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Why Indian Banks are afraid of Multiple Banking Arrangement

Indian Banks lend loans and other credit facilities to companies and large corporates under various banking arrangements. The list of Banking Arrangement and their key features are explained below:

  • Sole Banking
  • Multiple Banking Arrangement
  • Consortium Arrangement

Sole Banking

If the company is dealing with only one bank for all its banking needs then it is called as Sole Banking. Here the sole bank has the complete rights on all the properties of the company or on the assets exclusively given by company to the bank.

Multiple Banking Arrangement (MBA)

In this arrangement, loans and other facilities are given by banks to a company based on individual assessment and individual set of securities. Under this arrangement, different banks give loans and facilities to the same company but have their own and independent arrangement with the company. The individual banks may have exclusive charge or paripassu charge on assets of the company. In a MBA setup, all the banks have to periodically communicate with other banks about the company’s performance and also share the conduct. 

Consortium Arrangement

Under this, different banks lend various loan and credit facilities to the same company but under a common umbrella. Banks form a consortium and appoint one banks as its leader. All the banks do the common assessment and common legal documentation and clearly mention the list of securities assigned to them. They meet periodically i.e., once or twice in 3 months and  assess the performance of the company. In case of any default, all the banks have equal right in relation to their proportion of banking facilities on the assets. Any recovered amount will be distributed on a pro-rata (pari passu) basis.

Problem with Multiple Banking Arrangement

Many banks faced problems with MBA in recent past. The main reasons are:

  1. Lack of co-ordination among banks
  2. No clarity on security related issues like which bank has precedence over others
  3. Lack of common purpose lead to leg pulling among banks
  4. Unable to monitor the end use of funds properly
  5. Company availing banking limits beyond the assessed level

As a result, Indian Banks Association (IBA), the banking lobby forum, had taken steps to bring to notice of RBI the difficulties related to MBA arrangements. RBI is in favour of consortium arrangement beyond a threshold limit of Rs. 500 crore i.e., all the companies having more than Rs. 500.0 crore exposure to the banking industry has to do so in consortium only.

Even though all the problems may not be solved, banks are of the opinion that slippage of assets to NPA may come down by forming consortium and taking remedial measures collectively for timely resolution of issues.