BTL 712 - Credit Delivery

 

The Banking Tutor’s Lessons

BTL 712                                                                          09-10-2024

Credit Delivery 

Credit Limits can be availed in any of the following methods as required by the borrower:

 (a) Sole Banking ;  (b) Multiple Banking Arrangement (MBA)

 (c) Consortium arrangement;  (d) Syndication.

 (e) Joint Lending Arrangement (JLA)

Sole Banking

Under Sole Banking, the entire credit requirements of the borrower are met by one Bank only.

Consortium Advances

The necessity of consortium arises when the amount involved is very large and beyond the permissible resources of a single bank or beyond what a bank would like to risk under ordinary circumstances on a single borrower beyond the prudential exposure norms.

Borrowers having multi divisions/multi product companies are to be treated as one single unit, unless there is more than one published balance sheet for each division/unit. Therefore, more than one bank financing each division of the company with only one published balance sheet without the formation of Consortium / MBA would not be in order.

Under the consortium arrangement, more than one lending institution including banks may participate in consortium to share the advances upto the total assessed requirement of a borrower, on agreed proportions.

 

Multiple Banking Arrangement (MBA)

Borrowers can avail any credit facilities (both FB & NFB) from any number of banks without a formal consortium arrangement.

So long as the total credit limits enjoyed by a borrower from the bank are within the permissible resources of a single bank, or within the prudential exposure norms, such facilities can be extended by the individual banks without a formal consortium under MBA.

To strengthen the sharing information about the status of borrowers enjoying credit facilities under MBA., following guidelines shall be adhered to:

a) Where the borrowers enjoy credit facilities from more than one bank, obtain declaration about the credit facilities already enjoyed by them from other banks from the borrower. Also, obtain declaration each time any fresh facilities/ enhancements are sought or limits are renewed.

b) Bank shall obtain full details of all credit facilities including temporary/adhoc facilities availed by such borrowers from the banking system, duly certified by their auditors every time the credit facilities are renewed/ fresh facilities/ enhancements are permitted.

 

Under Consortium financing, several banks finance a single borrower with a common appraisal, common documentation, joint supervision and follow up exercises, but in multiple banking, different banks provide finance and other banking facilities to a single borrower without having a common arrangement.

Loan Syndication

A syndicated credit is an agreement between two or more lending institutions to provide the borrower credit facility using common loan documentation.

Bank shall obtain a mandate from the project sponsor and act as a Lead Manager / Mandated Bank to arrange credit on its behalf.

Wherever Bank is appointed as Lead Manager / Mandated Bank, the Bank shall follow the general guidelines laid down for syndication of loan.

Wherever any Bank wants to participate in loan syndication, the information memorandum prepared by the lead manager / mandated bank shall be evaluated and the matter be placed before appropriate authority for decision.

While loan syndications typically work across borders and may handle financing in different currencies, consortiums typically occur within the boundaries of a given nation.

The managing bank in a loan syndication is not necessarily the majority lender, or "lead" bank. Any of the participating banks may act as lead or assume the responsibilities of the managing bank depending on how the Credit Agreement is drawn up.

Under Consortium all the banks acts as a supervisor whereas under loan syndication there is a lead bank or syndicate agent who looks after all the issues.

Consortium is within a country's boundary whereas under syndication institutions from different countries pool their resources to provide for the required amount.

While a loan syndication also involves multiple lenders and a single borrower, the term is generally reserved for loans involving international transactions, different currencies, and a necessary banking cooperation to guarantee payments and reduce exposure. A loan syndication is headed by a managing bank that is approached by the borrower to arrange credit. The managing bank is generally responsible for negotiating conditions and arranging the syndicate. In return, the  borrower generally pays the bank a fee.

Loan syndication is a process where borrower approach a single bank / financial institution and that bank sanction a part of the loan and get the rest of the part sanctioned from other banks. (Sometimes the bank may not provide the loan itself and may get it sanctioned from other banks). Banks do this for a fee and also to diversify the risk.

In case of consortium , borrower approach different banks and get them at one platform, generally the bank having largest share of loan act as leader of consortium.

Joint Lending Arrangement (JLA)

With a view to inculcate the required financial discipline in the borrowers and to enable financing banks to take informed decision on credit matters and as a risk mitigant, the ground rules governing Joint Lending Arrangement (JLA) has been introduced.

The JLA scheme shall be applicable to all lending arrangements, with a single borrower with aggregate credit limits (both Fund Based and Non-Fund Based) of 150 Crore and above involving more than one Public Sector Bank.

Borrowers having Multiple Banking Arrangement (MBA) below 150 crore may also be encouraged to come under JLA.

Banks/Consortia shall treat borrowers having multi-division/ multi-product companies as one single unit, unless there is more than one published balance sheet.

Loan System for Delivery of Bank Credit (LSDBC)

The Loan System for Delivery of Bank Credit (LSDBC) is applicable in the case of  borrowers enjoying fund based working capital facilities of Rs. 150 crore and above from the banking system.

In respect of borrowers having aggregate fund based working capital limit of Rs 150 Crore and above from the banking system, a minimum level of loan component of 60% with effect from 01.07.2019.

In respect of certain business activities, which are cyclical and seasonal in nature or have inherent volatility, the strict application of loan system may create difficulties for the borrowers. Banks may exempt such borrowers from the loan system of delivery.

Sekhar Pariti

+91 9440641014