The Economic Survey of 2015-16 acknowledges that one of the critical challenges confronting the Indian economy is the Twin Balance Sheet Problem. The balance sheets of both public sector banks (PSBs) and some corporate houses are in terrible shape.
It is known as the twin balance sheet problem as the challenges faced by the banks are linked to that of the corporate sector.
The corporates are unable to repay their loans to banks. It has affected the banks’ balance sheets and hence their ability to lend more to the corporates.
Why are the corporates unable to repay their loans?
During the boom years in 2007 to 2012, some companies borrowed a lot of money from banks to invest in infrastructure and commodity-related businesses, such as steel, power, infrastructure etc. By 2013, due to slump in both these sectors, the corporate profits hit new lows.
The slump was due to a decrease in global commodity prices, regulatory hurdles and macroeconomic issues like slow economic growth.
With low profits, the corporates are not able to repay their loans and their debts are rising at an alarming level. The corporate sector has no other option other than to cut back investments.
Let us understand some basic terms to appreciate the full import of the troubles faced by the economy.
What are Non-Performing Assets?
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.
What are stressed assets?
Stressed assets are NPAs plus restructured assets. Restructured loans are loans that have been converted to equity under the corporate debt restructuring scheme.
The high amount of NPAs in banks have hit their profitability as well, as banks have to make more provisioning. Banks have to set aside large funds from their profits as provisions to provide for the potential losses arising out of the loans that might go bad. NPAs are the reason why most banks reported losses in the last quarter.
Banks’ NPAs have been growing for a while now. It not only affects the balance sheet and profitability of banks but also limits credit availability to the corporate sector. This limited credit availability leads to further decline in private investment. This is what has been known as the Twin Balance Sheet Problem.
The Union budget of 2016 has allocated Rs 25000 crore towards recapitalisation of Public Sector banks. This is a necessary step to infuse capital into the Public Sector Banks. RBI has set March 2017 as the deadline for banks to clean up their balance sheets and strengthen their assets and has taken several measures to address the problem.
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