In October 2020, Manish Sabharwal of Teamlease Services made the case that a court-ordered interest waiver on loans hurts the common man, has nothing to do 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 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.
India’s ` 144 lakh crore in bank deposits make our ` 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. 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 judgements on leadership, growth rates, and governance.
It is commercially ignorant because any ‘annualised effective rate’ is adjusted for interest payment frequency.
It is spatially ignorant because a common man cannot borrow ` 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 ` 29 lakh crore), scarce (Covid creates ` 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.
A loan interest waiver and bad loan recognition ban fail this test.
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. 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 judgements on leadership, growth rates, and governance.
The average Indian enterprise is small for many reasons, one reason being the availability and cost of credit. Our embarrassing 50 per cent credit-to-GDP ratio needs to rise to 100 per cent. And despite lower inflation and fiscal discipline, most borrowers do not get globally competitive interest rates because our banking system has high bad loans (above ` 10 lakh crore for the last decade) and financial statement uncertainty. 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.
Our 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.
Institutional immunity needs balancing of independence and accountability; rising citizen concern about mandates and appointments should trigger court introspection.
Courtesy: The Indian Express