What is Consortium Lending?
By BYJU'S Exam Prep
Updated on: November 9th, 2023
In a consortium lending system, a single borrower is financed by two or more lenders. Lending banks formally come together through a mutual agreement to meet the credit requirements of the borrower. The sanction of the limit for the borrower is supplemented by joint documentation, joint appraisal, and monitoring of the advance with follow-up exercise and mutual supervision.
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Consortium Lending in Banking
The borrower’s company delegates authority to the bank, which is known as the Consortium’s Lead (leader) Bank. As per the consortium, the consortium leader is responsible for keeping the joint advance/loan documents issued by the borrower’s company.
- A “Pari-Passu” fee will be created from securities offered by the borrower company against the total credit extended to the company by the consortium’s lending institutions.
- A “pari passu” fee occurs when the borrowing entity is dissolved, or the security is sold or disposed of by the consortium; The assets created by the encumbrance will be given proportionately to the lender concerned.
- Thus the syndicated lending system provides space and the possibility for risk sharing among banks. This system is considered to be mutually beneficial for banks and customers.
- In Consortium Advance, the commitment fee levied is not mandatory and is left to the discretion of the Financing Consortium/Banks/Syndicate. Banks may frame guidelines on the basis of commitment fees to ensure credit discipline.
Summary:
What is Consortium Lending?
Consortium Lending is a situation where a single borrower is financed jointly by various lending institutions by grouping together. The borrower’s limit is sanctioned in addition to joint documentation, joint appraisal, and advance monitoring with follow-up exercise and mutual supervision.
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