In October 1996, various regulatory prescriptions regarding conduct of consortium / multiple banking / syndicate arrangements were withdrawn by Reserve Bank of India with a view to introducing flexibility in the credit delivery system and to facilitate smooth flow of credit. However, Central Vigilance Commission (CVC), Government of India, in the light of frauds involving consortium/multiple banking arrangements which have taken place in the recent past, expressed concerns on the working of Consortium Lending and Multiple Banking Arrangements in the banking system. The CVC attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks. The matter was examined by the Reserve Bank of India (RBI) in consultation with the Indian Banks Association (IBA) who were of the opinion that there is need for improving the sharing/dissemination of information among the banks about the status of the borrowers enjoying credit facilities from more than one bank.

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 Multiple Banking Arrangements

The circular RBI Circulars DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD. No. BP.BC.94/08.12.001/2008-09 dated December 8, 2008. prescribe the  formats for declaration of information by the borrower at the time of applying for a credit facility to a bank and the format for exchange of information among the banks in respect of borrowers enjoying credit facilities from more than one bank .

Annexure 1 Minimum Information to be declared by Borrowing Entities to Banks while Approaching for Finance under Multiple Banking Arrangement

At the time of granting fresh facilities, banks may obtain declaration from the borrowers about the credit facilities already enjoyed by them from other banks. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of Rs. 5.00 crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks, and introduce a system of exchange of information with other banks as indicated above.

Annexure II Format under Multiple Banking Arrangement Credit Information Exchange

Subsequently, banks should exchange information about the conduct of the borrowers’ accounts with other banks at least at quarterly intervals.

An Auditor should check whether:

Declared by Borrowing Entities

(a) a declaration from existing borrowers availing sanctioned limits of Rupees five crore and above or wherever it is in their knowledge that their borrowers are availing credit facilities from other banks, have been obtained;

(b) information in prescribed format about the conduct of the borrowers’ accounts has been exchanged with other banks at least at quarterly intervals; and

(c) suitable clause in loan agreements regarding exchange of credit information, have been incorporated.

(d) ‘diligence report’ has been received from CS/CA/CMA in terms of RBI Circular DBOD. No. BP. BC. 110/08.12.001/2008-09 dated February 10, 2009.

Diligence Report

To,

The Manager, _________________________ (Name of the Bank)

I / We have examined the registers, records, books and papers of ____________ Limited (the Company) as required to be maintained under the Companies Act, 2013 (the Act) and the rules made thereunder, the provisions of various statutes, wherever applicable, the provisions contained in the Memorandum and Articles of Association of the Company as well as the provisions contained in the Listing Agreement/s, if any, entered into by the Company with the recognized stock exchange/s, as may be applicable for the half year ended on ____________ .

In my / our opinion and to the best of my / our information and according to the examination carried out by me / us and explanations furnished to me / us by the Company, its officers and agents. I / We report that in respect of the aforesaid period :

1. (a) The management of the Company is carried out by the Board of Directors comprising the following persons : (b) During the period under review the following changes took place :

2. (a) The shareholding pattern of the company is as under : (b) During the period under review the following changes took place:

3. The company has altered the following provisions of (i) the Memorandum of Association during the period under review and has complied with the provisions of the Act. (ii) the following Articles of Association during the period under review and has complied with the provisions of the Act.

4. The company has during the period under review, entered into the following transactions with business entities in which directors are interested.

5. The company has during the period under review, advanced loans, given guarantees and provided securities amounting to Rs. ____________ to its directors and / or persons or firms or companies in which directors are interested.

6. The Company has during the period under review, made loans and investments; or given guarantees or provided securities to other business entities as under :

7. The amount borrowed by the Company from directors, members, public, financial institutions, banks and others during the period under review is / are within the borrowing limits of the Company. The break-up of the company’s borrowings is as under:

8. The Company has during the period under review, not defaulted in the repayment of any public deposits or unsecured loans and the Company or its Directors are not under the Defaulter’s list of Reserve Bank of India or in the Specific Approval List of ECGC.

