Finance Minister Nirmala Sitharaman on Friday highlighting government’s resolution on the twin balance sheet problem said from those twin balance sheet problems of 2013-14, today it is twin balance sheet advantage situation.
“The twin balance sheet advantage is there for both the opportunity and confidence element that this situation gives us,” she said.
“RBI and government survey report said from those twin balance sheet problems of 2013-14, today it is twin balance sheet advantage situation. So both corporate and financial sector balance sheets have not just turned around but are in pink to help,” the Finance Minister said.
The Finance Minister said that now, the balance sheets of both corporations and banks have turned around in recent years.
“The corporate sector balance sheet and the government and the financial sector (bank) balance sheet have not just turned around, they are now in the pink of health,” she said.
“The vibrancy with which investments can happen, expansions can happen, the banking sector can be buoyant enough to address the credit requirements, (which) will push the economy faster (and) make sure that the big and small (companies) have credit access,” she added.
What is a twin balance sheet problem?
A twin balance sheet is a scenario where banks are under severe stress and the corporates are overleveraged to the extent that they cannot repay their loans.
As per the definition provided by the Economic Survey of 2017-18, during a boom period and when the economic growth is robust, corporates are encouraged to invest and expand aggressively.
Companies expand during a boom, leaving them with obligations that they cannot repay. So, they default on their debts, leaving bank balance sheets impaired, as well.
The economic survey (2017-18) also highlighted that the investors dumped the stocks of PSU, bringing their prices to such low levels that at one point HDFC was valued as much as 24 public sector banks put together.
Twin balance sheet problem in India
It is to be noted that the occurrence of the Twin Balance Sheet issue in India goes back to 2000 when the country’s economic growth was at its peak.
India launched massive projects and was riding on huge amounts of debt, mostly financed by banks.
Later by 2007-08, the investment to GDP ratio reached almost 38%. Also, the amount of non-food bank credit doubled from 2004-05 to 2008-09.
Amid the then global financial crisis, growth and revenue projections fell and finance costs went up due to higher interest rates.
Due to the global crisis, there was stress on the books of both corporates and banks, and RBI had to step in to control the damage to the economy.
In order to control the rising crisis of the Twin Balance Sheet, the Indian government in June 2015 launched the Strategic Debt Restructuring (SDR) scheme allowing banks to take over the firms which are unable to repay their loan and sell them to new owners.
Further, under the 5/25 Refinancing of Infrastructure Scheme, the GOI provided a larger window to the borrowers.
The government also took the help of the Scheme for Sustainable Structuring of Stressed Assets (S4A).
Under this scheme, a bank can hire an independent agency, which will decide on the sustainable debt of a company., while converting the unsustainable one into equity.
The Private Asset Reconstruction Companies (ARCs) were also brought into the picture.
