Question

65. Twin balance sheet problem is accurately explained by which among the following?

• A. a) Large number of NPA’s by PSU’S and private companies
• B. b) Poor Financial position of banks and companies in term of oversubscribed debt
• C. c) Inability of the start up’s to make profit and also not being able to exit the market
• D. d) Rising government debt and also bad loans of the banks

Answer 1

The correct option is B

b) Poor Financial position of banks and companies in term of oversubscribed debt

65 Ans B

Explanation: Twin Balance Sheet (TBS) problem, includes the two intertwined economic issues, namely :
i) Over-leveraged corporates &
ii) Bad-loan-encumbered banks

During mid 2000s, the peak of GDP growth, industry was optimistic of future and banks, banking on optimistic industries, followed a credit boom policy.

ie Industries beckoned, credit boom, over-leveraged corporates

All, seemed fine, before the recessionary trend surfaced, whereafter the overall growth cycle slowed, and the hopeful investments soured.

ie recession, project delays, bad debt servicing , NPAs

The two pillars of TBS were created. Now, TBS creates a vicious economic circle where,

A slowing economy dampens private investment

Dampened investment impedes debt ridden corporates from servicing debts,

Poor debt recovery leads to increasing NPAs for the bank,

Increasing NPAs discourages banks from financing future private investments,

Lack of credit finance in turns slows the economic growth.