 50%3 of limits sanctioned and added to total fund based facilities to arrive at total exposure to the borrower.

• Exposure limit to group has also now been stipulated. The overall exposure to a group should not exceed 50%2per cent (60%2 in case of infrastructure projects consisting of power, telecommunication, roads and ports) of the net worth of the banking institution.

(a) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of Rs. 50.00 crores or more must necessarily be brought under Consortium arrangements. The bank who is having the largest share in the credit facilities would automatically become the leader of Consortium and would ensure that Consortium arrangements are finalised immediately.

(b) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of less than Rs.50 crores should also be brought under formal Consortium arrangements at the time of further enhancements which would take the aggregate limits to Rs.50 crores or more. The enhancements in such cases would be considered jointly by the financing banks concerned and the bank which takes up the largest share of fund based limits shall be the leader of the Consortium.

(c) These provisions would also be applicable to new units which approach more than one bank for sanctioning of working capital limits of Rs.50 crores or more.

The net effect of these provision amounts to that no borrower will be allowed to have multiple banking arrangement if the total fund based credit limit sanctioned to him amounts to Rs.50 crores or more. A formal Consortium will have to he constituted in such cases and the bank having largest share in fund based credit limits will automatically assume the status of the leader of the Consortium.

Reserve Bank has since withdrawn its instructions for obligatory formation of Consortium. It will thus not be obligatory on the part of banks to form a Consortium even if the credit limit per borrower exceeds Rs.50 crore. The need based Finance required by the borrowers may, therefore, be extended by the banks either entirely on their own, subject to observance of exposure limits, or in association with other banks. As an alternative to sole/multiple banking/ Consortium arrangement, banks may adopt loan syndication route, irrespective of the quantum of credit involved.

• There is no ceiling on number of banks in a Consortium, whether it is obligatory (fund based credit limits of Rs.50 crates and above from more than one bank) or voluntary (fund based credit limits below Rs.50 crores from more than one bank) in nature. However, the share of a bank as member of Consortium should he a minimum of 5 per cent of the fund based credit limits or Rs.1 crore whichever is more. This provision would itself restrict the number of banks in a Consortium. To illustrate this point let us consider these two examples:

(a) In a Consortium for total fund based credit limits of Rs.3 crores, the minimum share should be Rs1.00 crore.

(b) In a Consortium for total fund based credit limits of Rs.50 crates, the minimum share should be Rs.2,50 crores.

• The banks who have sanctioned term loans to a unit or who have also participated in term loans sanctioned in Consortium with term lending financial institution should also provide working capital facilities to such a unit. ‘These banks may, however, associate other banks, if so warranted, to provide working capital Finance.

• The borrower who is being financed under a formal Consortium arrangement should not avail any additional credit facility by way of bills limits/ guarantees/acceptances, letters of credit etc. from any other bank outside the Consortium. It has been stipulated by Reserve Bank of India that any bank outside the Consortium should not extend any such facility or may not even open a current account without the knowledge and concurrence of the Consortium members.

This stipulation is applicable to even those borrowers who are enjoying total fund based credit limits of above Rs.50 crores from a single bank or under syndication without a Consortium arrangement.

• In case of borrowers enjoying aggregate fund based credit limits of Rs.1 crore and above but below Rs.50 crore from more than one bank, and where there is no formal Consortium arrangement, banks should obtain full details of the credit facilities (including ad hoe facilities) availed of by such borrowers from the banking system, each time any fresh facility/enhancement is sought. Also the banks should ensure timely exchange of information and co ordinated approach in the interest of overall health of advance made to such borrowers. Further, in the case of borrowal accounts enjoying fund based credit limits below Rs.50 crore from more than one bank, the concerned banks will be free to enter into a Consortium arrangement at their option.

• Banks/consortia treat borrowers having multi division/ multi product companies as one single unit, unless there is more than one published balance sheet. Similarly, in the case of merger, the merged unit will be treated as a single unit. In case of split, the separated units will be treated as separate borrowal accounts provided there is more than one published balance sheet.

