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The need for increased interest-free banking in India

By Syed Zahid Ahmad

Indian Government’s expectation to get around 20% of demonetized currencies has not come true. Due to demonetization the Public Final Consumption Expenditure has reduced drastically affecting the GDP growth. To counter this effect, the Government is under pressure stimulating the economy through increasing Public Expenditure. Since Government has not received the estimated demonetized currencies to convert them into Public Income, the Government certainly needs more funds to spend for infrastructure development and spending upon flagship program.
The record high public debt does not allow the Government to borrow any more money because the interest burden already requires the Government to pay 1/4th of Public revenue on repayment of debts along with interest. So, Government can just afford interest free finance that do not carry interest burden. This could be possible if Government invites investment by mode of equity and lease finance for infrastructure development in India.
demonetisation-day-51

After increasing the interest rate by Federal Reserve the US based investors have pulled their hands. Other capital surplus economies are China and oil rich nations. China has already ditched India in part of commitment to invest in India. If India has to invite Interest free finance, it needs to open gateway for Islamic Finance to draw big investors from Gulf market. The investors in Gulf have been demanding for liberalized regulations for Islamic Finance, but on 9th December State Finance Minister has dejected RBI’s proposal to open Interest-free windows in Indian banks.
If Government opens gateway for Islamic Finance in India, the surplus capital hold by Gulf economies may draw investment opportunities in India without adding interest burden upon Government. Presently India needs huge investments for following specific purposes –
1. To connect proposed smart cities with all nearby villages through roadways.

2. Low cost affordable housing for poor people.

3. Agro processing industries to generate employment in rural economy.

4. Keep the work ahead to provide required electricity supply in rural economy.

5. Development of Indian railways.

6. Developing air routes between metros with other cities in India.

7. Providing high bandwidth internet to realize digitalization in Indian economy.

8. Investment into Indian Banks enabling them meets CRAR under BASEL–III standard.

9. Micro equity to Indian MSMEs enabling to compete with Chinese MSMEs.
So, Indian Government needs to revisit RBI’s proposal about Interest-free banking and liberalize regulations to invite foreign investments into Indian economy. Especially Indian banks need infusion of additional capital to upgrade their CRAR to meet BASEL III norms. This would not be possible until Indian banks are allowed to deal with Interest –free financial products. If Indian banks be allowed to open interest-free windows catering products based on principles of equity and lease mechanism, this would enable them draw sought investments from gulf economies likely to invest in Indian banking.
The expectation that Indian Government would infuse additional capital to Indian Banks after demonetization is not coming true and Indian banks are in need of huge capital investment as well as expanding additional assets to reduce NPAs. This would be possible if Indian banks are allowed to provide Interest-free financial products (equity and lease base products) to their customer base. So, there is utter need that Indian Government allows Indian banks deal in Interest-free finance to attract foreign investments in Indian economy and specially in Indian Banks.
(Syed Zahid is Consultant at Bhartiya Samruddhi Investment and Consulting Services Ltd.)

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