Twin Balance Sheet Crisis
#TwinBalanceSheetCrisis
The Twin Balance Sheet Crisis (TBS) is a term coined in the Indian economic context to describe a dual financial stress affecting both:
Corporate balance sheets (companies), and
Bank balance sheets (especially public sector banks, PSBs).
It was prominently highlighted in the Economic Survey of India 2016–17 by then-Chief Economic Adviser Arvind Subramanian.
1. What Is the Twin Balance Sheet Crisis?
A. Stressed Corporates
• Large Indian firms borrowed heavily during the 2000s economic boom.
• Loans were used for infrastructure, power, steel, telecom, etc.
• Many projects underperformed or were delayed, especially after the 2008 global crisis and policy paralysis in India.
• Result: Companies couldn’t repay loans, leading to high debt levels and stalled investment.
B. Stressed Banks
• Mainly public sector banks lent heavily to these corporates.
• As firms defaulted, banks were hit by non-performing assets (NPAs).
• This eroded bank capital, leading to:
•Credit contraction (banks hesitant to lend)
• Weaker economic growth
2. Why Is It a “Twin” Crisis?
Because the crisis feeds on itself:
• Indebted corporates can’t invest or repay
Banks’ bad loans rise, restricting further credit
Economy slows, worsening corporate performance
• Cycle repeats.
3. Effects on the Indian Economy
• Investment stagnated (Gross Capital Formation fell)
• Credit growth to industry collapsed
• PSBs required massive recapitalization
• GDP growth slowed
• Government fiscal burden increased due to recapitalization packages
4. Government and RBI Responses
A. Insolvency and Bankruptcy Code (IBC) 2016
Time-bound mechanism to resolve bad loans
Gave banks power to recover dues via legal channels
B. Asset Quality Review (AQR) by RBI (2015)
Forced banks to recognize hidden NPAs
Increased transparency, though it worsened short-term NPA numbers
C. Bank Recapitalization Plan
Over ₹2 lakh crore ($30+ billion) injected into PSBs
D. Privatization/Consolidation
Merged weaker banks to improve scale and efficiency
Encouraged private sector participation
5. Evolution into “4 Balance Sheet” Problem
In later years, the TBS crisis was seen to have widened:
1. Corporates – still deleveraging
2. Banks – recovering, but cautious
3. NBFCs (Non-Banking Financial Companies) – post-IL&FS crisis (2018)
4. Real estate – builders burdened with unsold inventory and debt
6. Current Status (As of 2024–2025)
• Corporate deleveraging mostly complete
• Bank NPAs have reduced significantly
• Credit growth recovering, especially after COVID
• IBC and reforms have had mixed success (delays, haircuts)
• Yet, new challenges like shadow banking stress and global rate volatility remain
Summary Table
Aspect Corporates Banks (PSBs)
Problem High debt, stalled projects NPAs, capital shortage
Cause Overleveraging, poor regulation Aggressive lending, poor oversight
Solution IBC, deleveraging AQR, recapitalization, mergers
Outcome (2020s) Improved balance sheets Credit recovery underway
Let me know if you’d like a case study (like Bhushan Steel or IL&FS), a comparison with China’s corporate debt issues, or the macroeconomic impact of TBS.
