In recent months, the Reserve Bank of India (RBI) has stepped up its scrutiny of the financial system, targeting a persistent and complex issue: the evergreening of loans. This is a practice where banks, instead of recognizing a loan as a non-performing asset (NPA), find ways to artificially keep it classified as performing. One of the more opaque mechanisms used for this involves the use of Security Receipts (SRs), instruments issued when banks sell bad loans to Asset Reconstruction Companies (ARCs). Although these sales are meant to clean up a bank’s balance sheet, the reality has often been far murkier.
When a bank sells a bad loan to an ARC and receives SRs in return, it technically removes the asset from its books. However, if the bank continues to retain a large portion of those SRs, and particularly if it guarantees or supports recoveries, the risk isn’t really transferred. In effect, the bad loan is still hanging around, just under a different label. These kinds of arrangements can create what are sometimes called “zombie” assets—loans that appear gone but continue to affect the bank’s financial health. The problem deepens when banks use other financial maneuvers, like investing in funds that reinvest in the very companies that owe them money, thereby giving these borrowers a fresh lease on life without true repayment. This creates a façade of loan performance while the underlying issues remain unresolved.
To address these concerns, the RBI has recently introduced new norms aimed at bringing greater transparency and accountability to the process. One significant step was tightening the rules around SRs, particularly when the government backs these instruments. The new guidelines allow banks to reverse provisions made on these stressed loans, but only when specific and more stringent conditions are met. This change is meant to encourage proper resolution rather than creative accounting.
More importantly, the RBI has begun cracking down on financial institutions that have used complex structures to perpetuate evergreening. For instance, recent actions against firms such as ECL Finance and Edelweiss ARC illustrate the regulator’s increasing willingness to intervene directly where it sees evidence of circular funding or collusion. The central bank has also barred banks and NBFCs from investing in Alternative Investment Funds (AIFs) that hold debt in companies linked to those same lenders—a move specifically designed to cut off indirect routes of evergreening.
Together, these initiatives mark a shift in the RBI’s posture: from permissive oversight to active enforcement. They signal to the banking sector that cleaning up balance sheets must mean real risk transfer and recovery—not just reshuffling of paper. For the broader financial ecosystem, this could lead to healthier lending practices, more genuine asset resolution, and a clearer picture of where the risks actually lie.
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