Daily Current Affairs : 21-December-2023

The Reserve Bank of India (RBI) has recently taken measures to fortify regulations for Regulated Entities (RE), such as banks and financial institutions. These actions are specifically targeted at addressing the prevalent issue of evergreening of loans through investments in Alternative Investment Funds (AIFs).

Understanding Evergreening of Loans:

Evergreening of loans refers to a common practice where lenders extend new credit to borrowers facing difficulties in meeting their debt obligations. Instead of addressing the root financial issues, lenders provide additional funds, creating the illusion that the borrower’s financial situation is stable. This temporary facade of creditworthiness, however, often results in a cycle of escalating debt and prolonged resolution of financial difficulties.

Risks Associated with Evergreening:
  • Illusion of Stability: Evergreening creates a short-term illusion of financial stability for borrowers.
  • Cycle of Increasing Debt: Instead of resolving financial problems, it contributes to a continuous increase in debt.
  • Delayed Resolution: The practice hampers the timely resolution of financial difficulties.
Regulatory Response by RBI:

In an effort to ensure a transparent and healthy financial system, the RBI has strengthened regulations for Regulated Entities. The focus is specifically on curbing the evergreening of loans through investments in Alternative Investment Funds (AIFs).

Key Regulatory Measures:
  • Stricter Guidelines for RE: The RBI has introduced stricter guidelines for Regulated Entities to deter them from engaging in evergreening practices.
  • Scrutiny of AIF Investments: There is increased scrutiny on investments made by banks and financial institutions in Alternative Investment Funds to prevent the channeling of funds towards evergreening.
Important Points:
  • Regulatory Action by RBI:
    • Strengthened regulations for Regulated Entities (RE), including banks and financial institutions.
    • Targeted specifically at curbing evergreening of loans through investments in Alternative Investment Funds (AIFs).
  • Understanding Evergreening of Loans:
    • Practice where lenders extend new credit to struggling borrowers.
    • Instead of addressing financial issues, lenders provide additional funds.
    • Creates a temporary illusion of stability but leads to a cycle of increasing debt.
  • Risks Associated with Evergreening:
    • Illusion of Stability: Creates a short-term appearance of financial stability for borrowers.
    • Cycle of Increasing Debt: Contributes to a continuous increase in debt rather than resolving financial problems.
    • Delayed Resolution: Hampers the timely resolution of financial difficulties.
  • Regulatory Response Measures:
    • Stricter Guidelines for RE: Introduction of stringent guidelines to deter Regulated Entities from engaging in evergreening practices.
    • Scrutiny of AIF Investments: Increased scrutiny on investments made by banks and financial institutions in Alternative Investment Funds to prevent channeling of funds towards evergreening.
Why In News

In an effort to fortify measures against the evergreening of loans through investments in Alternative Investment Funds (AIFs), the Reserve Bank of India (RBI) has enhanced regulations for Regulated Entities (RE), encompassing banks and financial institutions, to ensure greater financial stability and transparency in the lending ecosystem.

MCQs about Evergreening of Loans in India

  1. What is the primary focus of RBI’s recent regulatory measures?
    A. Encouraging evergreening practices
    B. Strengthening regulations for Regulated Entities
    C. Promoting increased debt among borrowers
    D. Relaxing guidelines for Alternative Investment Funds (AIFs)
    Correct Answer: B. Strengthening regulations for Regulated Entities
    Explanation: The RBI’s recent measures aim to strengthen regulations for Regulated Entities, specifically addressing the issue of evergreening of loans through investments in Alternative Investment Funds.
  2. What is evergreening of loans?
    A. Timely resolution of financial difficulties
    B. Providing additional funds to borrowers in need
    C. Creating a temporary illusion of financial stability
    D. Encouraging transparent financial practices
    Correct Answer: C. Creating a temporary illusion of financial stability
    Explanation: Evergreening involves providing additional funds to borrowers, creating a temporary illusion of financial stability, but often leading to a cycle of increasing debt and delayed resolution of financial difficulties.
  3. What risks are associated with evergreening practices?
    A. Rapid resolution of financial problems
    B. Continuous increase in debt
    C. Enhanced transparency in financial systems
    D. Decreased scrutiny on AIF investments
    Correct Answer: B. Continuous increase in debt
    Explanation: Evergreening contributes to a continuous increase in debt rather than resolving financial problems, creating risks for the financial system.
  4. How does RBI plan to address evergreening through its regulatory response?
    A. Relaxing guidelines for Regulated Entities
    B. Scrutinizing investments in Alternative Investment Funds (AIFs)
    C. Encouraging lenders to engage in evergreening
    D. Promoting a cycle of increasing debt
    Correct Answer: B. Scrutinizing investments in Alternative Investment Funds (AIFs)
    Explanation: RBI plans to address evergreening by increasing scrutiny on investments made by banks and financial institutions in Alternative Investment Funds (AIFs) to prevent the channeling of funds towards evergreening practices.

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