India: Ever-Greening Of Loans And Bad Debts - RBI's Stand And Its Implications

Last Updated: 5 November 2018
Article by Seema Jhingan and Neha Yadav

The Reserve Bank of India ("RBI") has time and again, in its directions, reports and Master Circulars, reiterated that banks should not indulge in ever-greening of its loans. RBI strongly frowns upon the practice of ever-greening of bad debts where banks so as to avoid classifying their accounts as non-performing assets (NPAs) (which requires higher provisioning and ultimately affects the profitability of banks), extend more loans to debt-ridden companies to repay their old loans with such banks, much to the detriment of the interest of the stakeholders and general public interest.

For instance, the RBI in the Master Circular dated July, 2014 on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances ("2014 Master Circular"), emphasized that the basic objective of restructuring of loans by banks was to preserve economic value of (borrower) units, not ever-greening of problem accounts. Account should be taken up for restructuring by the banks if the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects/activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory actions as deemed appropriate by RBI."

RBI also specifically emphasized on the prohibition of providing additional financing to the borrower for ever-greening of an account by stating that while the JLF (Joint Lenders' Forum) may consider providing need based additional finance to the borrower, if considered necessary, as part of the rectification process, however, it should be strictly ensured that additional financing is not provided with a view to ever-greening the account.

A strong view against ever-greening was also expressed in the Report of the Committee constituted by the RBI to review the Governance of Boards of Banks in India dated May 2014, where evergreening was recognized as a practice of mis-governance for which the top management is to be held accountable. The Report states that if significant evergreening is detected by RBI supervisors, then it must mean that evergreening is wilful, with support from sections of the senior management of the bank. It then becomes necessary to levy penalties and target the prime beneficiaries of such evergreening. Therefore it was recommended that wherever significant evergreening in a bank was detected by RBI, RBI should impose penalties wherein: (i) unvested stock options granted to officers who have indulged in the practice, and to all whole-time directors, be cancelled in part or in full. (ii) monetary bonuses paid to such officers and to all whole-time directors, be clawed back by the bank, in part or in full; and (iii) the chairman of the audit committee be asked to step down from the board of the bank.

The view of RBI on ever-greening has remained unchanged over the years and in fact RBI's scrutiny of such practices has become more stringent in the recent times. For instance, in its notification dated February 12, 2018 on Resolution of Stressed Assets –Revised Framework, RBI clearly stated that "Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory/enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties.

As reported widely in the media in the past, there has been a gross divergence between banks' assessment of NPAs in its annual reports and the RBI's assessment of NPAs. The RBI has in its notification of April 18, 2017 noted this divergence as follows: "In fact, the instances of material divergences in banks' asset classification and provisioning from the RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank". RBI has also in various instances imposed heavy penalties on various banks, for violation of the instructions/ guidelines of RBI relating to submission of false compliance regarding closure of NPA accounts by indulging in ever-greening of loans.

Ever-greening of loans has unfortunately been a widespread practice adopted by banks in the past to ever-green their stressed accounts (and avoid classification of NPAs which would require higher provisioning, compliances and impact profitability). This has led to huge debts getting piled up with borrower entities who clearly have no capacity to repay such loans, and ultimately results in a situation of hundreds (and in many cases thousands of crores) of bank debt remaining unpaid, a consequence much against the public interest at large.

While, the RBI's imposition of penalties on banks indulging in evergreening is a step in the right direction, however, the fact that these practices have continued to go on for so many years even after RBI's clear prohibition in the past, shows that this practice (or rather problem) of evergreening is still far from being eradicated and needs some stringent enforcement of anti-ever-greening policies by the RBI against the delinquent banks.

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Seema Jhingan
Neha Yadav
 
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