Evergreening is the practice of using new credit to service existing credit, creating an appearance of a performing loan when the underlying borrower cannot service the debt from operating cash flow. The loan is technically not in default because the payments are current. The payments are current because they are funded by fresh borrowing, not by the business.
The practice is destructive for the lender because it delays the recognition of stress. An evergreened account appears performing in the portfolio until the moment the fresh borrowing stops, at which point the account moves from “performing” to “NPA” without passing through the warning stages that would have given the lender time to intervene.
The Evergreening Test examines whether a borrower’s debt-service payments are funded by operating cash flow (genuine performance) or by new credit (artificial performance).
How evergreening works in practice
Pattern 1: Additional facility from the same lender. The borrower has a term loan with Bank A. The instalment is Rs 50 lakh per quarter. The borrower requests, and receives, an additional working capital facility of Rs 2 crore from Bank A. Within one quarter, the new facility is drawn down. The term loan instalment is paid on time. The working capital facility was used, in part, to fund the term loan payment. Bank A’s portfolio shows: the term loan is performing (instalments paid) and the working capital facility is utilised (drawing power supports the utilisation). Both accounts look healthy. The economic reality is that one facility is funding the other.
Pattern 2: New borrowing from a different lender. The borrower obtains Rs 3 crore from NBFC B. Within weeks, Rs 50 lakh is transferred from the NBFC’s disbursement to the borrower’s account at Bank A, from which the term loan instalment is paid. Bank A sees a performing account with timely payments. Bank A does not see that the payment originated from a new borrowing, because Bank A does not have visibility into the NBFC’s disbursement.
Pattern 3: Group entity round-trip. The borrower transfers Rs 1 crore to Group Entity C as an “intercompany advance.” Group Entity C transfers Rs 80 lakh back to the borrower as a “loan repayment” or “advance for services.” The borrower uses the Rs 80 lakh to service its bank debt. The bank sees a performing account. The transaction audit shows money leaving and returning through a connected entity, with no genuine commercial purpose.
Pattern 4: Promoter infusion. The promoter borrows Rs 2 crore personally from a private lender. The promoter lends Rs 2 crore to the company as a “promoter contribution.” The company uses Rs 50 lakh to pay the bank instalment. The bank sees a performing account and a promoter who is investing in the business. The reality: the promoter has taken personal debt to keep the company’s account performing, creating a hidden obligation that the company will eventually need to repay.
The detection methodology
Step 1: Source-of-repayment analysis. For each debt-service payment made by the borrower in the last 12 months, trace the source of the cash.
The analysis examines the borrower’s bank account in the five business days preceding each instalment date. Where did the cash come from? If the account had a steady balance of Rs 2 crore from which the Rs 50 lakh instalment was debited, the payment was funded from existing operational cash. If the account received a Rs 60 lakh credit from an unusual source (an NBFC disbursement, a group entity transfer, a promoter infusion) two days before the instalment date, the timing correlation suggests the credit was arranged to fund the payment.
The timing analysis across 12 months of instalment dates reveals the pattern: are the pre-instalment credits systematic (occurring before every instalment) or isolated (occurring once due to a genuine operational cash gap)?
Step 2: New-borrowing-to-repayment correlation. Every new borrowing event (new facility drawdown, NBFC disbursement, group entity inflow, promoter infusion) is mapped against every debt-service payment within the subsequent 30 days. If new borrowing consistently precedes debt service by 3 to 15 days, the correlation suggests the new borrowing is funding the old borrowing’s service.
Step 3: Debt stack trajectory. The total debt (across all lenders, all facilities, all sources) is tracked over time. A borrower that is genuinely performing should have declining total debt (the business generates enough cash to reduce the obligation over time, assuming the debt is amortising). A borrower whose total debt is increasing while term loan instalments are being paid on time is replacing old debt with new debt. The portfolio is not deleveraging. It is re-leveraging.
Step 4: Cash-basis DSCR. The Repayment Capacity Test (Article 3) is applied. If the cash-basis DSCR is below 1.0x (the borrower does not generate enough operating cash to service the debt), but the debt service is current (payments are being made on time), the gap must be funded from somewhere. The evergreening test identifies the source of that gap funding.
What the lender does with the finding
An evergreened account is not a performing account that happens to have additional borrowings. It is a stressed account whose stress is being masked by the additional borrowings. The moment the additional borrowings stop (because the NBFC declines to lend more, because the promoter has exhausted personal borrowing capacity, because the group entity has no more cash to route), the account defaults.
The lender that identifies evergreening has options that disappear when the account defaults: restructure the facility to match the borrower’s actual cash-generation capacity (smaller instalments, longer tenure), require a credible turnaround plan before extending additional credit, enhance security while the borrower is still cooperating, or exit the exposure through a sale of the performing (technically) asset before the mask falls and the recovery value collapses.
The lender that does not identify evergreening carries a hidden loss in the portfolio. The loss is hidden because the account appears performing. The loss is real because the borrower’s cash flow does not support the debt. The loss will crystallise the day the fresh money stops.