• In case of borrowers enjoying fund based credit limits of Rs.50 crore and above, the concerned single bank and/or the leader of the existing Consortium, will be free to organise a ‘syndication’ of the credit limits.

• In cases, where banks/consortia/syndicates am unable to adhere to the recommended maximum time frames for disposal of loan applications/ proposals, borrowers will be free to bring in a new bank or new banks to form/ to join a Consortium /syndicate. Within seven days of sanction of any credit facility, such new banks should inform the existing Consortium /syndicate/ regular banks/(s) and. should not disburse the limit without obtaining ‘no objection’. In case such ‘no objection’ certificate is not received within next ten days, it would be doomed that existing consortia/syndicates/regular bank/(s) have no objection to the new bank/(s) joining/forming consortia/syndicates.

• In the cases of existing consortia, if a member bank is unable to take up its enhanced share, such enhanced share in full or in part could be reallocated among the other existing willing members. In case other existing member banks are also unable to take up such enhanced share of an existing & member bank, a new bank willing to take up the enhanced share may be inducted into the Consortium in consultation with the borrowers.

• While a member bank may be permitted not to take to up its enhanced/incremental shares it cannot be permitted to leave a Consortium before expiry of at least two years from the date of its joining the Consortium. An existing member bank way be permitted to withdraw from the Consortium after two years provided other existing member banks and/or a new bank is willing to take its sham by joining the Consortium.

• In cases whore the other existing member banks or a new bank an unwilling to take over the entire outstanding of an existing member desirous of moving out of the Consortium after the expiry of above mentioned period of two years, such bank may be permitted to leave the Consortium by selling its debt at a discount and/or furnishing an unconditional undertaking that the repayment of its dues would be deferred till the dues of other members are repaid in full.

Note : It would be open to a borrower to choose his bank/(s) for obtaining credit facilities as also for the bank/(s) to take a credit decision on the borrower. However, once a Consortium(obligatory or voluntary) is formed, on” of a new member into a Consortium should be in consultation with the Consortium.

• Quite often non availability of data or submission of incorrect data or non receipt of required financial statements results in banks/consortia being not able to take decisions within a stipulated period of time. These data/

• statements include, among other, audited financial results for the last two years, estimated and projected results for’ the current and subsequent years respectively. More often than not borrowers require an average time of at least six months to obtain audited financial statements. Considering all these aspects as also available technology, the following maximum time frames are prescribed for formal disposal of loan proposals provided applications/proposals are received together

• with required details/information supported by requisite financial and operating statements :

Proposals for sanction of fresh/enhanced credit limits60 days (45 days)Proposals for renewal of existing credit limits45 days (30 days)Proposals for sanction of ad hoc credit facilities 30 days(15days

Note: Figures in brackets are the maximum time frames for sanction of export credit limits.

• Further, individual banks/consortia/syndicates should review the borrowal accounts during the first quarter of the current year on the basis of audited statements for the year before lust, provisional statements (where audited statements are not available) for the last accounting year, provisional estimates for the current accounting yew and forecast for the next year. Consequently, individual banks/consordia/syndicates, at their discretion, may release 50 per cent of the additional credit requirement during or before the second quarter of the current accounting year. The remaining 50 per cent could be released consequent to submission of audited results provided there is no significant difference between the provisional estimates and the audited results.

• No bank will be allowed to move out of the Consortium in case of sick/weak units since in such cases all the banks are required to associate themselves with rehabilitation efforts.

• The appraisal of credit proposals will be done by the lead bank.

The customer has to submit all the necessary papers and data regarding appraisal of his limits to the lead bank who will in turn arrange for preparation of necessary appraisal note and its circulation to other member banks. Lead bank must complete the entire work relating to appraisal within the maximum time frame. Reporting to and attending to any correspondence with Reserve Bank of India shall also be the responsibility of lead bank.

• There may sometimes be disagreement between the member banks on the quantum of permissible bank Finance, terms and conditions or any other matter. In such cases, decision of the Consortium will be binding on the lead bank as also other members. Lead bank will however, enjoy the freedom to sanction an additional credit upto a pre determined percentage in emergent situations. The lead bank should however, inform other members immediately together with their pro rata share.

