An evergreen loan is a loan that does not require the repayment of principal during the life of the loan, or during a specified period of time. In an evergreen loan, the borrower is required to make only interest payments during the life of the loan. Evergreen loans are usually in the form of a line of credit that is continuously paid down, leaving the borrower with available funds for credit purchases. Evergreen loans may also be known as “standing” or “revolving” loans.
What does evergreening of loans mean?
- The evergreening of loans is a term in which banks try to revive a loan that is on the verge of default by granting further loans to the same borrower.
- It is a form of zombie lending in which banks provide more loans to the borrowers to stop them from turning into huge non-performing assets (NPAs).
- The process of evergreening of loans is typically a temporary fix for a bank covering up the real status of stressed loans.
How an Evergreen Loan Works
Evergreen loans can take many forms and are offered through varying types of banking products. Credit cards and checking account overdraft lines of credit are two of the most common evergreen loan products offered by credit issuers. Evergreen loans are a handy type of credit because they revolve, meaning users do not need to reapply for a new loan every time they need money. They can be used by both consumers and businesses.
Non-revolving credit differs in that it issues a principal amount to a borrower when a loan is approved. It then requires that a borrower pay a scheduled amount over the duration of the loan until the loan is paid off. Once the loan is repaid, the borrower’s account is closed, and the lending relationship ends.
What are the evergreening methods?
- Bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments.
- Good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress.
- Use of internal or office accounts to adjust borrower’s repayment obligations.
- Renewal of loans or disbursement of new/additional loans to the stressed borrower or related entities closer to the repayment date of the earlier loans.
Why do banks follow evergreening of loans?
- If an account turns into a non-performing asset (NPA), banks are required to make higher provisions which will impact their profitability.
- To avoid classifying a loan as an NPA, banks adopt the evergreening of loans.
- Banks offer fresh loans to borrowers on the verge of default to ensure they repay an old loan.
- Banks delay the recognition of losses through evergreening process.
- Banks also avoid provisioning to cover loan losses and increase their liquidity.
FAQs
What is the "evergreening of loans"?
Evergreening of loans refers to the practice where banks or financial institutions extend new loans to borrowers to help them repay their existing debt. This gives the appearance that the borrower is meeting their obligations, while in reality, the debt is just being rolled over without any real repayment.
Is evergreening of loans legal?
Evergreening of loans is not illegal per se, but it is considered a risky and unhealthy banking practice. Regulatory authorities such as the Reserve Bank of India (RBI) discourage evergreening as it distorts the financial health of banks and can lead to larger financial instability over time.