Twin Balance sheet Problem India -Will it Lead To Economic Crisis

Twin Balance sheet Problem India -Will it Lead To Economic Crisis – The Economic Survey 2015-16 for the first time highlighted the weakening balance sheets of public sector banks and that of some large corporate houses as one of the most critical short term challenges for the Indian economy and an impediment to economic recovery.

Terming it as ‘Twin balance sheet challenge’, it is clear that the TBS problem is the major impediment to
private investment, and thereby to a full-fledged economic recovery.

Twin Balance sheet Problem India -Will it Lead To Economic Crisis

Twin Balance sheet Problem India -Will it Lead To Economic Crisis

Twin Balance sheet Problem India -Will it Lead To Economic Crisis

What is a balance sheet?

It is a financial statement that summaries a company/institution’s assets, liabilities and shareholder’s equity at a specific point of a time.

What is this Twin Balance Sheet Problem?

The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs 10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.

Thus, TBS is two-fold problems for Indian economy which deals with:

Over leveraged companies

  • Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans.
  • Note: 40% of corporate debt is owed by companies who are not earning enough to pay back their interest payments. In technical terms, this means that they have an interest coverage ratio less than 1.


  • Non Performing Assets (NPA) of the banks is 9% for the total banking system of India. It is as high as 12.1% for Public Sector Banks contributing to four-fifths of the total NPAs. As companies fail to pay back principal or interest, banks are also in trouble.


The NPAs are assets that have stopped generating income for a bank. Bank’s assets comprise mostly of loans and when these loans are on the verge of default (that is, about to go bad), they are classified as NPA.

In India, a loan is classified as NPA, if the interest or any instalment on the loan remains unpaid for a period of more than 90 days.

The gross NPAs in India were 5.1 % of total loans advanced by the public sector banks as of September 2015 and the stressed assets were 11% of total loans advanced by them.


Stressed assets are NPAs plus restructured assets. Restructured loans are loans that have been converted to equity under the corporate debt restructuring scheme.

Stressed assets = NPAs + Restructured loans + Written off assets

Origin of Twin Balance Sheet Problem in India

  • Origin of TBS problem can be traced to the 2000s when the economy was on an upward trajectory.
  • During that time, the investment-GDP ratio had soared by 11% reaching over 38% in 2007-08.
  • Non-food bank credit doubled and capital inflows in 2007-08 reached 9% of GDP.
  • Due to such a boom in the economy, firms started taking risks and abandoned their conservative debt/equity ratios and leveraged themselves up to take advantage of the upcoming opportunities.
  • But Global Financial Crisis (2007-08) reduced growth rates and thus revenues from the investment.
  • Projects that had been built around the assumption that growth would continue at double digit levels were suddenly confronted with growth rates half that level.
  • Firms that borrowed domestically suffered when RBI increased interest rates to avoid inflation increasing financial costs.
  • Environment and land clearances in infrastructure sector also delayed the ongoing projects.
  • Thus higher cost, lower revenues, greater financial costs – all squeezed corporate cash flow leading to NPAs in the banking sector.

Steps taken to address the TBS Problem

  • Government and RBI have taken many steps in past years to address the issue of TBS.

To address the challenges, Economic Survey 2015-16 recommended policy of four R’s:

  1. Recognition : Banks must value their assets as far as possible close to true value.
  2. Recapitalization: Capital position of banks must be safeguarded via infusions of equity.
  3. Resolution: The underlying stressed assets in the corporate sector must be sold or rehabilitated.
  4. Reform : Future incentives for the Private Sector and Corporate’s must be set-right to avoid a repetition of the problem.

Some of the major initiatives undertaken under these have been following:

1. 5/25 Refinancing of Infrastructure Scheme

  • This scheme offered a larger window for the revival of stressed assets in the infrastructure sector and eight core industry sectors.
  • Under this scheme, lenders were allowed to extend amortisation periods(spreading payment over multiple periods) to 25 years with interest rates adjusted every 5 years, so as to match the funding period with the long gestation and productive life of these projects.
  • The scheme thus aimed to improve the credit profile and liquidity position of borrowers, while allowing banks to treat these loans as standard in their balance sheets, reducing provisioning costs.
  • Issues: However, with amortisation spread out over a longer period, this arrangement also meant that the companies faced a higher interest burden, which they found difficult to repay, forcing banks to extend additional loans (called ‘ever-greening of loans’).
  • This, in turn, has aggravated the initial problem.

2. Private Asset Reconstruction Companies (ARCs)

  • ARCs acquire NPAs from banks or financial institutions and try to resolve them.
  • ARCs are a product of and derive their asset resolution powers from the SARFAESI Act.
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Actallows banks and other financial institution to auction residential or commercial properties to recover loans.
  • Issues: ARCs have found it difficult to recover much from the debtors.
  • They have only been able to offer low prices to banks which banks have found difficult to accept.

