Consortium Documents: Question of Stamp Duty

Question: Whether Joint Deeds of Hypothecations and Joint Deeds of Mortgages executed in Consortium Finance are covered under Section 5 or under Section 6 of Bombay Stamp Act or they do embrace separate and distinct matters or transactions or not? Whether or not they are liable to be stamped as separate instrument with separate stamp duty?
 
Ans: No
 
Joint Deeds of Hypothecations and Joint Deeds of Mortgages are not covered under Section 5 nor under Section 6 of Bombay Stamp Act as they do not embrace separate and distinct matters or transactions and not liable to be stamped as separate instrument with separate stamp duty. That Joint Deed of Mortgage & Joint Deed of Hypothecation are executed by the Borrowers in prescribed formats devised by IBA under directions of RBI are not embracing separate deeds or transactions but the documents formats have statutory binding and force and are of one single transaction carried out as a lenders partnership with common rights and liabilities.
 
REASONING FOLLOWS: -
 
What is Consortium?
 
A group of Independent Companies participating in a Joint Venture for mutual benefit. Companies in a Consortium co-operate with one another, often sharing technology as needed. A Consortium allows the Companies to conduct operations that they would not be able to do individually. It is important to note, however, that a Consortium is not a merger and the Companies remain independent. A group of Organizations that participate in a Joint Venture. Airbus Industries, a European Airplane manufacturer, is a Consortium of four Public and Private Corporations inBritain, France, Spain and Germany. A group of Organizations, sharing the same goals, which combine their resources and risks. Consortium Banking was popular in the late 1970s, when a number of major Banks would combine to form a Merchant-Banking or Finance-Company offshoot. Many of Australia's Merchant Banks were formed as consortia with European, Asian and US Banks teaming with Australian Banks. Consortium is a coalition of Organizations, such as Banks and Corporations, set up to fund ventures requiring large capital resources. A Consortium is an association of two or more Individuals, Companies, Organizations or Governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Consortium is a Latin word, meaning 'partnership, association or society' and derives from consors '’ Partner”, itself from con- 'together' and sors 'fate', meaning owner of means or comrade.
 
Consortium of Bank
 
A Subsidiary Bank owned by several different Banks. Each Owner Bank has an equal share so that no Bank is the majority shareholder. The Owner Banks are often in different countries. A Consortium Bank is created to finance a specific project; once the project is complete, the Consortium Bank dissolves itself. While they are not as common as they once were, they are useful when a project involves multiple currencies.
 
 
Definition
 
A Banking Syndicate formed by multiple Banks, often from different countries, for the singular purpose of financing a specific project that is too large for any individual Bank to finance on its own. Under this arrangement participating Banks completion of the project the Consortium Bank is disbanded.

That it means Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool. And therefore it shares the security interest in common.
 
RBI’s Role in Consortium Finance:-
 
Large Lending’s are formed always under Consortiums as per the guidelines issued by DBOD of RBI. That DBOD of RBI as such issues circulars and guidelines from time to time including documentation one of such is enclosed at Annexure I hereunder which please be read as part of this opinion as our opinion Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool formed under statutory directives and documents are obtained as per the IBA formats strictly devised as per directions of RBI. That in terms of the guidelines which has statutory force the Consortium of Banks has a force of community of interest.
 
Now the question springs up for my opinion whether a deed of hypothecation or Mortgage created by a borrower in consortium lending shall be treated as one instrument or separate instruments for the purpose of section 5,6 of Bombay Stamp Act. Whether it is a multifarious instrument covering Several distinct matters? We will have to refer the provisions of Bombay Stamp Act.
 
Where several distinct matters and transactions are embodied in a single Instrument, the Instrument is called the multifarious instrument.
 
Meaning of Distinct Matters:
 
The expression “Distinct Matters” connotes distinct transaction. The Term Distinct Matters mean the Matters of different kinds such as agreement for service and a lease. Similarly where a document under consideration is both an agreement for dissolution of a partnership and a bond, it is chargeable under Section 5 with aggregate duty with which two such separate instruments would be chargeable.
 
The word “Instrument” is defined in Section 2(14) to include "every document by which any right or liability is or purports to be, created, transferred, limited, extended, extinguished or recorded." If by an Instrument a distinct right is transferred it should be described for the purpose of stamp duty as an instrument to transfer of such right. The subject of the schedule of the Stamp Act is the amount of duty to be charged on every instrument mentioned in it, as laid down by Section 3 of the Act. It appears to me to be a subject which is repugnant to the application of the rule that the singular should include the plural. The first column of the first schedule of the Stamp Act is headed as "description of Instrument," and the second prescribes a duty with reference to the description thereof.
 
Distinct Matters would be comprised in an instrument, if different transactions are sought to be evidenced by the same deed. So long a transaction is one and the same it would not comprise Distinct Matters simply because the goods or properties dealt with by the transaction happen to be more than one.
 
When a transaction refers to several Distinct Matters documents can be executed in respect of those several Matters but for convenience can be jointly executed. Although for convenience one document is executed it should be treated as several documents and Section 35 of the Indian Stamp Act has to be applied to every one of those several instruments. It is true that when a document relates to several items of immovable properties and it does not bear a stamp chargeable in respect of all the properties it cannot be admitted in evidence in respect of some of the properties. A document which relates to a transaction relating to five distinct properties cannot be regarded as five documents relating to each of the five properties. But a document which relates to a mortgage of five properties and a receipt for the payment of `. 3500/- can be regarded as two instruments one relating to a Mortgage of immoveable properties and the second relating to the payment of `. 3500. In its popular sense, the expression "distinct matters" would connote something different from distinct "categories". Two transactions might be of the same description, but all the same, they might be distinct.
 
Expression "distinct matters" in Section 5 and "description" in Section 6 - Whether have different connotations-Instrument in question-Whether comprised distinct matters. Can be decided only by strict construction and interpretation of relations which subject has with the object.
 
It is settled law that when two persons join in executing a Power of Attorney, whether it comprises distinct matters or not will depend on whether the interests of the executants in the subject matter of the power are separate or not. Conversely, if one person holding properties in two different capacities, each unconnected with the other, executes a power in respect of both of them, the instrument should logically be held to comprise distinct matters. It was held in1956 AIR 35, 1955 SCR (2) 842, that the instrument in question in that case being braded as Exhibit A,-the impugned Power of Attorney -comprised distinct matters within the meaning of Section 5 of the Indian Stamp Act in respect of several capacities of the respondent mentioned therein. The fact that the donor of the Power of Attorney executes it in different capacities is not sufficient to constitute the instrument, one comprising distinct matters and thus requiring to be stamped with the aggregate amount of the duties with which separate instruments each comprising or relating to one of such matters would be chargeable under the Act, within the meaning of Section 5 of the Indian Stamp Act.
 
When two words of different import are used in a statute in two consecutive provisions, it cannot be maintained that they are used in the same sense and therefore the expression "distinct matters" in Section 5 and "description" in Section 6 have different connotations.
 
