What is consortium lending?

By Ritesh|Updated : September 2nd, 2022

In a consortium lending system, a single borrower is financed by two or more lenders. Lending banks come together formally through a mutual agreement to fulfil the credit requirements of the borrower. The sanction of limits for the borrower is supplemented by joint documentation, joint assessment, and monitoring of the advance with follow-up exercises and mutual supervision.

Meaning of Consortium Lending in Banking

  • The borrower's company gives the bank a mandate to lead the consortium, referred to as the consortium's lead (leader) bank.
  • The consortium leader is responsible for holding the joint advance/loan documents issued by the borrower's company, according to the consortium.
  • The "Pari-Pass" fee will be created from the securities given by the borrower company against the total credit extended to the company by the lending institutions of the consortium.
  • A "Pari Passu" charge is when the borrower 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 respective lender.
  • The syndicated lending system thus offers space and the possibility to share the risk between banks. This system is considered mutually beneficial for banks and customers.
  • In consortium advance, the commitment charge levied is not mandatory and is left to the discretion of the financing consortium/ banks/ syndicate. Banks can create guidelines based on the commitment charge 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.

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