Tisco, Reliance Want To Drop Small Banks From Consortia

Leading corporates like Tata Steel, Telco and Reliance Industries have written to their lead banks to reduce the number of banks in the consortium in order to streamline their borrowing activities.

The move comes in the wake of the Reserve Bank's decision to do away with the system of consortium banking. Corporates no longer need to stick to its consortium of banks; and banks now have the freedom to move in and out of consortium arrangements.

This is expected to lead to a shakeout in the banking industry with the smaller banks being weeded out of consortia arrangements for large corporates.Besides the Tata companies and Reliance, several others have written to banks to reduce the number of members in the consortium, a top State Bank official said.

 

Corporates have informed banks that it is becoming increasingly difficult to handle the many accounts held in these banks. For instance, Reliance Industries has a consortium of 17 banks which means that the company has to keep track of its balances, drawals, repayment due dates for all of them. Companies have told the lead banks that the members of the consortium that have a very small share of the funding arrangement will have to be dropped. This amount will now have to be distributed among the other members. Sources at Citibank say a leading corporate wants six of its 16 consortium members to be sacked.

With the current easy liquidity scenario, lead banks have no other option but to accept the proposal of the top corporates. Some of the lead banks also support the proposal because their share of the funding pie will go up.

The move will hurt many of the small banks and also the new private sector banks as they have a small share of consortium funding. Generally, top corporates with large borrowings enter into consortia for borrowing and the small borrowers go to a single bank or opt for multiple banking. With small banks being edged out of consortia, they will have to fund the smaller and more riskier companies.

Says an official at Union Bank of India, The only way out of this is to introduce syndicated loans for working capital also. The syndicated loan system works well for term loans by financial institutions, but it will be difficult to tailor it to working capital loans which are short-term in nature. It is procedurally difficult for a working capital loan