Saving face can be an expensive business

Interest waiver relief was a complete waste of taxpayers' money. It only enabled the government to provide the Supreme Court judges a face-saving way out of the mess of their own making

“Your credit card XXXX9999 is credited with ex-gratia amount of Rs 12.45 on November 4, 2020, under scheme announced by government of India. Read FAQ on this link”. This SMS message from my credit card issuing bank caught my attention — both because it was unexpected and because the amount of relief offered was meagre.  

But looking back I should not have been surprised — either about receiving the relief or its meagreness (refer to my column dated October 11: bit.ly/2ULokbV). It’s a great idea to provide the benefit even to those borrowers who did not avail the moratorium and had paid their instalments on time. Even in pre-Covid times, a credit card holder had the ability to pay only 5 per cent of the outstanding and defer the balance amount by paying interest. During the moratorium period even this 5 per cent payment was not required to be made. The interest on using the deferment option is prohibitively expensive (ranging from 40-55 per cent per annum).  Like many credit card holders, I had never utilised the deferment feature and always paid my total dues on time. That was the reason I was a bit surprised about receiving this compound interest waiver relief. 

I have already written about how meagre the relief is for an individual borrower. A home loan borrower who borrows Rs 50 lakh for 20 years would get around Rs 3,000 as relief. Even a micro, small & medium enterprise (MSME) which had borrowed Rs 2 crore would get around Rs 21,000 as relief. In both cases, the relief would be less than 10 per cent of a single EMI. Also, it has nil cash flow impact as it just gets credited to the loan account and the impact of even this meagre relief is received when the last EMI is paid. 

In the case of credit cards, the waiver scheme mandates use of a much lower interest rate for calculation than the actual deferment interest charged by the card issuers. Also, my credit card usage is rather modest and hence the meagreness of the relief should not really have surprised me. 

The government will find it difficult to find even a single entity in whose life this relief has made any difference at all. Yet the relief has reportedly cost us, the taxpayers, Rs 6,000 crore. The judges had initially wanted the entire interest during the moratorium period to be waived. That was not feasible, as became evident soon. Hence, this Rs 6,000 crore bill for the Indian taxpayers that satisfied no one. But this complete waste of taxpayers’ money enabled the government to provide the Supreme Court judges a face-saving way out of the mess of their own making. 

“Do you know how much it costs every day to keep you in poverty?” Sarojini Naidu once asked Bapu. Bapu’s response is not known but it’s unlikely he was offended, especially since he knew there was truth in what the feisty leader had said. Though Bapu only travelled third class, the railways had to reportedly run special trains for him and reserve an entire compartment for him, given the crowds that flocked to see him. 

In a similar vein, the Indian taxpayers have paid Rs 6,000 crore to enable the Supreme court judges to save face. Bapu, of course, had a transformational impact on our nation. I hope the Supreme Court will also use the occasion to transform the lives of borrowers by enabling easy loan portability, as many experts, including myself, have been urging them to do. That will have a transformational impact on the lives of many borrowers.

The writer heads Fee Only Investment Advisers LLP , a Sebi-registered investment adviser