Tuesday, 7 February, 2023

Can We Prevent Evergreening Of Loans?

Sagar Gautam


Evergreen loans also known as revolving loan, are those which can be used, paid back and used again once the loan is reviewed or once the renewal criteria is met. Here is a discussion about the former concept of evergreening of facility which is an intentional maneuvre by banks and financial institutions to mask loan default or probable default by disbursing new loans to help delinquent borrowers pay back their old and due loans or interest due on loans. It is a malpractice whereby banks and financial institutions (BFIs) extend more loans to highly leveraged firms and clients to help them repay those pending accounts and in turn receive lavish return as soon as the client gets out of trouble.
In a recent inspection made at an institution, it was found that a reputed businessman had withdrawn a handsome amount of fund in the form of loan from a bank stating the purpose of investment to settle the bad loan of his relative taken from another development bank. Such practices are widely prevalent in Nepal. Though, reducing the level of bad loans is imperative, it would instigate a devastating economic implication if such efforts are based on evergreening.
Loan evergreening can sprout out of multiple origins. In regards to severity of impact and complexity of nexus identification, evergreening in Nepali financial market can be categorised into four major levels. The first one is settlement of one demand loan by disbursing next demand loan deal. This is easy to identify and has feeble impact on the economy as BFIs allege that the deals are settled with new deals within the legitimate limits prescribed to the client as long as the initial or periodic hypothecation is fair or intact.
The second one is non-revolving credit of a delinquent account within a bank settled with one-off loan or ad-hoc deals out of the regular DP limits. Third, delinquent borrower within a bank is served with next borrower within a bank with fresh disbursement to the second party. Usually done at the end of the year or quarter, especially to the renowned parties to mask their faulty account and reduce NPAs. Fourth, the well-off person or business firm or fair performing account gets regular fund within the limit or exceeding the limit to drag the fund to multiple institutions to settle the problematic or due accounts on ground of personal or business relationship. The degree of complexity in terms of nexus and severity of impact of the four classes of evergreening gradually rises as we climb up the pyramid.
As per the provision of Directives (16) issued by Nepal Rastra Bank to BFIs regarding the accumulation of financial resources, A class of BFIs can collect or issue unlimited fund, resources, borrowing and debentures while it is 20 times the core capital for B class of BFIs. Till date, the amount of resources in the financial institution (A, B, C class) sums up to Rs. 3800 billion which is almost 2.5 times as large as Nepal’s budget or greater than the GDP of the country collected from diverse group of depositors to serve as a source of loans for productive and purposeful task. We envisage the implication of this huge sum of fund if that serves as weapon for unproductive, purposeless and unregulated activities.
There are many instances where NRB has granted sufficient ground of pacifiers such as interest capitalisation during the moratorium period of priority sectors, loans for quake victims based on collective guarantee and interest subsidy for commercial agriculture and livestock financing as per work plan 2073 mentioned in directive 2(30).
Evergreening is serious covert issue that is quite difficult to be demarcated by the regulators and BFIs too. Its economic impact is like a slow poison to economy that it disturbs the economic value of democracy, and it can be a tool for money laundering too. The spillover effect of faulty financial sector over real sector has manifold impacts over every nooks and corners of the country.
Regulators and other enforcing agencies have made few initiative to discourage evergreening practices in the banking industry. Unified Directives 2(3c) has provisions regarding the loan as bad if the purpose of the loan is not justified. Also, the mandatory provision of multiple banking, consortium financing agreement and CIC reporting mechanism have made evergreening process a bit difficult. Banking offences and punishment Act 2064 section 7 has few provisions over the unauthorised loan disbursement and acquiring fund. Section 8 has prohibited the misuse of fund for any unintended purpose, but it is insufficient. Ample policy reforms are needed to address the issue.
Red code system to track the aspect of evergreening in coordination with NCHL and other concerned law enforcing agencies should be devised to address this issue. The unique code for large and frequent borrower (amount can be fixed during policy making process) to monitor the disbursed fund at source would enable the data dumping from a master database to ascertain if the evergreening has actually occurred.
Pyramid structure monitoring mechanism is needed to see if more than 30 per cent value of fund gets transferred out of loan account without any business relationship justified by tax administration. It is important to make sure whether the repayment has come from legitimate personal income, justifiable business proceeds or through the sale of personal equity else evergreened.

(The author is an Assistant Director at the Bank Supervision Department of Nepal Rastra Bank.)