Factors of TBS

Factors of TBS

Tags:      Gig Economy     Economy     WTO     WTO Public Stockholding     MSP     Economic Growth     Masala Bond     Environmental Performance Index     Forecast of Economic Growth     Functions of the Finance Commission

The Twin Balance Sheet Syndrome has emerged as a complex and interlinked issue that affects both corporations and banks. This phenomenon is characterized by a vicious cycle of debt distress, wherein corporations struggle with indebtedness, leading to a burden on banks due to the rising number of Non-Performing Assets (NPAs). There are several factors responsible for Twin Balance Sheet Syndrome. On the corporate side, overleveraging and misallocation of funds can lead to debt accumulation without substantial returns. This is often exacerbated by unfavourable economic conditions, which impact revenue generation and debt servicing capabilities. Simultaneously, banks' lenient lending practices, inadequate risk assessment, and weak recovery mechanisms allow NPAs to proliferate, weakening their financial position.

The origin of the Twin Balance Sheet Syndrome can be traced back to a nexus of faulty financial practices and economic volatility. During periods of economic boom, corporations tend to take on excessive debt to fuel growth, often without a thorough evaluation of risks. However, when economic conditions deteriorate, these debts become burdensome due to reduced revenue and cash flows. This leads to corporations defaulting on their loans and accumulating NPAs.

As an example of twin balance sheet syndrome, consider a real estate company that capitalized on a booming housing market by taking out substantial loans to finance multiple construction projects. However, when the housing market experienced a downturn, the company faced challenges in selling properties, resulting in dwindling revenues. The company's inability to generate sufficient cash flows made it difficult to service the loans, leading to a rise in NPAs for the lending banks. As the banks grappled with NPAs, their financial health was compromised, making it harder for them to extend credit to other sectors, further impacting economic growth.

The effects of the Twin Balance Sheet Syndrome ripple through various layers of the economy. On the corporate side, indebted companies struggle with reduced profitability, hindered investments, and even bankruptcy. This can lead to job losses, disrupted supply chains, and a negative impact on economic output. For banks, a surge in NPAs erodes profitability, weakens capital adequacy, and restricts lending capacities. As banks become more cautious about lending, credit availability for productive sectors diminishes, stifling economic growth. As corporations grapple with debt distress, their focus shifts from innovation and expansion to debt management and survival. This stifles economic dynamism and innovation.