Home >Opinion >Views >Opinion | Debtors need waivers that banks can’t afford

India’s Supreme Court has sought the response of the finance ministry on demands by debtors for an interest waiver during the moratorium until 31 August. As covid relief, this is the date till when borrowers can defer paying back their loans without being called defaulters. As they see it, the relaxation offer lacks generosity, since credit charges are only to be held in abeyance, not pardoned, with the eventual burden piling up month after month, made heavier still by interest charged on unpaid repayments. This being the case, it is no surprise that our apex court wants to hear the Centre’s views on the details of the deferment scheme. Earlier, the Reserve Bank of India (RBI) had filed its own response on the matter, opposing any waiver of interest charges. By the regulator’s calculations, even if just 65% of outstanding term loans—a total put at 59 trillion at the end of 2019—were to go interest-free for six months, banks would lose 2 trillion. Such a large loss, RBI argued, would threaten the financial viability of banks and jeopardize the interests of depositors.

It is true that Indian lenders cannot afford to forgo their dues. There is also reason to believe that a large-scale write-off could threaten the stability of our banking sector, which has been in poor shape over the past few years, the result of a worrisome accumulation of bad loans. Their hope of using India’s Insolvency and Bankruptcy Code to solve that problem was looking shaky even before the covid crisis, and now that the Code has briefly been suspended as an additional support measure for borrowers, their apprehensions of further drops in asset quality are not baseless. Given the dismal state of our economy, the capital buffers of banks may soon be at risk of getting exhausted, and it is not clear how these would be refilled. Banks must never be pushed to the brink. If depositors begin to lose confidence in the system, it could set off panic runs on banks and turn their failure into a self-fulfilling prophecy. In this respect, banks are unique as businesses. For the sake of economic stability, depositors need the constant assurance that their money is safe.

This is not to say that debtors seeking interest waivers do not have a good argument. Their finances were stretched thin by a lockdown imposed by the government, and they must wonder what purpose is served by debt merely being pushed into an uncertain future. If they cannot meet their obligations now, would they be able to meet them in September? Most would presumably need another loan to pay their deferred dues. In all, this perplexity shows the limits of relying on credit mechanisms to lend individuals and businesses help. As it happens, our economic revival plan expects loan disbursals to play a starring role. In the case of grants to micro, small and medium enterprises, the Centre offered to make good any losses suffered by banks. Perhaps the government could revise its stance on the moratorium to stump up some money to relieve other borrowers of some debt as well. This would widen its fiscal deficit further, but there may be no other way to make the current loan moratorium meaningful. A better way to prop up the economy, as Mint has been advocating, would be to impart a direct stimulus. Financial intermediaries in India have served public policy objectives before, but at significant cost to their efficiency. It may be time to rethink some aspects of our approach to the current economic crisis.

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