Twin Balance Sheet Problem (TBS) deals with two balance sheet problems. One with Indian companies and the other with Indian Banks.
Thus, TBS is two two-fold problem for Indian economy which deals with:
Overleveraged companies
Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans. Note: 40% of corporate debt is owed by companies who are not earning enough to pay back their interest payments. In technical terms, this means that they have an interest coverage ratio less than
Bad-loan-encumbered-banks
Non Performing Assets (NPA) of the banks is 9% for the total banking system of India. It is as high as 12.1% for Public Sector Banks. As companies fail to pay back principal or interest, banks are also in trouble.
Causes of India’s Twin Balance Sheet Problem
Loss recognition
Banks do not recognise stressed assets and continue giving loans. They are reluctant to conduct the asset quality review for their assets. Coordination problems: Difficulty in deciding compensation by different banks on Joint Lenders Forums which has not achieved much success.
Court cases
Public Sector Banks are reluctant to write down loans as bank managers are afraid of accusation of favouritism.
Lack of Capital
Indradhanush Scheme promised to infuse Rs 70,000 crore into Public Sector Banks by 2018-19. But this amount is not enough and banks need atleastRs 1.8 lakh crore more.
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