The statutory provisions bearing on the question are Sections 3 to 6 of the Act. Section 3 is the charging section, and it enacts that subject to certain exemptions, every instrument mentioned in the Schedule to the Act shall be chargeable with the duty of the amount indicated therein as the proper duty therefore. Section 4 lays down that when in the case of any sale, mortgage or settlement several instruments are employed for completing the transaction, only one of them called the principal instrument is chargeable with the duty mentioned in Schedule 1, and that the other instruments are chargeable each with a duty of one rupee. Section 5 enacts that any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under the Act. Section 6, so far as is material, runs as follows: "Subject to the provisions of the last preceding section, an instrument so framed as to come within two or more of the descriptions in Schedule I, shall, where the duties chargeable there under are different, be chargeable only with the highest of such duties".
 
The point for decision is as to the meaning to be given to the words "distinct matters" in Section 5. The contention which found favour with the majority of the learned Judges is that the word "matters" in Section 5 is synonymous with the word "description" occurring in Section 6, and that they both refer to the several categories of instruments which are set out in the Schedule. The argument in support of this contention is that: Section 5 lays down that the duty payable when the instrument comprises or relates to distinct matters is the aggregate of what would be payable on separate instruments relating to each of these matters. An instrument would be chargeable under Section 3 only if it fell within one of the categories mentioned in the Schedule. Therefore, what is contemplated by Section 5 is a combination in one document of different categories of instruments such as sale and mortgage, sale and lease or mortgage and lease and the like, But when the category is one and the same, then Section 5 has no application, and as, in the present case, the instrument in question is a Power-of- Attorney, it would fall under Article 48 (a) in whatever capacity it was executed, and there being only one category, there are no distinct matters within Section 5. We are unable to accept the contention that the word "matter" in Section 5 was intended to convey the same meaning as the word "description" in Section 6. In its popular sense, the expression "distinct matters" would connote something different from distinct "categories". Two transactions might be of the same description, but all the same, they might be distinct. If ‘A’ sells Survey No. 145 to ‘X’ and Mortgages Survey No. 155 to ‘Y’, the transactions fall under different categories, and they are also distinct matters. But if ‘A’ Mortgages Survey No. 145 to ‘X’ and Mortgages Survey No. 155 to ‘Y’, the two transactions fall under the same category, but they would certainly be distinct matters. But if ‘A’ Mortgages Survey No. 145 & 155 to ‘X’ and ‘Y’ jointly and severally, the two transactions fall under the same category, and they would certainly not be distinct matters. That in Consortium Finance there exist community or association common interest and therefore the Mortgage will be in favor of a group of persons branded as A Bank Consortium and therefore the interpretation that such Mortgage embraces separate and distinct subjects or matters or transaction is misnomer. That person interpreting such is not understanding the concept of consortium finance at all.
 
As held by Honorable Supreme Court of India in THE MEMBER, BOARD OF REVENUE  Versus ARTHUR PAUL BENTHALL {1956 AIR 35 1955 SCR (2) 842} Conversely, if a number of persons join in executing one instrument, and there is community of interest between them in the subject-matter comprised therein, it will be chargeable with a single duty. That in the above case old celebrated judgments were relied on in deciding previously it was held inDavis v. Williams (1804 104 ER 358), Bowen v. Ashley (1804 104 ER 358), Good-son v. Forbes (1804 104 ER 358) and other cases. That if the interests of the executants are separate, the instrument must be construed as comprising distinct matters. In case of community of interest it should not be treated likewise.
 
Relying on the observations I have to opine that In case of Consortiums relations spurting out are from agreements between parties and a community of interest is created. if such community of interest is spelt out in the documents itself then such Mortgage or Hypothecation can not be said to have separate and distinct matters and such holding will be misinterpretations of law and misapplication of fiscal statute as well as it will be misunderstanding the concept of Consortiums rather it will be poor understanding of legal and factual position concerning Bank lending.
 
In the said judgment it was further Held that "No instrument chargeable with stamp duty under the heading Letter or Power of Attorney and Commission, Factory, Mandate, or other instrument in the nature thereof' in the First Schedule to the Stamp Act, 1891, shall be charged with duty more than once by reason only that more persons than one are named in the instrument as donors or donees (whether jointly or severally or otherwise), of the powers thereby conferred or that those powers relate to more than one matter".
 
In the matter of Vide Freeman v. Commissioners of Inland Revenue {(1804) 104 ER 358}. Applying the same principle to Powers-of-Attorney, as held in Allen v. Morrison that when members of a mutual insurance club executed single power, it related to one matter, Lord Tenterdon, C. J. observing that "there was certainly a community of purpose actuating all the members of this club". In Reference under Stamp Act, S. 46(1), a Power of Attorney executed by thirty-six persons in relation to a fund in which they were jointly interested was held to comprise a single matter. On the other hand, where several donors having separate interests execute a single Power-of-Attorney with reference to their respective properties as, for example, when ‘A’ constitutes ‘X’ as attorney for management of his estate Black-acre and ‘B’ constitutes the same person as attorney for the management of his estate White-acre, then the instrument must be held to comprise distinct matters.
 
If the intention of the legislature was that the expression 'distinct matters' in Section 5 should be understood not in its popular sense but narrowly as meaning different categories in the Schedule, nothing would have been easier than to say so. When two words of different import are used in a statute in two consecutive provisions, it would be difficult to maintain that they are used in the same sense, and the conclusion must follow that the expression "distinct matters" in Section 5 and "descriptions" in Section 6 have different connotations.
 
It is urged against this conclusion that if the word "matters" in Section 5 is construed as meaning anything other than "categories" or in the phraseology of Section 6, "descriptions" mentioned in the Schedule, then there could be no conflict between the two sections, and the clause in Section 6 that it is "subject to the provision of the last preceding section" would be meaningless and useless.
 
There is no provision in the statute law of this country similar to the above, and it is significant that it assumes that a power of attorney might consist of distinct matters by reason of the fact that there are several donors or donees mentioned in it, or that it relates to more than one matter.
 
It is, as has been stated above, settled law that when two persons join in executing a Power-of-Attorney, whether it comprises distinct matters or not will depend on whether the interests of the executants in the subject- matter of the power are separate or joint.
 
That will be in consonance with the generally accepted notion of what are distinct matters, and that certainly was the view that express recited in the power that the executants executed it both in his individual capacity and in his other capacities.
 
I have to rely on the views expressed in judgment part rendered by Justice BHAGWATI J.- “ dissentingly he observed that “I am unable to agree with the conclusion reached in the Judgment just delivered. While agreeing in the main with the construction put upon Sections 4, 5 and 6 of the Act and the connotation of the words "distinct matters" used in Section 5, I am of the view that the question still survives whether the instrument in question is a single Power of Attorney or a combination of several of them. The argument which has impressed my Brother Judges forming the majority of the Bench is that though the instrument is executed by one individual, if he fills several capacities and the authority conferred is general, there would be distinct delegations in respect of each of those capacities and the instrument should bear the aggregate of stamp duty payable in respect of each of such capacities. With the greatest respect I am unable to accede to that argument. I agree that the question whether a Power of Attorney relates to distinct matters is one that will have to be decided on the consideration of the terms of 'the instrument and the nature and the extent of the authority, conferred thereby. The fact, however, that the donor of the Power of Attorney executes it in different capacities is not sufficient in my opinion to constitute the instrument one comprising distinct matters and thus requiring to be stamped with the aggregate amount of the duties with which separate instruments each comprising or relating to one of such matters would be chargeable under the Act, within the meaning of Section 5. The transaction is a single transaction whereby the donor constitutes the donees jointly and severally his attorneys for him and in his name and on his behalf to act for him in his individual capacity and also in his capacity as managing director, director, managing agent, agent, secretary or liquidator of any company in which he is or may at any time, thereafter be interested in any such capacity as aforesaid and also as executor, administrator, trustee or in any capacity whatsoever as occasion shall require”.
 
