RBI warns on 'evergreening'

Banks told not to manage NPA accounts

The Reserve Bank of India (RBI) has issued a stern warning to public sector banks against any attempt to "evergreen" their balance sheets for 2003-2004.

RBI Deputy Governor KJ Udeshi told bankers at a recent meeting that the central bank was keeping a close tab on such activities, and any bank resorting to "evergreening" would be taken to task.

Technically, evergreening refers to the practice of "managing" the balance sheet through means, which may not be violating banking laws in letter, but breaching them in spirit.

For instance, a bank can lend money to a company to pay off another bank's loan. This way, the second bank can save an account from going bad and reduce its non-performing assets (NPAs). The second bank can then extend a similar facility to a company which has not been been able to repay loans from the first bank.

This is the most common method of evergreening. Some banks also disburse too many loans at the end of the year. This way they can increase their advances portfolio and reduce the NPA in percentage terms.

The RBI feels that banks might resort to evergreening to contain their NPAs since they are shifting to the 90-day income recognition norms for calculating NPAs from March-end.

Till now, banks recognised a loan as an NPA if either the principal or the interest was overdue for two quarters or 180 days. Bankers said RBI's apprehensions were misplaced and they were fully prepared for the transition.

In fact, some banks have already made additional provisions to adhere to the 90-day income recognition norm. For instance, Oriental Bank of Commerce has declared itself a zero-NPA bank after shifting to the 90-day norm.

Bank of Baroda, for instance, adopted the 90-day norm from December 2003. The bank's net NPA on December 31, 2003 slipped to 3.46 per cent, against 4.01 per cent in the corresponding period during the last financial year.

Corporation Bank adopted the 90-day NPA classification norm in December 2003. After the adoption of the 90-day NPA norm, the net NPA level of the bank decreased to 1.7 per cent from 2.4 per cent in the corresponding period during the last fiscal year.

The State Bank of India's NPA level may go up marginally from 2.11 per cent on account of the change to the 90-day income recognition norm. In the private sector, HDFC Bank adopted the the 90-day norm in August 2003 and the overall impact was marginal. The net NPA ratio of around 0.5 per cent of its advances is based on the 90-day norm.

Skirting act

• Evergreening refers to a practice followed by banks to 'manage' their balance sheets through means that circumvent banking laws
• The RBI feels that banks might resort to evergreening to contain their NPA since they are shifting to the 90-day income recognition norms for calculating NPAs from March-end
• Bankers, however, say RBI's apprehensions are misplaced and they are fully prepared for the transition
• Some banks like Oriental Bank of Commerce, Bank of Baroda, Corporation Bank and the State Bank of India have adopted the 90-day norm