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.
That projects in non-investment grade be compulsorily under a consortium lending arrangement, irrespective of size is one of the suggestions of the bankers’ panel formed by the finance ministry to look into the issue. The panel was headed by Diwakar Gupta, managing director and chief financial officer, State Bank of India (SBI).
SBI, the country’s largest lender, saw its gross non-performing asset levels touching almost five per cent of advances at the end of the first quarter.
Banks have started implementing the committee’s suggestion, albeit in an informal way, even before the finance ministry takes a further call on it, said a senior executive with another public sector bank (PSB).
Though the banks are dubbing the move as part of ensuring credit discipline, analysts say banks, especially PSBs, have been facing non-performing asset (NPA) pressures for quite some time. Entering into a consortium is one way of risk aversion in the corporate loan book. In consortium lending, bankers enter into a common agreement with borrowers. This agreement deals with issues like rate of interest, information disclosures with lenders’ future fund requirements. There are also less chances of information asymmetry.
A senior SBI official said bankers always nudge borrowers to be in a consortium, but this might not work in all cases. When borrowers have a good repayment record and strong credit profile, some banks don’t want to enter into a consortium.
On whether it would cause procedural delay and increase costs for both banks and borrowers, the SBI official said, “On the contrary, the whole purpose (of consortium) is to streamline decision making and to make cost uniform.”
A PSB chairman said, “We have already started to convince them (borrowers) to enter into a consortium, beneficial both for borrowers and the banks, as they (bankers) can exchange views regarding interest rates, margins, monitoring of account and future requirement of the borrowers.” He refused to give an exact number but indicated loan accounts above Rs 300 crore had been approached to enter into consortium agreements.