Financial repression typically performed as the interest rate non-marketization and this system causes the resources allocation low efficiency and somewhat distorted. For example, it is not wise to keep the stage of bank’s net interest margin by artificially lowering the bank’s saving and lending rate. Because this behavior is actually subsidizes borrowers and banks within depositors. Additionally, when in high inflation, this benefit transportation is closer to “plunder”.
Furthermore, owing to the artificially low level of interest rates on bank loans, there has been an excess demand for the bank loans which makes the loans more scarcity. Compare to the small and medium-sized enterprises, the larger ones and government-backed borrowers are more likely to get a loan, so that widened the gap between rich and poor. To make even worse, this may limit the normal credit risk pricing and fund the financing capital asset bubbles which leads to an irrational resource allocation.
The other form of financial repression includes credit limit control and lending scale limit. Besides traditional limit control, the supervisory authority is more concentrated on some specific borrowers, products and areas, institutionally and regularly. Such supervised limit control has become the decisive factor in affecting the bank’s credit business.
In a word, there is no innovation for this financial institution under circumstances of such bound and direct-control financial system, since everything is keep on the rails and acted regularity and sequentially.
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