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Introduction

Business entities can have various types of borrowing arrangements. They are  One Borrower – One Bank

 One Borrower – Several Banks (with consortium arrangement)

 One Borrower – Several Banks (without consortium arrangements – Multiple Banking

 One Borrower – Several Banks (Loan Syndication)  One Bank

The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement where the borrower confines all his financial dealings with only one bank.

Sometimes, units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement without being constrained by the limited resource of its own banker. Besides this, consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information.

The various arrangements under borrowings from more than one bank will differ on account of terms & conditions, method of appraisal, coordination, documentation & supervision & control.

 Consortium Lending

When one borrower avails loans from several banks under an arrangement among all the lending bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool banking recourses & expertise in credit management together & finance a single borrower with a common appraisal, common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facilities from several banks. The arrangement continues until any one of the bank moves out of the consortium. The bank taking the highest share of the credit will usually be the leader of consortium. There is no ceiling on the number of banks in a consortium.

 Multiple Banking Arrangement

Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. The borrower avails credit facility from various banks

providing separate securities on different terms & conditions. There is no such arrangement called ‘Multiple Banking Arrangement’ & the term is used only to denote the existence of banking arrangement with more than one bank. Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. Additionally, when units were not doing well, consensus was rarely prevalent among the consortium members. If one bank wanted to call up the advance & protect the security, another bank was interested in continuing the facility on account of group considerations.

Points to be noted in case of multiple banking arrangements

• Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline

• Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing

• Certificates on the outstanding with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing

 Credit Syndication

A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. It is a convenient mode of raising long-term funds.

The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate spells out the terms of the loan & the mandated bank’s rights & responsibilities.

The mandated banker – the lead manger – prepares an information memorandum & Circulates among prospective lender banks soliciting their participation in the loan. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination, communication & control within the syndication process & finalizes deal timing, management fees, cost of credit etc. The loan

agreement is signed by all the participating banks. The borrower is required to give prior notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks.

Features of syndicated loans

• Arranger brings together group of banks

• Borrower is not required to have interface with participating banks, thus easy & hassle fee

• Large loans can be raised through syndication by accessing global markets

• For the borrower, the competition among the lenders leads to finer terms

• Risk is shared

• Small banks can also have access to large ticket loans & top class credit appraisal

• & management

Advantages

• Strict, time-bound delivery schedule & drawals

• Streamlined process of documentation with clearly laid down roles & responsibilities

• Market driven pricing linked to the risk perception

• Competitive pricing but scope for fee-based income is also available

• Syndicated portions can be sold to another bank, if required

• Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline

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