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banking

• banking crisis Arun Jaitley says the RBI had
failed to stop lending spree during UPA rule

pressures or even a full-blown crisis
that eventually require sharper mon-
etary contractions; excessive lowering
of interest rates or relaxation in bank
capital and liquidity requirements can
lead to greater credit creation, asset-
price inflation, and semblance of strong
economic growth in the short term, but
excessive credit growth is usually ac-
companied by lending down the quality
curve which triggers mal-investment,
asset- price crashes, and financial crises
in the long term.
Sweeping bank loan losses under
the rug by compromising supervisory
and regulatory standards can create a
façade of financial stability in the short

The Reserve Bank
of India is not
directly subject
to political time
pressures and the
acquires urgency; where manifestos over business and financial cycles, and induced neglect
cannot be delivered upon, populist al- hence, have to peer into the medium
ternatives need to be arranged with to long term. Unsurprisingly, central of the future; by
immediacy. banks strive to build credibility through virtue of being
In contrast, a central bank plays a a series of difficult choices that reflect
Test match, trying to win each session sacrificing short-term gains for long- nominated rather
but importantly also survive it so as to term outcomes such as price or finan- than elected
have a chance to win the next session, cial stability.
and so on. In particular, the central Another explanation as to why the
bank is not directly subject to political central bank is separate from the gov-
time pressures and the induced neglect ernment relates to the observation that run, but inevitably cause the fragile
of the future; by virtue of being nomi- much of what the central bank man- deck of cards to fall in a heap at some
nated rather than elected, central bank- ages or influences — money creation, point in future, likely with a greater tax-
ers have horizons of decision- making credit creation, external sector man- payer bill and loss of potential output.
that tend to be longer than that of gov- agement, and financial stability — in- While not always the case, often
ernments, spanning election cycles or volves potential front-loaded benefits the required interventions for stable
war periods. While they clearly have to to the economy but with the possibil- growth are structural reforms by the
factor in the immediate consequences ity of attendant “tail risk” in the form government with upfront fiscal outlay;
of their policy decisions, central bank- of back-loaded costs from financial ex- however, these may compromise popu-
ers can afford to take a pause, reflect, cess or instability. For example, greater list expenditures or require displeasing
and ask the question as to what would supply of money can facilitate ease of incumbents. As a result, it might seem
be the long-term consequences of financial transactions, including the fi- as an expedient solution to the govern-
their, as well as government’s, policies. nancing of government deficits, but this ment to ask/task/mandate/direct the
Indeed, by their mandate central banks can cause economy to over-heat in due central bank to pursue strategies that
are committed to stabilise the economy course and trigger (hyper-) inflationary generate short-term gains but effec-

Tehelka / 15 november 2018 43 www.Tehelka.com

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