Evergreening of Loans: Detection Techniques and Warning Signals

Vinu: Manu, while reviewing loan accounts, how do bankers identify whether a loan is being evergreened?

Manu: Evergreening happens when fresh funds are used—directly or indirectly—to repay an existing loan, making the account appear regular even though the borrower isn't generating sufficient cash from business operations.

Vinu: Can you explain with a simple example?

Manu: Suppose a borrower has a term loan overdue of ₹15,00,000. Instead of repaying it from business cash flows, the bank sanctions a fresh facility or another lender provides funds, and the overdue is cleared. The account looks regular, but the repayment isn't genuine.

Vinu: Why is this considered risky?

Manu: Because it hides the borrower's actual repayment capacity. The financial stress remains, while the loan appears healthy on paper.

Vinu: What are the common warning signals?

Manu: A few important red flags are:

Loan repayments immediately after fresh disbursements.
Frequent enhancement of limits without business growth.
Continuous rollover of short-term facilities.
Heavy dependence on new borrowings to meet old obligations.
Weak operating cash flows despite regular repayments.

Vinu: What should a credit officer verify?

Manu: Trace the source of repayments. Check bank statements, cash flow statements, fund flow, and end-use of loan proceeds. Repayments should come from business earnings—not borrowed money.

Vinu: Do financial statements provide any clues?

Manu: Yes. Watch for:

Increasing debt without proportional sales growth.
Persistent negative operating cash flows.
Rising interest costs.
High receivables and inventory with stagnant turnover.
Weakening DSCR and Interest Coverage Ratio.

Vinu: Can account operations also indicate possible evergreening?

Manu: Absolutely. Temporary credits just before EMI dates, immediate debit reversals, frequent fund transfers between related entities, and circular transactions deserve closer examination.

Vinu: What should a banker do if these warning signals appear?

Manu: Conduct a detailed review, verify the end-use of funds, assess the borrower's real cash generation, and escalate the findings wherever necessary. Decisions should always be based on genuine repayment capacity.

Vinu: What's the key takeaway?

Manu: A regular loan account isn't always a healthy loan account. Good credit appraisal goes beyond timely repayments—it verifies whether repayments are supported by sustainable business cash flows or merely by fresh borrowings.

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