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Twin Balance Sheet Problem

Last Updated : 05 Sep, 2022
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An economy runs well when there is ample money flow in the market. And this market cash flow often depends upon bank loan interest rates. For positive economic growth, banks provide loans to companies and individuals, so that they can invest that money in infrastructural development resulting in an increase in the country’s domestic production. However, in many instances, it has been observed that banks issue huge loans to overleveraged companies for sake of high returns. But soon these companies come up with huge debts and are unable to repay the interest or principal loan amount and soon turn into NPA (Non-Performing Assets). Such a condition is also often referred to as Twin Balance Sheet (TBS) problem in India.

What is the Twin Balance Sheet (TBS) Problem?

In order to understand the Twin Balance Sheet problem, you must be aware of a balance sheet. A balance sheet is a financial statement of an institution at any point, which shows the assets, liabilities, and stakeholding of a company. The twin balance sheet problem in India deals with the balance sheets of Indian companies and Indian Banks. It’s basically a scenario when an overleveraged company is under huge debts and is unable to repay the loan’s interest amount. When a company fails to repay the principal and interest amount within a specified time then it’s categorized under NPA (Non-Performing Assets) of banks. 

The occurrence of the Twin Balance Sheet (TBS) problem in India goes back to 2000 when the country’s economic growth was at its peak. Thus at that time, Indian banks issued huge loans to several institutions/organizations, but due to the global financial crisis of 2007-2008, many companies suffered huge losses and some of them even went bankrupt. Thus leading to soon turning these accounts into NPA.

Of the total Banking System in India, around 9% is NPA, which is 12.1% for Public Sector Banks. 

Present Scenario of Twin Balance Sheet (TBS) Problem in India:

In many countries, it has been observed that corporates took up huge loans when the economy was at boon. But soon they find it difficult to repay the loan amount, thus arising a situation where NPA rises and leads to the banking crisis. But in India, there were no debts or stress on the interbank, the GDP was growing at a decent pace, and also there was no need for any liquidity support. But it all continued till 2010 when the first case of TBS arose in India, and since then continuously numerous similar cases started appearing. And at present, the scale of TBS has reached another level and is quite threatening to the stability of the banking system in India. The TBS problem becomes quite serious as the majority of NPA accounts are in the Government of India-backed public sector banks. 

Steps were taken by the GOI to address the issue of NPA and TBS:

  • In June 2015, the GOI launched the Strategic Debt Restructuring (SDR) scheme, which allows banks to take over the firms which are unable to repay their loan and sell them to new owners.
  • Under the 5/25 Refinancing of Infrastructure Scheme, the GOI provided a larger window to the borrowers. Under this scheme, the amortization period was extended to 25 years in which the interest rates were adjusted for each consecutive 5 years. 
  • The GOI also took the help of the Scheme for Sustainable Structuring of Stressed Assets (S4A), under which a bank can hire an independent agency, which will decide on the sustainable debt of a company., while converting the unsustainable one into equity.
  • The GOI also tried to recover the loan amount from Private Asset Reconstruction Companies (ARCs). In which NPAs of banks are acquired by ARCs and then they try to resolve them by using their asset resolution powers under SARFAESI Act.
  • The RBI suggests banks, conduct Asset Quality Review (AQR), before issuing a loan amount to the borrower.

Way forward:

Till now Government of India has adopted many schemes to deal with the NPA and bad loans. But it seems like none of them was quite successful. Thus now the time has come to create the Public Sector Asset Rehabilitation Agency (PARA), a centralized agency, that will resolve the problem of NPA and TBS. Also, in the economic survey of 2017, it’s suggested that PARA can turn out to be a game-changing step against NPA. As it will be a centrally controlled agency, the coordination and decision-making will be swift. 

The Twin Balance Sheet (TBS) problem, has now emerged as a major problem in the Indian economy. And if this problem doesn’t get addressed soon it will be a major threat to the stability of the Indian banking system. Also making a delay in taking the right approach to Twin Balance Sheet (TBS) problem can result in huge economic losses to the country. 

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