The Economic Survey of 2016-17 has devoted an entire chapter to the Twin Balance Sheet (TBS) problem.
The balance sheets of both Public Sector Banks and corporates in India are in terrible shape.
The Non-performing Assets (NPAs) of the Public Sector banks have increased to alarming levels. Currently, the NPA ratio stands at 9.1 % of gross loans. This NPA problem in the public sector banks has been linked to the rising indebtedness in the corporate sector. This is the twin balance sheet problem.
What is the Twin balance sheet Problem and why did it happen?
Read this article to get a basic idea of the Twin Balance Sheet Problem and the reasons behind it- Twin Balance Sheet Challenge.
How has Twin Balance Sheet affected the Indian economy?
The corporate sector has too much debt on their balance sheet. Therefore, they are not in a position to make any fresh investments.
Banks have too much NPAs on their balance sheet. It has affected their ability to lend. Hence, TBS has negatively affected private investment and credit growth.
What is the Twin Balance Sheet problem with Indian characteristics?
In most of the countries (including the United States in 2008), the twin balance sheet problem has been a precursor to recession
(Read about the financial crisis of 2008 in the United States in this article: The Financial Crisis 2008 Explained- Part 1 and Part 2)
But, in India, the consequences of the TBS problem were minor. Though it had a negative impact on credit growth and private investment, India still continued to grow at a healthy rate of around 7 %.
Why were the consequences of TBS in India minor?
As mentioned in the Economic Survey, the reasons were:
- The people did not lose confidence in the banks as the NPA crisis was concentrated in the Public Sector Banks (PSBs) and they are backed by the Government. Hence, the soaring NPA levels did not trigger bank runs.
- The Structure of Indian economy: There was a severe infrastructural deficit in the economy. Even though the companies which invested in infrastructure were debt-ridden and unprofitable themselves, it provided an opportunity for the other sectors of the economy to grow.
- The response of the financial system: Unlike other countries, when the corporate sector could not pay their debt, the public sector banks did not trigger bankruptcies. Instead, they used the “giving time to time” strategy. They gave more time to stressed companies for repayment and extended fresh loans to them. It was expected that this would increase the cash flows of the stressed companies and allow them to repay their debt.
But, this strategy did not work. The TBS problem is beginning to impact growth now.
The Reserve Bank of India has taken many measures to resolve the NPA problems. But, they did not prove to be successful. So, the economic survey has proposed the creation of a ‘Public Sector Asset Rehabilitation Agency’ (PARA) to take care of the TBS problem.
Reference:
The Economic Survey 2016-17