What is the double bottom line problem?

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In February 2016, public sector banks started to publish their financial results for the December quarter. And the numbers were enough to send the stock markets into a frenzy. Their non-performing assets or NPA had increased dramatically, to the point that provisioning had exceeded operating profit. Their net income had plunged deep into the red.

According to the 2017-2018 economic survey, investors sold PSU stocks, driving their prices to such low levels that at one point HDFC was valued as much as 24 public sector banks combined.

A dual balance sheet is a scenario in which banks are under severe strain and businesses are so overleveraged that they cannot repay their loans.

During boom times and robust economic growth, businesses are encouraged to invest and grow aggressively. The 2017-18 economic survey put it simply. A double bottom line problem follows a standard path. Their businesses expand during a boom, leaving them with obligations they cannot repay. Thus, they default on their debts, leaving bank balance sheets compromised as well.

Something similar happened in the mid-2000s. India’s economy was booming, where annual GDP growth hovered around 9-10%. As corporate profitability peaked, India Inc launched massive projects worth trillions of dollars and ran on huge debts, mostly financed by banks.

In 2007-2008, the investment/GDP ratio reached nearly 38% and the amount of non-food bank loans doubled between 2004-2005 and 2008-2009. However, in the wake of the global financial crisis, growth and revenue projections have fallen and financial costs have risen due to rising interest rates, which have weighed on corporate and bank books. The RBI had to step in to control the damage to the economy.

But the country’s finances are now in good shape. Public sector banks saw an 81% year-on-year increase in net profit last quarter on higher net interest income and lower provisions for bad debts, according to analysis by Business Standard.

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