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Mumbai: A committee appointed by the finance ministry has found retrograde a directive issued by the same ministry, albeit under the previous finance minister, asking state-owned banks to group together with other state-owned banks while lending any amount in excess of 150 crore.

It arrived at this conclusion because the banking regulator, the Reserve Bank of India (RBI), freed banks from this requirement in the mid-1990s.

The committee, comprising bankers, has also suggested that any recommendation on such issues should come from the banking regulator, and not the finance ministry. This will make the recommendation binding for private banks as well, two persons familiar with the development said.

The banks themselves have been in favour of a multiple lending approach unless the amount is too high, say, 1,000 crore and beyond.

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

If one borrower of a consortium fails to repay a bank’s loan, all lenders in the consortium are forced to classify the loan as bad and set aside money for it. This does not happen in case of multiple lending. The consortium lending arrangement, however, allows banks to share information about a company and by virtue of that the bankers can act quickly and in unison to recover money in case a borrower is in distress.

The directive was not binding on private banks, and hence the public sector banks that account for about 70% of the banking industry were worried that it would take away business from them.

The panel, headed by State Bank of India (SBI) managing director Diwakar Gupta, has suggested that any loan above 1,000 crore should compulsorily be under consortium lending, irrespective of the loan being for working capital or otherwise.

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—were part of the committee that submitted its recommendations last week.

The group said 150 crore was too small an amount for large firms, whose working capital needs usually exceed this, according to a banker in the know of the committee’s recommendations.

“The most important part is that we have asked that these directives should come from RBI, so that it becomes mandatory for all banks—private or public. It is very crucial that a level playing field is created in a competitive environment," said another banker.

None of the bankers quoted in the story wanted to be identified given the sensitivity of the issue.

“The panel has also suggested that such a consortium approach is a retrograde step because RBI itself gave us the freedom to go for multiple lending long back, scraping the mandatory consortium approach," the second banker said.

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.

“In a free market, these directives don’t augur well for the government-owned banks. It is only fair that they will want the directive to be a rule for private banks as well. It will help create an equal play," said Hatim Broachwala, an analyst at Karvy Stock Broking Ltd.

The panel also suggested that each bank should have a minimum 10% share in a consortium as this would force them to keep a constraint vigil on their respective exposures instead of leaving the task to the lead bank of the consortium.

The department of financial services of the finance ministry will now take a decision, based on the recommendations of the committee. It is not clear whether the ministry will seek RBI’s views before taking the call.

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