'Banks should give replacement before leaving a consortium'

Banks that want to leave a loan consortium can do so only after finding a replacement, if the recommendations of a committee on joint lending are implemented.

The committee, set up by the finance ministry to improve the credit flow for the corporate sector, met on Thursday to discuss the issues regarding consortium lending. The committee is headed by Diwakar Gupta, managing director and chief financial officer (CFO), State Bank of India, and comprises members from various public sector banks. The panel is of the view that if a lender wants to leave a consortium, it has to find a replacement, according to a member of the panel.

“We discussed how to make loan sanctioning process more disciplined. We are also suggesting that a decision has to be taken regarding approval of rejection of the loan within a specified framework,” said another committee member.

The panel was also formed to increase the information sharing process within banks in the consortium because the finance ministry is of the view that despite the Reserve Bank of India (RBI)’s repeated requests, there is an asymmetry in information among banks and the companies have been taking advantage of it.

“The committee meeting was for laying down the grounds on how consortium should work and whether it should be mandatory. The committee has deliberated on it and when all members agree, we will prepare a detailed report and submit it to the department of financial services. They will take a further call on it,” committee chairman Gupta told Business Standard.

“Today if we don’t form a consortium we have a problem like borrowers don’t adhere to discipline and so on... and when borrower is good, bankers run after each other to get more business by cutting rates. So, we have to rationalise all this conditions and need to have ground rules so that they don’t become oppressive and monopolistic,” Gupta added.

Once the committee finalises its views, it will be sent to the ministry. However, to implement the committee’s recommendation, RBI will have to issue operational guidelines. Interestingly, private and foreign lenders are not a part of the committee, but the panel has representation from Indian Banking Association, the banks’ body, comprising the private sector, foreign banks and public sector banks.