Nature of Borrowing Arrangements
The following paragraphs explain the different ways in which a banking arrangement can be tied up by a borrower.
Sole Banking
In this arrangement, the borrower obtains credit from a single bank. This is the simplest form of tie-up and is operationally convenient for both the lender and the borrower. Most of the banking tie-ups in India are of this type because the quantum of bank finance in an individual case is usually small. Depending on the nature and extent of credit facility offered, the lending bank itself may stipulate that the borrower will not avail of finance from another bank.
Consortium Arrangement
In this type of arrangement, the number of lending banks is more than one. The lending banks form a formal consortium. Salient features of the
arrangement are:
The consortium has a formal leader, called the ‘lead bank’ (normally though not necessarily, the bank with the largest exposure).
The consortium frames and adopts its rules within the RBI framework for conducting its business with the borrower.
There is a common set of loan documents, which is obtained by the lead bank on behalf of other participating banks also.
The lead bank is responsible for overall monitoring.
The member banks of the consortium have rights over the security in an agreed proportion.
The borrower maintains direct business relationship with all member banks of the consortium.
Minutes of the consortium meetings are circulated amongst the members.
Banks should exchange information about the conduct of the borrowers’ accounts with other banks at least at quarterly intervals.
Multiple Banking
In this type of arrangement, there is no formal arrangement amongst the lending banks. Each of them has its set of loan documents, securities and mode of lending, independent of other lending banks. The borrower has to deal with each of the banks separately.
The RBI, vide its Circular No. DBOD No. BP. BC.46/ 08.12.001/2008- 09 dated September 19, 2008 on “Lending under Consortium Arrangement/Multiple Banking Arrangements”, encourages the banks to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks as under:
(i) At the time of granting fresh facilities, banks may obtain declaration from the borrowers about the credit facilities already enjoyed by them from other banks, as prescribed in the RBI Circular No. DBOD.No.BP.BC.94 /08.12.001/2008-09 dated December 08, 2008 on “Lending under Consortium Arrangement/Multiple Banking Arrangements”. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of Rs.5.00 crores and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks, and introduce a system of exchange of information with other banks as indicated above.
(ii) Subsequently, banks should exchange information about the conduct of the borrowers’ accounts with other banks at least at quarterly intervals.
(iii) Obtain regular certification by a professional, preferably a Company Secretary, regarding compliance of various statutory prescriptions that are
in vogue, as per specimen given in the RBI Circular.