A conversation on Slack today on our Premium channel led to this explanation of the concept of “evergreening” loans by banks.
So let’s say you are 60 days past due. In 30 days you will become NPA. The scene is like this:
You: I cant pay
Bank: Abeyaar interest at least give no?
You: I can’t pay don’t have money forget it
Bank: Okay I can suggest a way out
Bank: I will give you another loan for something else. You have to use it to pay me back interest portion on the current loan at least, using the extra money
You: How does it help
Bank: Then I won’t call you defaulter and tell everyone else you are defaulter and try to do recovery and all that
You: Okay, so now what
Bank: You owe 10,000 no now? I will give you 1000. You pay me back 1000 as interest on earlier loan. You will owe total 11,000 because of second loan but we will eventually forgive the extra 1000 just take some time to find the 10000
Bank, after two more months: Abeyaar give me interest on 11,000 now.
(repeat from: “You: I can’t pay”)
Then for the markets, the bank situation is like this:
Banker: I have low NPA
Banker: And my loan book has grown from 10,000 to 11,000
Analyst: Well done sir
Banker: Also we are finding more borrowers because they have heard of our excellent “top up” loan policy
Analyst: And we can see your fee income is also going up
Banker: Because we charge fees on top up loans also.
Another Analyst: But this fellow has already defaulted to other banks so do you think he’ll do this to you also
Banker: Abeyaar, we don’t comment on individual loans okay we have to close conference call now any more question no thank you goodbye.
Of course it gets more nuanced than this. Bankers don’t say Abeyaar.
But that’s what it is.