1. Home
  2. |  
  3. Civil Services |  

Economic Survey 2016-17 for IAS Prelims: The Festering Twin Balance Sheet Problem Part 1

Feb 28, 2017 17:43 IST

    Economic Survey on TBS problemFor some time, India has been trying to solve its Twin Balance Sheet problem of the overleveraged companies and the bad loan encumbered banks using a decentralised approach, under which banks have been put in charge of the restructuring decisions.

    ECONOMIC SURVEY 2016-17 IMPORTANT QUESTIONS

    As the data filtered into the public consciousness, it became clear that India was suffering from a “twin balance sheet problem”, where both the banking and corporate sectors were under stress. Not just a small amount of stress, but one of the highest degrees of stress in the world.

    Here, we provide exclusive questions on twin balance sheet problem from the Economic Survey 2017 which can prove to be extremely helpful in IAS Prelims 2017 preparation.

    Union Budget 2017 Questions for IAS Exam

    1. At the current level, India’s NPA ratio is higher than many major emerging market economies. Consider the following statements regarding India’s NPA ratio and why it is different from other countries:

    1) Normally, nonperforming assets (NPAs) soar when there is an economic crisis. But there was no economic crisis in India; to the contrary, GDP was growing at a world-beating pace.
    2) India’s NPA ratio is higher even than the peak levels seen in Korea during the East Asian crisis.
    3) NPAs soar happened in East Asia during 1997-98 and the US and UK in 2008-09 when there was an economic crisis, triggering widespread bankruptcies in the country.

    Which of the above statements is true?

    a) Only 1
    b) 1 and 2
    c) 2 and 3
    d) 1, 2 and 3

    Answer: d

    Explanation:

    Normally, nonperforming assets (NPAs) soar when there is an economic crisis, triggering widespread bankruptcies. This is precisely what happened in East Asia during 1997-98 and the US and UK in 2008-09. But there was no economic crisis in India; to the contrary, GDP was growing at a world-beating pace. Nor had there been any major calamity in the corporate sector; no large firm had gone bankrupt.

    NPA ration of india and other countries

    At its current level, India’s NPA ratio is higher than any other major emerging market (with the exception of Russia), higher even than the peak levels seen in Korea during the East Asian crisis.

    As the data filtered into the public consciousness, it became clear that India was suffering from a “twin balance sheet problem”, where both the banking and corporate sectors were under stress.

    Economic Survey 2016-17 for IAS Prelims: Demonetisation To Deify or Demonize Part 3

    2. According to the economic survey 2017, high growth will not solve the problems of the stressed firms. What is the solution suggested by survey to counter the twin balance sheet problem in India?

    a) Creation of a formal agency to resolve the large bad debt cases.
    b) To create a public Sector asset rehabilitation agency (PARA)
    c) Both (a) and (b)
    d) None of the above

    Answer: c

    Explanation:

    For some years, it seemed possible to regard the twin balance sheet (TBS) problem as a minor problem, which would largely be resolved as economy recovery took hold. But more recently it has become clear that this strategy will not work. Growth will not solve the problems of the stressed firms; to the contrary, the problems of the stressed firms might actually imperil growth.

    To avoid this outcome, a formal agency may be needed to resolve the large bad debt cases; the same solution the East Asian countries employed after they were hit by severe TBS problems in the 1990s. In short, the time may have arrived to create a ‘Public Sector Asset Rehabilitation Agency’.

    3. The economic survey suggests creating a public sector asset rehabilitation agency (PARA). Why is a public sector asset rehabilitation agency (PARA) needed in India?

    1) The stressed debt is heavily concentrated in large companies and companies are unviable at current levels of debt requiring debt write-downs in many cases.
    2) Banks are finding difficult to resolve debt cases, despite a proliferation of schemes.

    Which of the following statements is correct?

    a) Only 1
    b) Both 1 and 2
    c) Only 2
    d) Neither 1 nor 2

    Answer: b

    Explanation:

    The economic survey suggests creating a public sector asset rehabilitation agency (PARA). Some important points that trigger the development of PARA are as follows.

    The stressed debt is heavily concentrated in large companies. Concentration creates an opportunity, because TBS could be overcome by solving a relatively small number of cases. But it presents an even bigger challenge, because large cases are inherently difficult to resolve.

    Many of these companies are unviable at current levels of debt requiring debt write-downs in many cases. Cash flows in the large stressed companies have been deteriorating over the past few years, to the point where debt reductions of more than 50 percent will often be needed to restore viability. The only alternative would be to convert debt to equity, take over the companies, and then sell them at a loss.

    Banks are finding it difficult to resolve these cases, despite a proliferation of schemes to help them. Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. If PSU banks grant large debt reductions, this could attract the attention of the investigative agencies. But taking over large companies will be politically difficult, as well.

    The Economic Vision for Precocious Cleavage India Part 2

    4. As per the Economic Survey, gross NPAs have climbed up to what percentage of gross advances for public sector banks?

    a) Approx 10 percent
    b) Approx 12 percent
    c) Approx 18 percent
    d) Approx 20 percent

    Answer: b

    Explanation:

    The Survey shows that our country has been trying to solve its ‘Twin Balance Sheet’ (TBS) problem, a legacy of the boom years around the Global Financial Crisis. The problem has consequently continued to fester: Non-Performing Assets (NPAs) of the banking system (and especially public sector banks) keep increasing, while credit and investment keep falling.

    As per the Survey, gross NPAs have climbed to almost 12 per cent of gross advances for public sector banks at end-September 2016. The consequent squeeze of banks has led them to slow credit growth in crucial sectors-especially to industry and medium and small scale enterprises (MSMEs)-to levels unseen over the past two decades.
    As this has occurred, growth in private and overall investment has turned negative. A decisive resolution is urgently needed before the TBS problem becomes a serious drag on growth.

    5. India developed its own unique version of TBS: what recent Economic Surveys called a ‘Balance Sheet Syndrome with Indian Characteristics’. Why is it called so?

    1) The TBS problem the impact on growth has been quite modest and it did not lead to economic stagnation.
    2) The TBS problem co-existed with strong levels of aggregate domestic demand but low levels of inflation.

    Which of the following statements is correct?

    a) Only 1
    b) Only 2
    c) Both 1 and 2
    d) Neither 1 nor 2

    Answer: a

    Explanation:

    Contrary to conventional wisdom, India did indeed follow the standard path to the TBS problem: a surge of borrowing, leading to overleverage and debt servicing problems. What distinguished India from other countries was the consequence of TBS. Even as Indian balance sheets have suffered structural damage on the order of what has occurred in crisis cases, the impact on growth has been quite modest.

    TBS did not lead to economic stagnation, as occurred in the U.S and Europe after the Global Financial Crisis and Japan after its bubble burst in the 1990s.

    To the contrary, it co-existed with strong levels of aggregate domestic demand, as reflected in high levels of growth despite very weak exports and moderate, at times high, levels of inflation. In other words, India developed its own unique version of TBS: what recent Economic Surveys called a ‘Balance Sheet Syndrome with Indian Characteristics’.

    Current Issues and Events

    Latest Videos

    Register to get FREE updates

      All Fields Mandatory
    • (Ex:9123456789)
    • Please Select Your Interest
    • Please specify

    • ajax-loader
    • A verifcation code has been sent to
      your mobile number

      Please enter the verification code below

    This website uses cookie or similar technologies, to enhance your browsing experience and provide personalised recommendations. By continuing to use our website, you agree to our Privacy Policy and Cookie Policy. OK
    X

    Register to view Complete PDF