Countering the Twin Balance Sheet Problem in India

Countering the Twin Balance Sheet Problem in India

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As the economy was booming, it has been seen that corporations took out substantial debts. But, they quickly discover that it is difficult to repay the loan, which creates a situation where NPA increases and causes the banking crisis. Yet, India had no debts or interbank stress, its GDP was expanding at a respectable rate, and it didn't require any liquidity support. Yet nothing changed until 2010, when the first instance of TBS or, the Twin Balance Sheet was discovered in India, and ever since then, an endless stream of similar cases have been popping up. And right now, the scope of TBS has grown to a new level and poses a serious threat to the stability of the Indian banking system. Since the majority of NPA accounts are in public sector banks supported by the Government of India, the TBS issue becomes rather significant.

Actions by the Indian Government to counter the TBS issue

To counter the TBS or, the Twin Balance Sheet issue, the Government of India (GOI) introduced the Strategic Debt Restructuring (SDR) scheme in June 2015, which enables banks to seize failing businesses and sell them to new owners. The Government of India offered the debtors a larger window under the 5/25 Refinancing of Infrastructure Programme. With this plan, the amortisation term was increased to 25 years, with interest rates being modified every five years in a row. The GOI also enlisted the aid of the Scheme for Sustainable Structuring of Stressed Assets (S4A), which enables a bank to engage an impartial organisation to determine a company's sustainable debt while transforming the unsustainable debt into equity.

Also, the GOI made an effort to have Private Asset Reconstruction Firms pay back the loan amount (ARCs). In this scenario, ARCs buy bank NPAs and then attempt to settle them utilising the SARFAESI Act's asset resolution capabilities. The RBI advises banks to perform Asset Quality Reviews (AQRs) prior to extending a loan to a borrower.

The Government of India has implemented numerous programmes to deal with NPA and bad loans up to this point. But it appears that none of them was really a success. Therefore, it is now necessary to establish the Public Sector Asset Rehabilitation Agency (PARA), a centralised organisation that would address the NPA and TBS issues. Also, it is stated in the 2017 economic study that PARA may prove to be a game-changing move against NPA. Considering that it would be a centralised agency, coordination and decision-making will be quick.

The Twin Balance Sheet (TBS) issue has recently become one of the biggest issues facing the Indian economy. And the stability of the Indian banking sector would be seriously threatened if this issue is not resolved quickly. Delays in addressing the Twin Balance Sheet (TBS) problem could cause the nation to suffer significant economic losses.