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.
i) 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.
ii) 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.