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Consortium lending model, once touted as a ‘better alternative’ to extending large credit facilities, seems to have failed to achieve the desired effect, thanks to the inability of banks to share data with each other in a timely manner.
Consortium lending is a process under which several banks finance a borrower based on common appraisal and documentation, and conduct joint supervision and follow-up exercises.
Consortium lending was considered a must for big-ticket loans (typically above ₹500 crore) to stem cases of fraud and help check the rise in bad loans in the system.
However, the inability of banks (particularly public sector banks) to share information about a ‘bad’ account in a timely and adequate manner has led to a rise in the number of frauds involving consortium lending, once considered the best route to help spread risk, industry experts said.
According to Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services, there are loopholes in process control and credit monitoring at state-owned banks.
“Banks, particularly public sector, tend to work in isolation. When it comes to monitoring accounts they do not work with other banks in understanding borrowing and repayment behaviour and identifying NPAs,” Parekh told BusinessLine .
Banks work in isolation
Take the recent example of Canara Bank filing a fresh complaint against computer maker RP Infosystem and its directors with the Central Bureau of Investigation (CBI).
In January 2015, IDBI Bank, which had an exposure of around ₹156 crore to Kolkata-based RP Infosystem, the makers of Chirag brand of computers, lodged a complaint to the CBI ‘alone’ regarding fraud committed on the bank.
The said company had a total exposure of around ₹600 crore to a consortium of lenders, including Canara Bank, State Bank of India, Punjab National Bank (PNB), Union Bank of India, Allahabad Bank, Federal Bank, Oriental Bank of Commerce, and Central Bank of India.
The company is alleged to have inflated its receivables, and some of the debtors (as claimed by the company) like GAIL India, Vincent Electronics, and CEAT had said they had no dealings with the company.
Interestingly, as per the information available in the complaint letter filed by Canara Bank, the other banks (including Canara Bank) declared the account as a fraud and reported it to the RBI around late 2015, early 2016.
Union Bank reported in August 2015, Central Bank in September 2015, Canara Bank, OBC, State Bank of Patiala and State Bank of Bikaner and Jaipur in October 2015, PNB and Federal Bank in November 2015, Allahabad Bank in March 2016, and SBI in May 2016.
It is possible that the account (in this case RP Infosystem) turned NPA in the books of one bank, while it continued to remain standard in others and hence, did not call for attention, senior bank officials told BusinessLine justifying the delay in reporting the fraud.
However, as per the complaint letter, the account was termed NPA in the books of most banks in the consortium as early as 2013 and the consortium member banks had also filed a suit for recovery in 2014.
It is to be noted, as per standard procedure, once a bank reports a particular company as ‘fraud’ to the RBI, the central bank immediately circulates the information to all banks, calling for their attention.
“The fraud database is made available by the RBI to everyone. It needs to be seen whether it was properly checked by banks while lending to a large borrower. In a consortium, other banks typically tend to go by the due diligence carried out by the lead bank,” a senior banking analyst said.
Faulty project appraisals
Incidentally, the RBI in its Financial Stability Report in December 2017, highlighted conflict of interest among merchant bankers to be one of the key reasons for faulty project appraisals leading to piling up of NPAs.
“A significant part of such projects undertaken were consortium lending with appraisals being carried out by professional merchant bankers with built-in conflict of interest (since they were paid by the borrowers),” the RBI observed.
According to Parekh, unless banks pay attention to the borrowing and repayment behaviour and work together, it will be very difficult to recognise the manifestation of stress in an account.
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