Home >Politics >Policy >Finmin panel reviews order on group lending

Mumbai: A committee constituted by the finance ministry is reviewing a directive that asked banks to lend in groups for loans above 150 crore, in line with P. Chidambaram’s assurance that the ministry will not micro-manage state-owned lenders.

The department of financial services of the finance ministry has set up a committee headed by State Bank of India (SBI) managing director Diwakar Gupta to provide feedback on consortium lending before it becomes operational.

A directive to this effect was issued in April by banking secretary D.K. Mittal, when Pranab Mukherjee was finance minister. Chidambaram took over the reins after Mukherjee resigned to become India’s 13th President.

Apart from SBI, officials from five other large public sector banks—Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and Union Bank of India—are part of the committee.

Gupta confirmed he is heading the committee, but declined to comment further.

The panel is working on a tight deadline and needs to finalize its recommendations in a week, said a banker familiar with the development. He declined to be named.

The Indian Banks’ Association (IBA) is not involved in the process, an official of apex bankers’ lobby said, requesting anonymity.

Once the recommendations are finalized, the Reserve Bank of India (RBI) will give its view to the ministry.

When the directive was issued, RBI was not consulted, and bankers had certain reservations about consortium lending. They had asked certain clarifications from the ministry through IBA.

RBI has been encouraging so-called multiple banking instead of group lending for quite sometime now to make banks more competitive and fair to companies.

“It is not that RBI prevents us from consortium lending, but it sees consortium lending as retrograde," said the unnamed banker.

“Both the arrangements have their advantages and disadvantages. A consortium-lending arrangement is very well-structured," said Prabal Banerjee, chief financial officer at Adani Power Ltd. “Big-ticket loans like that of project finance, etc., can only be given through a consortium, but for working capital loans, multiple banking arrangement is ideal."

Till 1997, when a committee headed by K. Kannan, then chairman of Bank of Baroda, recommended a multiple-lending arrangement, mainly for working capital loans, Indian banks were mandated to extend loans to companies by forming a group.

Under the consortium-lending approach, a group of banks comes to an agreement and offers common terms and conditions to the borrower, while in a multiple-lending arrangement, the borrower separately negotiates with its lenders.

In consortium lending, if a borrower fails to repay one bank’s loan, all the lenders in the consortium need to classify the loan as bad and set aside money. However, consortium lending allows banks to share information about a company and they can act quickly in unison if a borrower is not in good shape.

“Both the systems have their advantages and disadvantages, provided banks are able to plug the loopholes," said Saikiran Pulavarthi, lead banking analyst at Espirito Santo Investment Bank. “What is most important is effective exchange of information."

However, not all bankers agree that an exchange of information is critical for a bank to give loans.

“In most countries, absolute secrecy is maintained about the accounts and no exchange of information is encouraged. For example, in Singapore, it is banned by the regulator to exchange any information on client business," said the unnamed banker cited above. “It poses a question mark on the banks’ own credit appraisal process."

One major reason why banks have shifted from the consortium arrangement is that the companies were complaining that they didn’t have the pricing power as the banks were offering a uniform rate.

“Pricing power for a corporate depends upon the strength of its balance sheet and profitability," said Adani’s Banerjee. “Consortium or multiple, it doesn’t make a difference."

Most public sector banks are opposing the consortium approach now as they fear losing business to private banks.

“Building a consensus poses a major challenge in a consortium. It can take even a year for all banks to agree to the terms and conditions before a loan could be sanctioned," said another top official of a public sector bank, who too declined to be identified. “Corporate borrowers will not wait that long and go to private banks."

“When the finance ministry issues a directive, it becomes a rule for the public sector bankers as we are government owned, but such norms are not applicable to private banks," said the first unnamed banker cited earlier. “This denies us a level playing field."

However, if RBI issues such a directive, all banks need to comply.

“The multiple lending arrangement is preferred by borrowers as it offers them great flexibility in operating account with different banks, but at the same time, it is contrary to the principles of credit discipline," the ministry directive, issued by Mittal, had said, adding that the consortium-lending approach, besides bringing credit discipline, will also prevent high value frauds, The Economic Times newspaper had reported in April.

The bankers had discussed the ministry’s micro-management in their first meeting with Chidambaram in August. He had assured them that he would oversee all directives and that no micro-management would be allowed.

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