ECONOMY TO GET RID OF TWIN BALANCE SHEET PROBLEM

 

Latest Context

Recently, Finance Minister indicated that the Indian Economy got rid of the problem of twin balance sheet problems of Banks and Corporates and it has been moved to the twin-balance sheet advantage.

Background of the Problem: For the first time, the Economic Survey 2015-16 highlighted this problem.  Weakening balance sheets of public sector banks and of some large corporate houses is one of the most critical short-term challenges and hurdles for the Indian economy in order to get recovered from the economic crisis.

• It is also known as the ‘Twin balance sheet challenge’, or the TBS problem which is one of the major impediments to private investment and hence to a full-fledged economic recovery.

Twin Balance Sheet Problem: It connotes the huge debt on the books of corporate entities in addition to the estimated Rs10 trillion of stressed assets that have accumulated at banks due to their incapability of borrowers to repay. Therefore, the TBS Problem is a two-fold problem for the Indian economy which deals with

1. Overleveraged companies – Debt accumulation is one of the biggest problems of companies and therefore they are unable to pay interest payments on loans.

Note: Approximately, 40% of corporate debt is owed by companies that are not in a position to earn enough to pay back their interest payments. It means that they have an interest coverage ratio of less than 1 in technical terms.

2. Bad-loan-encumbered-banks – Non-Performing Assets (NPA) are one of the biggest problems of Indian banks.  They constitute 9% of the total banking system of India. For Public Sector Banks, it is as high as 12.1% contributing to four-fifths of the total NPAs. The moment companies fail to pay back principal or interest, banks are also in trouble.

Steps Taken by Government to Address TBS Problem

• The 5/25 Refinancing of Infrastructure Scheme
• 4R strategy i.e. Recognizing the problem of NPA, Recapitalizing banks, Resolving their problems, and Reforming them
• RBI introduced the Central Repository of Information on Large Credits (CRILC) to enable banks to share information on large loans.
• Insolvency and Bankruptcy Code, 2016.
• National Asset Reconstruction Company (NARCL) to handle bad debt.

 

 

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