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Evergreening of loans

 

Source: Indian Express

 Context: Recently, the Reserve Bank of India (RBI) Governor raised red flags over banks adopting innovative methods for evergreening of loans – covering up the real status of stressed loans of corporates.

  

About Evergreening of loans:

  • Evergreening of loans refers to a practice where banks or lenders provide additional funds or take other measures to artificially sustain a loan that is not being repaid as scheduled.
  • It is a temporary solution used by banks to avoid classifying the loan as a non-performing asset (NPA) because such classification would require them to set aside more money for potential losses, which could affect their profitability.

 

Methods used by banks for Evergreening of loans:

  • Bringing two lenders together to evergreen each other’s loans.
  • Good borrowers are being persuaded to enter into structured deals with stressed borrowers.