If the transaction or matter to which the instrument in question relates is single and indivisible and cannot be separated without destroying the object of the transaction it will not be treated as relating to two distinct matters within the meaning of Section 5, Stamp Act. The instrument contains only one contract, a demise; the option of renewal of the lease is ancillary to it and forms part of the consideration for entering into the lease.
 
It was there held that an instrument can be regarded as falling under two distinct categories each requiring a separate stamp, only where there is what is called a "distinct consideration" for each and not where there is a unity of consideration as in the present case.
 
The instrument clearly says that the properties shall continue as security until the entire amount due is discharged. Article 6 (2) relating to stamp duty payable, on a pledge runs:
 
"Article 6. Agreement relating to deposit of title deeds, pawn or pledge, that is to say, any instrument evidencing an agreement relating to .......................................
 
(2) the pawn or pledge of moveable property, where such deposit, pawn or pledge has been made by way of security for the repayment of money advanced or to be advanced by way of loan or an existing or future debt."
 
The very Article gives an Indication of what is meant by pawn or pledge of moveable property. The moveable property must have been given by way of security for the repayment of money advanced or to be advanced by way of loan or an existing or future debt. In this case, moveable property has been pledged for an existing debt. Section 172 of the Indian Contract Act defines "pawn" or "pledge" as bailment of goods as security for payment of a debt or performance of a promise. Clearly, the instrument also satisfies the requirement of Article 6. As the instrument is attested, it does not fall under the exemption to Article 6.
 
The fact that there has been so much difference of opinion shows that the Stamp Act on the point in question is capable of various interpretations. I think I have to accept that interpretation which is for the benefit of the subject borrower, the Act being purely a fiscal one it is to be construed strictly and no far and no further. That in matters of consortium advances basis of the consortium is not to be destroyed for Stamp Act.
 
Hence in our opinion Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool formed under statutory directives and documents are obtained as per the IBA formats strictly devised as per directions of RBI. That in terms of the guidelines which has statutory force the consortium of banks has a force of community of interest and bank documentation is to be strictly construed as Homogenous transaction and not separate transaction as apprehended.
 
As a conclusion:- Joint Deeds of Hypothecations and Joint Deeds of Mortgages are not covered under Section 5 nor under Section 6 of Bombay stamp Act as they do not embrace separate and distinct matters or transactions and not liable to be stamped as separate instrument with separate stamp duty. That Joint Deed of Mortgage & Joint Deed of Hypothecation are executed by the Borrowers in prescribed formats devised by IBA under directions of RBI are not embracing separate deeds or transactions but the documents formats have statutory binding and force and are of one single transaction carried out as a lenders partnership with common rights and liabilities. That thus it is admittedly proved fact that the joint documents are not separate and distinct contracts but interwoven as a single transaction and hence they do not embraces separate and distinct matters or transactions and hence not liable to be stamped as separate instrument with separate stamp duty.
 
This article is for removing the established misconception about the interpretation that such documents embraces separate and distinct matters or transactions and hence not liable to be stamped as separate instrument with separate stamp duty and based on that certain practice adopted by the Banks of over stamping it. It is suggested that borrowers are unnecessarily burdened with such unwarranted stamp duty. If Bank feels it a borrower may be directed to seek the opinion of competent Court and get the confirmation of the situation.  
 
 Annexure I
CONSORTIUM ADVANCES
 
It is not uncommon to find a Borrower availing Term Loan as well as Working Capital limits from a number of Financial Institutions and Commercial Banks. A Term Loan to a Borrower may be sanctioned jointly by All India Financial Institutions and Banks. Similarly, Working Capital limits may also be availed by the Borrower from a number of Banks partly because of the large size of borrowing and partly to have a degree of flexibility in his operations with different Banks.
 
The Borrower may have a multiple Banking relationship where he has independent arrangement with each Bank, security offered to each Bank is separate and no formal understanding exists between different Banks financing the same Borrower. Under this arrangement Banks may not be exchanging information on the Borrower and limits might have been sanctioned on different terms and conditions. This arrangement may be preferred by the Borrower as it affords him a great flexibility in operating his accounts with different Banks but goes contrary to the expectations of Reserve Bank which desires that a wholesome view of entire operations of a customer must be taken by the Banks and the assessment of credit needs be also done in totality.
 
The other arrangement for sanctioning of credit limit to such a Borrower may be to form a Consortium of Banks to take care of the entire needs, of the Borrower. No definite guidelines on formation of consortium of Banks, however, existed in past and it was generally left to the Borrower to decide this issue.
 
The first attempt in this regard was made by Reserve Bank of India while it constituted a study group in December, 1973, headed by Shri G. Lakshmmaryanan, which submitted its report in July, 1974. The report was accepted by Reserve Bank.
 
RBI Guidelines on Consortium Advances
 
The concept of Consortium Advance has since gone many changes and most of the large Borrowers are now being financed by Banks in consortium. Reserve Bank of India had also issued revised comprehensive guidelines in June 1987 on this subject.
 
Reserve Bank of India further constituted a Committee in January, 1993. under the Chairmanship of Shri J.V. Setty, Chairman and Managing Director, Canara Bank, to review the extant guidelines on lending under Consortium arrangement and suggest measures for improving the efficiency of banking system in delivery of credit. Based upon the report submitted by the above Committee, Reserve Bank announced important changes in die existing guidelines. Guidelines m applicable to Consortium advance are as under. 1
 
1. The overall exposure to a single borrower should not exceed 25% 2 of the net worth of the banking institution. For this purpose non fund based facilities shall be counted @ 50% 3 of limits sanctioned and added to total fund based facilities to arrive at total exposure to the borrower.
 
2. Exposure limit to group has also now been stipulated. The overall exposure to a group should not exceed 50% 2per cent (60% 2 in case of infrastructure projects consisting of power, telecommunication, roads and ports) of the net worth of the banking institution.
 
(a) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of Rs.   50.00 crores or more must necessarily be brought under Consortium arrangements. The bank who is having the largest share in the credit facilities would automatically become the leader of  Consortium and would ensure that Consortium arrangements are finalised immediately.
 
(b) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of less than Rs.50 crores should also be brought under formal Consortium arrangements at the time of further enhancements which would take the aggregate limits to Rs.50 crores or more. The enhancements in such cases would be considered jointly by the financing banks concerned and the bank which takes up the largest share of fund based limits shall be the leader of the  Consortium.
 
