Evergreening of loans and Zombie lending

Reserve Bank of India (RBI) Governor Shaktikanta Das raised red flags over banks adopting innovative methods for evergreening of loans.

  • Evergreening of loans is a practice of covering up the real status of stressed loans of corporates – to project an artificial clean image in cahoots with corporates.
  • During the supervision of banks, the RBI noticed certain instances wherein banks were using innovative ways to conceal the real status of stressed loans.
  • Such (evergreening) methods include bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments; good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress; use of internal or office accounts to adjust borrower’s repayment obligations; renewal of loans or disbursement of new/additional loans to the stressed borrower or related entities closer to the repayment date of the earlier loans.
  • The RBI has come across cases where one method of evergreening, after being pointed out by the regulator, was replaced by another method.
  • The process of evergreening of loans, a form of zombie lending, is typically a temporary fix for a bank. Zombie lending refers to the practice of providing credit to entities that do not have the capability to repay. While this inflates credit growth, loan defaults haunt financial institutions at a later stage.
  • If an account turns into a non-performing asset (NPA), banks are required to make higher provisions which will impact their profitability. A loan turns into a nonperforming asset, or NPA, if the interest or instalment remains unpaid even after the due date — and remains unpaid for a period of more than 90 days.

Written by 

Leave a Reply

Your email address will not be published. Required fields are marked *