RBI Warns of Banks' Innovative Methods to Conceal Stress Loans

Reserve Bank of India (RBI) Governor Shaktikanta Das has raised concerns over banks adopting innovative methods to conceal the real status of stressed loans, a practice known as evergreening. This has been exacerbated by the accommodative monetary policy implemented since March 2020, creating an enabling environment for weak banks to evergreen loans to zombies and keep them alive. The RBI has observed instances where banks are using various methods to conceal the true status of stressed loans, including sale and buyback of loans, structured deals, and use of internal or office accounts to adjust borrower's repayment obligations.

Key Takeaways:

• The RBI has identified various methods used by banks to evergreen loans, including sale and buyback of loans, structured deals, and use of internal or office accounts to adjust borrower's repayment obligations.
• The practice of evergreening is typically a temporary fix for a bank, allowing it to avoid classifying a loan as a non-performing asset (NPA) and making higher provisions, which can impact profitability.
• The RBI has observed that evergreening has declined since the enactment of the bankruptcy code, but recovery rates remain abysmally low.
• Public sector banks were found to be more involved in evergreening, leading to a jump in NPAs.
• Bankers argue that temporary funding can help borrowers from becoming NPAs, and that the RBI's strict monitoring makes it difficult for banks to engage in evergreening.
• Loan write-offs have enabled banks to reduce their NPAs, but these loans continue in another form, and the RBI has detected cases of fund diversion by promoters of companies from loans advanced again and again by banks.
• The Committee to Review Governance of Boards of Banks in India has recommended penalties for significant evergreening, including cancellation of unvested stock options and claw-back of monetary bonuses on senior officers and directors.

Statistics:

• According to the RBI's data, gross NPAs were 11.2% in 2017-18, and declined to 5.9% as of March 2022 and 5.5% in March 2023.
• The mega write-off exercise has enabled banks to reduce their NPAs by Rs 10,09,510 crore (approximately $123.86 billion) in the last five years.
• The banking sector reported a decline in gross NPAs to Rs 7.29 lakh crore as of March 2022.

Sources:

• Shaktikanta Das, RBI Governor, during the supervision of banks, cited in "RBI chief raises alarm over banks' method to conceal stressed loans".
• "RBI paper on Zombies and the Process of Creative Destruction".
• Reserve Bank of India (RBI), "Reply to Right to Information (RTI) request filed by The Indian Express".
• Committee to Review Governance of Boards of Banks in India headed by PJ Nayak.