(c) These provisions would also be applicable to new units which approach more than one bank for sanctioning of working capital limits of Rs.50 crores or more.
 
The net effect of these provision amounts to that no borrower will be allowed to have multiple banking arrangement if the total fund based credit limit sanctioned to him amounts to Rs.50 crores or more. A formal  Consortium will have to he constituted in such cases and the bank having largest share in fund based credit limits will automatically assume the status of the leader of the Consortium.
 
Reserve Bank has since withdrawn its instructions for obligatory formation of Consortium. It will thus not be obligatory on the part of banks to form a Consortium even if the credit limit per borrower exceeds Rs.50 crore. The need based Finance required by the borrowers may, therefore, be extended by the banks either entirely on their own, subject to observance of exposure limits, or in association with other banks. As an alternative to sole/multiple banking/ Consortium arrangement, banks may adopt loan syndication route, irrespective of the quantum of credit involved.
 
1. There is no ceiling on number of banks in a Consortium, whether it is obligatory (fund‑based credit limits of Rs.50 crates and above from more than one bank) or voluntary (fund based credit limits below Rs.50 crores from more than one bank) in nature. However, the share of a bank as member of Consortium should he a minimum of 5 per cent of the fund based credit limits or Rs.1 crore whichever is more. This provision would itself restrict the number of banks in a Consortium. To illustrate this point let us consider these two examples:
 
(a) In a  Consortium for total fund based credit limits of Rs.3 crores, the minimum share should be Rs1.00 crore.
 
(b) In a Consortium for total fund based credit limits of Rs.50 crates, the minimum share should be Rs.2,50 crores.
 
2. The banks who have sanctioned term loans to a unit or who have also participated in term loans sanctioned inConsortium with term lending financial institution should also provide working capital facilities to such a unit. 'These banks may, however, associate other banks, if so warranted, to provide working capital Finance.
 
3. The borrower who is being financed under a formal Consortium arrangement should not avail any additional credit facility by way of bills limits/ guarantees/acceptances, letters of credit etc. from any other bank outside the Consortium. It has been stipulated by Reserve Bank of India that any bank outside the Consortium should not extend any such facility or may not even open a current account without the knowledge and concurrence of the Consortium members.
 
This stipulation is applicable to even those borrowers who are enjoying total fund based credit limits of above Rs.50 crores from a single bank or under syndication without a Consortium arrangement.
 
4. In case of borrowers enjoying aggregate fund-based credit limits of Rs.1 crore and above but below Rs.50 crore from more than one bank, and where there is no formal Consortium arrangement, banks should obtain full details of the credit facilities (including ad hoe facilities) availed of by such borrowers from the banking system, each time any fresh facility/enhancement is sought. Also the banks should ensure timely exchange of information and co-ordinate approach in the interest of overall health of advance made to such borrowers. Further, in the case of borrowal accounts enjoying fund-based credit limits below Rs.50 crore from more than one bank, the concerned banks will be free to enter into a  Consortium arrangement at their option.
5. Banks/consortia treat borrowers having multi-division/ multi-product companies as one single unit, unless there is more than one published balance sheet. Similarly, in the case of merger, the merged unit will be treated as a single unit. In case of split, the separated units will be treated as separate borrowal accounts provided there is more than one published balance sheet.
6. In case of borrowers enjoying fund-based credit limits of Rs.50 crore and above, the concerned single bank and/or the leader of the existing Consortium, will be free to organise a 'syndication' of the credit limits.
7. In cases, where banks/consortia/syndicates am unable to adhere to the recommended maximum time-frames for disposal of loan applications/ proposals, borrowers will be free to bring in a new bank or new banks to form/ to join a Consortium /syndicate. Within seven days of sanction of any credit facility, such new banks should inform the existing Consortium /syndicate/ regular banks/(s) and. should not disburse the limit without obtaining 'no objection'. In case such 'no objection' certificate is not received within next ten days, it would be doomed that existing consortia/syndicates/regular bank/(s) have no objection to the new bank/(s) joining/forming consortia/syndicates.
8. In the cases of existing consortia, if a member-bank is unable to take up its enhanced share, such enhanced share in full or in part could be reallocated among the other existing willing members. In case other existing member-banks are also unable to take up such enhanced share of an existing & member-bank, a new bank willing to take up the enhanced share may be inducted into the Consortium in consultation with the borrowers.
9. While a member-bank may be permitted not to take to up its enhanced/incremental shares it cannot be permitted to leave a Consortium before expiry of at least two years from the date of its joining the Consortium. An existing member-bank way be permitted to withdraw from the Consortium after two years provided other existing member-banks and/or a new bank is willing to take its sham by joining the Consortium.
10. In cases whore the other existing member-banks or a new bank an unwilling to take over the entire outstanding of an existing member desirous of moving out of the Consortium after the expiry of above-mentioned period of two years, such bank may be permitted to leave the Consortium by selling its debt at a discount and/or furnishing an unconditional undertaking that the repayment of its dues would be deferred till the dues of other members are repaid in full.
 
Note : It would be open to a borrower to choose his bank/(s) for obtaining credit facilities as also for the bank/(s) to take a credit decision on the borrower. However, once a Consortium(obligatory or voluntary) is formed, on" of a new member into a Consortium should be in consultation with the Consortium.
 
11. Quite often non-availability of data or submission of incorrect data or non-receipt of required financial statements results in banks/consortia being not able to take decisions within a stipulated period of time. These data/statements include, among other, audited financial results for the last two years, estimated and projected results for' the current and subsequent years respectively. More often than not borrowers require an average time of at least six months to obtain audited financial statements. Considering all these aspects as also available technology, the following maximum time-frames are prescribed for formal disposal of loan proposals provided applications/proposals are received together with required details/information supported by requisite financial and operating statements :
 
Proposals for sanction of fresh/enhanced credit limits
60 days (45 days)
Proposals for renewal of existing credit limits
45 days (30 days)
Proposals for sanction of ad hoc credit facilities        
30 days(15days)
 
Note: Figures in brackets are the maximum time frames for sanction of export credit limits.
 
