The Economic Survey 2021 has come down heavily on the poor governance structure in banks, blaming it for the bad loan mess in the system.
The inefficiency of the bank boards and the failure of auditors to understand the problem of "ever-greening" contributed to the mess, the government's annual pre-budget survey released on January 29 said. Apart from re-capitalising banks, it is important to enhance the quality of their governance.
Ever-greening refers to the practice of banks giving fresh loans to the same borrower to enable them to pay up the old loan and, in turn, hide the actual stress in the banking system. This leads to systemic problems at a later stage.
“Ever-greening of loans by banks as well as zombie lending is symptomatic of poor governance, suggesting that bank boards are “asleep at the wheel” and auditors are not performing their required role as the first line of defence. Therefore, to avoid evergreening and zombie lending following the current round of forbearance banks should have fully empowered, capable boards,” the survey said.