LEADER ARTICLE
Conflict of Interest: Low Lending Rates Help Well-heeled Not Poor

Who benefits the most from low interest rates? Answer: The government of India, which is steeped in debt, and big business groups, which benefit from lower costs of borrowing. Who loses the most? Answer: Workers who do not have any social security scheme worth the name (that is, if one can describe the Employees’ Provident Fund as one such scheme) and senior citizens who have parked their savings of a lifetime in fixed deposit schemes.
In nominal terms, almost all interest rates in India are currently at their lowest in the last 30 years. Yet, hardly a day goes by when representatives of industry associations and chambers of commerce do not urge the government and the Reserve Bank of India to ensure that the "soft" interest rate regime continues. The pink dailies faithfully echo their sentiments. The voice of the depositor or the pensioner is hardly heard in the clamour. When trade unions demand higher interest rates on their EPF deposits, they are accused of making unreasonable demands.
In developing countries, the cost of capital (represented by the interest rate structure) is invariably relatively higher than the cost of labour (or the remuneration structure). As a matter of fact, it is this crucial difference that demarcates a developing country from a developed one. Why would India otherwise be doing as well as it is in business process outsourcing or development of computer software, which are labour-intensive activities? But, no, we don’t like ourselves described as "cyber coolies".
Many advocate the virtues of low interest rates on the ground that these spur investments, that, in turn, create job opportunities. But, the cost of capital is only one of many complex factors that have to be considered by an entrepreneur before an investment is made. The state of the infrastructure, market conditions, availability of skilled labour, the law and order situation are among the factors that could influence investments. Despite the prevalence of relatively low interest rates, the investment climate in India is yet to show significant improvement.
What the government has acknowledged is that the reduction in interest rates in recent years has been skewed rather than uniform. Lending rates have been sticky at the upper levels while deposit rates have come down very quickly. Thus, the average "spread" of banks — that is, the difference between the average lending rate and the average deposit rate — has gone up resulting in an improvement in their profitability. The hapless depositor, on the other hand, has had to bear the brunt of the soft interest regime.
The larger business houses invariably manage to obtain loans at relatively low rates of interest. Banks ostensibly feel
comfortable advancing such loans to the affluent sections of industry because they think the money (principal and interest) would be returned on time. Ironically, it is the poor and not the rich who are far more diligent in repaying borrowed funds.
Large corporate borrowers often delibe-rately delay repaying the soft loans they have obtained from banks and financial
institutions. The top bosses of the banks and FIs are their good friends — they meet regularly at the same five-star hotels and clubs over dinners that cost more than what the average Indian can hope to earn in two or three months. The bankers are easily persuaded not to insist on prompt repayment. If necessary, they can extend fresh loans even before the old debts have been settled — a phenomenon called "evergreening".
When it comes to a crunch, business-persons engage clever lawyers who show them a zillion ways of delaying repayment. Thus, a corporate borrower can appeal against a decision of a debt recovery tribunal by moving the appellate authority. Then, of course, there is the high court and as a final resort, the Supreme Court can be petitioned. It is hardly a secret that India’s criminal justice system is heavily weighted on the side of the rich and the powerful.
Despite the enactment of a new law to deal with defaul-ters — the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — the gargantuan volume of non-performing assets (a euphemism for loans not repaid) plaguing the country’s financial system has not come down very much. Total NPAs are currently in the region of Rs 1,50,000 crore or 5.5% of India’s gross domestic product.
For many promoters, interest rates had not mattered very much in the past for a simple reason: There was little or no
inclination on their part to repay the money they had borrowed. It made much better business sense for the sick firms to languish before the Board for Industrial and Financial Reconstruction.
So who’s afraid of defaulting on bank loans? Certainly not the well-heeled. The fat-cats know the law and the system is on their side. But the farmer and the small guy are mortally afraid of defaulting on their financial obligations. They are scared to death of having their properties attached and of litigation that drags on for years, if not decades. For them, interest rates matter much more. In any case, most of them do not borrow at the interest rates offered by banks but at usurious rates from local moneylenders. Some of the borrowers are so afraid of the creditor’s goons that they end up committing suicide. This is India’s reality.