12. Further, individual banks/consortia/syndicates should review the borrowal accounts during the first quarter of the current year on the basis of audited statements for the year before lust, provisional statements (where audited statements are not available) for the last accounting year, provisional estimates for the current accounting yew and forecast for the next year. Consequently, individual banks/consordia/syndicates, at their discretion, may release 50 per cent of the additional credit requirement during or before the second quarter of the current accounting year. The remaining 50 per cent could be released consequent to submission of audited results provided there is no significant difference between the provisional estimates and the audited results.
13. No bank will be allowed to move out of the Consortium in case of sick/weak units since in such cases all the banks are required to associate themselves with rehabilitation efforts.
14. The appraisal of credit proposals will be done by the lead bank.
The customer has to submit all the necessary papers and data regarding appraisal of his limits to the lead bank who will in turn arrange for preparation of necessary appraisal note and its circulation to other member banks. Lead bank must complete the entire work relating to appraisal within the maximum time frame. Reporting to and attending to any correspondence with Reserve Bank of India shall also be the responsibility of lead bank.
15. There may sometimes be disagreement between the member banks on the quantum of permissible bank Finance, terms and conditions or any other matter. In such cases, decision of the Consortium will be binding on the lead bank as also other members. Lead bank will however, enjoy the freedom to sanction an additional credit upto a pre-determined percentage in emergent situations. The lead bank should however, inform other members immediately together with their pro-rata share.
16. There also exists a provision for forming steering committee consisting of leader bank and the bank with next highest share in the Consortium. Normally steering committee banks must have more than 5 1 % share. Wherever Consortium fails to reach the consensus, other member banks shall follow the decision of the steering committee.
17. Earlier, the terms and conditions including rate of interest, margin etc. finalised at the Consortium meeting were uniformly applicable to all banks. Reserve Bank has however, relaxed the guidelines in this regard with freedom granted to banks to determine their own lending rates for advances above Rs.2 lacs. The banks in a Consortium will now be free to offer different rates of interest and other charges on their shares.
18. The ancillary and non-fund based business should also be passed on by the borrower to all the member banks in almost the same proportion in which funds based limits are shared.
19. The inspection/verification of securities may be done by the lead bank or members in rotation as per arrangement which may be finalised in the Consortium.
20. The quarterly operating statements as required under Chore Corn mince for fixation of quarterly operative limits will also be required to be sent to the lead bank who shall in association with the bank having the next largest share in the credit facilities should meet at quarterly intervals and fix the operative limits and also individual bank's share thereof for the next quarter.
21. The information regarding quarterly operating limits fixed in such a manner would be communicated by the lead bank to other member banks.
22. In a Consortium, lead bank or the lead bank and the bank with the next highest share will be the final authorities in case of differences of opinion and their views will prevail in all cases of disputes among the member relating to terms and conditions.
 
From the above discussion it will be appreciated that the borrower under the Consortium arrangements is required to deal with the lead bank and bank having second largest share in total credit limits for an practical purposes. The borrowers were, however, put to inconvenience for execution of varied types of documents etc. with various banks in the Consortium. On the recommendations of 'Mahadevan Committee' who submitted its report in April, 1988, Reserve Bank revised guidelines in relation to Consortium advances and the ultimate ideal set for the banking industry is to achieve 'Single Window Concept For Lending (SWCL), to minimise delay and inconvenience to the borrowers. Single Window Concept has now been brought into operation in respect of two important areas of lending in Consortium as under:
 
First Disbursement
 
Lead bank in all Consortium will have the authority from each of the other member banks to make available their shares of entire/enhanced limits if latter's decision is not conveyed to the lead bank within the prescribed time of two months. The borrower will thus be able to avail first disbursement from the lead bank itself, if other member banks delay their decision. However, after first disbursement as above, the borrower will be allowed to operate his accounts with different member banks according to his requirements subject to the limits allocated to them.
 
Documentation
 
Important recommendations as accepted by Reserve Bank for implementation are as given below:
 
(i) The borrower should tie required to execute only one document, which will be signed by the lead bank on its own behalf as well as on behalf of other members.
(ii) The lead bank should complete the formalities connected with creation and registration of charge etc. with the Registrar of Companies.
(iii) As soon as the documents are executed, the lead bank shall send a confirmation in this regard to other members by telex/telegram.
(iv) The sharing of security and the rights and responsibilities of the banks, including the lead bank, should be documented by means of an inter se agreement among the members of the Consortium.
 
To bring, in the uniformity in respect of type of documents to be obtained by different banks. Indian Bank. Association has finalised model documents to be adopted by all the banks uniformly. The document procedure as recommended by IBA for implementation by the banks has been revised and now the execution of following documents:
 
(i) Resolutions to be passed by the borrower's Board of Directors authorising the borrowing company to borrow under the Consortium arrangement.
(ii) Working capital Consortium agreement.
(iii) Joint deed of hypothecation.
(iv) Revival letter for purposes of limitation.
(v) Letter of undertaking from the borrower for creating a second mortgage on the fixed assets.
(vi) Agreement to be signed with the lead bank who signs on behalf of itself and on behalf of other member banks.
 
Model forms for all these documents have already been circulated by IBA to all the banks for implementation and borrowers may approach their bank to get copies of these documents. In addition the banks are required to sign various inter se agreements as per revised pro-forma adopted by IBA .
 
Classification of Advance
 
As per the norms specified by Reserve Bank each borrowal account is to be classified in any of the four categories as under:
 
(i) Standard Asset
(ii) Sub-standard Asset
(iii) Doubtful Asset
(iv) Loss Asset
 
The banks are further required to make provisioning at the prescribed rates in their profit and loss ale on the basis of the above classification at the time of finalising their annual accounts. Classification of borrowal account has thus assumed an added significance.
 
As per the practice, member banks were following the classification as given by the lead bank in a Consortium. It has now been stipulated by Reserve Bank that each member bank will classify the ale on its own keeping in view the relevant guidelines. If any bank under the Consortium classifies the ale as 1 sub-standard' all the Banks under the Consortium will have to classify such ale as 'sub-standard'. This stipulation has been brought into effect to ensure that borrower lakes steps to maintain his a/c with all member banks free of irregularities.
 
Lead Bank charges
 
Reserve Bank has permitted the lead bank to charge a suitable fee (say 0.25 per cent of the limits) per annum for various services rendered to the borrower. Detailed guidelines in this regard are as under:
 
(a) The fee of 0.25 percent per annum is to be reckoned with reference to the fund based working capital credit limits sanctioned by the Consortium.
(b) The rate of fee may be negotiated with the borrowers with the ceiling of 0.25%.
(c) Service charge on enhancement of limits after regular sanction has taken place will be charged on the amount of enhancement/incremental limits.
(d) No fee is payable on syndication of limits.
(c) No service charge is to be levied on working capital limits authorised under special arrangements, by Reserve Bank of  India for procurement/purchase under price support/market intervention operations etc. to public sector corporations or agencies of State Government.
 
It may be mentioned here that formation of Consortium is no more obligatory and instruction relating to conduct of Consortium which were issued by Reserve Bank Iron, time to time have also been withdrawn. Consortium members have been given powers to frame their own ground roles governing the Consortium arrangement viz. number of participating banks, minimum share of each bank, entry into/exit from the Consortium, sanction of additional/adhoc limit in emergent situations/contingencies by lead banks/ other banks, the fee to be charged by the lead bank for the services rendered by it, the grant of any facility by a non-member bank etc.
 
Consortium arrangement of lending for working capital needs will continue to exist for operational convenience of the participating banks as well as borrowers. The ground rules of Consortium arrangements discussed in earlier paragraphs will also hold good in most of the cases with certain modifications and hence may be considered relevant.
 
