Focus: GS-III Indian Economy
Why in news?
India’s Supreme Court has sought the response of the finance ministry on demands by debtors for an interest waiver during the moratorium until August.
Argument calling for a waiver
The moratorium 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.
Arguments against a waiver
- Earlier, the Reserve Bank of India (RBI) had filed its own response on the matter, opposing any waiver of interest charges.
- By RBI’s calculations, even if just 65% of outstanding term loans were to go interest-free for six months, banks would lose ₹2 trillion.
- Such a large loss would threaten the financial viability of banks and jeopardize the interests of depositors.
Analysing what could happened if a waiver is given
- A large-scale write-off could threaten the stability of our banking sector.
- The capital buffers of banks may soon be at risk of getting exhausted, and it is not clear how these would be refilled.
- If depositors begin to lose confidence in the system, it could set off panic runs on banks and turn them into a failure.
Conclusion and Options for Way Forward
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 would be to impart a direct stimulus.