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Tuesday, November 24, 2020

Ideas Explained: Why a court-ordered interest waiver on loans is a bad idea

It sabotages economic justice because fiscally funding banking diverts money from education, health, and skilling expenditure, writes Manish Sabharwal.

By: Explained Desk | New Delhi | October 21, 2020 10:00:11 am
Ban loan recognition ban, Interest waiver on loans, Interest on loans, Manish Sabharwal on ban loans, indian expressAn employee counts Indian rupee banknotes. (Bloomberg Photo: Dhiraj Singh)

In his latest opinion piece, Manish Sabharwal of Teamlease Services, makes the case that “a court-ordered interest waiver and bad loan recognition ban is scope creep that hurts the common man, has nothing to with economic justice defined as the greatest good for the greatest number, and is hardly what our constitution imagined as the role of courts”.

Sabharwal points out that India’s Rs 144 lakh crore in bank deposits make our Rs 110 lakh crore in bank loans possible. The “common man” is more likely a depositor than a borrower; banks have 210 crore deposit accounts but only 27 crore loan accounts. That is why he states, “Banks don’t make loans; depositors do”.

Protecting bank depositors needs ensuring reasonable expenses, collecting loans with interest, ensuring accurate financial statements, and fighting political temptations to gift wrap spending as lending. Tools include prudential norms and subjective judgments on leadership, growth rates, and governance.

“Central banks have tough jobs in the best of times but the courts consistently choose borrowers over depositors,” he states.

Waiving interest dues or banning bad loan recognition is economically ignorant because more than 20 per cent of Indians are depositors while less than 2 per cent are borrowers.

It’s commercially ignorant because any “annualised effective rate” is adjusted for interest payment frequency.

It’s spatially ignorant because a common man can’t borrow Rs 2 crore.

It sabotages economic justice because fiscally funding banking diverts money from education, health, and skilling expenditure.

Resources are finite (total central government expenditure is Rs 29 lakh crore), scarce (COVID creates a Rs 3 lakh crore GST shortfall), and fragile (our fiscal deficit may exceed 12 per cent). “If fiscal deficits could make countries rich, no country would be poor,” he points out.

Also read | Explained Ideas: Five main strategic implications of Bangladesh’s economic rise

A modern state is a welfare state but banks are lousy vehicles for “Common Man Diwali gifts”.

Gandhiji said “When you are in doubt, apply the following test. Recall the face of the poorest and the weakest man whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him. Will it restore his control over his own life and destiny? In other words, will it lead to Swaraj for the hungry and starving millions?”📣 Click to follow Express Explained on Telegram

A loan interest waiver and bad loan recognition ban fail this test.

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