Modern lending

The RBI has now called for discussion on a framework for enhancing credit supply for large borrowers through market mechanisms. While the intention of the central bank is to explore the evolution of other market mechanisms, mainly capital market-related options, it is also time to look at the credit delivery system in place in the banking system.

Of late, the lines distinguishing between working-capital lenders and project-lenders have blurred. In a way, banks have successfully taken up the vacuum created by development financial institutions, stepping into their shoes and extending project loans.

The concepts of multiple banking arrangement and consortium arrangement are slowly losing their significance in the modern context. Though the consortium arrangement insists on common documentation and pooling of cash flows to service debt of same corporate with various banks, it has failed in many counts as is evident with divergence in asset classification of the same loan by different banks under the consortium arrangement.

The RBI should think of bringing in systems such as shared and national credit (SNC) prevalent in the US and other developed markets, especially for high-value credits in which many banks participate, along with development of secondary market for loans to infuse liquidity into loan market.

In an SNC system, relationship banks develop the lending model and finalise the terms governing the loan. As funding including working capital takes place by means of term loans, the debt market is more divided based on the tenor of the loan, than the purpose. Banks generally subscribe to shorter tenure loans and financial institutions such as pension, PF and insurance funds prefer longer tenure loans.

Interestingly, individual investors can also take part based on their risk appetite. A meeting is arranged; lenders are invited and the case is presented. Banks and FIs carry out due diligence and take a call on participation within mandated time frame of generally 10 to 15 days, which is definitely quicker than turnaround times in India. Secured web-based service agents keep uploading supporting documents from time to time. Loan agreements are executed online saving lot of executive time and the whole process is closed within one or two months.

Once the deal is subscribed and allocations are made, it opens up for secondary market trading, even before funding takes place and the market drives the price based on the yield, tenor, original discount offered, industry and credit metrics of the company. Participants can offload their exposure at any time due to the liquidity available in the market. All cash flows are captured in an escrow account at one place and are utilised for servicing of debt along with other corporate purposes.

An important aspect of SNC is regulators carry out review at one place, i.e. with lead bank, and the outcome is sacrosanct on all participants saving lot of time, effort and cost for both the regulator and participants.

Finally, it is advisable to develop debt market space based on tenure. Banks can take up short-term loans with average tenures up to seven years matching their short-term risk profile, and institutional investors can take up term loans with longer tenures and better yields as they have the bandwidth to assume such loans.

The author is vice-president of syndications at SBI, New York. The views are personal

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