What is Evergreening of Loans?

Context: RBI recently imposed restrictions on two Edelweiss group entities for evergreening stressed loans.

The RBI has issued a public warning against the practice, often used to conceal the extent of troubled loans held by a company.

Evergreen loans simply refer to Endless Loans.

What is it?

They are also referred to as a "standing" or "revolving" loan, an evergreen loan is a type of loan where the borrower is not obligated to repay the principal within a set timeframe.

Evergreening of loans is the practice of banks extending new loans or offering more credit to debtors struggling to repay previous debt.

Purpose: This practice is often used to prevent loans from being classified as non-performing or bad, thereby hiding the financial health of both the borrower and the bank. While evergreening may temporarily relieve borrowers, it can also lead to a cycle of debt that becomes increasingly difficult to repay.

The parameter: The Reserve Bank of India (RBI) has expressed concern over this practice, as it can negatively affect the overall health of the banking sector. Banks need to adopt responsible lending practices and avoid the evergreening of loans to ensure the financial system's sustainability.

• A lender tries to revive a loan on the verge of default by extending more loans to the same borrower.

• In 2023 RBI Governor Shaktikanth Das had raised concerns over banks adopting innovative methods for evergreening of loans. Asset Classification and Provisioning Norms:- 1. Standard Asset- These are the regular assets in paying interests and their operations are normal. 2. Substandard Asset- If the loan is a Non-Performing Asset (NPA)- for up to 12 months the same is called Substandard Asset. 3. Doubtful Asset- If an asset is a Substandard asset for a period exceeding 12 months, it should be classified as doubtful. 4. Loss Asset- These are considered irrecoverable and banks must make a 100% provision for their loss.