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Consortium lending......making a comeback - Views on News from Equitymaster
 
 
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  • Aug 27, 1999

    Consortium lending......making a comeback

    According to newspaper reports, the Reserve Bank of India (RBI) will institute a high level, permanent co-ordination committee for a combined approach in case of large loans to corporates. The committee will comprise of representatives of banks and financial institutions.

    The move is aimed at tackling three major issues:

    • Making jointly available both working capital and long term funds to avoid mismatches
    • Information regarding non performing assets
    • Sharing of charge on fixed and current assets in a project

    RBI's decision to set up such a body will go a long way in improving the investment climate for large projects. Presently, as no institution is able to meet all the needs of a large project, promoters have to source their funds from a number of institutions and banks. This causes delays, which are amplified due to the absence of an efficient flow of information between various financial intermediaries. Such delays at times can have serious implications for the viability of the project.

    However, such a move could also lead to lesser competition in the market, pushing up the cost of funds. Presently, a company can always approach another bank or financial institution to seek better financing rates. Under the new system, however, the companies would have limited options of financing. In short, possibly a monopolistic structure would be created, which would be detrimental for the health of the economy.

     

     

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