Reserve Bank of India has raised concerns over Non-Banking Financial Companies (NBFCs) granting fresh loans to borrowers who have already defaulted on earlier loans. This practice, known as “evergreening,” can conceal the true level of stressed assets within a lender’s balance sheet .
Key Observations by RBI:
- During inspections, RBI found instances where lenders were granting new loans to existing defaulters.
- The regulator has directed NBFCs to frame board-approved policies clearly specifying the circumstances under which such loans can be granted.
- These policies must include safeguards to prevent evergreening and ensure transparency in lending practices .
Regulatory Objective:
The move primarily targets larger NBFCs following Indian Accounting Standards (Ind AS).
RBI aims to strengthen risk management frameworks and ensure early recognition of stress before such accounts turn into Non-Performing Assets (NPAs) .
The RBI’s directive is expected to improve governance standards within NBFCs and ensure that lending decisions are supported by risk assessments rather than ad-hoc judgments.