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Economic Survey 2021: Yes Bank, LVB events show RBI audits failed to catch 'ever-greening'

The RBI initiated an asset quality review in 2015 under governor Raghuram Rajan to dig up NPAs from bank balance sheets.

January 29, 2021 / 03:07 PM IST
Rana Kapoor, the founder of Yes Bank is pictured after his arrest in Mumbai on March 8, 2020. - The founder of India's Yes Bank was arrested on allegations of money laundering on March 8, amid efforts to formulate a rescue plan for the country's fourth-largest private lender. (Photo by Bhushan KOYANDE / AFP) (Photo by BHUSHAN KOYANDE/AFP via Getty Images)

Rana Kapoor, the founder of Yes Bank is pictured after his arrest in Mumbai on March 8, 2020. - The founder of India's Yes Bank was arrested on allegations of money laundering on March 8, amid efforts to formulate a rescue plan for the country's fourth-largest private lender. (Photo by Bhushan KOYANDE / AFP) (Photo by BHUSHAN KOYANDE/AFP via Getty Images)

The Economic Survey 2021 is highly critical of the audits done by the Reserve Bank of India (RBI), saying events at Yes Bank and Lakshmi Vilas Bank (LVB) showed that the central bank did not spot "ever-greening" carried out in ways other than formal restructuring.

"The recent events at Yes Bank and Lakshmi Vilas Bank corroborate that the AQR (asset quality review ) did not capture ever-greening carried out in ways other than formal restructuring," the survey said.

Ever-greening refers to the practice where a bank gives new loans to pay off an old one to help the borrower escape the non-performing assets (NPA) tag. The practice, widely prevalent, is not in line with the spirit of good corporate governance.

The fact that both these banks had to be rescued by the regulator also goes against RBI’s assumption that the private banks should have been able to raise the required capital after the clean-up, the survey said.