There is good news for small and medium business owners as well as private individuals who have taken bank loans: thanks to a public interest litigation filed in the Supreme Court, they will now get a partial waiver on interest charged for six months during the Covid-19 lockdown.
The man they need to thank is Gajendra Sharma, who ran a spectacle shop close to the Taj Mahal in Agra. Sharma had availed of a scheme announced by the Reserve Bank of India which allowed him a six-month moratorium on his home loan repayments. This was by way of relief during India’s Covid-19 lockdown, which saw economic activity collapse due to the harsh curbs put in place by the Modi government.
Except Sharma wasn’t happy with the fact that, while there was a moratorium on EMI repayments, interest still continued to accrue during the lockdown. In June, Sharma filed a public interest litigation with the Supreme Court asking courts to stop charging what is standard when taking a loan: compound interest. In other words, Shamra didn’t want interest charged on interest already accrued during the moratorium.
Court-led nationalisation
Sharma was in luck: India’s Supreme Court was sympathetic to him and pushed the Modi government to act. “Common man’s Diwali is now in the hands of the government,” the court said.
In the end, the Modi government proposed that interest on interest would indeed be waived. And this would be achieved not by the banks waving their interest charges but by the Indian taxpayer stepping in and subsidising people who had taken loans.
On October 24, it was announced that the Union government will pay banks for waiving interest on interest – or put another way, paying the difference between compound and simple interest. This would apply to loans below the amount of Rs 2 crore and would cover small and medium business loans as well as education, housing, consumer durables, auto, personal, consumption and credit card loans.
The hit to the Union government revenues is an estimated Rs 6,5000 crore.
A poor precedent
For a person who has taken a loan, this is certainly a positive since it allows her a reduction in interest charged on top of the repayment moratorium. Matter, however, gets more complicated if we look at the bigger picture.
While subsidies and government help is often needed – and especially during the lockdown – this PIL and the subsequent government action pushes an odd bargain where relatively well-off loan takers would be subsidised with public money. Given the financial responsibilities before the government of India right now it is distinctly odd, even unfair, that it is going to be spending money to help, say, someone who has taken a loan of Rs 1 crore to buy a house. Given India’s significant poverty levels – sharply exacerbated by the lockdown – surely a large number of Indians have a much better claim to that Rs 6,500 crore.
To make things even worse is the precedent the Supreme Court has set by admitting and pushing Sharma’s PIL. What was a private contract between a bank and borrower has now become, in a manner of speaking, nationalised. Since the court has set no objective criteria on why it heard this particular loan case, there is nothing stopping any borrower from heading to a court in the hope of relief.
During the case, there were some tense moments for banks, who in their precarious situation right now, could hardly offer to waive interest. Just like banks charged interest from borrowers during the lockdown, it must also pay out interest to depositors during the lockdown. It can hardly afford to cut its income while maintaining its 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 a poor one for Indian banking: a contract between the bank and the borrower should not be tampered with arbitrarily by the court or the government gives the precedent it sets.
Lose-lose
The lack of thinking around this interest waiver becomes even more apparent when one considers that the actual waiver amounts for most borrowers would be rather small. To take one illustration, if a person takes a car loan of Rs 5 lakh at 8% interest for 5 years, his interest waiver under this scheme would amount to only Rs 336. It is quite clear that to a person who can afford a car worth more than Rs 5 lakh, this amount would mean nothing.
This PIL has thus cost the public exchequer money, set a bad precedent for Indian banking and in the end resulted in a quantum of gain that is practically irrelevant for the supposed beneficiaries.