EVERGREENING OF LOANS -
ECONOMY
News: Evergreening concerns: RBI
puts biz restrictions on Edelweiss ARC, ECL Finance
What's in the news?
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The Reserve Bank of India (RBI) imposed business
restrictions on two Edelweiss group companies — Edelweiss Asset Reconstruction
Company (EARCL) and ECL Finance Ltd (ECL) on material concerns observed during
the course of supervisory examinations.
Evergreening of Loans:
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Evergreening of loans is a process whereby a lender tries to revive a loan that is on
the verge of default by extending more loans to the same borrower.
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The process of evergreening of loans is typically a
temporary fix for a bank.
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It could be noted that in May 2023, RBI Governor
Shaktikanta Das had raised concerns over banks adopting innovative methods for
evergreening of loans.
Issues:
●
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.
○
A loan turns into a non performing asset, or NPA,
if the interest or installment remains unpaid even after the due date — and
remains unpaid for a period of more than 90 days.
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So, to avoid
classifying a loan as an NPA, banks adopt the evergreening of loans.
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In the past, many banks had indulged in dressing up
bad loans and given additional funds to companies who didn’t have the capacity
to repay.
●
Banks delay the recognition of losses due to loan
defaults and engage in evergreening, which is essentially the rolling over of debts of unviable borrowers
that would have otherwise defaulted.
●
This is purely misgovernance,
so that bad loans are made to look good many a time by additional lending to
troubled borrowers.
Difference Between Loans
Written off and Evergreening of Loans:
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Loan write-offs are a process of removing bad loans from the books
of banks after making adequate provisions for them. Loans written off by the
banks are removed from the NPA books and reflect banks true financial position.
●
Evergreening of loans, on the other hand, is a
practice of extending new or additional loans.
Impact of Evergreening
of 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.
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Evergreeening loans can also undermine credit discipline and moral hazard among borrowers, and
erode the trust and confidence of depositors, investors and regulators.
Measures taken to Curb
Evergreening of Loans:
RBI:
●
In December 2023, in a move to curb the
“evergreening” of loans, the Reserve Bank barred
banks and NBFCs from investing in any scheme of Alternative Investment
Funds (AIFs) having investment in companies that have taken loans from the
lenders concerned in the past 12 months.
PJ Nayak Committee
Recommendations:
●
Levying penalties through cancellations of unvested
stock options.
● Claw-back of monetary bonuses on officers concerned and All whole-time directors, and the Chairman of the audit committee should be asked to step down from the board.