An evergreening exercise that has gone unnoticed for too long Premium Prasanna Tantri Regulators must turn their attention to the indirect evergreening of loans before these swell to levels that threaten stability Share Via Read Full Story With the recent union budget proposing a bad bank to clean up bank NPAs, the issue of evergreening by banks has come to the fore. The evergreening of loans is a well-known exercise, in which banks revive a loan on the verge of default by granting further loans to the same firm. The consequences of evergreening are well known: a reduction in reported defaults in the short run, followed by an eventual explosion in default rates. The pattern has manifested in all major economies, including the US, the European Union, Japan and India. In most cases, the process of evergreening is direct: a troubled bank lends to a troubled borrower, and therefore, is detectable with some effort. In a recent paper, Nishant Kashyap, Sriniwas Mahapatro and I highlight what we call ‘indirect evergreening’, in which banks and firms use related entities to evergreen loans. Worryingly, both markets and regulators seem to miss this phenomenon.