Consortium banking involves multiple banks joining together to finance large projects and loans. Each bank contributes a share of funding based on a common agreement and shares risk. It allows for risk distribution and reduced costs compared to individual lending. However, delays in banks sharing information about troubled "bad" accounts has led to increased fraud. Timely and adequate information sharing between consortium banks is needed for the model to be effective.
Consortium banking involves multiple banks joining together to finance large projects and loans. Each bank contributes a share of funding based on a common agreement and shares risk. It allows for risk distribution and reduced costs compared to individual lending. However, delays in banks sharing information about troubled "bad" accounts has led to increased fraud. Timely and adequate information sharing between consortium banks is needed for the model to be effective.
Consortium banking involves multiple banks joining together to finance large projects and loans. Each bank contributes a share of funding based on a common agreement and shares risk. It allows for risk distribution and reduced costs compared to individual lending. However, delays in banks sharing information about troubled "bad" accounts has led to increased fraud. Timely and adequate information sharing between consortium banks is needed for the model to be effective.
Consortium banking involves multiple banks joining together to finance large projects and loans. Each bank contributes a share of funding based on a common agreement and shares risk. It allows for risk distribution and reduced costs compared to individual lending. However, delays in banks sharing information about troubled "bad" accounts has led to increased fraud. Timely and adequate information sharing between consortium banks is needed for the model to be effective.
Introduction Consortium banking means several banks joins together as a single financier and make common agreement. Based on their share of lending each bank lends the money to borrower.
In consortium bank lenders share the credit information about the borrower with them and also helps to reduce the risk of dealing with very large borrowers.
In consortium banking there is a common documentation between all the banks and the financial institutions, so a participating banks can form a new consortium bank.
The whole loan amount is divided among those banks forming consortium bank, so risk also get divided.
Advantages Risk Divided: There should be equal distribution of risks as per the amount of money invested among the members of the project which will help them to invest in project without any worries.
Cost: The Cost of running consortium bank is lower than running any other financial institutions. Tax Transparency: The consortium banking is not directly subjects to taxation the individual members.
Flexibility: Consortium banking means a contractual agreement, so members of consortium
have rights to changed their contractual agreements at any times.
Ease of formation: There is no formation mode, so there is no capital required to create the consortium Banking.
Disadvantages Risk: There Should Be Clear understanding of obligations and risk associated with the consortium banking.
Not Sharing adequate information on “bad “accounts in timely manner
Liability: It is difficult for a consortium members to restricts its liability, members may liable to third parties for non-performance of other member of consortium. No Permanent Structure: Consortium banking is a contractual structure, so lack of Permanent structure makes it difficult for consortium to establish long term business relationship with third parties.
Formation of Consortium banking
A Consortium bank is a Subsidiary Bank Owned by several different banks, each owners of banks has an equal share so that no bank is the majority shareholders. All the banks have same rights and obligation under consortium. A consortium bank is created to finance to specific projects where a project involves multiple currencies.
Large lending’s are formed always under consortium as per the guidelines issued by RBI.
Why consortium lending by banks hasn’t deliverd
Consortium lending model, once touted as a ‘better alternative’ to extending large
credit facilities, seems to have failed to achieve the desired effect, because of the inability of banks to share data with each other in a timely manner.
However, the inability of banks (particularly public sector banks) to share information about a ‘bad’ account in a timely and adequate manner has led to a rise in the number of frauds involving consortium lending, once considered the best route to help spread risk, industry experts said.
Case Laws on Consortium
Take the recent example of Canara Bank filing a fresh complaint against computer
maker RP Infosystem and its directors with the Central Bureau of Investigation (CBI).
In January 2015, IDBI Bank, which had an exposure of around ₹156 crore to Kolkata-
based RP Infosystem, the makers of Chirag brand of computers, lodged a complaint to
the CBI ‘alone’ regarding fraud committed on the bank.
The said company had a total exposure of around ₹600 crore to a consortium of lenders,
including Canara Bank, State Bank of India, Punjab National Bank (PNB), Union Bank of India, Allahabad Bank, Federal Bank, Oriental Bank of Commerce, and Central
Bank of India.
The company is alleged to have inflated its receivables, and some of the debtors (as
claimed by the company) like GAIL India, Vincent Electronics, and CEAT had said
they had no dealings with the company.
Interestingly, as per the information available in the complaint letter filed by Canara
Bank, the other banks (including Canara Bank) declared the account as a fraud and
reported it to the RBI around late 2015, early 2016.
Union Bank reported in August 2015, Central Bank in September 2015, Canara Bank,
OBC, State Bank of Patiala and State Bank of Bikaner and Jaipur in October 2015,
PNB and Federal Bank in November 2015, Allahabad Bank in March 2016, and SBI in
May 2016.
It is possible that the account (in this case RP Infosystem) turned NPA in the books of
one bank, while it continued to remain standard in others and hence, did not call for
attention, Which justifying the delay in reporting the fraud.
Conclusion
Consortium lending is a process under which several banks finance a borrower based
on common appraisal and documentation, and conduct joint supervision and follow-up exercises.
Thus we can say that consortium banking is an important concept in finance the project
which involves a huge risk. There should be a clear understanding of obligations and
risk associated with the projects. There should be an equal distribution of risks as per the amount of money invested among the members of the project which will help them