9. The Company has during the period under review, created, modified or satisfied charges on the assets of the company as under :

10. The Forex Exposure and Overseas Borrowings of the company are as under”

11. The Company has issued, offered and allotted all the securities to the persons entitled thereto and has also issued letters, coupons, warrants and certificates thereof to the concerned persons and also redeemed its preference shares / debentures and bought back its shares (wherever applicable) in compliance with the specified procedures and within the stipulated time.

12. The Company has insured all its assets including the secured assets.

13. The Company has complied with the terms and conditions, set forth by the lending institution at the time of availing the facility and also during the currency of the loan and has utilized the funds for the purposes for which these were borrowed.

14. The Company has declared and paid dividends to its shareholders as per the provisions of the Companies Act, 1956.

15. The Company has paid all its statutory dues and that there are no arrears.

16. The Company has complied with the provisions stipulated in Section 372 A of the Companies Act in respect of its Inter Corporate loans and Investments.

17. The Company has complied with the applicable and mandatory Accounting Standards issued by the Institute of Chartered Accountants of India.

18. The Company has credited and paid to the Investor Education and Protection Fund all the unpaid dividends and other amounts required to be so credited.

19. A list of prosecutions initiated against or show cause notices received by the Company for alleged offences under the Act and also the fines and penalties or any other punishment imposed on the Company in such cases is attached.

20. The Company has complied with the various clauses of the Listing Agreement, if applicable.

21. The Company has deposited both Employees’ and Employer’s contribution to Provident Fund with the prescribed authorities. Note : The qualification, reservation or adverse remarks, if any, may be stated at the relevant place(s).

Place : Signature :

Date : Name of Company Secretary/CA/CMA  : C.P.No.

Certification of Borrowal Companies by Chartered Accountants / Company Secretaries

i. Terms of reference for stock audit are to be spelt out clearly by the Banks, so that the Chartered Accountants can give focused attention to such areas.

ii. End-use verification of funds lent, if certified by Statutory Auditors, will be a good comfort to the Banks & credit reports are available from a credit information company registered with RBI; and

iii.  As Banks quite often deal with unlisted companies, disclosure requirements for such companies above a specific turnover may be made akin to those for listed companies, viz. consolidated balance sheet, segmental reporting etc. Information on large shareholding also will be useful.

iv. Further, the following additional certification either from Chartered Accountant or Company Secretary may also be thought of :-

(a) Company Directors not figuring in defaulters list (RBI / ECGC) / willful defaulters list etc.)

(b) Details of litigation above a specified cut off limit.

(c) A specific certificate, probably from the Company Secretary, regarding compliance with Sec. 372 (a) of the Companies Act.

(d) Details of creation / modification / satisfaction of charges on the assets of the company, position regarding insurance, show cause notices received, finds and penalties awarded.

v. As regards rotation of Auditors, for the sake of operational convenience, it is suggested they may be changed once every 5 years instead of every 3 years.

vi. In order to avoid concentration, group companies may have different Statutory / Internal Auditors in case group turnover exceeds Rs.100 crores.

Consortium Arrangements

In the case of lending under consortium arrangement, the participating lenders should evolve procedures to complete appraisal of proposals in the time bound manner to the extent feasible, and communicate their decisions on financing or otherwise within a reasonable time. Guidelines in case of Consortium Arrangements are applicable in the case of consortium arrangements, the above norms relating to grant of credit facilities to relatives of senior officers of the bank will apply to the relatives of senior officers of all the participating banks.

Infrastructure projects are often financed through Special Purpose Vehicles. Financing of these projects would, therefore, call for special appraisal skills on the part of lending agencies. Identification of various project risks, evaluation of risk mitigation through appraisal of project contracts and evaluation of creditworthiness of the contracting entities and their abilities to fulfil contractual obligations will be an integral part of the appraisal exercise. In this connection, banks/FIs may consider constituting appropriate screening committees/special cells for appraisal of credit proposals and monitoring the progress/performance of the projects. Often, the size of the funding requirement would necessitate joint financing by banks/FIs or financing by more than one bank under consortium or syndication arrangements. In such cases, participating banks/ FIs may, for the purpose of their own assessment, refer to the appraisal report prepared by the lead bank/FI or have the project appraised jointly. Further, Banks extending credit facilities against the guarantees issued by other banks/FIs should ensure strict compliance. Issuance of guarantees by consortium member banks unable to participate in rehabilitation packages on account of temporary liquidity constraints, in favour of the banks which take up their share of the limit.

