Banks put in place new ground rules for consortium lending

To ensure that large borrowers do not game the banking system, banks have stitched together a Standard Operating Procedure (SOP) for consortium lending so that there is effective coordination amongthem during the life cycle of a loan – pre-sanction, post-sanction/disbursement, and monitoring.

The SOP, put together at the behest of the Finance Ministry, has been necessitated to overcome, among others, herd mentality among banks in following the loan appraisal by the lead bank, information asymmetry among banks, multiple financing against the same security, and time lags in reporting defaults/frauds. It is also aimed at arresting fresh accretion of bad loans.

To ensure a better turnaround time for loan proposals, the SOP, which is part of the public sector banks’ reforms agenda, also specifies timelines for various stages of the loan.

Pre-sanction stage

At the pre-sanction stage, banks want borrowers to put in request for renewal/ enhancement of working capital facilities four months (or any other reasonable period) prior to the due date of renewal.

The request for credit facility, either for project funding and/or working capital, received by the lead bank from an existing borrower, has to be sent to all members of the consortium for their observations/ queries within a specified time frame (say 7 days) with directions that they send their feedback/queries within a week. The consolidated queries will be sent to the borrower within a week.

After receiving additional information/clarification/replies to the queries from the borrower, the initial consortium meeting, which will firm up project cost and working capital requirement, will be held by the lead bank.

The lead bank/core group of banks (as decided) will then appraise the proposal. The appraisal copy will be circulated to all banks for information, seeking further observations, if any, within 10 days.

Following this, members will finalise the terms and conditions, and also the share to be taken by each member bank if there is an increase in funding requirement.

Each bank has to convey to the lead bank/borrower its final sanction within a maximum period of 45 days.

Post-sanction

Upon sanction/ renewal/ enhancement of limits, the lead bank will ensure completion of joint documentation/creation of security/ registration of charges/legal audit. It will also ensure compliance of all stipulated terms and conditions of sanction prior to disbursement and issue confirmation to all consortium member banks.

The inspection/verification of securities may be done by the lead bank or member banks in rotation, with the report being shared with all members.

The lead bank will calculate the drawing power based on inspection of stocks/ book debts, and share the same with all member banks to facilitate working capital disbursement.

In the case of project loans, the lead bank will monitor the project progress and ensure periodic disbursement by the member banks.

As per the SOP, the (loan) release order/ instructions will be issued by the lead bank with information regarding availment/ release of limits being shared among member banks on a weekly basis or as per need.

All member banks will be sharing statement of account pertaining to the borrower at monthly intervals.

The lead bank will review financial covenants of the borrower in quarterly consortium meeting on the basis of quarterly progress report (submitted by the borrower).

In case of non-compliance of any of the benchmark financial covenants, penal interest for the breach will be charged by all banks. Concrete steps initiated by the borrower for curing the breach will be discussed, and the timeline for compliance of the various benchmark covenants, will be minutised.

Controlling and monitoring of Trust and Retention Account/ Escrow/ central account operations of the company will be in one place, with the lead bank or as specified. The lead bank, in consultation with other lenders, can engage the services of project management consultants for monitoring the implementation and progress of the project.

The SOP requires periodical exchange of information among consortium banks on monthly/quarterly basis. Unsatisfactory features observed by the lead bank, or any other member bank in the conduct of account, devolvement of letter of credit/ bank guarantee will be shared among all the banks and discussed.

Temporary support extended in the form of additional finance over and above the sanctioned limits by any of the member banks has to be apprised to the consortium. Borrowers cannot raise finance outside the consortium without obtaining its prior no-objection certificate.