opinion | Debtors need waivers that banks can’t afford

of India supreme court has been looking for the answer Ministry of Finance on claims of debtors for a Interest waiver during the moratorium until 31.08. As a convenience, this is the date by which borrowers can defer repayment on their loans without being labeled as delinquent. From their point of view, the offer of relaxation lacks generosity, since credit burdens are only intended to be kept in limbo, not to be excused, and the possible burdens are piling up month after month, made even worse by interest on unpaid repayments. With that in mind, it is not surprising that our Supreme Court would like to hear the Center’s views on the details of the deferral plan. earlier the Reserve Bank of India (RBI) had submitted its own statement on this matter and opposed an interest waiver. According to the regulator’s calculations, even if only 65% ​​of the outstanding loans – a grand total – are recognised 59 trillion at the end of 2019 – if there were no interest for six months, banks would lose 2 trillion. Such a large loss, the RBI argued, would threaten the banks’ financial viability and jeopardize the interests of depositors.

It is true that Indian lenders cannot afford to waive their fees. There is also reason to believe that a large-scale writedown could endanger the stability of our banking sector, which has been in disrepair over the past few years due to a worrying build-up of bad loans. Their hopes of solving this problem through the Indian Insolvency and Bankruptcy Act looked shaky even before that Covid crisis, and now that the code has been temporarily suspended as an additional measure of support for borrowers, their fears of a further decline in asset quality are not unfounded. Given the state of our economy, banks’ capital buffers may soon be depleted and it is not clear how these will be replenished. Banks must never be marginalized. If depositors start to lose confidence in the system, it could trigger panic attacks on banks and make their failure a self-fulfilling prophecy. In this respect, banks as companies are unique. For reasons of economic stability, depositors need constant assurance that their money is safe.

This is not to say that debtors requesting an interest waiver do not have a good argument. Their finances have been strained by a government-imposed lockdown, and they have to wonder what the point of pushing debt into an uncertain future is. If they cannot meet their commitments now, could they meet them in September? Most would probably need another loan to pay their deferred premiums. All in all, this confusion shows the limits of relying on credit mechanisms to help individuals and businesses. Coincidentally, our economic recovery plan expects loan disbursements to play a major role. In the case of grants to micro, small and medium-sized enterprises, the center offered to compensate for any losses incurred by the banks. Perhaps the government could revise its stance on the moratorium to raise some money to help other borrowers get out of debt as well. This would widen the fiscal deficit further, but there may be no other way to make the current lending moratorium meaningful. A better way to prop up the economy, as Mint advocates, would be through direct stimulus. Financial intermediaries in India have previously served public policy goals, but at a significant cost to their efficiency. It might be time to reconsider some aspects of how we are dealing with the current economic crisis.

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