Consortium financing: is an activity of
lending that might not take place with a single lender. Many banks jointly
grants a loan to a single borrower with a common documentation, follow up,
appraisal and own equal number of shares. Many banks come together and play an
equal role in managing the loan project.
A legal contract
governs the transaction. There is a consortium bank that comprises of several
banks that jointly decide to lend to the single borrower. The banks dissolve
the consortium after the transaction. They are not built to handle
international transaction which is a major difference between consortium
finance and loan syndication.
Consortium financing includes a collective documentation, joint supervision
and corrective exercises amongst the financial institutions or banks. The bank
which agrees to take on maximum risk acts as a mediator between the consortium
and the lender. The mode of consortium financing includes a combination of
financial risk and a management challenge.
Loan syndication: is an activity where multiple banks
come together to lend the same person for the same purpose. There are major
structural and functional differences between the two.
Loan syndication is led by a managing bank which is then responsible for
negotiating conditions and arranging the transaction. The borrower is obliged
to pay bank fees for the same. The managing bank may not be the major lender.
It depends on how the credit agreement is drawn up. The borrower approaches the
managing bank for credit. It is a practiced method for European and
American corporations that wish to seek financing from lenders and banks.
Thank you
Regards
Author - Kaushal Shah
Kautilya
IBS Mumbai
Much Informative
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