Economic Survey 2017 : Chapter 4 : Twin Balance Sheet Problem and bank NPAs

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Q: What is the ‘twin balance sheet(TBS) problem’?

It is a situation where both the banking and corporate sectors are under stress. Over leveraged companies are unable to payback the debts and invest more. The bad loan encumbered banks are unable to lend more and struggles to keep up their business. This situation will lead to economic crisis.

Q: What is a bad loan?

A loan given by the creditor that is not collectible and therefore worthless to the creditor.

Q: What is a stressed asset?

Assets of the banking system comprises of loans given and investment (in bonds) made by banks.
Stressed assets = Non Performing Assets(NPAs) + Restructured loans + Written off assets.
Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures. Hence, under restructuring a bad loan is modified as a new loan. A restructured loan also indicates bad asset quality of banks. This is because a restructured loan was a past NPA or it has been modified into a new loan.
Written off assets are those the bank or lender doesn’t count the money borrower owes to it. The financial statement of the bank will indicate that the written off loans are compensated through some other way.

Q: What is an NPA?

An asset, including a leased asset, becomes non­ performing when it ceases to generate income for the bank. The different types of assets have different technicalities to be considered as an NPA. For example, in respect of a term loan, if interest and/ or instalment of principal remain overdue for a period of more than 90 days it becomes an NPA.

Q: When did the TBS problem first emerge in India?


Q: When did the problem catch the public attention?

In February 2016, when the public sector banks reported a plunging net income for the last quarter.

Q: What has caused the sudden loss in income for the banks?

Banks reported that the non-performing assets(NPAs) have soared. Normally NPAs will soar when there is an economic crisis. But there was no crisis in India nor any calamity in the corporate sector. The reason could be the clean up action triggered by the RBI, which asked the banks to clean up their books. So all the bad loans accumulated over years have showed up.

Q: Did the situation get better in the following quarter?

No. Rather the NPAs continued to increase. This shows that RBI’s Asset Quality review of 2016 was not the only reason for the sudden spurt in the NPAs.

Q: How much was the NPAs?

It was 9% of total advances of banks by September 2016.

Q: Where are the NPAs concentrated?

More than four-fifth are in the public sector banks(PSBs). Their NPA have reached 12% of total advances.

Q: How did corporate sector stress contribute to the TBS problem?

  • Around 40% of the debt was owed to companies which did not earn enough to pay the interest obligations on their loans (ie their interest coverage ratio was less than 1).
  • Thus the revenues of bank got reduced and they were not able to lend more. The most stressed banks are not even earning enough to cover their running and deposit costs.
  • So the banks minimised new risks. The corporates under stress cut short their investments. This reduced the capital formation in the economy.

Q: What is ‘the twin balance sheet syndrome(TBS) with Indian Characteristics’?

India’s TBS different from other countries in the following ways
  1. Usually TBS occurs during a financial crisis. But India sailed through the last global financial crisis largely unaffected.
  2. In other countries the TBS have triggered banking crisis. But this has not happened in India.

Q: How India could sail through the global financial crisis of 2008?

Indian companies and banks avoided the boom-period mistake of accumulating too much leverage. Companies that borrow too much and are over leveraged are at the risk of becoming bankrupt if their business does poorly. There were restrictions on bank credit expansion and capital controls on accumulating foreign loans.

Q: How India could avoid a banking crisis even though it had TBS problem?

Bulk of the problem was shouldered by the public sector banks, which have their own capital and also backed by the government. So the creditors did not loose the confidence in the banking system which prevented bank runs.

Q: What is the gravity of the TBS issue presently?

At present India’s NPA ratio is higher than other emerging markets and is among one of the highest degrees of stress ever happened in the world. Total stressed assets are more than the NPAs. If restructured loans and evergreened loans are also accounted, total stressed assets will be almost 17% of banking system loans.

Q: What went wrong in Indian scenario?

When the economies all over the world boomed during 2000s, Indian companies also invested more, particularly in infrastructure related sectors. This investment boom was followed by a credit boom. There were large capital inflows from overseas reaching 9% GDP in 2007-08. The firms leveraged themselves up to take advantage of the opportunities.
But costs soared far above the calculations, as securing land and environmental clearances proved difficult and time consuming. The Global financial crisis caused revenue losses. The economic growth rates were not high as expected. Financing costs increased with increase in interest rates and weakening of rupee. All these – higher costs, lower revenues and greater financial costs affected the cash flow of companies and they defaulted the loans.

