Corporates are calling the shots, but consortium banking is alive and kicking

The belief got reinforced when engineering major Larsen & Toubro (L&T) expressed interest in a relationship outside its existing consortium, and sought lead-bank State Bank of India’s approval for the same.

Hongkong Bank head of corporate & institutional banking Sanjeev Bhasin feels this is a forerunner of things to come: "Clients are now more inclined togo to a bank/banks which they perceive have a strength in a given area". But that doesn’t mean consortium banking is ready to roll over and play dead.

According to ANZ Investment Bank head of corporate relationships (India) Ashok Sood, "Corporates today have the best of both worlds. Prime rates are different…so within a consortium you can do more business with a bank which is more competitive.

Again, avenues of tapping funds are varied. You have commercial paper issuances at sub-prime rates being subscribed to by entities outside the consortium. A big change has come through, and that is, consortiums are no more moribund or restrictive. A corporate can enjoy flexibility without disbanding it". Echoes Bhasin, "even now, you do have a situation wherein corporates earmark both fee-based and fund-based activities with select banks."

Consortium banking characterises corporate-India "connect" with financial intermediaries, and it is not uncommon for companies to have an unwieldy relationship with 15-20banks. ABN Amro Bank chief executive officer Ramesh Sobti gives it a historical perspective: "Prudential norms were tighter and banks hit their exposure ceilings (for individual corporates) soon…unrelated diversifications and liquidity problems saw more and more banks join a corporate’s consortium."

Sobti, like many corporate bankers, feels that it is sensible for corporates to opt for multiple banking or a pruned consortium. Says Bank of India (BoI) executive director S Gopalakrishnan: "For corporates, gains on pricing of loans and services can be achieved if fewer banks get the luxury of bigger business volumes".

But thanks to the new choosiness among corporates, intra-consortium tension is more apparent today, accentuated by thinner spreads to skate on, fierce challenges from new generation private banks, and the always on-the-go foreign banks. These encourage what Standard Chartered Bank head of corporate & investment banking Sanjeev Nanawati, terms as "Kamikaze pricing".

Take HLL’s decision to goin for multiple banking, which saw corporate bankers gasp. For banks which had done no business with HLL till then, group treasurer VK Vishwanathan’s move to disband consortium arrangements gave a great chance to snuggle into a plum relationship: a Rs 600-crore one, on guesstimates. Banks went into overdrive wooing the company while for those already in a relationship with HLL, it was nail-biting time.

Exactly what the Reserve Bank of India (RBI) had in mind when it set the stage for a break away from consortium banking about a year-and-a-half back, giving tacit approval to domestic loan syndications. The last mentioned is still many aeons away, but as Stanchart’s Nanawati explains, "regulatory changes enabling corporates to access credit outside the lender’s consortium were was based on the premise that the prevalent arrangement was not conducive to smooth credit delivery…that banks within a consortium were not competitive enough, given a captive clientele".

Such undercurrents should ideally emboldencorporates to disband or prune consortiums to get better deals from banks. But that is not happening because, as BoI’s Gopalakrishnan observes, "you have a polarised situation today…at one of the spectrum are the multinationals and bigger local companies. Every bank wants to do business with them, but the rest of the lot are perennially on the lookout for funds". Bhasin is more blunt: "No corporate would like to annoy banks…you never know when you need them, especially in a tight liquidity situation".

It is not that the consortium structure has not served corporates well. It is a cosy situation wherein quarterly information systems are standardised, and everyone is well versed with the attendant bureaucracy.

Nanawati appears to be closer to the truth when he says: "At one level, I feel it is sheer inertia…of finding oneself comfortable with things as they are. Then you have the trade-off aspect…it is still not clear to corporates whether by disbanding or pruning a consortium they can availthemselves of cheaper funds or better services…so why take all that trouble".Banking relationships in the country also reflect social mores.

Says Sood: "Call it sentimentality, but it is there". Few promoters or corporate finance directors would like to openly call it quits with a bank. Help rendered in the past continues to shape contemporary corporate banking relations. This is best exemplified by Reliance Industries, whose lead bank continues to be the relatively small Manipal-based Syndicate Bank.

Other ground realities helping traditional banking relationships to hold sway is credit appraisal techniques.

The RBI’s move to do away with the maximum permissible credit limits for corporates and current ratio stipulations of 1:1.33 has not incentivised banks to come up with new norms.

One, they are unsure and are more at home with Reserve Bank norms, and two, customised credit appraisal is seen as increasing paperwork for state-run players who bank most of corporate India.

For now, it appearsthat consortium banking is resilient enough to be around for some to come.