CONSORTIUM FINANCING IN INDIA - ALL YOU NEED TO KNOW
Essential for All Upcoming Bank Exams
Under Consortium Financing, the bank formally joins the inter-sector agreement to meet the credit needs of the lenders. In case of project funding, banks and term loan companies come together. In accordance with the loan policy of October 1996, the Reserve Bank of India (RBI) approves personal co-operation, to restrict their own rules for consortium loans.
In consortium financing, a number of banks (or financial institutions) pay for a single borrower. In this case there is a general documentation, joint supervision and follow-up exercises among all the banks / financial institutions. So participating banks constitute a new Consortium Bank. The amount of the entire debt is divided between banks constituting, so the risk is divided. Banks, which provide the highest risk (maximum debt) will act as a leader and thus act as the intermediary between the consortium and the borrower.
Compulsory Consortium Formation-
Banks should ensure that their exposure does not exceed the detailed credit exposure ceiling (15% for individual borrowers and 40% for group borrowers).
No. of banks and new banks –
There is no ceiling on the part of the existing consortium of participating banks, without the consent of the members, no bank can extend any credit facility.
The central bank is responsible for the preparation of banknote notes, its circulation, meeting arrangements etc. It accepts fees from the borrower.
In the case of account management with each bank related bank, other banks have to classify the loans account based on classification.
Charge on securities-
Banks are called Peri Passu Charges on securities, which means they share the charge in their exposure ratio approved by the Consortium through a formal agreement.
Disposal of loan application-
60 days for new loan or increase (45 for export), 45 days for renewal (30) and 30 days (15) for convenience. Where the participating banks are unable to comply with the deadline, the lender is required to bring new banks.
Consortium – A Risky Business:
Consortium banking is not right for each project to bring their own unique risk and enough management challenges.
The agreement is compulsory and needs to be executed with the relevant liability so that they are in written agreement that the risks associated with the supply of paid projects are divided between the respective parties.
A joint venture is a short-term or long-term provision between two or more parties to take general projects or initiatives. There are 2 types of joint ventures –
Contractual joint venture –
As a name it suggests corporation is independent and independent from its shareholders and its interests which are responsible for the laws of all obligations.
Corporate joint venture –
Unlike the contractor joint venture, a permanent structure is not controlled by the contract, and the team is mainly formed to provide a short-term project, such as a consortium of engineering, the most common use of this initiative.
In a multiple banking arrangement, the banks allow credit facilities without a formal arrangement among themselves. They make their own assessment of credit needs and determine margin, rate of interest, terms and conditions to be stipulated. The charge on securities can be 1st and 2nd charge or they can have pari-passu charge through exchange of charge ceding letter.
Advantage of Consortium:
- Ease of Formation
- Ease of Termination
- Tax Transparency