The Economic Survey of 2015-16 acknowledges that one of the critical challenges

confronting the Indian economy is ‘the twin balance sheet’ problem. The balance sheets of
both public sector banks (PSBs) and some corporate houses are in terrible shape and it
has been seen as a major obstacle to investment and reviving growth.

The problems faced by the Public Sector Banks are linked directly to that of the
corporate sector. During the boom years, some companies borrowed a lot of money from
banks to invest in infrastructure and commodity- related businesses, such as steel, power,
infrastructure etc. But now, due to slump in both these sectors, the corporate profits have hit
new lows. With low profits, the corporates are not able to repay their loans and their
debts are rising at an alarming level. They have no other option other than to cut back
investments.

Let us understand some basic terms to appreciate the full import of the troubles faced by the
economy.

What are Non-Performing Assets?

The NPAs are assets that stop generating income for a bank. Bank’s assets mostly comprise
of loans and when these loans are on the verge of default (that is, about to go bad), they are
classified as NPA.

In India, a loan is classified as NPA, if the interest or any installment remains unpaid for a
period of more than 90 days.

The gross NPAs in India were 5.1 % of total loans advanced by the public sector banks as of
September 2015 and the stressed assets were 11% of total loans advanced by them.

What are stressed assets?

Stressed assets are NPAs plus restructured assets. Restructured loans are loans that have been
converted to equity under the corporate debt restructuring scheme.

The high amount of NPAs in banks have hit their profitability as well, as banks have to make
more provisioning. Banks have to set aside large funds as provisions to take care of the
potential losses arising out of the loans that might go bad. NPAs are the reason why most
banks reported losses in the last quarter.

Banks’ NPAs have been growing for a while now. It not only affects the balance sheet and
profitability of banks but also limits credit availability to the corporate sector. This limited
credit availability leads to further decline in private investment,

The Union budget of 2016 has allocated Rs 25000 crore towards recapitalisation of Public
Sector banks. This is a necessary step to infuse capital into the Public Sector Banks. RBI
has set March 2017 as the deadline for banks to clean up their balance sheets and strengthen
their assets and has taken several measures to address the problem.