Evergreening

Also called: Loan evergreening · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

Evergreening is when a bank gives a fresh loan (or extra credit) to a borrower who is struggling to pay, so the borrower can use that money to repay old dues and the old loan does not have to be marked as bad. It matters because it hides a bank's real bad loans, called non-performing assets or NPAs. It also makes the bank's reported profits look higher than they really are. In the end the problem grows bigger and costs more to fix.

Explanation

How it works

• The starting point: a borrower cannot pay interest or instalments on a loan.

• If a payment stays unpaid for more than 90 days, the loan becomes an NPA (non-performing asset: a loan that has stopped earning income for the bank).

• The trick:

• Just before the loan would turn NPA, the bank sanctions a new loan to the same borrower.
• The borrower uses the new money to pay the old dues.

• On paper the old loan now looks "repaid" or "regular". The account never turns NPA.

• The reality: the borrower is no healthier than before. The debt has only been rolled forward, and it is now bigger.

• It can be done directly, or through a group company of the borrower, or with the help of another lender. The purpose is the same each time: keep the account looking healthy.

Why banks do it

• To avoid provisions: a provision is money a bank keeps aside from its profits to cover a likely loss on a bad loan.

• No NPA → no provision → higher reported profit.

• To keep reported NPA ratios low: this protects the bank's image and the managers' records.

• To avoid hard decisions: cutting a loan, taking over a company or going to court is slow and unpopular. Bankers often hope the borrower will recover.

Worked example: what evergreening hides

• A bank has given loans of Rs 1,000 crore. Rs 100 crore of this has really gone bad. The bank would have to set aside Rs 70 crore as provisions.
• Honest accounting:
• GNPA ratio = (Gross NPAs ÷ Gross Advances) × 100 = 100 ÷ 1,000 × 100 = 10%
• Provision Coverage Ratio (PCR) = 70 ÷ 100 × 100 = 70%

• Profit is reduced by the Rs 70 crore provision.

• With evergreening:

• The bank lends fresh money so the borrower "repays" the Rs 100 crore.
• Reported GNPA ratio = 0%, and no Rs 70 crore provision is made.

• Reported profit looks Rs 70 crore higher than it should be.

• Result: the bank looks healthy, but Rs 100 crore of loans is still at risk, and more money has now been lent to the same weak borrower.

What makes it rise or fall

• It rises when:
• the regulator relaxes its rules (regulatory forbearance), so stress can be kept off the books
• asset-quality checks are weak

• big borrowers in stalled sectors, such as the infrastructure, power, steel and telecom projects of the 2004-2011 boom, cannot pay but are "too big to let fail"

• It falls when:

• the regulator inspects bank books strictly, as in the Asset Quality Review (AQR)
• defaults must be reported quickly
• banks must set aside more money if they delay a resolution
• a working insolvency law gives a real alternative to rolling over bad loans

In India

• The NPA crisis: after the 2004-2011 credit boom, many large loans could not be repaid.
• Forbearance and evergreening hid this stress for years.

• Until April 2015, restructured loans could be counted as standard (healthy) assets, so banks did not have to make provisions for them.

• Twin balance sheet problem (Economic Survey 2016-17):

• Companies had too much debt and banks had too many bad loans, both at the same time.

• Evergreening kept money flowing to weak companies instead of new, productive borrowers.

• Asset Quality Review (2015-16, RBI under Governor Raghuram Rajan):

• The RBI checked whether banks were classifying bad loans and setting aside provisions correctly.

• This exposed the hidden NPAs. The GNPA ratio of public sector banks (PSBs) rose from 4.97% (March 2015) to a peak of 14.58% (March 2018) [2].

• Rules that make evergreening harder:

• 12 February 2018 circular: one day of default was enough to trigger action by lenders. Large accounts needed a resolution plan within 180 days, or they went to the IBC (Insolvency and Bankruptcy Code, 2016). The Supreme Court struck it down in Dharani Sugars (April 2019).
• Prudential Framework (7 June 2019): lenders get a 30-day review period after a default. An inter-creditor agreement (ICA) binds all lenders to one plan. Banks must make additional provisions if resolution is delayed.

• Compromise-settlement framework (8 June 2023): after a settlement or technical write-off, the borrower must wait at least 12 months before getting fresh credit. Farm loans are excluded [4].

• The clean-up: the 4R strategy has been followed since 2015: Recognition, Resolution, Recapitalisation and Reform [2]. Recognition means ending hidden practices such as evergreening.

• Latest figures:
• PSB GNPA ratio: 2.30% (September 2025) [3]
• GNPA ratio of all scheduled commercial banks: 2.3% (March 2025), a multi-decadal low [1]

Don't confuse with

• Loan restructuring: the bank openly changes the loan's tenure, interest rate or repayment schedule under rules that can be seen. Evergreening hides the default by lending fresh money to repay the old loan.
• Regulatory forbearance: the regulator relaxes its own rules for a time, for example by letting restructured loans be counted as standard assets until April 2015. Evergreening is something the bank does with individual loans.
• Loan write-off: a bank removes a fully provided bad loan from its balance sheet, but the borrower still owes the money. Evergreening never admits that the loan is bad at all.
• Wilful default: the borrower can pay but chooses not to, or diverts the loan money to other uses. Evergreening is mainly a lender's way of hiding stress, although both can happen in the same account.

Prelims Hooks

• Evergreening means a fresh loan is given to repay an old one, so the account does not turn NPA. An NPA is a loan unpaid for more than 90 days.
• Evergreening lowers reported GNPA and provisions, and pushes up reported profit. The real risk stays the same.
• The AQR (2015-16) exposed hidden NPAs. PSB GNPA peaked at 14.58% in March 2018 [2].
• Forbearance that let restructured loans count as standard assets ended in April 2015.
• 12 February 2018 circular: 1-day default trigger and a 180-day resolution deadline. The Supreme Court struck it down in Dharani Sugars (April 2019). It was replaced by the Prudential Framework (7 June 2019).
• Trap: "Evergreening reduces a bank's actual credit risk." This is wrong. It only hides the risk, and often raises it.

Mains Points

• Delay makes the cost bigger:
• Evergreening and forbearance put off recognising bad loans → weak borrowers kept getting credit → final losses were larger and recapitalisation was needed.

• The AQR worked because it forced honest accounting first. This is the "Recognition" step of the 4R strategy [2].

• Link to the twin balance sheet problem and growth:

• Money locked in evergreened loans could not go to healthy firms. Stressed banks lent less, and investment and credit growth stalled.

• Early reporting of stress, the Prudential Framework (2019) and a working IBC are needed so that the problem does not return.

• Governance and moral hazard:

• Evergreening often comes from pressure on bank managers and a fear of taking hard decisions.
• Strict rules alone are not enough. Governance reform (EASE, the 4R strategy) and accountable boards are also needed.

Related concepts

• Twin balance sheet problem
• Asset Quality Review
• Loan restructuring
• Bank recapitalisation
• Loan write-off
• One-time settlement
• Wilful defaulter

Read more

• The NPA crisis: twin balance sheets, evergreening and the clean-up