Corporate Banking Consortium Lending Issues
Corporate Banking – Consortium Lending Issues
1. Meaning of Consortium Lending
Consortium lending is a financing arrangement where two or more banks/lenders jointly lend to a corporate borrower under a common loan agreement.
Used for:
Large infrastructure projects
Capital-intensive industries
Big corporate expansions
2. Legal Framework
Consortium lending touches multiple laws:
Indian Contract Act, 1872
Banking Regulation Act, 1949
RBI Guidelines on Consortium & Multiple Banking
SARFAESI Act, 2002
Insolvency and Bankruptcy Code, 2016
3. Structure of Consortium Lending
| Role | Function |
|---|---|
| Lead Bank | Coordinates lenders, monitoring |
| Member Banks | Provide proportionate share of loan |
| Security Trustee | Holds security for all lenders |
| Inter-Creditor Agreement (ICA) | Governs lender relationships |
4. Major Legal Issues in Consortium Lending
(A) Divergence of Lender Interests
Not all banks agree on:
Restructuring
Enforcement
IBC referral
Problem: Minority lenders may delay decisions.
(B) Enforcement of Security
Questions arise:
Can one bank enforce alone?
Must all act jointly?
Depends on ICA and security documents.
(C) Role & Liability of Lead Bank
Lead bank’s duties:
Information sharing
Monitoring borrower
Acting in good faith
Disputes arise over negligence.
(D) Inter-Creditor Disputes
Conflicts over:
Priority of charge
Sharing recoveries
Voting in resolution plans
(E) SARFAESI Actions
Under Section 13(9) SARFAESI:
60% of secured creditors by value must agree for enforcement.
(F) IBC Proceedings
Consortium lenders often act jointly as financial creditors, but voting share depends on exposure.
5. Key Practical Problems
| Issue | Effect |
|---|---|
| Delayed decisions | Value erosion |
| Evergreening by some lenders | Regulatory risk |
| Misreporting by borrower | Collective exposure |
| Security documentation gaps | Litigation |
6. Landmark Case Laws
1. Central Bank of India v. State of Kerala (SC, 2009)
Discussed priority of secured creditors; relevant in multi-lender enforcement.
2. ICICI Bank v. Sidco Leathers Ltd. (SC, 2006)
Clarified pari passu charge and distribution among secured lenders.
3. Pegasus Assets Reconstruction Pvt. Ltd. v. Haryana Concast Ltd. (SC, 2015)
SARFAESI enforcement involving multiple creditors.
4. Innoventive Industries v. ICICI Bank (SC, 2017)
Strengthened financial creditor rights in consortium defaults.
5. Essar Steel v. Satish Kumar Gupta (SC, 2019)
Voting share of consortium lenders in resolution plan.
6. State Bank of India v. V. Ramakrishnan (SC, 2018)
Clarified creditor rights outside moratorium for guarantors.
7. K. Sashidhar v. Indian Overseas Bank (SC, 2019)
Commercial wisdom of CoC — majority binds minority lenders.
7. Regulatory Safeguards
RBI requires:
✔ Inter-Creditor Agreements
✔ Majority decision rule
✔ Timely resolution
✔ Provisioning for dissenting lenders
8. Importance of ICA
ICA governs:
Voting rights
Enforcement procedure
Sharing of recoveries
Exit of lenders
It reduces litigation among consortium members.
Conclusion
Consortium lending balances:
✔ Risk sharing
✔ Large-scale financing
but creates:
❗ Inter-creditor conflicts
❗ Enforcement complications
❗ Regulatory compliance issues
Courts and RBI increasingly support majority-driven decision-making to prevent value destruction.
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