Laws Likely To Be Amended To Check ‘Evergreening’ Of Loans; Banks May Be Required To Report Defaults Beyond A Week

The government is believed to be considering the amendment of banking laws in order to check the practice of “evergreening” of loans, which means unethically disbursing fresh loans to help borrowers pay off their old dues.

Industry observers believe that the amended laws would probably make it mandatory for banks or lenders to report any default beyond a week, by any unlisted company to the Ministry of Company Affairs (MCA), or to the Securities & Exchange Board of India (SEBI), if the company is listed.

It is believed that such immediate and stringent information sharing could prevent cascading damage across the banking and financial sector, if and when any company ever faces any financial crunch and is on the verge of default.

As per existing laws, while companies are required to immediately report default on bonds to SEBI, they are not required to do so for their bank loans, which account for bulk of the credit in the Indian economy.

Fresh comprehensive reporting norms being considered may also mandate rating agencies to scrutinize short-term financial instruments such like commercial paper more closely in order to prevent any mismatch between short-term and long-term ratings.

Regulators have often observed that the overall picture of the financial health of borrowers becomes fuzzy when their commercial paper often gets top rating even when their long-term rating is much lower.

Incidentally, India happens to hold the dubious distinction of having the worst non-performing loan ratio among the world’s major economies.

In this connection, it may be recalled that a recent Reserve Bank of India (RBI) circular had warned that any attempt by lenders to conceal the actual status of their accounts or “evergreen” stressed accounts would invite stringent supervisory as well as enforcement action.