3. The Strategic Debt Restructuring (SDR) scheme

  • The SDR scheme was introduced in June 2015, under which banks could take over firms that were unable to pay and sell them to new owners.
  • Issues: By December 2016, only two sales had been materialised as many firms remained financially unviable.

4. Asset Quality Review (AQR)

  • Reserve Bank of India (RBI) inspectors check bank books every year as part of its annual financial inspection (AFI) process.
  • However, a special inspection was conducted in 2015-16 in the August-November period. This was named as Asset Quality Review (AQR).
  • In a routine AFI, a small sample of loans is inspected to check if asset classification was in line with the loan repayment and if banks have made provisions adequately.
  • However, in the AQR, the sample size was much bigger and most of the large borrower accounts were inspected
    to check if classification was in line
     with prudential norms.

5. The Scheme for Sustainable Structuring of Stressed Assets (S4A)

  • An independent agency hired by the banks will decide on how much of the stressed debt of a company is sustainable.
  • The rest (unsustainable) will be converted into equity and preference share.
  • Issues: Only one case has been solved under this scheme so far.

6. Indradhanush Action Plan

  • It is a 7 pronged plan launched by Government of India to resolve issues faced by Public Sector banks.
  • It aims to revamp their functioning to enable them to compete with Private Sector banks.
  • Many of the measures taken were suggested by P J Nayak committee on Banking sector reforms.
  • The 7 parts include Appointments, Banks board bureau, Capitalisation, de-stressing, Empowerment, Framework of accountability and Governance reforms (ABCDEFG)

 Appointments – separation of posts of CEO and MD to check excess concentration of power and smoothen the functioning of banks; also induction of talent from private sector (recommendation of P J Nayak Committee)

2. Bank Boards Bureau – will replace the appointments board of PSBs.

  • It will advise the banks on how to raise funds and how to go ahead with mergers and acquisitions.
  • It will also hold bad assets of public sector banks.
  • It will be a step into eventual transition of the bureau into a bank holding company.
  • It will separate the functioning of the banks from the government by acting as a middle link.
  • The bureau will have three ex-officio members and three expert members, in addition to the Chairman.

3. Capitalisation

  • Capitalisation of the banks by inducing Rs 70,000 crore into the banks. (Completed)
  • Banks are in need of capitalisation due to high NPAs and due to need to meet the new BASEL- III norms

4. De-stressing: Solve issues in the infrastructure sector to check the problem of stressed assets in banks

5. Empowerment: Greater autonomy for banks; more flexibility for hiring manpower

6. Framework of accountability: The banks will be assessed on the basis of new key performance indicators.

These quantitative parameters will include NPA management, return on capital, growth and diversification of business and financial inclusion as well as qualitativeparameters such as human resource initiatives and strategic steps to improve assets quality.

7. Governance Reforms: Gyan Sangam conferences between government officials and bankers for resolving issues in banking sector and chalking out future policy.


  • A Comparison with recommendations of P J Nayak Committee report suggests that the extent of capitalisation into the public sector banks is not sufficient to overcome the problem of NPAs and to achieve Basel –III levels of tier-I capital.
  • The measures involved in Mission Indradhanush have already been around for some time.
  • Thus, the real reform would be in proper implementation of the suggested measures.

Why the TBS problem still persists?

Loss recognition

  • Banks do not recognise stressed assets and continue giving loans. They are reluctant to conduct the asset quality review for their assets.

Coordination problems

  • Difficulty in deciding compensation by different banks on Joint Lenders Forums which has not achieved much success.

Court cases

  • Public Sector Banks are reluctant to write down loans as bank managers are afraid of accusation of favouritism.

Lack of Capital

  • Indra Dhanush Scheme promised to infuse Rs 70,000 crore into Public Sector Banks by 2018-19. But this amount is not enough and banks need at least Rs 1.8 lakh crore more.

What is the solution to the Twin Balance Sheet Problem?

  1. TBS problem can be resolved by taking a four step path that involves – recognition, Recapitalization, resolution and reform.
  2. First, there needs to be a readiness to confront the losses that have already occurred in the banking system, and accept the political consequences of dealing with the problem.
  3. Second, the PARA needs to follow commercial rather than political principles. To achieve this, it would need to be an independent agency, staffed by banking professionals. It would also need a clear mandate of maximising recoveries within a specified, reasonably short time period.
  4. The third issue is pricing. If loans are transferred at inflated prices, banks would be
    transferring losses to the Rehabilitation Agency. As a result, private sector banks could not be
    allowed to participate – and then co-ordination issues would remain – while private capital
    would not want to invest in the Agency, since PARA would make losses.
  5. A rekindled optimism on structural reforms in the Indian economy, along with implementation of GST and diligent implementation of Bankruptcy Code will play supporting pillars.

Twin Balance sheet Problem India -Will it Lead To Economic Crisis

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