If a group of banks and financial institutions agree to finance a single business unit/firm/company together, it is called consortium financing. Basically, for big business units such as hotel, hospital, hydropower company, cement industry etc. requires huge fund for the development of infrastructures and day to day operation. So, sole investment by a bank in a unit is very risky in one side. Likewise, on the other side a bank cannot supply huge amount of investment because of single obligor limit (SOL), concertation of fund, risk associated with business, lack of capital fund/capital adequacy and to minimize credit risk and so on. Thus, for the investment in to such a big organization, when a group of banks is formed with a coordination of a bank (lead bank), it is known as consortium finance.
As per NRB Unified Directives-2/077, Point No 35, multiple banking equal to or more than 1 billion lending or going to lend shall have to convert/ finance through consortium financing. It means, it is mandatory to finance through consortium in a unit equal or more than 1 billion.
Consortium financing play the significant role for the economy development of nation through big projects and programmes. Similarly, operation and conduction of huge project and programs are possible through consortium financing only.
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Lead bank is a bank whose portion of investment is more than other banks, having consortium knowledge, business expertise and overview with customer since long.
Member banks are the banks that agree to finance in a single business unit under consortium agreement with the coordination of lead bank.
The unit enjoying credit facility through consortium financing shall have to conduct banking transaction through either lead bank or member banks only.
Membership In Consortium Financing
Licensed institutions from Nepal Rastra Bank to conduct financial transaction can be a members of consortium financing. Similarly, Employees Provident Fund, Citizen Investment Trust (CIT), Hydroelectricity Investment and Development Company Limited (HIDCL), Insurance Companies can also participate in consortium financing as a member of consortium lead by the BFIs.
Time Frame For Consortium Financing Decision
When the proposal for consortium financing is dropped by firm, then the lead bank and members banks shall have to confirm within 90 days whether to invest or not into consortium financing.
Disbursement And Recovery Of Loan
Disbursement of loan to the consortium financing and settlement/recovery of consortium loan shall have to be performed through lead bank. In case of recovery of installment, principal and interest partially, it will be allocated on the basis of Investment portion.
Duty, Responsibility And Authority Of Lead Bank
As a lead bank, the bank has to perform different activities such as: work as an agent of members bank, maintain coordination, communication and correspondence among the members bank, conduct the consortium meeting once at least with in six month, analysis of project, prepare report and grant the report to members bank, analyze the requirement of short term fund of borrower, prepare required documents to supply loan and advance.
Similarly, it should manage the necessary arrangement to mortgage security collateral and insurance related task for the security of investment, get the project report from the borrower and make available to members bank, conduct the physical supervision of project along with member banks and prepare report and grant to member banks, evaluate the work in progress of project time and again and inform the members bank.
Likewise, in case of default of loan- the lead bank should organize consortium meeting, take necessary action and decision for the legal action with the purpose to recovery of loan, delay in disbursement of loan by member banks shall have to be managed by lead bank and lead bank shall compensate from concerned member bank along with fine and penalty, expenses incurred while managing consortium financing that is failed to bear by the borrower shall have to bear by members bank on the basis of investment portion, get credit information of borrower through Credit Information Center (CICL). If the borrower is blacklisted, the bank shall decline the proposal, make availability of fund time and again as per consortium agreement and so on.
Duty And Responsibility Of Member Banks In Consortium Financing
As a member bank, it shall have to perform different activities such as: grant the approval to the lead bank to conduct different consortium related activities, support to lead bank to work as a leader, actively participate in consortium meeting, implement and obey the rules, regulations, terms and conditions of consortium agreement after granting the approval to finance in consortium, with the respect of consortium meeting try to solve the problems and disputes with mutual understanding, do not carry out any activity to fulfil self interest and loss to other.
Likewise, after the disbursement of loan from their portion, the member bank shall immediately inform to lead bank and release fund, share the information of loan and borrower by maintaining transparency, implement the consortium decision as soon as possible. Members cannot invest more than their limit and can’t initiate recovery action individually and can’t classify loan own self, make the availability of fund to the borrower as per agreement and so on as and when required other tasks.
Withdraw Of Consortium Member
Member financial institution can withdraw the membership without hampering for the completion of project as per following:
- If the portion of investment of terminating member’s is ready to be taken by another member.
- If the portion of investment of terminating member’s is transferred to new member with the recommendation of existing members.
Newly entered member and accepting member shall have to bears all the liabilities of terminating member. Terminating member can sell its portion of investment either in par, premium or in discount.
Appointment Of Auditor And Expertise
In order to evaluate the financial conditions of borrower or calculating the cost estimation of project and the revaluation of work in progress of project, if consortium member felt the necessity of independent auditor or expert, it can appoint as for the same. Expenses incurred for the auditor and expert shall have to borne by consortium members based on portion of investment.
Reporting Of Consortium Financing
Lead bank shall have to compulsorily submit the report of consortium financing in the prescribed format with in 30 days of each quarter to Banks and Financial Institutions Regulation Department and Bank Supervision Department in Nepal Rastra Bank.
The act of financing by a group of banks and financial institutions under the consortium agreement in a unit for the purpose of development of infrastructure and day to day operation is called consortium financing. From the different point of view, single bank shall not/can to supply the require fund in a huge business organization. So the concept of consortium has emerged. Consortium members shall have to implement and obey the consortium terms and conditions with the coordination of lead bank.
(Mr. Mukunda Tripathee is currently working in the banking sector.)
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