Interest rate must be average of that offered by three top banks with biggest exposure, says committee
A committee set up to review consortium lending has recommended that the interest rate for a loan should be the average of the rates offered by the three banks which has the biggest exposure. ?The rate of the loan must be the mean of the rate of the top three banks in terms of exposure,? said Diwakar Gupta, MD and CFO of State Bank of India, who chaired the committee.
The committee, set up at the instance of the finance ministry, also suggested that banks that leave the consortium must find a replacement. Moreover, the exposure of each bank in a consortium must be at least 10% of the total. ?One cannot have a consortium of R500 crore with 23 banks,? Gupta told FE.
The department of financial services, in the ministry of finance, will meet with representatives of select banks and the Reserve Bank of India on Tuesday to review the report. The meeting will discuss ways to improve the credit flow to the corporate sector, which is looking to improve consortium lending practices. Banks want to put in place a timeframe and a framework for speeding up decisions and also information sharing.
The government feel that banks do not share information or play fair in a consortium. ?There are banks who short circuit the consortium approach, go outside the consortium and make some money. Even within the consortium the more powerful banks want to get more than their fair share of fee income,? Gupta observed.
However, to implement the recommendations, the RBI will have to issue operational guidelines. Gupta said that the regulator could have reservations on more regulation since it has stayed away from micromanaging banks’ operations.
Gupta chaired the committee which included representatives from six other banks including Bank of Baroda, Bank of India, Canara Bank, and Punjab National Bank.