The Twin Balance Sheet Problem Explained

Twin Balance Sheet Problem
Image credits: Indian express

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.

Other articles from Economyria:

The Bank Recapitalisation Explained

What is prompt corrective action (PCA)?

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Have any Question or Comment?

8 comments on “The Twin Balance Sheet Problem Explained


Hey .
Thanks for sharing the information, it is a wonderful read.
What factors according to you were responsible for the slump in the profitability of these companies because of which they were not able to repay their loans ?
It would be really nice if you share the time frame too.
Thanks in advance 🙂


Indian economy was growing at double-digit in the 2000s. As a result, a lot of investment was made on over-optimistic assumptions. But, in the aftermath of the global financial crisis 2007-08, the growth rate slowed down and the revenues declined.

In sectors such as infrastructure, steel, power etc., the projects were delayed due to the environmental and land clearances. Thus, growth and revenue decline, as well as Government red-tapism, were responsible for the slump in profitability of the companies.

Vardhaman jain

thanks a ton.


Thanks for sharing detailed information about NPA,twin balance sheet problem and stressed assets. It was very useful for me.


Glad you liked it 🙂

Vivek Sharma

Very nice article. Thanks alot


You are welcome:)

Econ. Enthusiast

Thanks, that was very helpful for getting a clearer insight into NPA and stressed assets mechanism,not to mention i didnt know earlier that they are different.
But can recapitalization again and again help the indian banking sector in general and PSBs in particular,especially in the long run? What can be done to inherently improve the situation and develop resilience in banking sector to combat externalities like economic fluctuations. Willful defaults are also a concerning issue.


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