Evergreening of Loans

The RBI issues a warning against "evergreening" loans, when banks employ cutting-edge techniques to hide the true situation of stressed loans.

What does evergreening of loans mean?

• The process of evergreening of loans, a form of zombie lending, is a temporary fix for a bank.
• If an account turns into a non-performing asset (NPA), banks are required to make higher provisions which will impact their profitability.
• To avoid classifying a loan as an NPA, banks adopt the evergreening of loans, which is essentially the rolling over of debts of unviable borrowers that would have otherwise defaulted.
• This is a form of misgovernance, as bad loans are made to look good many a time by additional lending to troubled borrowers.

When do banks evergreen loans?

• Restructuring is often used by banks to 'evergreen' problem accounts to keep reported NPA levels low.
• This was allowed between 2000 and 2014, but with the enactment of the bankruptcy code, evergreening has declined.
• An accommodative monetary policy creates an enabling environment for weak banks to evergreen loans to zombies, leading to a jump in NPAs.

What is the main Concern?

• The process of evergreening of loans, a form of zombie lending, is typically a temporary fix for a bank. If an account turns into a non-performing asset (NPA), banks are required to make higher provisions which will impact their profitability.

How can evergreening be stopped?

• The primary defence against evergreening in a bank must come from the CEO, audit committee and board.
• If significant evergreening is detected by RBI supervisors, penalties should be levied through cancellations of stock options and claw-back of bonuses, and the Chairman of the audit committee should step down from the board.