Joint Lending Agreement
Large banks do have the capability to meet the credit needs of most of their business clients. However, when the amount involved is huge, the bank may ask the borrower to approach other banks for the part of the credit requirements as they may not wish to take up the risk of lending the entire amount. Multiple banks may finance the borrower under two arrangements viz., Consortium arrangement and multiple banking arrangements.
Consortium of Banks – Under this the banks come together and collaborate with each other in assessing the credit requirements of the borrower duly sharing the credit facilities as well as sharing securities with “Pari Pasu” charge. Normally, the bank which has larger exposure act as leader who conduct meetings, assess the credit requirements of the borrower and share all the information with member banks from time to time. However, the decisions taken at the consortium meetings are not binding on the individual banks and the management of each bank has to approve in its respective boards.
Multiple Banking – Under this, the borrower approaches various banks and avails credit facilities across banks. Each bank undertakes their own assessment of risk, decide the mix of credit facilities and stipulate their own terms and conditions. Each of the banks takes the security and gets the charges registered with the ROC in their favour. Practically there is no co-ordination between the banks and they compete with each other to protect their business and interests. This is giving scope to the borrowers to take undue advantage from the banking system i.e. excess borrowings and interest concessions. In order to ensure financial discipline RBI issued guidelines on sharing of information between banks and making the lead bank responsible for ensuring proper assessment of credit requirements of the borrower so that over financing can be averted.
Joint Lending Arrangement (JLA) – Under the existing system of Credit Delivery, credit requirements of large borrowers are being met under Consortium or Multiple Banking arrangement systems. It is observed that high value borrowers have been availing credit limits through Multiple Banking over the years which has led to dilution of asset quality as well as control on the borrowers. In order to address the challenges associated with Multiple Lending, Govt. of India has introduced ground rules governing Joint Lending Arrangements. The scheme shall be applicable to all lending arrangements, with a single borrower with aggregate credit limits (both fund and non-fund based) of Rs.150 crore and above involving more than one Public Sector Bank. Further, all borrowers with external rating of below BBB or equivalent to be brought under JLA irrespective of the amount of exposure. Borrowers having multiple banking arrangements below Rs.150 crore may also be encouraged to come under joint lending arrangement, so that the wholesome view of the assessment of credit requirement as well as the entire operations of the customers can be taken by banks.
New Borrowers – Lending under joint arrangement shall be mandatory for Public Sector Banks for borrowers seeking credit limits of Rs.150 crore and above by way of term loan, working capital and non-fund based facilities, from multiple banks. The Bank from which the borrower has sought the maximum credit will be the designated Lead Bank for the JLA.
Existing Borrowers – In case of borrowers presently enjoying aggregate limits in excess of Rs.150 crore under multiple banking arrangement the Bank which has extended the highest credit, or any other Bank as mutually agreed by Member Banks, would become the leader of the JLA and take initiative for holding the meeting of all financing banks. In case of borrowers enjoying aggregate credit limits below Rs.150 crore from more than one bank, where further enhancement would take the aggregate limits to Rs.150 crore or more, should be considered jointly by the financing banks concerned and the bank, which takes up the largest share of the limits, shall be deemed to be the leader of the formalized JLA.
For working capital exposure under Rs.1000 crore, minimum share of 10% of the aggregated working capital limits is stipulated. For above Rs.1000 crore, minimum share of 100 crore is stipulated. In the cases of existing JLA, if a member-bank is unable to take up its enhanced share, such enhanced share in full or in part could be reallocated among the other existing willing members. In case other existing member-banks are also unable to take up such enhanced share of an existing member-bank, a new bank willing to take up the enhanced share may be inducted into the JLA. In case of any contentious issue, the decision will be taken by member banks having more than 50% share in the exposure to the borrower.
An existing member-bank may be permitted to withdraw from the JLA after two years provided other existing member-banks and/or a new bank is willing to take its share by joining the JLA. In case, where the other existing member-banks or a new bank are unwilling to take over the entire outstanding of an existing member desirous of moving out of the JLA after the expiry of above-mentioned period of two years, such bank may be permitted to leave the JLA by selling its debt.
It is necessary that lead bank and member bank(s)/institution(s) ensure that formal joint lending arrangement does not result in delay in credit delivery. The Lead Lender will make all efforts to tie up the Joint Lending Arrangement within 90 days of taking a credit decision regarding the proposal. Lead bank will be responsible for preparation of appraisal note, its circulation, and arrangements for convening meetings, documentation, etc. In case of any contentious issue, the decision will be taken by the member banks having more than 50% share in the exposure to the borrower. (Cir.no.24 Ref 26/04 dated 15.04.2013)