Is evergreening illegal?

Renewing a loan is lawful, and there is no general offence of evergreening in New Zealand, Australia or the UK under that name. The exposure comes from what it does to a bank's reporting: a supervisor can treat it as a breach of the rules on classifying and provisioning problem loans, and a misreported loan book raises questions for directors and auditors. The renewal itself is normally a valid contract; the problem is how the bank classifies and reports it.

Why would a bank evergreen a loan?

Because recognising the loan as a problem has immediate costs. A larger provision reduces profit, a non-performing loan can attract more capital, and the person who approved the facility has to explain it. A renewal defers all of that and keeps interest income on the books. The incentive is strongest when a bank is short of capital or close to a target, which is the time when hiding the loss does the most damage.

What is a zombie company?

A business that cannot cover its interest from its earnings and stays alive only because its lenders keep extending credit. Economists studying Japan's long slowdown after its early-1990s asset price collapse popularised the term, and evergreening is how such a company is kept going. The damage extends beyond the lender: the staff, customers and capital tied up in the business are unavailable to healthier competitors, and new lending to viable firms is crowded out.

How can you tell if a loan is being evergreened?

Follow the cash, not the arrears. Ask whether interest is paid from trading receipts or from new drawings, whether the debt has grown without a new asset being bought, whether the maturity has been extended more than once, and what repays the loan if it is not renewed again. On a bank's published accounts the signs are less direct: restructured or forborne balances rising, and non-performing loans low against a weakening book.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Evergreening: a Worked Example

Nothing is late. The debt is simply larger every year.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 5 MIN READ

// THE SHORT ANSWER

The mark of evergreening is a loan that stays up to date and keeps growing. Because the arrears report counts missed payments, a bank can keep that report clean by supplying the money for the payments itself, through a renewal, a higher limit or unpaid interest added to the balance. The income it reports is partly its own lending coming back. A trampoline-park chain can go three years without a late payment while US$455,000 of interest is lent to it to pay that interest, and while the bank's likely shortfall on the loan grows from US$400,000 to US$1.16m.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

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PART OF When Your Loan Goes to the Workout Team

// 01 — HOW A LOAN IS KEPT GREEN

The forms are ordinary banking acts, which is the difficulty. A facility reaches its expiry with nothing to pay it out, and the review paper extends it. Interest the borrower did not pay is debited to the loan. An overdraft limit moves up just far enough to absorb the excess. Or a fresh loan is written, its proceeds pay off the old one, and the file now shows a current facility with a recent approval date. Sometimes the new money goes through a related company, so that the two sets of records do not meet.

The motive is the point. Recognising the problem would mean a provision, more capital and an uncomfortable conversation for whoever approved the loan. The borrower has every reason to agree. Both sides are spared a decision, and the cost of being spared arrives later.

Three readings a reviewer takes on a renewal:

Interest paid from the borrower's own cash ÷ interest charged

Closing debt − opening debt, where no new asset was bought

Debt ÷ forced-sale value of the security, year on year

// 02 — WHAT THE RULES REACH

Evergreening is market shorthand; neither the Basel Committee's forbearance guidelines nor Australia's APS 220 uses the word. They reach the conduct by other means. The Basel guidelines list capitalising arrears as a concession and say a refinancing can be one where the borrower is in difficulty, and a bank must test the non-performing criteria even if the concession creates a new exposure. APS 220 says outright that renegotiation must not be used to obscure a loan's poor quality or to avoid an increase in provisions.

In the UK, article 47b of the Capital Requirements Regulation counts as forbearance a refinancing that would not have been granted but for the borrower's difficulties. A New Zealand bank answers to the Reserve Bank's wording. The accounting test is common ground for banks reporting under IFRS 9 or its New Zealand and Australian equivalents: a concession granted because of the borrower's difficulty is a listed sign of credit impairment, whatever the renewal is called.

// 03 — THE EXAMPLE

A chain of trampoline parks, constructed for this page like every figure in it, owes US$3.0m at 9%, secured on two freehold sites. Trade has fallen, and the cash it can put towards interest is shrinking. At each annual review the bank renews the facility for twelve months and adds what the chain cannot pay to the balance. Figures are in US$000.