Lending under Consortium Arrangement/Multiple Banking Arrangement

(a) Various regulatory prescriptions regarding conduct of consortium / multiple banking / syndicate arrangements were withdrawn by Reserve Bank of India in October 1996 with a view to introducing flexibility in the credit delivery system and to facilitate smooth flow of credit. However, Central Vigilance Commission, Government of India, in the light of frauds involving consortium / multiple banking arrangements which have taken place recently, has expressed concerns on the working of Consortium Lending and Multiple Banking Arrangements in the banking system. The Commission has attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks.

Banks are encouraged to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks as under:

(i) At the time of granting fresh facilities, banks may obtain declaration from the borrowers about the credit facilities already enjoyed by them from other banks in the format prescribed in circulars DBOD.No.BP.BC.46/08.12.001 /2008-09 dated September 19, 2008 and DBOD.No.BP.BC.94/08.12.001 /2008-09 dated December 08, 2008. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of Rupees five crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks, and introduce a system of exchange of information with other banks as indicated above.

(ii) Subsequently, banks should exchange information about the conduct of the borrowers’ accounts with other banks in the format given in circulars DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD.No.BP.BC.94/08.12.001/2008-09 dated December 08, 2008 at least at quarterly intervals.

(iii) Obtain regular certification by a professional, preferably a Company Secretary, Chartered Accountant or Cost Accountant, regarding compliance of various statutory prescriptions that are in vogue, as per specimen given in circulars DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008, DBOD.No.BP.BC.94/08.12.001/2008-09 dated December 08, 2008 and DBOD.No.BP.BC.110/08.12.001/2008-09 dated February 10, 2009.

(iv)  Make greater use of credit reports available from a credit information company which has obtained Certificate or Registration from RBI and of which the bank is a member.

(v) The banks should incorporate suitable clauses in the loan agreements in future (at the time of next renewal in the case of existing facilities) regarding exchange of credit information so as to address confidentiality issues.

(b) In terms of our extant instructions on ‘Lending under Consortium Arrangement / Multiple Banking Arrangements’ banks were advised to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks by obtaining declaration from the borrowers about the credit facilities already enjoyed by them from other banks. Banks were also advised to exchange information about the conduct of borrowers’ accounts with other banks in the specified format at least at quarterly intervals. The format specified in the circular was finalised in consultation with Indian Banks’ Association. Banks were further advised on ‘Lending under Consortium Arrangement / Multiple Banking Arrangements’, that the information exchange should also, inter alia, cover information relating to borrowers’ derivative transactions and unhedged foreign currency exposures. In terms of circular DBOD.BP.BC.No.62/ 21.04.103/ 2012-13 dated November 21, 2012, banks are advised to strictly adhere to the instructions regarding sharing of information relating to credit, derivatives and unhedged foreign currency exposures among themselves and put in place an effective mechanism for information sharing by end-December 2012. Any sanction of fresh loans / ad hoc loans / renewal of loans to new / existing borrowers with effect from January 1, 2013 should be done only after obtaining / sharing necessary information. Non-adherence to the above instructions by banks would be viewed seriously by the Reserve Bank and they would be liable to action, including imposition of penalty, wherever considered appropriate.

Appraisal and Sanction

An auditor should  check whether:

(a) loan application along with relevant documents have been obtained in prescribed format and;

(b) copies of minutes of consortium meetings are held;

(c) reports on joint-inspection of securities charged are held on records; and

(d) all other sanction terms have been complied meticulously;

Collecting Share of Recovery

An auditor should check whether:

(a) it has been arranged to get their share of recovery transferred from the lead bank or

(b) an express consent from the lead bank for the transfer of their share of recovery is held.

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Meerut, Uttar Pradesh, IN
Member Since: 17 Jun 2018 | Total Posts: 113
Author was Member of ICAI- Regional Research Committee 2013-14 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email [email protected] or on phone Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2 having office at 1 1 5, Chappel Street, Meerut Cantt, UP, INDIA) View Full Profile

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