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Multiple Banking Arrangements – How to navigate them
Nov 10 2023
5 min read
To raise funds, businesses often seek multiple banking arrangements from financial institutions . But what exactly does this entail, and why are some companies favoring this approach over traditional consortium lending?
Banks are embracing this shift because corporations are reducing their debts. Bad loans have reached a seven-year low, and there are signs of an upswing in the credit cycle.
India’s Domestic Credit growth for large industries is on the rise, surging by 15.60 % YoY in June 2023, compared with an increase of 13.70% YoY in the previous month.
As we navigate these shifts in the corporate financing landscape, it’s clear that MBA is favourable as a dynamic and flexible option, catering to the evolving needs of both corporate and Financial institutions . As we go further let’s understand the financial grounds as well.
However, the present prudential norms issued by RBI has capped the Banks credit exposure to single borrower or borrower group connected entities at 15% and 25% of capital base. Therefore, it is paramount for the corporate to arrange funding from consortium or multiple banking.
Consortiums vs Multiple : A Comparison
For a corporate seeking loan from lenders, they have option of the Consortium Banking Arrangement. CBAs are a structured form of banking, where a Lead bank oversees a corporate’s loan requirements and monitors the process in collaboration with member banks. The key benefit is uniformity – all lenders have access to the same corporate information, creating a controlled and coordinated monitoring system. This means each process is streamlined.
And other option is the multiple Banking Arrangement, where each lender interacts separately with the corporate without coordination among them. Here, information exchange among lenders is fragmented, and corporates interact separately with each lender.
So, why the choice? Corporates opt for consortium arrangements when a few lenders can’t shoulder their entire exposure. It’s a practical solution to meet their growing financial needs.
Operational Inconveniences in the Multiple Banking Arena
1. Information Asymmetry
In the independent banking setup, each lender possesses different information about the corporate. This can lead to significant information gaps where any single lender may not have a comprehensive understanding of the corporate’s financial health and activities.
2. Loan Processing Delays
The corporate world operates at a rapid pace, and any delays in loan sanctioning can have costly consequences. Information gaps and a lack of streamlined communication among lenders can lead to extended approval processes.
3. Limited Independent Enquiries
In multiple banking arrangements, lenders often rely primarily on the information provided by the corporate seeking the loan. This reliance can be risky, as corporate-provided data may not always provide the full and accurate picture of the company’s financial health.
4.Delay in Sharing of Performance Results
Timely sharing of a corporate’s financial performance and conduct is critical for informed lending decisions. Delays in sharing this information can disrupt the interests of other lenders in the consortium.
5. Lack of Cohesiveness
When lenders in a multiple banking arrangement are not aligned in their understanding of the corporate’s financial situation and objectives, it can create opportunities for corporate misuse of funds.
Regulatory Efforts to Bridge the Gap
To address the aforesaid, the Reserve Bank of India (RBI) has stepped in to address these issues. They’ve introduced guidelines like Joint Lending Arrangements and Exchange of Credit Information Reports among lenders. These measures aim to create a more harmonious financial environment.
A Need for a Custodian
In line with maintaining the requires standards of corporate borrowing it would be ideal to have a platform – a custodian to facilitate in ensuring the credit and financial discipline. Imagine this as a secure vault where all information related to a corporate’s credit and business is stored. It’s the key to eliminating information asymmetry.
The Role of the Platform – Custodian
So, what can a custodian do? Let’s break it down:
1. Centralized Information: A custodian gathers and centralizes all data related to a corporate’s financial health. This means all lenders have access to the same information, levelling the playing field.
2. Real-time Updates: It’s like having a live dashboard of a corporate’s financial performance. Lenders can stay updated, making informed decisions promptly.
3. Risk Mitigation: With a custodian, lenders can spot potential red flags early on, reducing the risk of lending to unstable businesses.
4. Transparent Monitoring: A custodian helps lenders keep an eye on how corporates are using funds. This transparency discourages misuse.
5. Efficiency: By streamlining data access, a custodian reduces delays in loan processing, benefiting both corporates and lenders.
In the world of multiple banking arrangements, striking a balance between the corporates’ financial needs and lenders’ risk management is a challenge. Consortiums and multiple arrangements each have their merits, but operational inconveniences can’t be ignored.
Regulatory efforts like Joint Lending Arrangements and Credit Information Exchange are steps in the right direction. However, to truly bridge the information gap and ensure credit discipline, the concept of a custodian is paramount.
This custodian acts as a guardian of financial information, offering a centralized platform for all lenders. It’s like a bright spotlight on a corporate’s financial stage, allowing lenders to make harmonious, well-informed decisions.
So, as the financial world continues to evolve, remember that information is power. And a custodia is the key to unleashing that power and fostering a more robust and disciplined multiple banking system.