Twin Balance Sheet Problem (TBS): How can Indian Economy Avoid a Crisis?

A balance sheet is a statement that lists an organisation’s assets and liabilities. This applies to both businesses and financial organisations. Even the Reserve Bank of India releases its balance sheet. However, the twin balance sheet problem refers to a problematic balance sheet of Indian enterprises and banks, implying that both lenders and borrowers are stressed.

The Twin Balance Sheet Problem addresses two balance sheet issues. One is with Indian corporations, while the other is with Indian banks.

TBS is a Two-Pronged Concern for the Indian Economy that Deals with

1. Companies with excessive debt: Companies with excessive debt are not able to pay the interest payments on loans. Companies that do not generate enough to cover their interest payments account for 40% of corporate debt. In technical terms, this indicates they have a lower interest coverage ratio than one

2. Banks with bad loans: Non-performing assets (NPA) of banks account for 9% of the overall banking system in India. For public sector banks, it can reach 12.1%. Banks are in jeopardy as corporations fail to repay principal or interest.

Check out the complete UPSC Syllabus

The Origin of Twin Balance Sheet Problem in India

The origins of the TBS problem may be traced back to the 2000s, when the Indian economy was on the rise.

Back then, the investment-to-GDP ratio increased by 11%, reaching more than 38% in 2007-08. Thus, non-food bank credit increased, and capital inflows touched 9% of GDP in 2007-08. Because of the economic boom, corporations began to take chances, abandoning their conservative debt or the equity ratios and leveraging themselves to capitalise on forthcoming opportunities

However, the Global Economic Crisis (2007–08) lowered growth rates and, consequently, investment revenues. Projects that had been designed on the basis of double-digit growth were suddenly challenged, with growth rates half of that level.

Firms that borrowed nationally suffered when the RBI raised interest rates in order to avert inflationary finance expenses. As a result, higher costs, decreased revenues, and higher finance charges constrained corporate cash flow, resulting in NPAs in the banking industry.

Visit to know more about UPSC Preparation Books

A Solution to the Twin Balance Sheet Problem 

To date, India has taken a decentralised approach, with individual banks making decisions on their own to settle NPAs. This strategy has not remedied the problem, and the time has come to establish a centralised organisation known as the Public Sector Asset Rehabilitation Agency (PARA).

PARA’s Operation

PARA would buy loans from the banks and then work them in various ways, such as turning debt into equity and auctioning off holdings.

The government would recapitalise public-sector banks after removing their loans. Similarly, if the over-indebted firms’ financial viability is restored, they will be able to target their operations and will be able to contemplate new investments rather than their finances.

PARA financing

• Some government securities may be transferred to PARA by the RBI

• Securities financing from the government

• The remainder of the funds could come from capital markets.

Earlier Initiatives to Remedy the NPA or TBS Issues

India has made many attempts to address the NPA or TBS problem. The Insolvency and Bankruptcy Code followed suit. Here’s a list of the major schemes:

1.     5/25 Infrastructure Refinancing Scheme

2.     Private Asset Reconstruction Companies (ARCs)

3.     The SDR (Strategic Debt Restructuring) program

4.     Asset Quality Assessment (AQR)

5.     The Scheme for the Long-Term Restructuring of Stressed Assets (S4A)

Read about UPSC Notes

Why Did the Previous Measures Fail to Resolve the TBS Issue?

• Banks do not recognise losses on stressed assets and continue to make loans. They are hesitant to perform an asset quality analysis on their assets

• Coordination issues: Difficulties in determining compensation by multiple banks on the Joint Lenders Forums, which have had limited success

• Public-sector banks are hesitant to write down debts because bank executives are fearful of being accused of favouritism

• The Indradhanush Scheme proposes to invest Rs 70,000 crore in public sector banks by 2018-19. However, this sum is insufficient, and banks want at least Rs 1.8 lakh crore more.

Containment Scenario vs Phoenix Scenario

• Phoenix Scenario: Growth reduces bad debt by increasing demand and the investment cycle

• Bad Loan Containment Scenario: In this instance, bad loans must be contained in nominal terms, and their share of bank balance sheets must gradually decrease.

Both possibilities appeared viable previously, but according to new statistics, they are now failing. To overcome this challenge, some fresh and novel approaches are required.

Conclusion

The Twin Balance Sheet Problem (TBS) is a serious issue confronting the Indian economy today. Previous approaches for tackling this challenge, such as a decentralised approach, failed. There is no point in prolonging this problem because the economy would suffer when impaired banks reduce their credit and stressed industries reduce their investments. The moment has arrived to follow East Asia’s policy throughout their crisis. Creating a centralised agency in the shape of PARA would allow debt issues to be resolved rapidly. The time has come for India to take a similar approach.