Consortium

There arise cases where a borrower approaches a bank for huge loans; this high
amount means high risk to a single lender. In such cases banks resort to a lending
mechanism known as Consortium to reduce the risk involved in the Loan Process. A
consortium is successful where it is not possible for a single bank to finance the loan
amount to the borrower; it has nothing to do with international transactions unlike
Loan Syndication, simply the loan amount is too large or risky for a single lender to
provide. Consortium financing occurs for transactions that might not take place with
a single lender. Here when a borrower approaches a bank for loan, several banks club
together to supervise the said loan amount. A common appraisal,
documentation, joint supervision and follow-up play the key role.

These banks have a common agreement between them. Sometimes the participating
banks form a new consortium bank to look after the process of funding of loan,
leveraging assets from each institution and ultimately disbanding after completion of
the project. The lender who has taken the highest risk (by giving the highest amount
of loan) acts act as a leader and administers all the transactions, agreements etc.
between the consortium and the borrower. The consortium agreement is a crucial
document and not easy to draft. It must be clear on the rights and obligations of the
parties, which need to be focused firmly on the purpose of the consortium.

Advantages of consortium
1. No capital is required to create a consortium.
2. Ease of formation, no formal procedures need to be followed.
3. It is easy to terminate because it can be set to expiry on a particular date and
happening of an event without any formal requirements.
4. It is easy to terminate, can be set to expiry on a given date or on the occurrence
of certain events without the formal requirements needed in the case of
dissolution of a corporation.
5. The individual members are subject to tax and not the consortium.

Disadvantages of consortium
1. A consortium member can’t restrict or limit its liability. Members may even
become liable to third parties for the non-performance of other members of the
consortium or the debts of such members incurred in undertaking the common
project.
2. Third parties often find it difficult to enter into contract with a non-legal entity
like a consortium. Because it is a non-legal entity funding is also normally only
available to the individual members and not the consortium itself. So it becomes
difficult to maintain External relationship and funding.
3. The lack of a permanent structure makes it difficult for a consortium to establish
long-term business relationships with third parties.
Role of Lead Bank in Consortium
1. Conducting consortium meetings.
2. Obtaining of necessary documents, clarification etc. from the borrower.
3. Making arrangements for joint appraisal of loan proposal by all member Banks.
Preparation of joint appraisal report and sending the same to all member Banks
and finalization of decision after discussions.
4. Fixing and Deciding of Loan limit.
5. Custody, Verification of documents, securities etc., on behalf of itself and
consortium Banks.
6. To maintain mutual interest between consortium Banks and term loan lending
institutions, making correspondence with National/State level Financial
Institutions.
7. Obtaining stock statement and other legal obligations every month and ensuring
maintenance of adequate stock for the loan.
8. Passing on recoveries on pro rata basis to the entire consortium Banks.
9. Ensuring of all transactions by borrower through Cash Credit A/c maintained
with the Lead Bank and that the utilization of the loan advanced is only for
production activities.

Role of Consortium Banks

1. Participating in consortium meetings and using their expertise in the general
interest of consortium.
2. Authorizing the Lead Bank to take decision in the interest of consortium Banks.
3. The Consortium Banks are not supposed to demand the loss incurred and
change their lending share without obtaining prior approval from the consortium
members.
4. Act in accordance with the terms and conditions agreed upon between the Lead
Bank and other banks.
Faced with higher defaults, banks have become more cautious on non-investment-grade
corporate loans. They have started pushing more corporate loan accounts to enter into
consortium lending arrangements, to improve the access to information and avoid
surprises.