What do you understand by loan evergreening? To what extent, it affects the bad loans (NPAs) in the banking industry? Discuss while highlighting SEBI's efforts on loan evergreening.

Published: September 6, 2017

Evergreening in banking is a practice of providing a fresh loan to repay an old loan. For example, a bank can lend money to a company to pay another bank’s loan. In this way, the first bank can maintain its balance sheet and reduce its non-performing assets (NPAs). The first bank can then extend a similar service to a company which is unable to pay the debts of the second bank. So through evergreening practice banks to ‘manage’ their balance sheets by circumventing banking laws. Evergreening in banking is a practice of providing a fresh loan to repay an old loan. For example, a bank can lend money to a company to pay another bank’s loan. In this way, the first bank can maintain its balance sheet and reduce its non-performing assets (NP As). The first bank can then extend a similar service to a company which is unable to pay the debts of the second bank.
The problem with such practice is that it may keep a loan from going default in short run, but in long term, it increases bank’s exposure to a troubled credit. Also using the practice of evergreen loans bank tend to show less stressed assets in the balance sheet, therefore a clear picture of economic scenario is not reflected.
SEBI has taken various initiatives to deal with the issue of evergreen loans. As per new norms  listed companies need to present disclosure of defaults. This information will be open to all and will be present in real time. So the bank before providing loans can check information from stock exchanges and ensure if there is any default disclosure. And if there is a default disclosure, the bank cannot be fooled by the company. This new disclosure norm will make the practice of evergreen loans very difficult.Also when an investor is willing to gain control of a stressed company in the listed space, such investor need not to make an open offer. Also, SEBI’s pricing formula for share acquisition will not be applicable in such cases. Such relaxations from SEBI would keep the acquisition costs in check and also speed up the bad loan resolution process.
So the scope of evergreening loans will reduce under new SEBI norms, which will help in the reflection of the true economic scenario of non-performing assets.

Model Questions Category:  

Comments