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(^406) Financial Management
Consortium lending and loan syndication by banks
When the individual bank finds it difficult to meet the huge financial requirements of a
borrower, it gives rise to multiple banking which may be in the forms (i) Consortium
lending or (ii) Loan syndication.
Consortium lending- When the financial needs of a single unit are more than a single
bank can cater the needs, then more than one bank come together to finance the unit
jointly spreading the risk as well as sharing the responsibilities of monitoring and finance.
The arrangement is called the ëconsortium lendingí and it enables the industrial units
to mobilise large funds for its operations. This is generally formalised by a consortium
agreement. RBI has advised that banks which are lending to units requiring large outlay
of funds form a consortium arrangement among banks. Borrowers enjoying funds based
limits of Rs. 50 crores and above from more than one bank should be brought under the
above arrange≠ment. There is no ceiling or number of banks in consortium. However
the share of each bank should be a minimum of five per cent or Rs. one crore whichever
is more. It will not be permissible for any bank outside the consortium to extend any
additional credit facility or open current account for the borrowers without the knowledge
and concurrence of the consortium members.
Loan syndication - On the recommendations of Narasimhan Committee, 1991, and
further reviewed by a Committee under the Chairmanship of Mr. J. V. Shetty, then
CMD, Canara Bank. Recently RBI guidelines signalled formation of loan syndication
as a part of lending system. There are two methods of syndication direct lending and
through participation.
l Direct lending: In respect of ìdirect lendingî all the lenders sign the loan
agreement independently with the borrower and agree to lend upto their
respective share. The obligations of the syndicate members are several and
they do not underwrite one another.
l Through participation: In this method of lending the lead bank is the only
lending bank, so far as the borrower is concerned, that approaches the other
lenders to participate in the loan. This normally takes place without the
knowledge of the borrower. The lead bank grants a certain portion of the loan
to each participant as agreed. It also agrees to pay to the participants a pro
rata share of receipts from the borrower.
Types of participation - There can be four types of participation :
l Substitution : There is an agreement the borrower and the lead bank and
other participants to permit the lead bank to disburse the loan on behalf of the
participants.
l Undisclosed agency: Here, the lead bank is appointed as agent by the syndicate
before the loan is signed, but does not disclose this fact to the borrower. It is,
therefore, the principal as far as the borrower is concerned.