======Evergreening of Loans======
Evergreening of Loans is a deceptive banking practice where a lender tries to hide a bad loan by extending more credit to a struggling borrower. Think of it as getting a new credit card to pay off the balance on an old one you can't afford. The borrower, who is already on the brink of `[[Default]]`, uses the new `[[Loan]]` to make payments on the original one. For the bank, this accounting trick temporarily keeps the loan off the books as a `[[Non-Performing Asset]]` (NPA), making its `[[Balance Sheet]]` look much healthier than it is. This is a classic "kick the can down the road" strategy. It doesn't solve the borrower's underlying financial problems; in fact, it usually makes them worse by piling on more debt. For the bank and the wider economy, it's a ticking time bomb, concealing systemic risk and propping up unviable businesses.
===== How Does Evergreening Work in Practice? =====
While the concept is simple, the methods banks use can be quite creative. They range from the glaringly obvious to the sneakily complex, all designed to avoid classifying a loan as "bad."
==== The Classic "New Loan for Old" ====
This is the most straightforward method. Bank A has a $1 million loan to Company X, which is about to default. To prevent this, Bank A issues a //new// loan of $100,000 to Company X. Company X then immediately uses that $100,000 to make its overdue interest and principal payments to Bank A. On paper, the original loan looks "current" and healthy, even though the borrower's total debt has just increased, and its ability to repay has not improved at all.
==== More Subtle Tricks of the Trade ====
Banks often use more sophisticated techniques to fly under the radar of `[[Regulator]]`s and auditors. Common methods include:
  * **Debt Restructuring:** The bank might change the loan's terms, such as extending the repayment period or temporarily lowering the `[[Interest Rate]]`. While legitimate restructuring can help a viable business recover, evergreening involves doing this for a company with no realistic prospect of a turnaround, purely to avoid an NPA classification.
  * **Top-Up Loans:** A bank disburses additional funds to the borrower, supposedly for a new project or working capital. In reality, these funds are immediately funneled back to the bank to service the old debt.
  * **Lending to Related Parties:** The bank lends money to a healthy company that is a subsidiary, supplier, or customer of the struggling borrower. This "related party" then passes the funds to the troubled company, which uses the money to pay the bank.
  * **Adjusting [[Collateral]] Value:** The bank might unjustifiably inflate the value of the collateral backing the loan to make the lending position appear more secure than it is.
===== Why This Is a Red Flag for Value Investors =====
For practitioners of `[[Value Investing]]`, evergreening is more than just a bad practice; it's a sign of a deeply flawed business that should be avoided at all costs.
==== Hiding the Rot ====
Value investing is built on understanding a company's true financial health. Evergreening deliberately obscures it. An investor might look at a bank's financial statements and see low NPAs and steady profits, believing they are buying a sound, well-managed institution. In reality, they could be buying a business whose profits are a mirage and whose assets are riddled with hidden losses. When the charade inevitably ends, the stock price can collapse, wiping out shareholder value. This violates the cardinal rule: //know what you own//.
==== Creating [[Zombie Company|Zombie Companies]] ====
By keeping unviable businesses afloat, evergreening prevents the healthy process of "creative destruction" that is essential for a dynamic economy. These `[[Zombie Company|Zombie Companies]]` are businesses that don't earn enough to cover their debt-servicing costs but are kept alive by new loans. They soak up capital, labor, and resources that could be used by more productive and innovative firms. This is a classic example of poor `[[Capital Allocation]]`, a major sin for any long-term investor.
==== A Sign of Poor Governance ====
Evergreening is a symptom of weak management, poor ethical standards, and a lax regulatory environment. A management team willing to engage in such practices is not one you can trust. As `[[Warren Buffett]]` has often said, he looks for managers who are able, honest, and hardworking. Evergreening fails on the "honest" count, and it's a huge red flag about the overall corporate culture.
===== Spotting Evergreening from the Outside =====
Detecting evergreening is difficult for an outside investor, as it's designed to be hidden. However, there are several warning signs to look for:
  * **Repeated Debt Restructuring:** Pay attention to news or footnotes in annual reports about a bank consistently restructuring loans for the same set of large borrowers or within a specific troubled industry.
  * **Unusually Low NPAs:** Be skeptical if a bank reports NPA levels that are significantly better than its peers, especially during a broad economic downturn. If it looks too good to be true, it probably is.
  * **High Loan Growth in Stressed Sectors:** A bank that is aggressively growing its loan book in sectors known to be struggling (e.g., real estate during a housing bust) may be propping up its existing borrowers.
  * **Scrutinize the Footnotes:** Look for signs of significant lending to related parties, complex loan structures, or rapid increases in loans with long moratoriums on principal repayment.
===== The Capipedia Takeaway =====
Evergreening of loans is like putting makeup on a corpse—it might look presentable for a short while, but it doesn't change the underlying reality. It is a deeply corrosive practice that misrepresents risk, creates economic deadwood, and ultimately destroys shareholder value. For a value investor, a bank suspected of evergreening is a clear signal to stay away. The goal is to invest in strong, transparent, and honestly managed businesses, not financial houses of cards built on accounting tricks and a prayer that things will magically get better.