Twin balance sheet problem

Also called: TBS problem · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

The twin balance sheet (TBS) problem is the situation where two groups are in trouble at the same time: companies with too much debt (over-leveraged) and banks with too many bad loans. The term comes from the Economic Survey 2016-17.

It matters because the two problems feed each other. Indebted companies cannot invest, and stressed banks will not lend. As a result, investment and credit growth stall and GDP growth slows.

Explanation

How the "twin" stress builds up

• A balance sheet is a statement of what a company or bank owns (assets) and what it owes (liabilities).
• Company side: firms borrowed heavily for large projects. When the projects failed, they were left with big loans and little income.
• Bank side: the same loans turned into NPAs. An NPA (Non-Performing Asset) is a loan whose interest or instalment has not been paid for more than 90 days.
• Why "twin": one firm's unpaid debt is also one bank's bad asset. The two balance sheets are sick together.

Chain of effects

• Companies carry heavy debt, so they cannot invest.
• All their earnings go to paying old loans.

• They have no room to borrow for new plants.

• Banks carry bad loans and low capital, so they will not lend.

• They must set aside provisions (money kept aside from profits to cover a likely loss) for the bad loans.

• This eats into their capital, so they become careful about new lending.

• Less investment and less credit mean investment and credit growth stall, so GDP growth slows.

Where it came from: the 2004-2011 boom and later shocks

• Banks lent heavily during 2004-2011 to infrastructure, power, steel and telecom.
• Much of this went to PPP projects (public-private partnership: government and a private company build and run a project together).

• Banks expected high growth to continue.

• Shocks that followed:

• Delays in land acquisition and environmental clearance meant projects got stuck, costs rose and no revenue came in.
• The Supreme Court cancelled 2G spectrum licences (2012) and coal blocks (2014), so telecom and power firms lost the assets behind their loans.
• A global commodity-price crash cut the earnings of steel companies, so they could not repay.

What made it worse, and what fixed it

• Hiding the problem made it worse:
• Regulatory forbearance (the regulator relaxing its own rules for a while) let restructured loans count as standard assets (healthy loans) until April 2015.
• Evergreening meant giving a fresh loan so the borrower could repay the old one, so the account never turned NPA.

• Restructuring schemes like CDR, JLF, 5/25, SDR and S4A mostly delayed recognition of bad loans. They did not solve it.

• Recognising the problem started the fix: the Asset Quality Review (AQR), 2015-16, exposed the hidden NPAs.

• Worked example: how NPAs weaken a bank.
• A bank has loans of Rs 1,000 crore. Rs 100 crore is NPA, and it has set aside Rs 70 crore as provisions.
• GNPA ratio = (Gross NPAs ÷ Gross Advances) × 100 = 100 ÷ 1,000 × 100 = 10%
• Net NPA = Gross NPAs − Provisions = 100 − 70 = Rs 30 crore
• NNPA ratio = 30 ÷ (1,000 − 70) × 100 = about 3.2%
• Provision Coverage Ratio (PCR) = 70 ÷ 100 × 100 = 70%
• The Rs 70 crore of provisions comes out of profits. That leaves less capital to support new loans. This is the bank half of the twin problem.

In India

• Where the term comes from: the Economic Survey 2016-17 used the term. It proposed PARA (Public Sector Asset Rehabilitation Agency) as the fix.
• PARA is a kind of "bad bank" (an agency that buys bad loans from banks).

• It would take over the largest bad loans and take hard decisions, like reducing the debt, that bankers feared to take on their own.

• Recognition: the AQR (2015-16, Governor Raghuram Rajan) made banks show their true NPAs.

• PSB GNPA ratio: 4.97% (March 2015) → peak of 14.58% (March 2018) [2].

• Resolution rules:

• IBC (Insolvency and Bankruptcy Code, 2016) is the law that sets a time-bound process for companies that cannot pay their debts.
• The 12 February 2018 circular said one day of default triggers action and gave a 180-day resolution deadline. The Supreme Court struck it down in Dharani Sugars (April 2019).

• It was replaced by the Prudential Framework (7 June 2019), with a 30-day review period and an inter-creditor agreement (ICA).

• The 4R strategy, followed since 2015 [2]: Recognition, Resolution and Recovery, Recapitalisation and Reform.

• Recapitalisation (putting fresh capital into banks):
• The October 2017 package was Rs 2.11 lakh crore. Of this, Rs 1.35 lakh crore came through non-tradable recapitalisation bonds.
• In total, Rs 3.12 lakh crore was put in over four financial years [2].

• PSB CRAR (Capital to Risk-weighted Assets Ratio, the bank's own capital compared with its risky loans and investments) rose from 11.45% (March 2015) to 15.43% (September 2024) [2].

• Latest position:

• PSB GNPA ratio was 3.12% (September 2024) [2] and 2.30% (September 2025) [3].
• The GNPA ratio of all scheduled commercial banks was 2.3% (March 2025), a multi-decadal low [1].
• PSBs made their highest-ever net profit of Rs 1.78 lakh crore in FY 2024-25 [3].

Don't confuse with

• NPA problem: this is only the bank side (bad loans). The twin balance sheet problem is bad loans at banks plus excess debt at companies, at the same time.
• Evergreening: this is a way of hiding the bank side of the TBS problem by lending afresh to repay old dues. It is not the TBS problem itself.
• Loan write-off vs waiver: a write-off removes a fully provided loan from the bank's books, but the borrower still owes the money. A waiver legally cancels the debt. A fall in GNPA can come from write-offs, not only from recovery.
• PARA vs IBC: PARA was a proposed bad bank to take over big bad loans. IBC is a law (2016) for a time-bound insolvency process.

Prelims Hooks

• The term "twin balance sheet problem" comes from the Economic Survey 2016-17. Its proposed fix was PARA (Public Sector Asset Rehabilitation Agency).
• The "twins" are over-leveraged companies and banks with bad loans, not the government and RBI balance sheets.
• PSB GNPA ratio peaked at 14.58% in March 2018 [2]. SCB GNPA was 2.3% in March 2025 [1].
• Regulatory forbearance on restructured loans (counting them as standard assets) ended in April 2015. The AQR (2015-16) then exposed hidden NPAs.
• 4R = Recognition, Resolution, Recapitalisation, Reform, followed since 2015 [2].
• Trap: NNPA = GNPA − provisions, and PCR = provisions ÷ GNPA × 100. A higher PCR means the bank is better protected against losses.

Mains Points

• Delay raised the cost. Forbearance, evergreening and repeated restructuring schemes hid the stress for years. The clean-up worked only after the AQR forced honest accounting. Early recognition and a working IBC are needed so the twin problem does not return.
• Recapitalisation bonds, the trade-off:
• They saved PSBs without a jump in the headline fiscal deficit (the gap between what the government spends and what it earns, excluding borrowings). Only the yearly interest on the bonds hit the budget.
• But they reduced fiscal transparency.

• They also raise moral hazard: if the state keeps bailing out PSBs, banks may keep lending carelessly. So governance reform (4R, the EASE index) must go with the capital.

• Link to growth: fixing the twin balance sheets gave banks back their ability to lend.

• PSBs made a record profit of Rs 1.78 lakh crore in FY 2024-25 [3].
• The SCB GNPA ratio fell to 2.3% in March 2025 [1].
• Together, these give a base for private investment to revive.

Related concepts

• Evergreening
• Asset Quality Review
• Loan restructuring
• Bank recapitalisation
• Loan write-off
• One-time settlement
• Wilful defaulter

Read more

• The NPA crisis: twin balance sheets, evergreening and the clean-up