Twin Balance Sheet : Tearing down India’s Growth Map?

: – Akshat Kumar Jangir

A Balance sheet discloses an entity’s assets and liabilities, manifesting its financial position in a particular fiscal year. Twin Balance Sheet Problem (TBS) copes with two balance sheets problem of corporations and banks.

Indian CompaniesIndian Financial Institutions
Companies amass huge debt during boom period, but these corporate are left with less money to repay the loans. According to the Economic survey 2016-17, 40% of the debt was owned by companies having interest coverage ratio less than 1; revenues couldn’t cover interests.The main revenue for a bank is the interest that it earns by lending to syndicates, but what if those corporations are having a money crunch? The debts would become Non-Performing Assets (NPAs).

Among rising Debt Levels, Market Crash and Trade Tensions, a new complication has emerged, but how did this trouble originate? How can it be solved? Let’s look at all the aspects closely.

So, how TBS developed as an issue?

It is easy for a developing country to fall prey to this problem. During growth and boom, firms plan huge investments. These firms over-estimate the profitability of such investments in a growth period and take loans for these projects. But when depression hits, these projects turn out to be less profitable than expected and firms end up having a huge burden of repayment of those loans. In the 2000s, firms proposed numerous ventures believing that the economic expansion would continue at the same pace but it didn’t turn out to be so. 

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The Global Financial crisis (2007-08) affected growth rates all over the world. To handle this, RBI increased interest rates to steer clear of inflation but this hit the firms hard as they were already suffering from the headache of repayment of loans. The high cost and low revenue led to huge financial costs which in turn resulted in NPAs.

Earlier steps and  their failure

The Authorities have taken steps regarding TBS. some of them are: – 

  1. 5/25 Refinancing – It allowed money lenders to expand the amortization period to 25 years, in which rate was to be adjusted every 5 years but such a long period led to higher rates of loans.
  2. ARCsAsset Reconstruction Companies acquired NPAs from banks and tried to solve the problem by looking deep into it but thus they were unable to recover the debt fully too.
  3. SDR (Strategic Debt Restructuring) – Banks were allowed to take over the companies in debt and further put them up for sale but only a few companies could be sold out.
  4. AQR – Asset Quality Review was used to check whether the pending loans are in line with the guidelines of RBI.
  5. Stressed Assets’ Sustainable Structuring – An autonomous organization would decide upon the sustainable amount of the debt.

Why these steps failed to resolve the issue?

1. Indictment 2. Coordination3. Reluctance
Public Banks are hesitant to clear off the debt as their heads are afraid of the charge of favoritism.
Various Banks face problems regarding the decision of the compensation amount.Banks are unwilling to review, in hope that the company may repay the loan amount someday.

How is the government resolving the TBS issue?

Due to the inefficacy of the decentralization approach, a new solution has been devised under the centralized approach i.e. Public Sector Asset Rehabilitation Agency (PARA).

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Being the sole controller of these accounts, PARA can tackle the corporate better and take a rigorous action and even draconian enforcement, if required. PARA will not face the coordination problem and that of Indictment as it will be directly under the control of the Central Authorities.  

To sum up, there is no sense in further impeding the action to be taken to resolve the TBS problem in the Indian Economy as the decentralized approach has already failed. The time has come to use PARA to get rid of TBS as there are many other daunting hurdles still left unresolved.

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