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Judicil review of central bank action could impact several stakeholders at the same time. This type of problems could be termed as polycentric problems. The article disusses the issues with judicial reviews in such cases.

Judicial review of central bank actions

• The Supreme Court is currently considering if the RBI should extend the COVID-19 induced loan moratorium and waive the accrued interest on interest.
• Earlier this year, the court struck down an RBI circular imposing a ban on virtual currencies.
• Last year, it quashed RBI circular that mandated banks and financial institutions to initiate insolvency proceedings against defaulting companies with significant loan exposures.

Unsuitable for adjudication

• Legal scholars have long recognised that certain disputes are inherently unsuitable for adjudicative disposition.
• The most influential arguments on this subject were advanced by the American legal philosopher Lon Luvois Fuller.
• Fuller compared polycentricity with a spider’s web — a pull on one strand distributes the tension throughout the web in a complicated pattern.
• Applied to adjudication, polycentric problems normally involve many affected parties and a somewhat fluid state of affairs.
• The range of those affected by the dispute cannot easily be foreseen and their participation in the decision-making process by reasoned arguments and proofs cannot possibly be organised.
• As a result, the adjudicator is inadequately informed and cannot determine the complex repercussions of a proposed solution.

Complexity of functioning of bank

• Disputes involving certain central bank functions are highly polycentric and are unsuitable for resolution through judicial review.
• For example, consider monetary policy function.
• This involves varying short-term interest rate to control supply and demand of money in the economy, which, in turn, influences economic activity and inflation.
• If judicial review supplants the central bank’s decision on this rate with the decision of the adjudicator, the repercussions would affect every single borrower and saver.
• Yet, the adjudicator can neither offer a meaningful hearing to all those affected parties, nor can he effectively process all the necessary information to determine an optimal solution.
• Evidently, disputes about monetary policy rate are highly polycentric and are better resolved outside the court.\

Which actions of banks should involve judicial review

• Not all disputes involving central bank functions are polycentric.
• For example, a dispute regarding imposition of a pecuniary penalty by a central bank could be resolved through judicial review.
• If the adjudicator finds the central bank to be correct, it need not interfere.
• If the adjudicator finds the central bank to be incorrect, it could modify or overturn the central bank’s decision.
• Clearly, judicial review could be effectively used to resolve bipolar disputes involving the central bank if they exhibit low polycentricity.

Need for striking the balance

• Monetary policy and pecuniary penalties are at two extreme ends of the polycentricity spectrum.
• There are, however, various central bank functions of intermediate polycentricity.
• Consider prudential regulations such as bank capital regulation.
• If judicial review supplants provisions of such regulations with the decision of the adjudicator, it may appear to directly impact only the banks and nobody else.
• But in reality, it could impact bank lending, which, in turn, would have complex repercussions on the entire credit market and risk-taking abilities across the economy.
• Effective hearing of all affected parties, directly or indirectly, would, therefore, be impossible.
• Consequently, some bipolar disputes involving the central bank may be too polycentric for meaningful resolution through judicial review.
• Judicial review could be purely procedural — the adjudicator could merely review whether the central bank’s action is within its legal mandate or not.
• The adjudicator could at most nullify a procedurally invalid central bank action, but may never supplant the decision of the central bank with his own.

Consider the question “Judicial review of the central bank actions could be different from the other judicial reviews. Examine the issues in such reviews by the judiciary.”

Conclusion

Adopting polycentricity test within constitutional jurisprudence would help sustain the legitimacy of judicial review while retaining the accountability of technocratic institutions such as the central bank.