Balance sheet syndrome is a depiction or expression of unhealthy balance sheet which is due to either by cooked figures or window dressed or when investments are met by debts or similar situations resulting in difficulty for the firms to even service the debt.
Balance sheet syndrome with Indian characteristics
The balance sheet syndrome refers to the worsening profit scenario and mounting losses of private sector specifically corporate. High losses by the corporate discourage future investment and in this way, the economy suffers. The balance sheet problem of rising debt and losses occurred in many other countries especially in advanced countries in recent years. But in India, unlike in Japan and in the US, the problem has some unique features and hence is a "balance sheet syndrome with Indian characteristics." In Japan, there was a balance sheet problem after the real estate and equity boom of the late 1980s. Similarly, in the US there was a balance sheet problem after the global financial crisis.
The economic survey elaborates three reasons to show why this syndrome is distinctively Indian.
• India is not suffering from recession or stagnation (in Japan and in the US, there is recession).
• In India, there is no weak macro-economic demand. Rather, there is moderately strong demand (at least relative to supply) reflected in moderately high inflation and a moderately high current account deficit. On the other hand, in advanced countries like the US and Japan, demand is poor.
• Even more distinctly, the Indian balance sheet problem has partly due to private sector investment in infrastructure via the so-called public private partnership (PPP) model. This was because the public sector was reluctant to actively intervene in infrastructure projects.
Main causes for the Balance Sheet Syndrome
• Weak profitability and high burden of debt for the private sector as weak profitability and over-indebtedness discourages investment by corporate in India.
• Stalled projects and inadequate bankruptcy procedures.
• Failed PPP models have contributed to losses of the private sector.
• Many PSBs have financed several infrastructure projects and stalled infrastructure projects have resulted in large volume of stressed assets in banks.
• The PSBs are now not ready to give loans to the business sector fearing penal action for managers in the context of rising NPAs. It further stalls projects by the corporate.
This creates a web of difficult challenges that could hold back private investment. Private investment must remain the primary engine of long-run growth. The survey observes that because of this balance sheet problem, increasing capital flows will not be converted into real investment in the private sector.
Twin balance sheet
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, corporate sector is 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. To put it in other way public sector banks are burdened with the high non-performing assets (NPAs) while some of the corporate houses are also under stress due to sluggish global demand. This has been named as the Twin Balance Sheet Syndrome.
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.
To handle the Twin Balance Sheet Syndrome, the Economic Survey has recommended four Rs viz. Recognition, Recapitalization, Resolution and Reform.
• Recognition: The banks must value their assets as far as possible close to true value (recognition) as the RBI has been emphasizing.
• Recapitalization: Once recognition has been done, the banks’ capital position must be safeguarded via infusions of equity as the banks have been demanding.
• Resolution: The underlying stressed assets in the corporate sector must be sold or rehabilitated as the government has desired.
• Reform: Future incentives for the Private Sector and corporates must be set-right to avoid a repetition of the problem.