Consortium Lending

Why Consortium Lending is Essential in Debt Planning

Consortium lending offers key advantages, especially in risk mitigation. Picture a ₹2,000 crore project. Dividing this amount means each lender's minimum exposure could be just ₹150 crore. This significantly lowers the risk of loss from borrower defaults. It also helps banks comply with RBI rules, which limit exposure to any borrower to 25% of a bank's total capital. Additionally, consortium lending pools expertise, enhancing the quality of loan appraisal and due diligence. This is crucial for renewable energy projects, like those from IREDA, which have specific debt-to-equity ratios for funding. Consortium arrangements also assist banks in meeting priority-sector lending targets by collaborating with NBFCs.

Recognizing the Challenges and Limitations

However, consortium lending has challenges. Coordinating multiple banks, often five or more, can be complex and costly. Lead banks may charge fees of 0.15% to 0.20% for managing loans over ₹200 crore. Each lender also faces liability risks based on their share. For example, if a ₹1,000 crore loan becomes a non-performing asset (NPA), a lender with a 10% share faces a ₹100 crore loss. New RBI provisioning rules pressure banks to set aside large reserves, affecting liquidity. Documentation delays are another issue; multi-bank agreements in public-private partnership (PPP) projects can delay disbursements by six to twelve months due to complex contracts.

Strategic Tips for Effective Consortium Lending

To handle these challenges well, banks should follow the RBI's exposure floors. They must maintain at least a 10% participation rate in smaller loans to avoid regulatory issues. Using technology is also crucial. In 2024, public sector banks launched unified online portals to streamline approvals and recover NPAs, cutting turnaround times. Banks should adopt dynamic provisioning practices, setting aside about ₹2 crore quarterly for every ₹100 crore lent. This aligns with RBI’s phased provisioning schedule. Collateral strength is key; ensuring a 1.2x Debt Service Coverage Ratio (DSCR) through bank guarantees or fixed deposits can protect lenders from project failures. Regular joint audits, especially for sectors like energy, help maintain at least 75% asset coverage, reducing risks like asset diversion.

Navigating Future Growth Prudently

Consortium lending is essential for India’s ambitious ₹50 lakh crore infrastructure plan. To succeed, lenders must follow evolving RBI regulations, share risks wisely, and embrace technology. By adjusting to RBI’s 2024–2025 provisioning guidelines and adhering to exposure floors, lenders can balance growth with caution, protecting against systemic risks.