Financial repression
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Financial repression is a set of government rules that push people's savings towards the government at interest rates below the market rate. The main tools are caps on interest rates, directed lending (the state tells banks whom to lend to) and high compulsory holdings of government bonds. The government gets cheap loans, but savers earn less and banks have less money for productive lending. Over time this hurts bank profits and the quality of their loans.
Example
After the 1969 bank nationalisation, India's rules became steadily tighter. By around 1990-91, the Statutory Liquidity Ratio (SLR), the share of deposits banks must hold in safe assets such as government bonds, peaked at 38.5%. The Cash Reserve Ratio (CRR), the share kept as cash with the RBI, reached 15%. The Narasimham Committee I (1991) recommended lower SLR and CRR and freer interest rates, which began to unwind this repression.
Don't confuse with
- Social banking: the 1969 goal of spreading branches and credit to farms and small industry. Financial repression is the cost that came with it: cheap, forced funding for the government.
Related concepts
- Scheduled bank
- Public sector bank
- Urban cooperative bank
- Universal banking
- Narrow banking
- Islamic banking