• There also exists a provision for forming steering committee consisting of leader bank and the bank with next highest share in the Consortium. Normally steering committee banks must have more than 5 1 % share. Wherever Consortium fails to reach the consensus, other member banks shall follow the decision of the steering committee.

• Earlier, the terms and conditions including rate of interest, margin etc. finalised at the Consortium meeting were uniformly applicable to all banks. Reserve Bank has however, relaxed the guidelines in this regard with freedom granted to banks to determine their own lending rates for advances above Rs.2 lacs. The banks in a Consortium will now be free to offer different rates of interest and other charges on their shares.

• The ancillary and non fund based business should also be passed on by the borrower to all the member banks in almost the same proportion in which funds based limits are shared.

• The inspection/verification of securities may be done by the lead bank or members in rotation as per arrangement which may be finalised in the Consortium.

• The quarterly operating statements as required under Chore Corn mince for fixation of quarterly operative limits will also be required to be sent to the lead bank who shall in association with the bank having the next largest share in the credit facilities should meet at quarterly intervals and fix the operative limits and also individual bank’s share thereof for the next quarter.

• The information regarding quarterly operating limits fixed in such a manner would be communicated by the lead bank to other member banks.

• In a Consortium, lead bank or the lead bank and the bank with the next highest share will be the final authorities in case of differences of opinion and their views will prevail in all cases of disputes among the member relating to terms and conditions.

From the above discussion it will be appreciated that the borrower under the Consortium arrangements is required to deal with the lead bank and bank having second largest share in total credit limits for an practical purposes. The borrowers were, however, put to inconvenience for execution of varied types of documents etc. with various banks in the Consortium. On the recommendations of ‘Mahadevan Committee’ who submitted its report in April, 1988, Reserve Bank revised guidelines in relation to Consortium advances and the ultimate ideal set for the banking industry is to achieve ‘Single Window Concept For Lending (SWCL), to minimise delay and inconvenience to the borrowers. Single Window Concept has now been brought into operation in respect of two important areas of lending in Consortium as under:

RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE

In the past, working capital financing was constrained with detailed regulations on how much credit the banks could give to their customers. The recent changes made by RBI in the guidelines for bank credit for working capital Finance are discussed below:

1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished by RBI and a new system was proposed by the Indian Banking Association (IBA). This has given banks greater freedom and responsibility for assessing credit needs and credit worthiness. The salient features of new system are:

- For borrowers with requirements of upto Rs. 25 lakhs, credit limits will be computed after detailed discussions with borrower, without going into detailed
evaluation.

- For borrowers with requirements above Rs. 25 lakhs, but upto Rs. 5 crores, credit limit can be offered upto 20% of the projected gross sales of the borrower.

- For large borrowers not selling in the above categories, the cash budget system may be used to identify the working capital needs.

However, RBI permits banks to follow Tandon/Chore Committee Guidelines and retain MPBF concept with necessary modifications.

2. Earlier RBI had prescribed Consortium arrangements for financing working capital beyond Rs. 50 crores. Now it is not essential to have Consortium arrangements. However, banks may themselves decide to form Consortium so that the risks are spread. The disintegration of Consortium system, the entry of term lending institutions into working capital finance and the emergence of money market borrowing options gives the best possible deal.

3. Banks were advised not to apply the second method of lending for assessment of MPBF to those exporter borrowers, who had credit export of not less than 25% of their total turnover during the previous accounting year, provided that their fund based working capital needs from the banking system were less than Rs. 1 crore. RBI has also suggested that the units engaged in export activities need not bring in any contribution from their long term sources for financing that portion of current assets as is represented by export receivables.

4. RBI had also issued lending norms for working capital, under which the banks would decide the levels of holding of inventory and receivables, which should be supported by bank finance, after taking into account the operating cycle of an industry as well as other relevant factors. Other aspects of lending discipline, viz; maintenance of minimum current ratio, submission and use of data furnished under quarterly information system etc. would continue though with certain modifications, which would make it easier for smaller borrowers to comply with these guidelines.