CONSORTIUM ADVANCES
Sometimes commercial banks grant credit on a consortium basis to various public and private companies. It is adopted in case of big borrowers, whose credit needs are met by two or more banks jointly in proportion to their capacities. This practice is also known as Participation Financing, or Joint Financing. There are two specific reasons for financing on participation basis: First, the resources of banks do not permit large advances, particularly in view of the credit control measures adopted by the Central Bank; and second, the banks are able to diversify their risks by participating in big advances. Each bank bears a part of the risks involved in a large advance.
Joint financing or consortium lending is to be distinguished from multiple banking. In the latter case, a borrower borrows from a number of banks under separate agreements and securities are charged to them separately. But in case of a joint finance, an advance is given to the same party against a common security which remains charged to all the banks for the total advance. Usually in the case of a consortium advance, one of the banks acts as a consortium leader and takes leading part in the processing of the loan proposal, its documentation, recovery, etc. The participating banks enter into an agreement setting out the terms and conditions of such participation arrangement.
