Features of Twin Balance Sheet Syndrome in India

Features of Twin Balance Sheet Syndrome in India

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In a twin balance sheet situation, the corporates are so heavily leveraged that they are unable to pay back their loans while the banks are experiencing extreme difficulty. Corporates are encouraged to invest and grow aggressively while the economy is booming and growing rapidly. A twin balance sheet problem travels a predictable route. During a boom, their businesses grow, loading them with debts they are unable to pay back. Due to their debt default, bank balance sheets are also damaged. When there is enough money flowing through the markets, the economy functions well. And the market's cash flow frequently depends on the interest rates on bank loans.

Banks lend money to businesses and individuals to engage in infrastructure development, which boosts the nation's domestic output and promotes good economic growth. Yet, it has been noted that banks frequently provide sizable loans to overleveraged businesses in an effort to maximise returns. Yet, these businesses quickly accumulate significant debt, are unable to pay back the principal or interest, and soon become NPAs (Non-Performing Assets). In India, this problem is often sometimes referred to as the twin balance sheet problem

You need to be familiar with balance sheets in order to comprehend the twin balance sheet dilemma. A balance sheet is a financial statement that depicts the assets, liabilities, and ownership of a corporation at any one time. The balance sheets of Indian banks and corporations are involved in the country's double balance sheet crisis. It generally refers to a situation where a heavily leveraged corporation has enormous debts and is unable to pay back the interest on the loan. When a business doesn't pay back the principal and interest within a certain period of time, it is classified as a bank's NPA (Non-Performing Asset).

The Twin Balance Sheet (TBS) issue first appeared in India in 2000, during the height of the nation's economic expansion. As a result, several institutions and organisations received large loans from Indian banks at the time, but as a result of the global financial crisis of 2007–2008, many businesses experienced significant losses, and some even went bankrupt. Hence, these accounts will shortly become NPA.