CONSORTIUM APPROACH

                          CONSORTIUM APPROACH

                                           This approach to lending was introduced by the RBI in 1974. It required that more than one bank would finance a single borrower requiring large credit limit. Consortium approach
(a) enabled banks to spread risk of lending.
(b) broke the monopoly of big banks to have large accounts,
(c) enabled banks to share experience and expertise,
(d) introduced uniformity in approaches to lending,
(e) enable banks to pool their resources , and
(f) checked multiple financing of the same account.

                                               Each consortium had a lead bank, which had the largest share in the loan, and it processed the loan proposal. The meeting of the consortium for sanction of limit and review of accounts was convened . It was to obtain RBI's permission of credit limits, and it conducted joint inspection of the borrower's activities. The borrowers executed a single set of documents with the lead bank. It obtained the letter of authority from member banks and released the initial requirements of the borrower , thereafter it obtained reimbursements from the member banks to the extent of their shares in advance. If the member banks delayed the reimbursement beyond a week, the lead bank was entitled to charge a penal interest at the rate of seven per cent per annum for the period of delay. this arrangement was also called a "Single Window Lending"

                                                 When the consortium approach was introduced in 1947, banks were required not to invest more than 1.5 per cent of their deposits or Rs 100 crores in one account, whichever was lower. Since March 1989, banks were required not to lend more than 25 per cent of their capital to an individual borrowers, and not more than 50 per cent to a group of borrowers. Similarly, earlier, not more than five banks were to participate in a loan account up to Rs 50 crores. From October 1988, this restriction had been moved, but banks were advised to limit their number in a formal consortium arrangement to around ten.

                                                    The working of this scheme showed that banks quite often did not adhere to the RBI guidelines, that large banks tended to use their weight unfairly in the consortium, that they often shielded the borrower sidetracking the queries of participating banks, and that there was no uniform approach to evaluate credit proposals. It appears that banks had not really moved towards the consortium spirit. For example, banks insisted on handling individually lucrative business, such as that of foreign exchange . With a view " to introduce flexibility in the credit delivery system" in respect of working capital finance , it was decided that with effect from April 15, 1997, it would not be obligatory on the part of banks to form a consortium irrespective of credit limit per borrower as against the observance of exposure limits. As an alternative to the sole/multiple banking consortium arrangement, banks are now free to adopt syndication route, irrespective of the quantum of credit involved, if such an arrangement suits the borrower and the financing banks.