While the court needs to worry about the health of the banking system, it also needs to worry about the fundamental principle of equity.
The government affidavit arguing that the interest on interest component for all loans up to Rs 2 crore be waived has some unjustifiable proposals. It says the compound interest portion on all MSME and retail loans up to Rs 2 crore be borne by the government. This includes MSME loans, home loans, personal loans, credit cards loans, education loans, consumer durable loans and auto loans.
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This list is highly unjustifiable as it equates unequal. While a Rs 2 crore loan to an MSME would be justifiable as vulnerable, a person who takes a Rs 2 crore home loan can hardly be described as vulnerable. Assuming a loan-to-value ratio of 70 percent, the actual cost of the house would be Rs 2.7 crore. By what standards is a person who can afford a Rs 2.7 crore loan "vulnerable". Most income taxpayers wouldn't be able to afford a Rs 2.7 crore home. The income tax department disclosed in February this year that of the 1.46 crore people who pay income tax, one crore people have an income under Rs 10 lakhs. Most of these persons, may not in their lifetime be able to afford a house costing Rs 2.7 crore. Then why should their taxes be used to subsidise people far richer than themselves?
Likewise for a person who takes a credit card loan of Rs 2 crore, or an education loan or personal consumption loan of Rs 2 crore. These are essentially the top 1 percent of the population and hence do not deserve a subsidy from taxpayers money, A better idea would be to retain the Rs 2 crore limit for MSME loans but scale it down considerably for other categories. For home loans, the law itself defines what is affordable - a house costing Rs 45 lakh.
Assuming a loan to value of 70 percent, all home loans up to Rs 30 lakh may be termed affordable. Likewise, the education bill for a four-year engineering course in IIT or a 2-year management course in the IIMs may be considered as the minimum. This again would work out to Rs 30 lakh or so. A C segment car would cost a maximum of Rs 10 lakh. That may well be the cut-off limit for auto loans.
Also read: Interest waiver case: Centre submits affidavit in SC, supports waiver of compound interest for loans up to Rs 2 crore
Of course, many of these numbers can be tweaked on the basis of legitimate arguments, but the government must bear in mind that tax money can't be used to subsidise persons who are far richer than those who are paying the tax. If even Rs 1000 crore is saved with such careful and fair calculation of cut-offs for waiver eligibility, that one thousand crores may be used for an NREGS or some such program where a more numerous set of vulnerable people can benefit.
That said, the logic of the government's affidavit that banks and bank depositors can't be made to bear the burden of waived interest amounts is highly commendable. It strongly and correctly argues that "it is impossible for banks to bear the burden resulting from waiver of compound interest without passing on the financial impact to the depositors or affecting their net worth adversely, which would not be in the larger national economic interest".
The arguments that continued payment of interest to depositors is not only one of the most essential banking activities, but also a huge responsibility needs to be impressed on the court. As also the affidavit's argument that depositors are much more in number than borrowers. The numbers are telling: For every loan account, there are 8.5 deposit accounts, the affidavit argues.
The court needs to note the affidavit's clarion point that, "Banks pay interest to depositors only because borrowers pay interest to banks and that this transaction of depositors/banks/borrowers IS part of a chain that can never be permitted to be broken
While the court needs to worry about the health of the banking system, it also needs to worry about the fundamental principle of equity. The tax kitty comes from very vulnerable sections who pay GST on cement for their homes and biscuits for their children. It is important that this money drawn from vulnerable sections is not used to subsidise richer sections. The court's own reputation is at risk.