In consortium lending system, two or more lenders join together to finance a single borrower. The lending banks formally join together, by way of an inter-se agreement to meet the credit needs of a borrower. Here, the sanction of limits to a borrower is completed with common appraisal, common documentation and monitoring the advance with joint supervision and follow-up exercises.
The borrower company gives a mandate to a bank to lead the consortium, which is commonly referred as a consortium lead (leader) bank. The consortium leader will be responsible for holding common loan/advance documents executed by the borrower company on behalf of consortium.
The “Pari-Passu” Charge will be created on securities offered by the borrower company against the total credit extend to the company by all the lending institutions of consortium. “Pari Passu” charge means that when Borrower entity goes into dissolution or the security is sold or otherwise disposed –off by the consortium, the assets over which the charge has been created will be distributed in proportion to the creditors’ (lenders) respective holdings.
Thus, the system of consortium lending offers scope and opportunity to share risk amongst banks. The system is considered to be mutually beneficial to the banks as well as customers.
In consortium advance, the levy of commitment charge is not mandatory and it is left to the discretion of the financing banks/ consortium/syndicate. Accordingly, banks are free to evolve their own guidelines in regard to commitment charge for ensuring credit discipline.