Chapter 32: Evergreening-Liar's Poker !
Kalpathy G Lakshmi Vipin ( Lakshmi)
The Compliance Officer ! Global Head-Ethics & Business Integrity - Redington Ltd
A Little Late, But Here’s This Week’s Topic!
Apologies for the slight delay in this week's newsletter! I got a bit held up as I had the privilege of being a jury member for a paper submission session at Panimalar Engineering College, where I was also a session chair for an exciting conference on AI & ML. And let me tell you, the young talent I saw there was absolutely mind-blowing. These students presented so many innovative ideas that I was left speechless. Honestly, I felt like I was only 40% of what they are at their age! It was such a wake-up call for me, and I’m genuinely excited about the future these young minds are shaping.
Now that I’m back, let’s dive into this week’s very interesting topic. It all started when I watched the movie “Lucky Bhaskar”, which got me thinking about financial practices and certain deceptive strategies in the corporate world. From that inspiration, I decided to write about Evergreening, a topic that’s increasingly relevant in today’s financial landscape.
A Fraud by Any Other Name?
Ever heard of a company that’s constantly restructuring its loans but never really making any money? That’s evergreening in action—a financial sleight of hand used by banks and businesses to mask bad loans and keep failing companies afloat. But why do they do it? And more importantly, what does it mean for compliance officers like us?
Why Are We Talking About Evergreening Now?
Writing about evergreening is timely for several reasons. Regulators worldwide are tightening scrutiny on loan classifications and evergreening tactics, making it a hot topic in compliance circles. Recently, the banking sector has seen multiple instances where institutions were flagged for rolling over bad loans, leading to financial instability and even the collapse of some banks.
For compliance professionals, evergreening isn’t just a financial issue—it’s a form of fraud that must be actively guarded against. Many compliance and finance professionals may have heard the term but might not fully grasp its risks and long-term impact. With increasing regulatory pressure, it’s essential for companies to identify and mitigate evergreening risks before they result in significant financial losses and reputational damage.
The What?
In simple terms, evergreening is the practice of extending new loans to troubled borrowers to cover up their old, non-performing ones. On paper, it looks like the company is paying its debts, but in reality, the bank is just rolling over bad loans, hoping things magically improve.
Banks engage in this practice to avoid classifying loans as non-performing assets (NPAs)—a label that brings regulatory scrutiny, potential losses, and damage to their reputation. Companies, on the other hand, play along because it buys them time and keeps them from defaulting. It seems like a win-win, but it’s far from it.
A Game of Illusions
Companies engage in evergreening for several reasons. Some do it to make their balance sheets look healthier to investors, regulators, and rating agencies. Avoiding loan defaults is another key motivation, as defaulting can trigger legal action, asset seizures, and loss of market credibility.
In many cases, evergreening is simply a way to buy time. Some companies believe they’ll turn things around if they can just get through the next quarter. Banks, too, may face regulatory pressures to maintain a low NPA percentage, which incentivizes them to keep struggling borrowers afloat rather than acknowledge bad loans.
Why Should We Care?
For compliance professionals, evergreening is a major red flag that signals deeper financial fraud. If left unchecked, it can lead to massive losses and systemic financial instability.
Common warning signs of evergreening include:
If a borrower keeps getting fresh loans without a strong financial foundation, compliance teams should dig deeper. Delayed recognition of NPAs is another red flag—if an institution is avoiding recognizing bad loans despite clear financial distress, it may be engaged in evergreening.
How Can Compliance Officers Stay Vigilant?
To mitigate the risks of evergreening, compliance officers must strengthen internal controls and implement AI-driven loan monitoring to flag high-risk restructuring patterns. Enhanced due diligence is essential—compliance teams should scrutinize financials and repayment sources before approving loan rollovers.
Encouraging whistleblowing is another crucial step. Employees in lending institutions often witness the first signs of evergreening, and a strong whistleblower program can help uncover fraudulent practices early.
Compliance officers must also stay updated on evolving regulatory changes, as evergreening tactics shift to keep up with enforcement measures.
Incorporating Evergreening Checks into Credit Scoring
One of the most effective ways to detect evergreening early is by integrating it into credit scoring models. Compliance officers, in collaboration with risk teams, should ensure that creditworthiness assessments go beyond basic financial metrics and consider patterns that indicate loan rollovers.
How Can We Do This?
By embedding these controls into credit scoring frameworks, organizations can proactively prevent evergreening from seeping into their financial ecosystem.
Addressing Conflicts of Interest in Evergreening
One critical area where evergreening intersects with compliance is conflict of interest. Employees involved in loan approvals or financial transactions must not have personal or professional incentives to greenlight risky rollovers.
To mitigate conflicts of interest, companies should mandate disclosure policies requiring employees to declare any relationships with borrowers. Independent reviews should be conducted for high-risk loan restructurings, and rotation policies should be in place to reduce the likelihood of collusion in evergreening practices.
Could Evergreening Affect Us?
Evergreening isn’t just a banking risk—it can impact corporate procurement and vendor relationships as well. If a key vendor is engaged in evergreening, it may signal financial distress, which could lead to supply chain disruptions. A financially unstable vendor may suddenly collapse, leaving your company without critical supplies or services.
Fraudulent transactions are another risk. Vendors engaged in evergreening may inflate invoices or push for early payments to maintain cash flow. Furthermore, if a company is found to be engaging with vendors involved in financial fraud, regulators may hold it accountable for inadequate due diligence, leading to reputational damage.
Are We at Risk?
Companies working with vendors engaged in evergreening could face vicarious liability—where an entity is held responsible for the fraudulent acts of its associates. While laws differ across jurisdictions, regulators increasingly expect firms to conduct thorough vendor due diligence to prevent indirect involvement in financial fraud.
To mitigate vendor-related evergreening risks, organizations should conduct regular financial health checks of their vendors, ensuring transparency in payments and verifying invoices for any unusual transactions. Contracts should also include anti-fraud clauses that specify clear obligations against fraudulent financial practices.
Evergreening is like kicking the can down the road—except the road eventually ends, and the can turns into a bomb. Compliance officers need to stay vigilant, ask tough questions, and ensure that financial reporting reflects reality, not illusions.
So, next time you see a company magically ‘recovering’ while being constantly propped up by fresh loans, you know what to call it. And more importantly, you know what to do about it.
Your Compliance Officer....
Kalpathy G Lakshmi