 "Banks want compulsory consortium arrangement for large credit")
With loopholes in multiple banking arrangements adversely impacting their books, commercial banks now want a consortium to be made mandatory for large corporate credit.
Bankers said guidelines issued by the Reserve Bank of India (RBI) on sharing of the information had failed to bring desired discipline in multiple banking arrangements (MBA).
Multiple banking is an arrangement where a borrower avails of finance independently from more than one bank. Thus, there is no contractual relationship between various bankers. Also, in such arrangements, each banker is free to do his own credit assessment and hold security independent of other bankers. Under consortium financing, several banks (or financial institutions) finance a borrower with common appraisal, common documentation, joint supervision and follow-up exercises.
Even the facilities sanctioned against exclusive securities impact the cash flow of the borrower and result in serious irregularities, including frauds leading to non-performing assets.
Bank chief executives have discussed the issue under the Indian Banks’ Association (IBA), the banking lobby group. In light of concerns, RBI should revisit MBA and mandate compulsory formation of lenders’ consortium for large credit facilities, another PSB executive said.
Many banks have detected a spate of irregularities and rising non-performing assets, particularly large accounts.
A former chief executive of a state-owned bank said RBI had withdrawn various regulatory prescriptions regarding consortium multiple banking syndicate arrangements in 1996 to give flexibility in the credit delivery system and to facilitate smooth flow of credit.
However, the Central Vigilance Commission, in the light of frauds involving consortium/MBA, had expressed concerns.
The Commission had attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks.
Meanwhile, IBA in a communication to RBI said there was a need to review the cash credit mechanism, especially the large limits, which pose a serious liquidity challenge to banks due to sudden large withdrawals.
This forces banks to resort to expensive emergency funding to meet statutory obligations. One solution being recommended to deal with such challenge is to convert 50 per cent of a large credit facility through working capital component of short-term duration.
The cash credit component could carry interest rate commensurate with credit rating while working capital element would have commitment fee subject to rules, IBA said.
Bankers said guidelines issued by the Reserve Bank of India (RBI) on sharing of the information had failed to bring desired discipline in multiple banking arrangements (MBA).
Multiple banking is an arrangement where a borrower avails of finance independently from more than one bank. Thus, there is no contractual relationship between various bankers. Also, in such arrangements, each banker is free to do his own credit assessment and hold security independent of other bankers. Under consortium financing, several banks (or financial institutions) finance a borrower with common appraisal, common documentation, joint supervision and follow-up exercises.
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A senior public sector bank (PSB) executive said the absence of security sharing, monitoring of end-use of funds and coordination among the lenders under multiple banking allowed borrowers to play with credit discipline.
Even the facilities sanctioned against exclusive securities impact the cash flow of the borrower and result in serious irregularities, including frauds leading to non-performing assets.
Bank chief executives have discussed the issue under the Indian Banks’ Association (IBA), the banking lobby group. In light of concerns, RBI should revisit MBA and mandate compulsory formation of lenders’ consortium for large credit facilities, another PSB executive said.
Many banks have detected a spate of irregularities and rising non-performing assets, particularly large accounts.
A former chief executive of a state-owned bank said RBI had withdrawn various regulatory prescriptions regarding consortium multiple banking syndicate arrangements in 1996 to give flexibility in the credit delivery system and to facilitate smooth flow of credit.
However, the Central Vigilance Commission, in the light of frauds involving consortium/MBA, had expressed concerns.
The Commission had attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks.
Meanwhile, IBA in a communication to RBI said there was a need to review the cash credit mechanism, especially the large limits, which pose a serious liquidity challenge to banks due to sudden large withdrawals.
This forces banks to resort to expensive emergency funding to meet statutory obligations. One solution being recommended to deal with such challenge is to convert 50 per cent of a large credit facility through working capital component of short-term duration.
The cash credit component could carry interest rate commensurate with credit rating while working capital element would have commitment fee subject to rules, IBA said.