To stem cases of fraud as well as increase in bad loans in the banking system, the Reserve Bank of India is considering a radical overhaul of the way banks give big-ticket loans to India Inc.

This includes making consortium lending a must for loans of ₹500 crore and above and penalising borrowers seeking loans outside the lenders’ consortium without the latter’s knowledge.

A revamp of the consortium lending mechanism is being examined, as in the last few years credit discipline has been undermined by borrowers as well as banks, resulting in the latter coming to grief due to rising bad loans and increased provisioning, say bankers.

Now, large banks such as State Bank of India and ICICI Bank have the wherewithal to individually take a single borrower exposure of ₹500 crore. If such loans turn sour, the banks’ earnings will be seriously impacted. So, consortium lending may be the best route as it would help spread risks and prevent banks from overexposure to a single borrower.

A senior public sector bank official said: “A few years back, the chief of a large bank said his institution had sanctioned a steel company’s $1 billion loan proposal for acquiring an overseas company in 10 minutes flat.

“While this was projected as a sign of the bank’s nimbleness, things could have gone wrong. Consortium lending could prevent lenders from taking rash decisions and getting overexposed to a single borrower.”

Common agreement

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 loan is provided by a consortium of lenders.

Most large borrowers prefer having multiple banking relationships, whereby they have independent arrangement with each lending institution, the security offered to each institution is separate and no formal understanding exists between different lenders financing the same borrower.

In such an arrangement, lenders usually sanction loans on different terms and conditions. And, borrowers get an opportunity to play one bank against the other to wangle the best deal. Under the consortium guidelines that is in the works, banks could seek personal guarantee from borrowers whose ratings are below investment grade for loans above ₹500 crore, said the official.  

To strengthen the consortium lending mechanism, the central bank could make it compulsory for the lead bank to share with other consortium members the monthly statement of the cash flowing through the escrow account. This account is opened by the lead bank for financing the borrower, ensuring that proceeds of sale transactions is credited to this account, and for loan repayments.

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