Syndication of credit
 
A syndicated credit is an agreement between two of more lending institutions to provide a borrower a credit facility using common loan documentation. A prospective borrower intending to raise resources through this method awards a mandate to a bank as 'Lead Manager' to arrange credit on his behalf. The mandate spells out the commercial terms of the credit and the prerogatives of the mandated bank in resolving contentious issues in the course of the transaction. The mandated bank prepares an Information Memorandum about the borrower in consultation with the latter and distributes the same amongst the prospective lenders soliciting their participation in the credit to be extended to the borrower. The Information Memorandum provides the basis for each lending bank making its own independent economic and financial evaluation of the borrower, if necessary, by seeking additional supporting information from other source as well Thereafter, the mandated bank convenes a meeting to discuss the syndication strategy relating to coordination, communication and control within the syndication process and finalises deal timing. charges towards management expenses and cost of credit, share of each participating bank in the credit, etc. The loan agreement is signed by all the participating banks. The borrower is required to give prior notice to the ‘Lead Manager’ or his agent for drawing the loan amount to enable the latter to tie up disbursements with the other lending banks. Syndication is thus very similar to the system of Consortium lending in terms of disposal of risk and is a convenient mode of raising long-term funds by borrowers.
 
Consortium of banks and financial institutions
 
Banks are now taking increasing share in term loans sanctioned to borrowers by financial institutions. Granting of working capital assistance remains in the exclusive domain of commercial banks. To avoid delay in project implementation, it is desired that concept of 'single window clearance' is brought into operation. It is, therefore necessary that commercial banks either taking a share in term loans and/or financing working capital are associated by all India financial institutions at the appraisal stage of the project. For this purpose, all India financial institutions have to form a Consortium with commercial banks and have proper co-ordination in dealing with new investments either by existing companies (as modernisation, diversification, expansion) or by new companies. A summary of important guidelines issued by Reserve Bank in this regard is given below:
 
Association of commercial banks with the project appraisal: The promoter of a project must identify commercial bank(s) who should be willing to extend term loan and/or working capital Finance for the project. The bank which is to take the maximum share of term loans among the banks and/or working capital Finance should be associated with appraisal exercise initiated by lead financial institutions. The lead bank is to be given full opportunity for expressing views at the time of appraisal. The bank will not be allowed to withdraw unilaterally from the Consortium at a later date. Where more than one bank is associated, the appraisal as finalised jointly by the lead financial institutions and the lead bank should be accepted by other banks. An added advantage of this exercise would be correct estimation of margin required for working capital as part of project cost and help early sanction of requisite working capital limits after sanction of term loan assistance.
 
Extent of participation in term loan by banks: Restriction earlier imposed by Reserve Bank on participation in term loans by banks were related to the cost of project which have since been modified. The restriction is now placed on the basis of quantum of loan irrespective of the cost of project. The present position in this regard is now as under:
 
(i) The quantum of loan will be the determining criterion and not the cost of the project.
(ii) Maximum quantum of term Finance /loans sanctioned by a commercial bank together with its other exposures in the form of fund-based and non-fund based credit facilities, investments, underwriting, and any other commitment, will be restricted to the prudential exposure norm, as prescribed by the Reserve Bank of India from time to time, for individual borrowers/group of borrowers. The earlier ceiling of Rs. 50 crores for individual bank has since been withdrawn.
(iii) Subject to an individual ceiling of term loan for a bank, as per (ii) above various banks in consortia/syndicate may give loans uptoRs.500 crore for each project.
(iv) For projects requiring term finance assistance exceeding Rs.500crore, banks shall continue participating jointly with All India Financial Institutions, subject to share of individual banks not exceeding as per (it) above and that of the banking system Rs.500 crores.
 
Ground Rules for Co-ordination between hooks and financial institutions 1
 
 
(1) Time frame for sanction of facilities:
(a) If only two lenders we involved, all the issues with regard to sanction of facilities should be resolved by them by mutual discussion within 60 days front the date of sanction by the lead,
(b) Where more than two lenders we involved, their agreement or disagreement for sanction of facilities must he conveyed by the lead within 60 days from the date of receipt of complete loan application. The other participating institutions must convey their decision within 60days from there receipt of appraisal note from the lead.
(c) Prima facie rejection of the proposal should be conveyed within 30 days.
(d) Sanction in the case of fresh loan proposals involving more than 2 lenders should be conveyed within two months from the date of appraisal note by the lenders.
(e) Where restructuring is involved, the lead should complete the process within 3 months from die receipt of complete proposal and the other participants should convey their decision within 2 months from the receipt of appraisal note.
 
(2) Asset Classification: Banks and Financial Institutions may classify the, recounts based on their performance as per their books. In cases of restructured and Consortium accounts the classification should he same for ill lenders.
(3) Disciplinary Borrowers: The views of the majority of lenders, in a Consortium (say 70% of total funded exposure), on a Consortium specific basis, should he adopted in regard to changing the management of a defaulting borrower unit.
(4) Levy of Charges: Consortium members should decide the rate of interest to be charged oil borrowal accounts. Punitive charges/penal interest, if any, should not exceed two percentage points above the contracted rate.
(5) Group Approach: Normal funding requirements of the healthy units belonging to a group should not be hampered by adopting group approach.
(6) Sharing of Securities and Cash Flow: Exact modalities with regard to sharing of securities and cash flow has it) he worked out between the Consortium members.
 
Working Capital Finance by Non Consortium Financial Institution  2
 
 
In the case of borrowers, whose working capital is financed under it multiple banking arrangement, file financial institution should obtain an auditor's certificate indicating the extent of funds already borrowed, before considering the request of the borrower for further working capital Finance.
 
Prudential Norms for Exposure Limits w.e.f. April, 2002
 
To ensure that the banks have proper spread in their advance portfolio and do not commit large resources to a single borrower/group for better risk management, Reserve Bank of India has stipulated prudential norms for exposure to a single borrower or group as under:
 
(a) The overall exposure to a single borrower shall not exceed 15% (20% in case of credit to infrastructure projects) of the capital funds of the banking institution.
(b) The overall exposure to a group shall not exceed 40% of the capital funds of the banking Institution (50% in case of credit to infrastructure projects)
 
Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstanding, whichever are higher, shall be reckoned for arriving at exposure limit. With effect from 1.4.2003, non-fund based exposures should also be reckoned at 100% of the limit or outstanding. Loans and advances granted against the security of bank's own term deposits may be excluded from the purview of the exposure ceiling. For details refer to Chapter 3 of the Book.
 
Banks must ensure that its overall commitment to a single borrower/group is invariably within the exposure limit as per prudential norms. No exception in this regard is permitted by Reserve Bank of India except the following exemptions:
 
(a) The exposure limits would not he applicable to existing/additional credit facilities to weak/sick industrial units under rehabilitation packages; and
(b) Borrowers to whom limits we allocated directly by the Reserve Bank, for food credit, will be exempt from the ceiling.
  
