Tuesday, June 19, 2012

Evergreening of Loans

Officially, 3 percent of loans in India are bad. Including restructured or "impaired" loans, for which banks don't have to set aside heavy provisions in case of default, the figure is about 7 percent, according to analysts. 
The reality is worse, say some bankers and industry experts, who say many loans are restructured outside official channels. Under evergreening, banks provide additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans.
 "Restructuring helps the company sometimes, but if you step back and see it leads to ‘evergreening' of loans which can cause problems going forward," said Vikram Bajaj, director at Renaissance Capital Advisors, which advises companies on debt restructuring. "Basically, what you're doing is taking a call that the borrower may come out of the situation and you're giving him more money, but the odds, in most cases, are against it. Kingfisher Airlines is the biggest example of that."
Deadbeat corporate borrowers? Not in India

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