Pratik Sarkar

Roll No -1703022

Abstract on Twin Balance Sheet Problem

A balance sheet is a Financial Statement that consolidates a company’s assets, liabilities and equity
at a point of time.

But twin balance sheet refers to those problematic balance sheets of some Indian companies which
are not doing well and to the banks that have lend money to them. So Twin Balance sheet has two
categories of Problem:

A. Overleveraged companies: These companies have taken too much debt and now have little to no
money to repay it. “As per the Economic Survey 2016-17 it was reported that around 40% of the
corporate debt it monitored was owed by companies which had an interest coverage ratio less than
1”.

B. Bad Loan given by Banks: The major portion of the profit of banks comes from Interest. So, if the
companies who have borrowed money from the bank are not able to return the interest on time,
banks will be in trouble. As per RBI data 9.5 % of the loans given by banks turned out to be bad loan.
But the figures are staggeringly high for Public Sector Banks at 12.1%.

Origin of the Crisis:

Back in 2000s when the economy was booming, firms got bullish and started taking risk enormously
to leverage the growing economy. But in 2008 when the world was hit with the Global Economic
Crisis, investment sentiments took a downward turn. To counter the inflation RBI also had to hike
the interest rates which further added to the worries of the firms. So bogged by higher cost, low ROI
the companies slowly went into red in financials. For Banks they slowly became NPAs as they were
not able to return even the interest.

Effect of Twin Balance sheet on Indian Economy:

For any economy to grow the banks should perform efficiently and the companies that took money
from the banks should grow. But due to the problem both are not happening. Under such
circumstances, the conditions of the banks would worsen, and people will take out money from the
banks resulting in total collapse of the banking system. This would adversely affect the economic
growth of India.

Suggestions:

1. The banks should monitor the performance of the companies and should take adequate steps in
case it senses that the company is going towards bankruptcy.

2. The RBI should be given authority to monitor the performance of the banks and dictate terms in
case of inefficiencies in the operations.

Reference:

https://www.clearias.com/twin-balance-sheet-problem-tbs/

https://www.kotaksecurities.com/ksweb/Meaningful-Minutes/6-Things-to-know-about-Indias-Twin-
Balance-Sheet-problem
Pratik Sarkar
Roll No -1703022