 [R1] Reserve Bank of India has since permitted the banks to decide modalities of the functioning of consortium. Banks may therefore, decide on all issues including rates of interest, allocation of limits, sharing pattern, sanction of adhoc limits etc. in the consortium meting The guidelines issued by Reserved Bank may thus be taken as indicative only.
 [R2]The exposure ceiling limits applicable from 1.4.2002 is 15 percent of capital fund in case of single borrower and 40 percent in the case of a borrower group. In case of credit to infrastructure projects this ceiling shall he enhanced to 20% in case of a single borrower and 50% in case of a group.
 [R3]Effective from April 1, 2003. non-fund based exposure shall he taken at 100%.
 [R4]The exposure ceiling limits applicable from 1.4.2002 is 15 percent of capital fund in case of single borrower and 40 percent in the case of a borrower group. In case of credit to infrastructure projects this ceiling shall he enhanced to 20% in case of a single borrower and 50% in case of a group.
 [R5]The exposure ceiling limits applicable from 1.4.2002 is 15 percent of capital fund in case of single borrower and 40 percent in the case of a borrower group. In case of credit to infrastructure projects this ceiling shall he enhanced to 20% in case of a single borrower and 50% in case of a group.
 [R6]Circular No. DBOD. BP. BC. 82/21.04.048/00‑01, dt. 26.2.2001.
 [R7] As per RBI FIC No. 85/01 02.00/95‑96 dt. 26.6. 1996
 [R8] Vide DBOD No. Dir, BC‑20/13.03.00/2002-03 dt. 20.8.2002.
 Source : http://rushabhinfosoft.com/Webpages/BHTML/CH-20.htm.
 
 
 
 
 
Annexure II

Date: Aug 05, 2009
Lending under Consortium Arrangements/Multiple Banking Arrangements
 RBI/2009-2010/116 
DBOD.No.FID.FIC.5/01.02.00/2009-10
August 5, 2009
The CEOs of the Select  All-India Term-lending and Refinancing Institutions
(Exim Bank, NABARD, NHB and SIDBI)
Dear Sir,
Lending under Consortium Arrangements/Multiple Banking Arrangements
Please find enclosed  Circular DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 on the above subject along with subsequent circulars 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 respectively and DBS.CO.FrMC.BC.No.8/23.04.001/2008-09 dated June 24, 2009. It is advised that the above guidelines on Consortium arrangements/multiple banking arrangements  issued to banks, shall mutatis mutandis apply to the select all-India Financial Institutions (AIFIs) for sharing of  information among the AIFIs and with banks.
Yours faithfully,
(Vinay Baijal)
Chief General Manager
Encls : As above
 
 
 
 
ANNEXURE III
 
WORKING CAPITAL FINANCING BY BANKS AND IT’S REGULATION
Reema Srivastava *
 
ABSTRACTS OF THE ARTICLE  (as available on web)
 
Working capital is the fund invested in current assets and is needed for meeting day to day expenses. Working capital is the fund invested in current assets. It occupies an important place in a firm’s Balance Sheet. Working capital financing is a specialized area and is designed to meet the working requirements of a business. The main sources of working capital financing are trade credit, bank credit, factoring and commercial paper.
 
Out of all these, this paper is related only to bank credit which represents the most important source for financing of current assets. The firms generally enjoy easy access to the bank finance for meeting their working capital needs. But from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing. This paper attempts to analyse the role of bank credit in financing working capital needs of firms. It also tries to give a bird’s eye view about the guidelines issued by RBI to banks in relation to working capital financing.
 
INTRODUCTION
 
Working capital is that portion of a firm’s capital which is employed in short term operations. Current assets represent Gross Working Capital. The excess of current assets over current liabilities is Net Working Capital. Current assets consists of all stocks including finished goods, work in progress, raw material, cash, marketable securities, accounts receivables, inventories, short term investments, etc. These assets can be converted into cash within an accounting year. Current liabilities represent the total amount of short term debt which must be settled within one year. They represent creditors, bills payable, bank overdraft, outstanding expenses, short term loans, etc. The working capital is the finance required to meet the costs involved during the operating cycle or business cycle. Operating cycle is the period involved from the time raw materials are purchased to the time they are converted into finished goods and the same are finally sold and realized. The need for current assets arises because of operating cycle. The opera ting cycle is a continuous process and therefore the need for current assets is felt constantly. Each and every current asset is nothing but blockage of funds.
 
Therefore, these current assets need to be financed which is done through Working Capital Financing.
 
There is always a minimum level of current assets or working capital which is continuously required by the firm to carry on its business operations. This minimum level of current assets is known as permanent or fixed working capital. It is permanent in the same way as the firm’s fixed assets are. This portion of working capital has to be financed by permanent sources of funds such as; share capital, reserves, debentures and other forms of long term borrowings. The extra working capital needed to support the changing production and sales is called fluctuating or variable or temporary working capital. This has to be financed on short term basis. The main sources for financing this portion are trade credit, bank credit, factoring and commercial paper. It is in this context that bank financing assumes significance in the working capital financing of industrial concerns.
 
WORKING CAPITAL FINANCING BY BANKS
 
A commercial bank is a business organization which deals in money i.e. lending and borrowing of money. They perform all types of functions like accepting deposits, advancing loans, credit creation and agency functions. Besides these usual functions, one of the most important functions of banks is to finance working capital requirement of firms. Working capital advances forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firm’s working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. In the case of firms with seasonal businesses, the bank may approve separate limits for ‘peak season’ and ‘non-peak season’. These advances were usually given against the security of the current assets of the borrowing firm.
 
Usually, the bank credit is available in the following forms:
 
1. Cash Credit – Under this facility, the bank specifies a predetermined limit and the borrower is allowed to withdraw funds from the bank up to that sanctioned credit limit against a bond or other security. However, the borrower can not borrow the entire sanctioned credit in lump sum; he can draw it periodically to the extent of his requirements. Similarly, repayment can be made whenever desired during the period. There is no commitment charge involved and interest is payable on the amount actually utilized by the borrower and not on the sanctioned limit.
 
2. Overdraft – Under this arrangement, the borrower is allowed to withdraw funds in excess of the actual credit balance in his current account up to a certain specified limit during a stipulated period against a security. Within the stipulated limits any number of withdrawals is permitted by the bank. Overdraft facility is generally available against the securities of life insurance policies, fixed deposits receipts, Government securities, shares and debentures, etc. of the corporate sector. Interest is charged on the amount actually withdrawn by the borrower, subject to some minimum (commitment) charges.
 
3. Loans – Under this system, the total amount of borrowing is credited to the current account of the borrower or released to him in cash. The borrower has to pay interest on the total amount of loan, irrespective of how much he draws. Loans are payable either on demand or in periodical installments. They can also be renewed from time to time. As a form of financing, loans imply a financial discipline on the part of the borrowers.
 
4. Bills Financing – This facility enables a borrower to obtain credit from a bank against its bills. The bank purchases or discounts the bills of exchange and promissory notes of the borrower and credits the amount in his account after deducting discount. Under this facility, the amount provided is covered by cash credit and overdraft limit. Before purchasing or discounting the bills, the bank satisfies itself about the creditworthiness of the drawer and genuineness of the bill.
 
5. Letter of Credit – While the other forms of credit are direct forms of financing in which the banks provide funds as well as bears the risk, letter of credit is an indirect form of working capital financing in which banks assumes only the risk and the supplier himself provide the funds. A letter of credit is the guarantee provided by the buyer’s banker to the seller that in the case of default or failure of the buyer, the bank shall make the payment to the seller. The bank opens letter of credit in favour of a customer to facilitate his purchase of goods. This arrangement passes the risk of the supplier to the bank. The customer pays bank charges for this facility to the bank.
 
