What is the Twin Balance Sheet (TBS) Problem?

In order to understand the Twin Balance Sheet problem, you must be aware of a balance sheet. A balance sheet is a financial statement of an institution at any point, which shows the assets, liabilities, and stakeholding of a company. The twin balance sheet problem in India deals with the balance sheets of Indian companies and Indian Banks. It’s basically a scenario when an overleveraged company is under huge debts and is unable to repay the loan’s interest amount. When a company fails to repay the principal and interest amount within a specified time then it’s categorized under NPA (Non-Performing Assets) of banks. 

The occurrence of the Twin Balance Sheet (TBS) problem in India goes back to 2000 when the country’s economic growth was at its peak. Thus at that time, Indian banks issued huge loans to several institutions/organizations, but due to the global financial crisis of 2007-2008, many companies suffered huge losses and some of them even went bankrupt. Thus leading to soon turning these accounts into NPA.

Of the total Banking System in India, around 9% is NPA, which is 12.1% for Public Sector Banks. 

An economy runs well when there is ample money flow in the market. And this market cash flow often depends upon bank loan interest rates. For positive economic growth, banks provide loans to companies and individuals, so that they can invest that money in infrastructural development resulting in an increase in the country’s domestic production. However, in many instances, it has been observed that banks issue huge loans to overleveraged companies for sake of high returns. But soon these companies come up with huge debts and are unable to repay the interest or principal loan amount and soon turn into NPA (Non-Performing Assets). Such a condition is also often referred to as Twin Balance Sheet (TBS) problem in India.