======Evergreening======
Evergreening is a deceptive banking practice where a lender provides a new [[Loan]] to a borrower who is on the brink of defaulting on an existing one. This new loan is used by the borrower to make payments on the old loan, creating the illusion that the original debt is being serviced on time. In essence, it’s a way for a bank to "kick the can down the road," hiding a bad loan to avoid classifying it as a [[Non-Performing Asset (NPA)]]. This practice temporarily makes the lender’s [[Balance Sheet]] look healthier than it actually is by masking the true [[Credit Quality]] of its loan portfolio. Think of it as painting over rust on a car; it looks fine for a while, but the underlying problem is only getting worse. This temporary fix prevents the bank from having to set aside capital as a [[Loan Loss Provision]], artificially inflating its short-term profitability and misleading investors, [[Regulators]], and [[Auditors]].
===== How Evergreening Works: The Vicious Cycle =====
The mechanics of evergreening are deceptively simple but lead to a dangerous cycle. It all starts when a borrower, be it a company or an individual, can't afford to pay the interest or [[Principal]] on their loan.
Instead of acknowledging the default, the bank steps in with a solution that benefits its own books in the short term. It offers a fresh loan to the struggling borrower. The borrower then immediately uses the funds from this new loan to pay off the interest due on the old one. Voilà! From an accounting perspective, the original loan is now "current" and performing. The bank avoids taking a hit to its profits, and the borrower lives to fight another day.
The problem, of course, is that the borrower’s underlying financial situation hasn't improved. In fact, it has worsened, as they now owe even more money. This process can be repeated, with the loan amount growing larger each time, until the borrower is so buried in debt that the charade can no longer be maintained.
===== Why It's a Major Red Flag =====
Evergreening isn't just a bit of creative accounting; it's a practice that can have severe consequences for investors, the bank itself, and the wider economy.
==== For the Bank and its Investors ====
The most immediate danger is that it completely distorts a bank's financial health. Investors who rely on [[Financial Statements]] to make decisions are flying blind, believing the bank is stable when, in reality, its foundation is cracking. The practice creates a ticking time bomb. When the evergreened loans eventually collapse—and they always do—the resulting losses are often catastrophic, far worse than if they had been dealt with properly from the start.
Furthermore, evergreening props up financially unviable businesses, often referred to as [[Zombie Company|Zombie Companies]]. These companies are kept on life support by an endless drip-feed of new credit, trapping capital that could have been invested in healthy, innovative businesses.
==== For the Broader Economy ====
On a larger scale, widespread evergreening leads to a gross misallocation of capital. Money that should be fueling economic growth is instead used to paper over the cracks of failing enterprises. This can stifle competition, reduce productivity, and ultimately lead to a prolonged period of economic stagnation. It creates an unhealthy and fragile financial system where perceived stability is just an illusion.
===== The Value Investor's Perspective =====
For a practitioner of [[Value Investing]], evergreening is one of the most serious red flags imaginable. The entire philosophy is built on a foundation of analyzing the true, intrinsic value of a business based on reliable financial data. Evergreening deliberately corrupts that data.
It directly attacks the core principle of a [[Margin of Safety]]. An investor might think they are buying a bank's stock at a discount to its book value, but if that book value is inflated with worthless, evergreened loans, the margin of safety is a mirage. The risk is hidden, unquantifiable, and potentially devastating.
=== How to Spot Potential Evergreening ===
Detecting evergreening from the outside is notoriously difficult, as it's designed to be hidden. However, a diligent investor can look for clues and warning signs:
  * **Suspiciously Low NPAs:** Be wary of a bank that reports consistently pristine loan quality and very low NPAs, especially when its competitors are struggling or the overall economy is weak. If it looks too good to be true, it probably is.
  * **Rapid Loan Growth to Stressed Sectors:** Watch for banks that are aggressively lending to industries known to be under financial pressure. This could be a sign they are "doubling down" on bad borrowers.
  * **Frequent Loan "Restructuring":** Scour the footnotes of the annual report. A high number of "restructured loans" can be a euphemism for evergreening. While some restructuring is normal, a chronic pattern is a cause for concern.
  * **Discrepancy Between Profits and Cash Flow:** Evergreening inflates accounting profits but doesn't generate real cash. If a bank’s reported profits are consistently much higher than its cash flow from operations, it warrants a deeper dive into its lending practices.
Ultimately, evergreening is a sign of poor management and a weak corporate culture. A [[Value Investor]] prizes honesty and transparency above all, and evergreening is the exact opposite.