Corporates are gravitating towards multiple banking arrangements (MBA) from consortium lending arrangements (CLA) due to the flexibility it offers them in getting timely financing sans rigidity of CLA.

And banks too are not averse to this shift as corporate balance sheets are de-leveraged and bad loans are at a seven-year low even as the credit cycle is turning up.

This comes at a time when credit growth for the large industry is seeing an upswing, increasing by 7 per cent in December 2022 as compared with a growth of 1.1 per cent a year ago.

Kaizad Bharucha, Executive Director, HDFC Bank, said, “Many corporate borrowers have gravitated to the multiple banking arrangement. Multiple banking allows flexibility to the corporate even as it ensures that uniform security is available to the lenders.”

Bharucha noted that this arrangement also maintains the discipline of financing from the lenders’ point of view. 

He added that corporates find multiple banking arrangements to be much more conducive for meeting their financing and banking needs.

Preferred route

Companies with strong balance sheets are preferring MBA, said an executive director with a public sector bank.

“Consortium lending is very bureaucratic. Suppose there are five banks lending to an “AAA”-rated corporate. We, as the lead bank (usually a public sector bank), would have assessed the financing requirement at the beginning of a financial year.

“Now, if the corporate hits a purple patch and approaches the consortium for more finance, a re-assessment of fresh financing demand could take a few months. During this time, the corporate is on tenterhooks as there is no certainty that financing will come through,” the state-owned bank official quoted above said.

The re-assessment of the demand for fresh financing could take a few months as the lead bank’s credit committees—local and central—have to sign off on the proposal, a note has to be circulated among the consortium members, a meeting of the members has to be called for approving it, and minutes have to be circulated among them.

Hassle free

In MBA, a corporate can get its ad-hoc financing requirement met without any hassle by approaching any of the lenders who are part of this arrangement.

“Now, if a corporate wants to borrow from Bank X, which is part of MBA, The Bank will do an assessment as to why the corporate needs to borrow more and will inform the main bank and others in the MBA regarding its assessment and the financing given,” said the official.

Consortium lending is a mechanism whereby a borrower takes a large loan from two or more banks by making a common application.

Barring the rate of interest, all the terms and conditions set out in the consortium’s contract are common. A common loan agreement and joint deed of hypothecation are used when a loan is provided by a consortium of lenders.

Under MBA, large borrowers have independent arrangements with each lending institution. No formal understanding exists between different lenders financing the same borrower.

In such an arrangement, lenders usually sanction loans on different terms and conditions.