To learn about:
- Different delivery channels
- Features of sole banking, consortium
- Credit acquisitons
MODES OF DELIVERY
The credit facilities can be arranged in one of the following methods:
Sole Banking Arrangements
Multiple Banking
Consortium Lending
Syndication
Sole Banking Arrangement
This is a banking relationship where the entire credit needs of a borrowing unit are met by a single bank. Banks would try to retain such relationships for clients with higher credit ratings, subject to exposure ceilings.
Banks set exposure limits based on their own Capital and Free Reserves (within RBI guidelines).
If a customer’s credit need exceeds the limit, they are encouraged to go for Multiple Banking, Consortium, or Syndication arrangements.
b) Multiple Banking
In this arrangement, a borrower avails finance independently from more than one bank. There is no contractual relationship between the banks.
Each bank does its own credit assessment and holds independent security.
Borrowers negotiate credit terms individually with each bank.
Terms and conditions may vary across banks.
Key notes:
Credit limits from different banks should be within 10% tolerance of limits assessed by the main banker.
Large corporates may have different divisions financed by different banks, often without a formal agreement, leading to:
Poor credit discipline
Difficult recovery
To manage this, clients must share borrowing details with all banks they deal with.
Total exposure across all banks should not exceed 75% of the total Working Capital needs to maintain required margin.
Consortium Lending
For large credits, a group of banks finances the borrower by forming a consortium.
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Consortium promotes joint application of banking resources.
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Helps spread risk and ensures better appraisal quality.
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Prevents poaching of accounts and allows smaller banks to participate.
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Even if one bank faces a credit freeze, others can meet the borrower’s needs.
Banks have freedom to frame ground rules, and typically:
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A consortium leader is appointed.
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Leader organizes meetings to:
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Finalize working capital/facilities
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Coordinate documentation, inspections, and other matters
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Operating account is usually with the leader bank or another designated bank.