is going to expand rapidly. the concern is that this will raise the cost of credit and hence militate against growth. a familiar issue in monetary policy is an inflexion point beyond which there is no trade - off between growth and price stability. is there a similar inflexion point in the growth - financial stability equation? if there is, how do we determine that point? question 3 : does regulation have a role in achieving equity? that takes me to my third question : does regulation have a role in achieving equity? the dichotomy between growth and equity is standard stuff of development economics. for a long time, the orthodoxy was that if we took care of growth, equity followed automatically a la a high tide raising all boats. experience has taught us that reality is more complex. received wisdom today is that growth is a necessary, although not a sufficient, condition for equity. to achieve equity, we need growth that is poverty sensitive – that is growth to which the poor contribute and growth from which the poor benefit. how does this standard question translate in the context of financial sector regulation? this is a question that we in india struggle with. should stability be the sole objective of our regulation, with other instruments being deployed to achieve equity? or should equity be a variable in the objective function of regulation? to seek answers, we must ask a variant of the above questions. is the financial sector inherently equity promoting, or at least equity neutral? our experience in india has been that left to itself, the financial sector does not have a pro - equity bias. indeed, it is even possible to argue that the financial sector does not necessarily reach out to the bottom of the pyramid. our response to counter this bias has been to use regulation to encourage socially optimal business behaviour by financial institutions. let me just list a few of our affirmative action regulations. we have a directed credit scheme, called priority sector lending, whereby all banks are required to ensure that at least 40 per cent of their credit goes to identified priority sectors like agriculture and allied activities, micro, small and medium industries, low cost housing and education1. we have a “ lead bank ” scheme under which there is a designated commercial bank identified for each of the over 600 districts in the country with responsibility for ensuring implementation of a district credit plan that contains indicative targets for flow of credit to sectors of the economy that banks may neglect. we have largely deregulated licencing of bank branches ; banks are now free to

period before 1930, before the great depression, when banking was an exciting and expanding industry. bankers were paid better than in other sectors and therefore banking attracted talent, nurtured ingenuity and promoted innovation. bis central bankers ’ speeches the second phase was the period following the great depression when banking was tightly regulated, far less adventurous and decidedly less lucrative – in other words banking became boring. curiously, this period of boring banking coincided with a period of spectacular progress. the third phase, beginning in the 1980s, saw the loosening of regulation yielding space for innovation and expansion. banking became, once again, exciting and high paying. much of the seeming success during this period, according to krugman, was an illusion ; and the business model of banking of this period had actually threatened the stability of the real sector. krugman ’ s surmise accordingly is that the bank street should be kept dull in order to keep the main street safe. krugman ’ s thesis of “ boring banking ” is interesting, but debatable. it raises two important questions. is making banking boring a necessary and sufficient solution to preventing the excesses of the pre - crisis period? and what will be the cost of making banking boring? both questions cause much confusion, the first because it has too many answers and the second because it has too few. the dodd - frank act of the us is a response to the excesses of investment banks. in europe, the responses are somewhat different. abstracting from the specifics, i will argue that it is neither possible nor desirable to make banking boring. the narrow banking of the 1950s and 1960s was presumably safe and boring. but that was in a far simpler world when economies were largely national, competition was sparse, pressure for innovation was low, and reward for it even lower. bankers of the time, it is said, worked on a 3 – 6 – 3 formula : pay depositors 3 per cent interest, lend money at 6 per cent and head off to the golf course at 3 pm. from the 24 / 7 / 365 perspective of today, that may appear romantic but is hardly practical. the boring banking concept does not appear persuasive even going by more recent evidence and on several counts. first, recall that during the crisis, we saw the failure of not only complex and risky financial institutions like lehman brothers but also of traditional banks like northern rock. what this demonstrates is that a business model distinction cannot be drawn between a utility and a