WHETHER INTEREST-FREE LOANS WOULD BE A BOON OR BANE TO THE COUNTRY'S ECONOMY?: VED PRAKASH

 

As we all know that the major loans provider in our country is RBI i.e., the central bank of India and commercial banks under which a lot many processes are involved in the process of money creation and the commercial banks basically create money/credit on the basis of cash reserves which is set up by or changed by the central bank from time to time[1]. It is by maintaining some amount of the deposits as cash reserves that banks are able to create loans or credit. Through monetary policy, the central bank ensures the equal amount of money supply in the economy so that the situation of excess or deficient demand is corrected and similarly the government also performs the same kind of functions by undertaking fiscal policy[2] and thus in a way the government is also able to perform the functions of giving loans to the general public if the need arises and when there is some disbalance in the aggregate demand apart from the traditional sources i.e., banks which generally provides loans.

Boon or bane

In India, people rely a lot on the credit offered from the banks as well as from the government that’s why it can be seen that the demands for the product and services by the public at large is highly depended on the increase or decrease in the money supply by the banks and the government. When the credit offered by the banks and the government increases the aggregate demand in the economy also increases and when the credit offered is reduced the demand also get decreased. The various purposes for which loans are majorly taken by the people include child’s education, the money required for marriage, medical emergency, for purchasing a house, for investment in the business etc.[3] As we all know loans or credit are generally offered at interest means the principal as well the interest amount needs to be repaid by the borrower at the specified time or else the borrower might face repercussions and interest-free loans means where the borrower only has to repay the principal amount and not the interest and this interest factor[4] can also be taken as one of the main factors which discourages many people to take loans from the banks as the interest rate offered by them is too high and taking the note of our country where the economy is still developing and the income or spending potential of the people is still not high, the interest factor somewhere or the other acts as a deterrent in taking loans for many of the people and thus in country like India the interest free loans are utmost needed, however it is not free from the disadvantages as there are many who will start taking it for any inessential purposes and will also become complacent on the loans and that can further lead to many defaults on the part of the borrower and thus it might increase the burden to the provider of the loans and non-performing assets of the banks can increase, so if our country wants to go ahead in this arena where interest free loans can be offered, its citizens have a great role to play in it or if not then the loans provider have to be cautious and should be offered to those who are in need of it the most. Interest-free loans can be advantageous as it is very much required in our country especially for some specific sectors who with interest finds difficult to borrow loans and thus their growth always remains constant. Initiatives like the one which was recently taken by the education minister in providing interest-free loans to six institutions[5] to promote research and academics must be encouraged as it will encourage them to ameliorate and mark their presence in the global world, however, its ambit should be encouraged. There are many other sectors and people who are in need of such interest-free loans and one of them is the students who are pursuing their higher education or want to pursue their higher education. Providing such sort of loans will be very much beneficial and a good step as there are many students in our country who discontinue their further education just for the reason of not having enough money or are unable to take loans because of the high-interest rate[6]. It can be beneficial for the MSMEs as well as they are the key growth drivers of the country but because of the financial constraints, they cannot contribute much and always finds it difficult to operate. Such loans can also be used to fund the startups by women or self-help groups[7] to encourage and empower them for taking more initiatives. Therefore, it can be concluded that interest-free loan would be a boon for our country as there are many people and sectors who are in need of it and loans like these can empower them a lot, however, it should be used in a cautious and restricted manner or else if it will be given to all then it might happen that it can lead into materialistic spending and the very essence of it might get lost.

 

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[1] Economics Discussion, Credit Creation by Commercial Banks and Its Limitations, https://www.economicsdiscussion.net/banks/credit-creation-by-commercial-banks-and-its-limitations/4155 (last visited Aug. 28, 2020)

[2] Economics Help, Difference between monetary and fiscal policy, https://www.economicshelp.org/blog/1850/economics/difference-between-monetary-and-fiscal-policy/ (last visited Aug. 28, 2020)

[3] CNBC TV18, Loans: boon or bane?, https://www.cnbctv18.com/personal-finance/loans-boon-or-bane-1498341.htm (last visited Aug. 28, 2020)

[4] Investopedia, Zero Interest Loans: Why You Should Beware, https://www.investopedia.com/articles/personal-finance/081216/zero-interest-loans-why-you-should-beware.asp   (last updated Dec. 2, 2019)

[5] NDTV, Government Announces Rs 2,000 crore worth interest free loans for IITs, https://www.ndtv.com/education/government-announces-rs-2-000-crore-worth-interest-free-loan-for-iits-1781455 (last visited Aug. 29, 2020)

[6] India Today, Annual budget for interest-free education loans would increase to Rs 2,200 crore in next three years, announces Javadekar, https://www.indiatoday.in/education-today/news/story/annual-budget-for-interest-free-education-loans-would-increase-to-rs-2-200-crore-in-next-three-years-announces-javadekar-1348527-2018-09-25  (last updated Sep. 25, 2018, 15:26 IST)

[7] Firstpost, Andhra Pradesh govt re-launches zero interest loan scheme for women SHGs; releases Rs 1,400 cr, https://www.firstpost.com/business/andhra-pradesh-govt-re-launches-zero-interest-loan-scheme-for-women-shgs-releases-rs-1400-cr-8296741.html  (last updated Apr.24, 2020, 17:56:43 IST)