6. Working Capital Loan – Sometimes a borrower may require additional credit in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such credit through a Working Capital Demand Loan (WCDL) account or a separate ‘non–operable’ cash credit account. This arrangement is presently applicable to borrowers having working capital requirement of Rs.10 crores or above. The minimum period of WCDL keeps on changing. WCDL is granted for a fixed term on maturity of which it has to be liquidated, renewed or rolled over. On such additional credit, the borrower has to pay a higher rate of interest more than the normal rate of interest.
 
SECURITY REQUIRED IN BANK FINANCE
 
Banks generally do not provide working capital Finance without adequate security. The nature and extent of security offered play an important role in influencing the decision of the bank to advance working capital Finance. The bank provides credit on the basis of following modes of security:
 
1. Hypothecation – Under this mode of security, the banks provide working capital Finance to the borrower against the security of movable property, generally inventories. It is a charge against property for the amount of debt where neither ownership nor possession is passed to the creditor. In the case of default the bank has the legal right to sell the property to realise the amount of debt.
 
2. Pledge – A pledge is bailment of goods as security for the repayment of a debt or fulfillment of a promise. Under this mode, the possession of goods offered as security passes into the hands of the bank. The bank can retain the possession of goods pledged with it till the debt (principal amount) together with interest and other expenses are repaid. . In case of non-payment of loan the bank may either; Sue the borrower for the amount due; Sue for the sale of goods pledged; or After giving due notice, sell the goods.
 
3. Lien – Lien means right of the lender to retain property belonging to the borrower until he repays the debt. It can be of two types: (i) Particular lien and (ii) General lien. Particular lien is a right to retain property until the claim associated with the property is fully paid. On the other hand, General lien is applicable till all dues of the lender are paid. Banks usually enjoy general lien.
 
4. Mortgage – Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt. In case of mortgage, the possession of the property may remain with the borrower, while the lender enjoys the full legal title. The mortgage interest in the property is terminated as soon as the debt is paid. Mortgages are taken as an additional security for working capital credit by banks.
 
5. Charge – Where immovable property of one person is made security for the payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge on the property and all the provisions of simple mortgage will apply to such a charge. A charge may be created by the act of parties or by the operation of law. It is only security for payment.
 
REGULATION OF BANK CREDIT
 
Till the sixties, bank credit for working capital was available easily and in convenient form to industrial borrowers. Further, the cash credit arrangement, the principal device through which such Finance has been provided, is quite advantageous from the point of view of borrowers. Banks have not been concerning themselves about the soundness of the borrower or about the actual end use of the loan. Bank financing was mainly security oriented. This security oriented system tended to favour borrowers with strong financial resources irrespective of their economic function. This resulted in the concentration of economic power. Another problem was that the increase in the bank credit was not commensurate with the expansion in the level of inventory and production. This resulted in a number of distortions in financing of working capital by banks. Major Banks was nationalized in 1969 and with that, approach to lending also changed. Consequently, bank credit has been subjected to various rules, regulations and controls. The basic objective of regulation and control of bank credit is to ensure its equitable distribution to various sectors of the Indian economy. The RBI has been trying, particularly from the mid-sixties onwards, to bring a measure of discipline among industrial borrowers and to redirect credit to priority sectors of the economy. The RBI has been issuing guidelines and directives to the banking sectors towards this end. Important guidelines and directives have derived from the recommendations of certain specially constituted groups assigned with the task of examining various aspects of bank finance to industry.
 
RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE
 
In the past, working capital financing was constrained with detailed regulations on how much credit the banks could give to their customers. The recent changes made by RBI in the guidelines for bank credit for working capital Finance are discussed below:
1. The notion of Maximum Permissible Bank  Finance (MPBF) has been abolished by RBI and a new system was proposed by the Indian Banking Association (IBA). This has given banks greater freedom and responsibility for assessing credit needs and credit worthiness. The salient features of new system are:
 
(a) For borrowers with requirements of upto Rs. 25 lakhs, credit limits will be computed after detailed discussions with borrower, without going into detailed evaluation.
 
(b) For borrowers with requirements above Rs. 25 lakhs, but upto Rs. 5 crores, credit limit can be offered upto 20% of the projected gross sales of the borrower.
 
(c) For large borrowers not selling in the above categories, the cash budget system may be used to identify the working capital needs.
 
However, RBI permits banks to follow Tandon/Chore Committee Guidelines and retain MPBF concept with necessary modifications.
 
2. Earlier RBI had prescribed  Consortium arrangements for financing working capital beyond Rs. 50 crores. Now it is not essential to have Consortium arrangements. However, banks may themselves decide to form Consortium so that the risks are spread. The disintegration of Consortium system, the entry of term lending institutions into working capital finance and the emergence of money market borrowing options gives the best possible deal.
 
3. Banks were advised not to apply the second method of lending for assessment of MPBF to those exporter borrowers, who had credit export of not less than 25% of their total turnover during the previous accounting year, provided that their fund based working capital needs from the banking system were less than Rs. 1 crore. RBI has also suggested that the units engaged in export activities need not bring in any contribution from their long term sources for financing that portion of current assets as is represented by export receivables.
 
4. RBI had also issued lending norms for working capital, under which the banks would decide the levels of holding of inventory and receivables, which should be supported by bank finance, after taking into account the operating cycle of an industry as well as other relevant factors. Other aspects of lending discipline, viz; maintenance of minimum current ratio, submission and use of data furnished under quarterly information system etc. would continue though with certain modifications, which would make it easier for smaller borrowers to comply with these guidelines.
 
CONCLUDING REMARKS
 
From the above discussion we can say that bank credit occupies an important place in financing working capital requirements of industries. Working capital financing is a specialized line of business and largely dominated by commercial banks. Generally, the bank  finance for meeting working capital needs is easily available to firms. But it has been always difficult to determine the norms for an adequate quantum of bank credit required by an industry for working capital purpose. Various committees have been set up for examining the working capital financing by banks and to recommend norms for and to regulate bank credit. Besides this from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing.
 
REFERENCES:
1. Bhalla, V. K., (2003), Working Capital Management, New Delhi, Anmol Publications Private Limited, 5th Edition.
2. Chandra, Prasanna, (2001), Financial Management: Theory and Practices, New Delhi, Tata McGraw Hill Publishing Company Limited, 5th Edition,.
3. Khan, M. Y. and Jain, P. K., (2004), Financial Management: Text and Problems, New Delhi, Tata McGraw Hill Publishing Company Limited, 4th Edition.
4. Maheshwari, S. N., (2004), Financial Management: Principles and Practices, New Delhi, Sultan Chand & Sons Educational Publishers, 9th Edition.
5. Pandey, I. M., (2001), Financial Management, New Delhi, Vikas Publishing House Private Limited, 8th Edition.
6. Srinivasa, S., (1999), Cash and Working Capital Management, New Delhi, Vikas Publishing House Private Limited.
 
Scholarly Article written by Research Scholar Reema Shrivastava Faculty of Commerce BHU Waranasi.