Q: Which were the sectors most affected?

The infrastructure sector was most affected especially the power and metals sector.

Q: How India could manage a higher growth even with TBS problem?

There was strong levels of aggregate domestic demand, which prevented economic stagnation as in US and Europe during the crisis. So India could grow despite weak exports and moderate to high inflation.
Moreover during the boom, investments were made in the infrastructure sector in India, opposed to the housing sector in US. Even though the infrastructure investments themselves proved unviable, it gave a much needed push to the Indian economy, which has been long suffering from the supply constraints. New power plants, roads, airports and ports gave support to the economy to grow after the crisis.

Q: How India dealt the TBS problem?

Initially TBS was regarded as a simple problem, which could be solved by the economic recovery. So the banks gave time to debtors by postponing repayments, restructuring loans and giving fresh loans.
Decentralised approach was taken, under which banks have been put in charge of the restructuring decisions.

Q: Can India move forward with the present model?

The economic growth could not solve the problem of stressed firms as expected, rather their revenues decreased further. The loans are concentrated in large companies which could not be resolved by individual efforts by the creditors. Recently more mid-size and MSMEs(Medium,Small and Micro Enterprises) are also reporting defaults. Telecom sector also joined in the stressed category. The private investment has contracted sharply. The credit growth is negative. Banks are trying to cover up the revenue loss with more interest on good borrowers. Thus banks are losing good customers to other financial markets. The MSMEs will suffer most from the credit crunch. So unless the underlying debt problem is addressed , the economy cannot sustain the growth.

Q: What were the steps taken so far to address the issue?

RBI has been introducing a number of mechanisms including
  1. Establishment of private Asset Reconstruction Companies(ARCs) to buy up the bad loans of the banks.
  2. Strategic debt restructuring (SDR)Scheme under which banks can take over the firms which are unable to pay back and sell them to new owners.
  3. Asset Quality Review(AQR) – for recognition of stressed assets of banks.
  4. Sustainable Structuring of Stressed Assests(S4A) under which banks can provide upto 50% debt reductions and convert them to equity and shares in order to restore the financial viability.
The government has taken steps like
  1. Increased public investment to give stimulus to economic growth
  2. Indradhanush scheme to infuse fresh capital into public sector banks and help banks to resolve the bad loans

Q: Has these measures succeeded?

Their success was limited. Only a small portion of NPAs could be solved through the different schemes.

Q: What has to be done?

The key elements needed for the resolution are
  1. Loss recognition to understand the true state of the balance sheets
  2. Coordination among lenders
  3. Proper incentives for the banks to write off the unviable loans
  4. Recapitalisation of banks in lieu of the debt reductions
As the efforts in the above line have met with several obstacles, a different approach can be adopted, ie a centralised Public Sector Asset Rehabilitation Agency(PARA) that could take charge of the largest and most difficult cases.

Q: Why is a PARA needed?

  1. The present problem is not just about banks, but also about the companies in debt.
  2. Much of the bad debts are caused by changes in the economic environment not the intentional diversion of funds.
  3. The stressed debt is heavily concentrated in large companies, which are difficult to solve by piecemeal efforts.
  4. Many of the stressed companies are unviable to restore the debts, which may need debt to equity conversion and sell outs.
  5. Banks are unable to solve the bad debts, as the companies have many creditors and also because of the risks involved in decision making.
  6. Delay in solving is costly for the economy as it will further reduce the bank credits and reduce investments by the companies.
  7. The Private Asset Reconstruction Companies(ARCs) have not succeed in solving the problem. They could buy up only about 5% of total NPA.
A PARA could solve the coordination problem. It could solve the bad loans with out concerns about the bank capital.

Q: How does PARA work?

PARA will try to maximise the recoveries from the NPAs within a defined time period. The capital fund for PARA can be shared by the government, capital markets and RBI. PARA should be a purely professional body working only on commercial principles.

Q: Can PARA be a success?

The East Asian countries have solved their TBS problem through a centralised strategy. Perhaps it is time for India to consider the same approach, however difficult it may be.


  1. SUBIR MONDAL says:


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