Twin balance sheet problem in India: A case study on Bhushan steel

Abstract

Generally, countries that exhibit a twin balance sheet problem follow a standard way. Their corporations over-expand during an economic boom, leaving them with obligations that they are then unable to repay. They subsequently default on their debts, leaving behind impaired bank balance sheets. Thisis devastating for growth prospects, since such corporations are investment averse, while those that remain with a sound condition are unable to invest much either since affected banks cannot lend to them. India, however, does not follow this path. India had a boom during the mid-2000s parallelly with the global economy. But, it sailed through the global recession largely unscathed. This was because Indian corporations and banks were prevented from accumulating excessive leverage, as bank credit was kept from expanding disproportionately during the boom by prudential restrictions and simultaneously capital controls barred an undue recourse to overseas loans. Bhushan steel, with a consolidated debt of INR 40000 cr, is just one among the 12 declared NPAs by Internal Advisory Committee after the Asset Quality Review initiated by the then RBI governor Raghuram Rajan. Most the firms are concentrated on the infrastructure and steel industries. Instances like Bhushan Steel occurs in India because companies try the ride the boom of the high tides in business but get hit by economic slowdowns which affect their top and bottom lines adversely and the cascading effects of the global and domestic macroeconomic factors. The combines effect overturned a once-standard asset such as Bhushan Steel into non-performing bad loans. Till the Asset Quality Review of 2015, all such loans were being accounted as provisions for bad debts, thereby laying the foundation for the twin balance sheet syndrome. There is still a large percentage of debt on the verge of being declared bad, making the problem much more dire. Concrete long term distressed asset management techniques and firms to do the same will have to be established in the market by the consortium of banks backed by the government to help ride the economy from a potential grave and make it a robust economy.