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CS Professional · Internal and Forensic Audit · Special Points relating to Internal Audit in various Entities

While reviewing a bank's loan portfolio, an internal auditor notices several accounts of one borrower group that were fresh-sanctioned shortly before the original loans turned overdue, with the new funds used to pay the old instalments. Which practice does this pattern most strongly indicate?

This pattern indicates evergreening of loans. Fresh credit is sanctioned to the same borrower group and used to repay overdue instalments of earlier loans, which masks stress and delays recognition of non-performing assets. An internal auditor should flag it and trace the end-use of funds.

  1. AEvergreening of loans to conceal stressCorrect
  2. BNormal working capital renewal
  3. CLegitimate priority sector lending
  4. DRoutine interest capitalisation approved by the board

Explanation

Granting new credit that is used to repay existing overdue instalments hides the true asset quality and delays NPA recognition, which is evergreening. Normal renewal does not involve using fresh funds to clear overdue amounts of the same group.

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