In January 2018, on a matter relating to the understanding of free-rider problem, thirty-six eminent economists, including professors of law and economics, three Nobel laureates, two recipients of the American Economic Association’s prestigious John Bates Clark Medal, and two past-presidents of the American Economic Association filed an amici curiae brief (impartial advisers to a court of law) before the Supreme Court of the US, in the Janus v. AFSCME labour-law related case. The Supreme Court recognized that it needed to understand the free-riding problem holistically before it could pass a judgment.
Not only do the US courts seek out expert testimony routinely in deciding upon cases, the testimonies of the experts are subjected to the exacting Daubert standards which govern the admissibility of expert witness testimony. In 2016, a PWC study revealed that in 78 per cent of cases, appellate courts in the US agreed with lower courts on Daubert rulings of financial experts. In short, expert testimony, especially in areas where the courts may not possess deep expertise, are common, expected and standard.
Thus, in the US courts or hearings by SEC (Securities and Exchange Commission) in cases involving economics, finance, banking or capital markets, it is routine to call upon expert-testimonies from eminent professors and researchers.
Government of India routinely enlists academics and researchers from leading academic institutions as experts in various national level committees and institutions and other policy making bodies, including, for example, the Monetary Policy Committee or even the board of the Reserve Bank of India.
I have no doubt that Indian courts too perhaps call upon expert testimony when required from time to time. But perhaps this is much less so than, say in the US, because in my forty odd years in Indian academia, I have not once come across an instance when I knew of an eminent economist or finance academic (and I know many, if not most) being called upon to testify in any court of law on an economic or financial point impacting a decision.
The current case of bank-loans moratorium is a case in point. The Supreme Court has questioned the RBI on their requirement that interest shall continue to accrue on bank loans after the three-month moratorium period. The highest court of the land seemingly wonders what relief is ultimately being granted to those affected by COVID lock-down and slowdown, if loan interest continues to accrue for the moratorium period.
Basic principles of economics governing interest rates centre around the idea of real time value of money. In its simplest form, a bank borrows money from depositors (call them Peter) and lends it to sundry entrepreneurs (call them Paul) who need credit. The bank pays interest to the depositor on compounded basis. And it charges a little higher interest rate from the borrowers, also on a compounded basis. There is no such thing as simple interest (beyond Class V text books) in real-life, no matter how vilified the idea of compounded interest may be, thanks to Shakespeare.
The spread between the borrowing and lending rate of interest is what pays for the operating expenses of running a bank. And leftover surplus, if any from this spread goes to the owners of the bank, who take significant risk on their capital invested in the bank.
So the only way a bank can favour the borrowers (Paul) by waiving interest, is by robbing Peter, the lenders (or depositors) to bank. Any hit on the bank on account of interest loss is bound to directly hit the depositors.
If COVID has caused unforeseen closure of businesses and caused them enormous losses, it is equally true that depositors have lost their jobs and livelihoods. If banks waive off the interest for the borrowers for say the moratorium period, how are they supposed to pay the interest to their lenders for the same period, or service their shareholders? Unless it is the honourable SC’s case that the Peter should take a hit so that Paul will remain protected.
The writing off of the farmers’ loans from time to time by politicians doesn’t mean that it is all right to do so. The fact is such write-offs are utterly wrong. The least a government should do is to pay off that loan on behalf of the farmers to the banks. Of course even so, that “subsidy” to the farmer comes from the tax-paying public at large. But that’s a cost any citizen living in any country has to pay for the larger good, whether one likes it or not.
Perhaps the SC is driven by a desire to help the severely hit population of the businessmen. But to do so at the cost of depositors can hardly be the solution. Perhaps a judicial directive asking the Government pays off the banks from their own coffers makes for a much stronger case.
The Government may argue that it can hardly afford such a large payment to the banks on behalf of the borrowers. But that would hardly be a justifiable reason for the Government to shift its burden on to the hapless depositors, rather than spread it around the larger economy as a whole.
Yes, at a crunch, the Government may have to print currency (against the temple gold reserves?) to pay off the banks which in turn may cause inflation to go up, rupee to weaken, and such. But that’s the macro-economic cost of COVID on the nation as a whole. It would be unfair to shift that cost on the shoulders of depositors alone.
If the SC has called any eminent economists or finance experts, even if not Nobel Laureates, we do not know who they are. Perhaps the press should identify such experts consulted by the SC and make those names public so that the depositors and public are better informed and reassured that some informed opinions have influenced the judicial pronouncements.
After all, for the depositors, their life’s savings are at stake here, given that the capital markets are hardly a sustainable option for the common man at a time like this.
DISCLAIMER : Views expressed above are the author’s own.