Opening Interest Paid in Added to Closing

debt at 9% cash the debt debt

Year 1 3,000 270 150 120 3,120

Year 2 3,120 281 130 151 3,271

Year 3 3,271 294 110 184 3,455

Total 845 390 455

Forced-sale value, at the start 2,600 shortfall 400

Forced-sale value, after year 3 2,300 shortfall 1,155

No payment was late at any test date. The bank reported US$845,000 of interest and received US$390,000, or 46%. The other US$455,000 it lent to the borrower so the borrower could pay it. The shortfall grew 2.9 times: of the US$755,000 increase, US$455,000 is that interest and US$300,000 is the sites losing value as the parks ran down. The three years bought very little. Facing the position at the start would have returned US$2.6m. Waiting returned US$390,000 of interest and US$2.3m from the sites, US$2.69m in all, only US$90,000 more for three years without the money. And the accounts showed US$845,000 of income, more than half of it not received in cash. The values and the decline are the example's.

// 04 — HOW IT DIFFERS FROM A NORMAL RENEWAL

The same acts have honest versions. An evergreen facility is a contract built to renew unless someone gives notice, and renewing it for a sound borrower is ordinary business. Capitalised interest on a development loan is budgeted from the start and repaid from the sale of what was built. PIK interest is a priced term agreed at the outset. Forbearance may capitalise arrears too, but it carries conditions, an end date and a separate marker on the bank's books.

Each has a source of repayment that exists apart from the next renewal. Remove that, and the same document is carrying a loss forward.

DEFINED IN ONE PARAGRAPH → · FORBEARANCE, WORKED → · PROBLEM LOANS AND WORKOUT →

// 05 — WHERE IT DECIDES A FILE

It shows at annual review, in the account history rather than in the arrears report. A reviewer looks for interest debited to the overdraft and paid by a further drawing, limits that have risen without a matching purchase, a term loan refinanced by the same bank just before maturity, and renewal papers whose source of repayment is the next renewal. Each has an innocent explanation once. A run of them is a finding.

The borrower has a stake as well. A guarantor under an all-monies clause may find that the guarantee has grown with the debt, and the owners have spent the years in which a sale or a smaller business was still possible. A provision taken late does not change the loss. It changes who knew about it, and when.

PROVISION COVERAGE, WORKED → · WHEN A LOAN GOES BAD →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Prudential Regulation Authority, Prudential Standard APS 220 Credit Risk Management (in force from 1 January 2023) — paragraphs 13(c), 98 and 99 — Lists capitalising arrears and refinancing among concessions, prohibits using renegotiation to obscure poor quality, and requires the non-performing test even where a new exposure is created — section 02.
Basel Committee on Banking Supervision, Basel Consolidated Guidelines, chapter PAP10 (Prudential treatment of problem assets) — paragraphs 10.33, 10.34 and 10.36 — Treats capitalised arrears and refinancing as possible concessions and requires a bank to assess non-performing status even where forbearance creates a new exposure — section 02.

// QUESTIONS PEOPLE ASK

Is evergreening illegal?: Renewing a loan is lawful, and there is no general offence of evergreening in New Zealand, Australia or the UK under that name. The exposure comes from what it does to a bank's reporting: a supervisor can treat it as a breach of the rules on classifying and provisioning problem loans, and a misreported loan book raises questions for directors and auditors. The renewal itself is normally a valid contract; the problem is how the bank classifies and reports it.
Why would a bank evergreen a loan?: Because recognising the loan as a problem has immediate costs. A larger provision reduces profit, a non-performing loan can attract more capital, and the person who approved the facility has to explain it. A renewal defers all of that and keeps interest income on the books. The incentive is strongest when a bank is short of capital or close to a target, which is the time when hiding the loss does the most damage.
What is a zombie company?: A business that cannot cover its interest from its earnings and stays alive only because its lenders keep extending credit. Economists studying Japan's long slowdown after its early-1990s asset price collapse popularised the term, and evergreening is how such a company is kept going. The damage extends beyond the lender: the staff, customers and capital tied up in the business are unavailable to healthier competitors, and new lending to viable firms is crowded out.
How can you tell if a loan is being evergreened?: Follow the cash, not the arrears. Ask whether interest is paid from trading receipts or from new drawings, whether the debt has grown without a new asset being bought, whether the maturity has been extended more than once, and what repays the loan if it is not renewed again. On a bank's published accounts the signs are less direct: restructured or forborne balances rising, and non-performing loans low against a weakening book.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit risk analystSets and monitors the standard the lending line works to — policy, appetite, ratings and the models underneath them.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.
Model validatorIndependently checks that the bank's models do what they claim, before anyone relies on them.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE BANK · ASSET QUALITY

A bank's annual report gives three figures for its loan book.

Gross loans: US$10bn
Non-performing loans: US$300m
Provisions held: US$180m

What is its provision coverage of non-performing loans?

5 MORE ON THE BANK · ASSET QUALITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHEvergreening What is evergreening a loan?