Evergreening of Loans

Evergreening of Loans

News: Recently, Reserve Bank of India (RBI) Governor Shaktikanta Das raised red flags over banks adopting innovative methods for evergreening of loans – covering up the real status of stressed loans of corporates – to project an artificial clean image in cahoots with corporates.

What is Evergreening of loans?
 Evergreening loans, a form of zombie lending, is a practice of extending new or additional loans to a borrower who is unable to repay the existing loans, thereby concealing the true status of the nonperforming assets (NPAs) or bad loans.
 Evergreening loans can create a false impression of the asset quality and profitability of banks and delay the recognition and resolution of stressed assets.
 It can also undermine the credit discipline and moral hazard among borrowers, and erode the trust and confidence of depositors, investors and regulators.

What are the approaches followed?
 Selling and buying back loans or debt instruments between two lenders to avoid classifying them as NPAs.
 Persuading good borrowers to enter into structured deals with stressed borrowers to hide their default.
 Using internal or office accounts to adjust the repayment obligations of borrowers.
 Renewing or disbursing new loans to stressed borrowers or related entities closer to the repayment date of earlier loans.

Are Loan write-off and Evergreening same?
 Loan write-offs are a process of removing bad loans from the books of banks after making adequate provisions for them.
 Loan write-offs do not mean that the borrowers are relieved of their repayment obligations or that the banks stop pursuing recovery from them.
 Loan write-offs are done to clean up the balance sheet of banks and reflect their true financial position.
 Evergreening of loans, on the other hand, is a practice of extending new or additional loans to a borrower who is unable to repay the existing loans, thereby concealing the true status of the nonperforming assets (NPAs) or bad loans.

How can Evergreening of loans be controlled?
 Financial institutions should adopt robust risk assessment practices to evaluate the creditworthiness of borrowers accurately.
 Transparency is crucial in preventing evergreening of loans. Lenders should provide accurate and timely information on their loan portfolios, including non-performing loans (NPLs) and loan restructuring.
 There is a need to lay emphasis on the importance of asset-liability management (ALM), ALM involves assessing and monitoring the potential risks arising from the maturity mismatch between assets and liabilities, interest rate fluctuations, and other market risks.
 There is a need for banks to comply with ESG (Environmental, Social, and Governance) norms as they are becoming increasingly relevant for investors and stakeholders.
 As noted by Committee to Review Governance of Board of Banks in India headed by PJ Nayak, if significant evergreening is detected by RBI supervisors, it must mean that evergreening is wilful, with support from sections of the senior management of the bank. It then becomes necessary to levy penalties and action against the erring officers.