Banks don’t make loans; depositors do. 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. I make 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.
Banking seems simple — banks pay interest to depositors, charge higher interest to borrowers and use this “net interest margin” to meet expenses, write off bad loans, and generate profits for shareholders — but is complex because of bad behaviour. Sins include overpaying depositors or employees, undercharging borrowers and making bad loans. Stupidity is not illegal but banks are special because, unlike industrial firms, a liquidity crisis is practically indistinguishable from a solvency crisis. 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; a court warned the RBI pursuing a loan defaulter to not twist arms so hard that they break. Courts taking depositors for granted combines with COVID-19, past banking sins and suspended bankruptcy to make financial stability harder when it is most important.
The average Indian enterprise is small for many reasons but one of them is the availability and cost of credit. Our embarrassing 50 per cent credit-to-GDP ratio — Bihar is 12 per cent and Arunachal is 1 per cent and MSME lending is stuck at Rs 20 lakh crore — needs to rise to 100 per cent. And despite lower inflation and fiscal discipline, most borrowers don’t get globally competitive interest rates because our banking system has high bad loans (above Rs 10 lakh crore for the last decade) and financial statement uncertainty (investors know that breaking the thermometer does nothing for the fever so weak bad loan accounting has them imagining the worst). The availability of credit is more important than the cost of credit for entrepreneurs but availability will not rise and cost will not fall till our banking system has strong competition, consistent regulation, effective supervision and non-fiscal sustainability.
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).
Government money for bad loan write-offs or interest payments is dysfunctional; the Rs 2 lakh crore fresh equity in the last two years for nationalised banks is 40 times the Ministry of Skills’ budget; Bhushan Steel defaulted on more nationalised bank loans than the central government allocation to primary education; and the first 12 defaulters forced into IBC by RBI had nationalised bank loans equal to four times the central government allocation to healthcare. Private banks are not saints but their problems are borne by shareholders (crushing dilution by Rs 1 lakh crore fresh capital raising), management (removal) and market capitalisation calibration (differential price-to-book ratios capture important information).
Our 299 remarkable Constitution writers made two visionary partitions. Their distinction between fundamental rights and directive principles was not a lack of ambition — if fiscal deficits could make countries rich, no country would be poor — but a measured assessment of state capacity, resources and sequencing. The other was distinct driving lanes for the judiciary, executive and legislature to balance samaj (society), bazaar (markets) and sarkar (government). Courts have become less mindful of these two distinctions; the right to default on interest hardly qualifies as a fundamental right and banning NPA recognition is a violation of constitutional lanes. The most powerful case for lane driving by courts in a democracy comes from Bernard Crick’s 1963 book, In Defence of Politics that suggests that the messy, slow and clunky process involving conciliation, compromise and squeezing collective decisions out of conflicting citizen demands is best left to people who fight elections.
Institutional immunity needs balancing of independence and accountability; rising citizen concern about mandates and appointments should trigger court introspection. Ashoka University Professor Madhav Khosla’s new book India’s Founding Moment wonderfully captures our constitutional imagination; the court’s self-assumed mandate as protector of the Constitution’s “basic structure” may contradict Ambedkar’s view of the text as a living document whose easy amendment procedures protected it from “the faults of rigidity and legalism”. And Michael Sandel’s new book The Tyranny of Merit should catalyse an open debate on whether current rules for court appointments diminish cognitive diversity and are biased in favour of candidates born in legal households. Meritocracies can be incestuous and unfair.
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?” A loan interest waiver and bad loan recognition ban fail this test.
This article first appeared in the print edition on October 20, 2020 under the title “Lane driving & court”. The writer is with Teamlease Services. Views are personal
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