Subsidizing middle class loans is a misuse of public money – and it doesn’t even help borrowers
Good news for owners of small and medium-sized businesses as well as for individuals who have taken out bank loans: thanks to a public interest dispute filed with the Supreme Court, they will now benefit from a partial waiver of interest earned for six months. during the Covid-. 19 locking.
The man they have to thank is Gajendra Sharma, who ran an eyewear store near the Taj Mahal in Agra. Sharma had taken advantage of a program announced by the Reserve Bank of India that allowed her a six-month moratorium on mortgage repayments. This has been a relief during the Covid-19 lockdown in India, which has seen economic activity plummet due to severe restrictions put in place by the Modi government.
Except Sharma was not happy that while there was a moratorium on EMI repayments, interest continued to accrue during the lockdown. In June, Sharma filed a public interest litigation with the Supreme Court asking the courts to stop charging what’s standard when taking a loan: compound interest. In other words, Shamra did not want interest to be charged on interest already accrued during the moratorium.
Nationalization led by the courts
Sharma was lucky: the Supreme Court of India was favorable to him and pushed the Modi government to act. “Ordinary man’s Diwali is now in the hands of the government,” the court said.
Ultimately, the Modi government proposed that interest on interest be effectively waived. And this would be achieved not by the banks waving their interest charges, but by the Indian taxpayer stepping in and subsidizing the people who had taken out loans.
On October 24, it was announced that the Union government would pay banks for waiving interest on interest – or in other words, paying the difference between compound and simple interest. This would apply to loans below the amount of Rs 2 crore and would cover loans to small and medium enterprises as well as loans for education, housing, consumer durables, automobiles, individuals, consumption and credit cards.
The blow to the revenue of the Union government is estimated at Rs 6.5000 crore.
A poor precedent
For a person who has taken out a loan, this is certainly a positive point since it allows him to reduce the interest charged in addition to the repayment moratorium. The question, however, becomes more complicated if we look at the big picture.
While grants and government assistance are often needed – and particularly during foreclosure – this PIL and subsequent government action is driving a bizarre case where relatively well-off loan takers are being subsidized with public money. Given the current financial responsibilities of the Indian government, it is utterly strange, if not unfair, that it is spending money to help, say, someone who has taken out a loan of 1 crore rupee to buy a house. Given India’s significant poverty levels – greatly exacerbated by the lockdown – a large number of Indians surely have a much better claim at this Rs 6,500 crore.
To make matters worse, this is the precedent the Supreme Court set by admitting and pushing Sharma’s PIL. What used to be a private contract between a bank and a borrower is now somewhat nationalized. Since the court did not set any objective test for why it heard this particular loan case, there is nothing to prevent a borrower from going to court in the hope of being compensated.
During the course of the affair, there were moments of tension for the banks which, in their current precarious situation, could hardly offer to waive interest. Just as banks charged borrowers interest during foreclosure, they also have to pay depositors interest during foreclosure. She can hardly afford to cut her income while maintaining her expenses.
This time, of course, the Modi government decided to step in and dip into the taxpayer’s pocket to save the day. But the precedent this sets is poor for Indian banks: a contract between the bank and the borrower should not be arbitrarily falsified by the court or the government sets the precedent it sets.
The lack of thought around this interest waiver becomes even more evident when you consider that the actual waiver amounts for most borrowers would be rather low. To take an illustration, if a person takes out a car loan of Rs 5 lakh at 8% interest for 5 years, their waiver of interest under this program would only amount to Rs 336. It is quite clear that for a person who can afford a car worth more than Rs 5 lakh, this amount would mean nothing.
This PIL thus cost the treasury money, set a bad precedent for the Indian bank, and ultimately resulted in a virtually irrelevant amount of gain for the purported beneficiaries.