Evergreening: Practice of managing balance sheet

Reserve Bank of India (RBI) has been raising the issue of ‘evergreening’ for a long time now. As per the central bank, the practice is not only unhealthy for the banking sector, but also leads to accumulation of Non Performing Assets (NPAs).Clipboard01

What is evergreening?

Technically, evergreening is the practice of ‘managing’ the balance sheet by means which may not contravene existing laws of the banking sector,but infringe them in spirit.

How?

As per definition, evergreening or evergreening loans are generally doled out in the form of short-term line of credit that is regularly renewed leaving the principal remaining outstanding for the long term.

Under this provision, these loans don’t need the principal sum to be paid-out inside a specified period.

It is also called a ‘standing’ or ‘revolving loan’.

Way of evergreening

  • A bank may lend credit to some company so that the latter can pay-off its outstanding loan of another bank. Similarly, the beneficiary bank can reciprocate in the same way helping the accounts of each other from going bad and can reduce the number of NPAs.
  • While there are banks that may distribute too many loans at the end of the year which can help them to increase their ‘advances portfolio’ and trim down the NPA (in percentage terms).

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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