Banks do not give loans; Depositors do. India’s Rs 144 lakh crore of bank deposits make our Rs 110 lakh crore of bank loans possible. The “common man” is more of a depositor than a borrower; Banks have 210 million deposit accounts but only 27 million loan accounts. I advocate that a court-ordered waiver of interest and a ban on bad credit recognition is an area creep that hurts the common man, has nothing to do with economic justice, which is defined as the greatest good for the greatest number, and hardly is, what our constitution imagined as the role of the courts.
Banking seems simple – banks pay depositors interest, charge borrowers higher interest, and use this “net interest margin” to cover expenses, write off bad loans and generate profits for shareholders – but it is complex because of bad behavior. Sins include overpaying from depositors or employees, undercharging borrowers, and giving out bad loans. Stupidity is not illegal, but banks are special because, unlike industrial companies, a liquidity crisis is practically indistinguishable from a solvency crisis. To protect bank depositors, it is important to ensure reasonable spending, interest-bearing loans collected, accurate financial statements ensured, and political temptations to be fought to wrap expenses in gift paper as lending. Instruments include regulatory norms and subjective judgments on leadership, growth rates and governance. Central banks have a tough job at the best of times, but the courts consistently select borrowers over depositors; A court warned RBI, which is chasing a defaulting party, against twisting its arms so badly that they break. Courts that take depositors for granted are linking up with COVID-19, past bank sins, and suspended bankruptcies to complicate financial stability when it matters most.
The average Indian business is small for many reasons, but one of them is the availability and cost of credit. Our embarrassing 50 percent credit-to-GDP ratio – Bihar is 12 percent, Arunachal is 1 percent, and MSME lending remains at Rs 20 lakh crore – needs to increase to 100 percent. And despite low inflation and budgetary discipline, most borrowers don’t get globally competitive interest rates because of our banking system’s high non-performing loans (over Rs 10 lakh crore over the past decade) and balance sheet uncertainty (investors know that breaking the thermometer won’t do anything ) has so weakly lazy credit accounting because of the fever she can imagine the worst). The availability of credit is more important to entrepreneurs than the cost of credit, but availability will not increase and costs will not decrease until our banking system has strong competition, rigorous regulation, effective oversight and non-fiscal sustainability.
Foregoing interest payments or banning the recognition of bad loans is economically ignorant, as more than 20 percent of Indians are depositors while less than 2 percent are borrowers. It is commercially ignorant as any “annualized effective interest rate” is adjusted based on the frequency of interest payments. It is spatially ignorant because an ordinary man cannot borrow Rs 2 crore. It sabotages economic justice because the fiscal funding of banking pulls funds away from education, health and skills expenditures. Resources are finite (total central government spending is 29 billion rupees), scarce (COVID results in a GST deficit of 3 million rupees) and fragile (our budget deficit can exceed 12 percent).
Government funds for bad loan write-offs or interest payments are dysfunctional; the fresh equity of Rs 2 lakh crore over the past two years for nationalized banks is 40 times the budget of the Department of Skills; Bhushan Steel defaulted on more nationalized bank loans than the central government allocated for primary education; and the first 12 defaulters forced into the IBC by the RBI had nationalized bank loans that were four times government health allocations. Private banks are no saints, but their problems are borne by shareholders (devastating dilution from Rs 1 lakh crore of fresh capital), management (withdrawal) and market capitalization calibration (differential price-to-book ratios capture vital information).
Our 299 notable constitutional writers have made two visionary divisions. Their distinction between fundamental rights and policy principles was not a lack of ambition – if budget deficits could make countries rich, no country would be poor – but a measured assessment of state capacity, resources and operation. The other were separate lanes for the judiciary, executive and legislative branches to balance samaj (society), bazaar (markets) and sarkar (government). Courts have become less aware of these two distinctions; the right to interest on arrears can hardly be qualified as a fundamental right and the ban on NPA recognition violates constitutional channels. The strongest argument for driving lanes through courts in a democracy comes from Bernard Crick’s 1963 book In Defense of Politics, which suggests that the chaotic, slow, and clunky process of reconciliation, compromise, and forcing collective decisions to emerge from conflicting citizen demands includes, best left to the people who fight against elections.
Institutional immunity requires a balance between independence and accountability; The growing concern of citizens about mandates and appointments should trigger self-regulation in the courts. Madhav Khosla’s new book India’s Founding Moment by Professor Madhav Khosla of Ashoka University beautifully captures our constitutional imagination; the court’s self-proclaimed mandate as protector of the “basic structure” of the constitution could contradict Ambedkar’s view of the text as a living document whose simple revision procedures protected it from “the flaws of rigidity and legality.” And Michael Sandel’s new book, The Tyranny of Merit, should spark an open debate about whether current courtroom rules reduce cognitive diversity and are biased in favor of candidates born into legal households. Meritocracies can be incestuous and unjust.
A modern state is a welfare state, but banks are lousy vehicles for “ordinary Diwali gifts”. Gandhiji said, “When in doubt, take the following test. Remember the face of the poorest and weakest man you might have seen and wonder if the move you are considering will be of any use to him. Will it bring him back in control of 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 debt recognition ban fail this test.
This article first appeared in the print edition on October 20, 2020 under the title “Spurfahren &gericht”. The author is with Teamlease Services. Views are personal