Twin Balance Sheet Problem
India has been grappling with problems which are rooted in corporate balance sheets and Bank balance sheets. The Economic Survey also gives considerable attention to what it termed India's Twin Balance Sheet problem. This problem is a mixed of distressed and overleveraged companies and the increasing NPAs in Public Sector Bank balance sheets. And the Economic Survey has tried to give suggestions for solving this problem, and advocated the concept of Public Sector Asset Reconstruction Company (PARA) which is illustrated below.
Why it is a significant Problem?
This problem is very important because it is becoming a hindrance for private investment in the country and therefore, it is holding up growth in all sorts of sectors. Most of the issues that prevented many measures introduced by the government - from Reconstruction of Financial Assets and Enforcement of Security Interest Act, to Strategic Debt -Restructuring and the Sustainable Structuring of Stressed Assets , to a Reconstruction Companies are included within this problem.
Measures taken in past to solve this problem
India has followed many conventional paths to solve this problem. And as a result, while there are adequate laws for a bank or any other organization to take over a stressed asset, it is much more difficult to any decent money back and dispose of them.
For example, if a steel plan is unable to meet its debt obligations using the SDR route, it might seem like a good idea for a bank to take it over. But if the steel sector is in distress, it will be hard for the bank to get a good price for that asset from any buyer.
Apart from it, bank cannot hold on to it indefinitely, it is required that it should keep running. It is a also a fact that a physical asset tends to deteriorate very fast. The longer it takes for a bank or an asset reconstruction company or any other organization to dispose of it, the value continues to deteriorate.
The process of selling an asset, both for the country as a general and the sector in particular, depends hugely on the economic conditions.
For example, in the past two years, many deals have been witnessed in the cement sector and some in the power sector. In those deals stronger companies took over assets or entire divisions of weaker, overleveraged companies. But these deals were not seen in all sectors.
In those sectors where there is significant overcapacity or where establishing a new business is easier and less expensive than taking over an older business, these deals will not happen in such sectors.
When it comes to the loans which are given to a service oriented sector, for example airlines.
The reason bankers faced difficulties and found themselves in a spot with Kingfisher and many other defunct airlines was because the airlines did not have sufficient tangible assets that could be sold off. Most airlines were operating with leased aircraft and the aircraft holding company simply took back the aircraft.
Solutions offered by Economic Survey
The Economic Survey has given suggestions that a Public Sector Asset Reconstruction Company (PARA) be formed to buy most complex and biggest NPAs, and then dispose of them. It seems like a reasonable idea but it fails to take into account that the PARA (which others have termed as a Bad Bank) will face the same problem disposing assets.
It is obvious that If there is a market for the stressed asset, then recovering money would not be a problem. The real problem is that there isn't much of a market for stressed asset’s company in many sectors because they are already plagued with overcapacity.
Why PARA should be applied to solve twin balance sheet problem? To explain this issue Economic Survey has emphasized on these 6 reasons:
1. It’s not just about banks, it’s a lot about companies. So far, public discussion of the bad loan problem has focused on bank capital, as if the main obstacle to resolving TBS was finding the funds needed by the public sector banks. But securing funding is actually the easiest part, as the cost is small relative to the resources the government commands. Far more problematic is finding a way to resolve the bad debts in the first place.
2. It is an economic problem, not a morality play. Without doubt, there are cases where debt repayment problems have been caused by diversion of funds. But the vast bulk of the problem has been caused by unexpected changes in the economic environment: timetables, exchange rates, and growth rate assumptions going wrong.
3. 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.
4. 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.
5. 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.
6. Delay is costly. Since banks can’t resolve the big cases, they have simply refinanced the debtors, effectively “kicking the problems down the road”. But this is costly for the government, because it means the bad debts keep rising, increasing the ultimate recapitalization bill for the government and the associated political difficulties. Delay is also costly for the economy, because impaired banks are scaling back their credit, while stressed companies are cutting their investments.