Consortium & Multiple Banking

Large corporate credit requirements often exceed the exposure limits or risk appetite of a single bank. In such cases, funding is arranged through multiple banks. Two common structures are Consortium Lending and Multiple Banking. While both involve more than one lender financing the same borrower, they differ significantly in coordination, documentation, and risk management.

Consortium Lending

Consortium lending is a formal arrangement in which two or more banks jointly finance a borrower under a common agreement, usually for a large project or substantial credit requirement.
Under this system, the borrower’s total funding need is assessed collectively. One bank, known as the Lead Bank, generally conducts the primary appraisal and coordinates the consortium’s activities. Each bank agrees to take a defined share of the total exposure.
All consortium members operate under common loan documentation, which specifies uniform terms such as interest rate, tenure, repayment schedule, security, and covenants.
Security provided by the borrower is typically shared among all banks on a pari passu basis. Operationally, one bank may act as an agent bank for routing disbursements, repayments, and information flow. Monitoring and key decisions, such as restructuring or enhancement of limits, are taken collectively.

Advantages of Consortium Lending

• Borrowers gain access to large funds on uniform terms without negotiating separately with multiple banks.
• Banks benefit from risk sharing and collective expertise in appraisal and monitoring.
• Information transparency and uniform covenants promote stronger credit discipline.
• Banks can comply with regulatory exposure norms while participating in large loans.

Limitations of Consortium Lending

• Decision-making can be slow due to the need for consensus.
• Coordination challenges may arise due to differing risk perceptions among banks.
• Resolution of stressed assets can be complex if lenders disagree on strategy.

Multiple Banking

In a multiple banking arrangement, a borrower independently avails credit facilities from several banks without forming a formal inter-bank group.
Each bank conducts its own appraisal, sanctions its own limits, and enters into separate loan agreements with the borrower. While banks are aware that the borrower has relationships with other lenders, coordination is minimal. Security may be provided separately to each bank, or sometimes shared through limited pari passu arrangements, but without a comprehensive joint framework.
This structure offers the borrower flexibility to choose different banks for different needs, such as working capital, term loans, or foreign currency facilities.

Advantages of Multiple Banking

• Borrowers avoid dependence on a single bank and can negotiate competitively.
• Changes or enhancements can be managed quickly with individual banks.
• Banks retain full control over their own exposure and decision-making.

Limitations of Multiple Banking

• Borrowers face higher administrative burden due to multiple relationships and reporting requirements.
• Lack of coordination can lead to inconsistent covenants and operational complexity.
• Banks face information asymmetry, over-borrowing risk, and difficulties in coordinated recovery if the borrower defaults.

Regulators permit multiple banking but emphasize disclosure, information sharing, credit bureau reporting, and inter-creditor agreements to mitigate risks.

Consortium Lending vs. Multiple Banking: Comparison Table

Practical Perspective

In practice, companies often begin with multiple banking arrangements. As borrowing requirements grow and exposure becomes large, banks may encourage conversion to a consortium structure for better coordination and risk control. Syndicated loans represent an intermediate form, combining common documentation with distribution of exposure among lenders, often for specific transactions rather than ongoing relationships.