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Indirect Evergreening Using Related Parties: Evidence From India

Published online by Cambridge University Press:  19 April 2022

Nishant Kashyap Open the ORCID record for Nishant Kashyap [Opens in a new window] ,
Sriniwas Mahapatro  and
Prasanna Tantri
Nishant Kashyap*
Affiliation:
Indian School of Business
Sriniwas Mahapatro
Affiliation:
Indian School of Business sriniwas_mahapatro@isb.edu
Prasanna Tantri
Affiliation:
Indian School of Business prasanna_tantri@isb.edu
*
nishant_kashyap@isb.edu (corresponding author)
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Abstract

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We identify a novel way of evergreening loans in India. A low-quality bank lends to a related party of an insolvent borrower, and the loan recipient transfers the funds to the insolvent borrower using internal capital markets. Incremental investments, interest rates charged, and loan delinquency rates collectively indicate evergreening. These loans are unlikely to represent arm’s length transactions or rescue of troubled related firms by stronger firms to prevent group-wide spillover effects. Indirect evergreening is less likely to be detected by regulatory audits. It has significant real consequences at the firm and industry levels.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 5 , August 2023 , pp. 2131 - 2161
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee and Mara Faccio (the editor) for their valuable feedback. We also thank Shashwat Alok, Bhagwan Chowdhry, Prachi Deuskar, Nirupama Kulkarni, Gautam Udupa, and other seminar participants at ISB and CAFRAL for their helpful comments. We gratefully acknowledge the support from the Center for Analytical Finance, Indian School of Business for providing the data and the necessary financial assistance for this project. The usual disclaimer applies.

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