1. Causes of the TBS problem

Getting the basics right –The Twin Balance Sheet problem is called so because it affects the financial position of both over-leveraged companies and bad loan – encumbered banks.

Normally, this issue arises when there is an economic crisis (like in US and UK in 2008 and 2009). But things have been different in India; we have seen NPAs even with a booming economy and a growing GDP.

Underlying Causes – The following diagram explains the causes –

PSBs and NPAs – TBS is taking a heavy toll on the health of the public sector banks. At least 13 of these banks accounting for approximately 40 per cent of total loans are severely stressed, with over 20 per cent of their outstanding loans classified as restructured or NPAs. There are various reasons why private sector banks are not facing this problem:

1. High Exposure – Public Banks have to provide 40% of loans to the vulnerable sectors – Infrastructure, Mining, Aviation, Iron and Steel, Mining

2. Private sector banks have better management and better loan recovery mechanisms.

3. Politics and favouritism may play a role in hampering PSB’s lending decisions.

Banks around the world strive for a return of assets (ROA) of 1.5 per cent or above. Indian public sector banks are much below this international norm. SOURCE – Ministry of Finance

2. Peculiarities of India’s TBS :- Following the traditional way, in other countries, corporates overexpanded during the boom period (before 2008-09) and accumulated obligations which they found difficult to repay. It leads to default and a situation where high NPA levels had triggered banking crises was reached. But in India, there have been no bank runs, no stress in the interbank market, no need for any liquidity support and GDP was growing at a good pace since the TBS problem first emerged in 2010. Yet the problem has reached to this scale where it threatens the stability of the entire banking system. The reason for this is that major NPAs are concentrated in Public Sector Banks which have the full backing of the government.

Past Efforts to the problem of Twin Balance Sheet

Refinancing of Infrastructure Scheme- This scheme provided the lenders (only for infrastructure and eight core sectors) to extend the amortisation period to 25 years with interest rates adjusted every 5 years to match the funding period with the long gestation period. But with the amortisation period spread over longer periods they faced high interest burden further forcing banks to extend additional loans.

Private Asset Reconstruction Companies(ARCs)- The ARCs, which are a product of the SARFAESI Act, acquire NPA (Non-Performing Assets) from the banks or financial institutions and try to resolve them. But they have found it difficult to recover from the debtors and have been able to offer the banks only low prices which they found difficult to accept.

The Strategic Debt Restructuring (SDR) Scheme- This was introduced in June 2015, under which banks could take over firms that were unable to pay and sell them to the new owners. But by December 2016, only two sales had been materialised as many firms remained financially unviable.

Asset Quality Review (AQR)- The RBI emphasised AQR, to verify that banks were assessing loans in line with RBI loan classification rules and any deviations from such rules were to be rectified by March 2016.

The Scheme for Sustainable Structuring of Stressed Assets (S4A)- An independent agency hired by the banks will decide on how much of the stressed debt of a company is sustainable and the unsustainable will be converted into equity and preference share. But only one case has been solved under this scheme so far.

Current Effort of the Government Seeing that a decentralised problem has not been able to tackle the problem of NPAs, a centralised agency called Public Sector Asset Rehabilitation Agency (PARA) has been created. It is expected to resolve not only the NPAs of the banks but also the bad debts of the companies by solving the coordination problem. An international experience like of East Asian Companies has shown that a centralised agency can resolve the twin balance sheet problem. PARA would be funded by the RBI by transferring government securities and rest would come from the capital markets.

The Working PARA would purchase loan from banks and try converting the debt to equity and selling the stake at an auction. After taking off the loans from Public Sector Banks the government would recapitalise them, similarly, once the financial viability of the companies is restored, they will be able to focus on their operations.

3.. Insolvency and Bankrupt Code, the RBI’s policy and their impact The IBC is one of the quickest bills ever passed by the Parliament. The law aims to consolidate all processes related to insolvency and re-organization of corporate persons, partnership firms and individuals and conduct them in a time-bound manner.

THE SOLVENCY PROCESS In September, the IBC completed 270 days since its formulation. Incidentally, 270 days is the length of the period to conduct insolvency proceedings. In these two months, there is one major aspect that needs to be highlighted– the list of defaulters released by the RBI.

The RBI released a list of 12 defaulters, which comprised of about 25% of the bad loans clogging the banking system. These 12 defaulters were scrutinized through RBI’s existing mechanism after which 11 of them were referred to the NCLT for insolvency. On Aug 29 2017, the RBI released another list of about 30 to 40 defaulters that are supposed to go through the aforementioned process. The second list includes huge family businesses such as Ruia’s Essar Steel and Videocon Ltd.

This process may seem longer than simply approaching the National Company Law Tribunal.

But it benefits both the defaulter and the creditor since it gives them an incentive to avoid the disruptive insolvency process in the hope of some restructuring. At the same time, it is a shift from the lenders’ ‘ giving time to time ‘ tactic, (which led to bad loans in the very first place ) since only a short period of time is available to the borrower that too for restructuring.

By Arpita Sharda and Aishwarya Bagri