Credit Control by RBI


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

RBI has power to control the volume of credit created by banks. The RBI through its various quantitative and qualitative techniques regulates total supply of money and bank credit in the interest of economy. RBI pumps in money during busy season and withdraws money during slack season.
(1) Quantitative Credit Control
The Monetary Policy of RBI is not merely one of credit restriction, but it has also the duty to see that legitimate credit requirements are met and at the same time credit is not used for unproductive and speculative purposes RBI has various weapons of monetary control and by using them, it hopes to achieve its monetary policy.
Quantitative Credit Control Tools
In India, the legal framework of RBI’s control over the credit structure has been provided
Under Reserve Bank of India Act, 1934 and the Banking RegulationAct, 1949. Quantitative credit controls are used to maintain proper quantity of credit o money supply in market.
 
 Some of the important general credit control methods are as follows.
 
 Bank Rate Policy
Bank rate is the rate at which the Central bank lends money to the commercial banks for their liquidity requirements. Bank rate is also called discount rate. In other words bank rate is the rate at which the central bank rediscounts eligible papers (like approved securities, bills of exchange, commercial papers etc) held by commercial banks.
Bank rate is important because its is the pace setter to other marketrates of interest. Bank rates have been changed several times by RBI to control inflation and recession. In Feb 2016, the bank rate was 7.75% p.a.
 
Open market operations
 It refers to buying and selling of government securities in open market in order to expand or contract the amount of money in the banking system.This technique is superior to bank rate policy. Purchases inject money into the banking system while sale of securities do the opposite. During last two decades the RBI has been undertaking switch operations. These involve the purchase of one loan against the sale of another or, vice-versa. This policy aims at preventing unrestricted increase in liquidity.
Cash Reserve Ratio (CRR)
 
The Gash Reserve Ratio (CRR) is an effective instrument of credit control. Under the RBl Act of, l934 every commercial bank has to keep certain minimum cash reserves with RBI. The RBI is empowered to vary the CRR between 3% and 15%. A high CRR reduces the cash for lending and a low CRR increases the cash for lending. The CRR has been brought down from 15% in 1991 to 7.5% in May 2001. It further reduced to 5.5% in December 2001. It stood at 5% on January 2009. In January 2010, RBI increased the CRR from 5% to 5.75%. It further increased in April 2010 to 6% as inflationary pressures had started building up in the economy. As of Feb 2016, CRR was 4%.
 
Statutory Liquidity Ratio (SLR)
Under SLR, the government has imposed an obligation on the banks to ,maintain a certain ratio to its total deposits with RBI in the form of liquid assets like cash, gold and other securities. The RBI has power to  fix SLR in the range of 25% and 40% between 1990 and 1992 SLR was as high as 38.5%. Narasimham Committee did not favour maintenance of high SLR. The SLR was lowered down to 25% from 10thOctober 1997.It was further reduced to 24% on November 2008. In Feb 2016 SLR was 21.5%.
 
Repo And Reverse Repo Rates
In determining interest rate trends, the repo and reverse repo rates are becoming important. Repo means Sale and Repurchase Agreement. Repo is a swap deal involving the immediate Sale of Securities and simultaneous purchase of those securities at a future date, at a predetermined price. Repo rate helps commercial banks to acquire funds from RBI by selling securities and also agreeing to repurchase at a later date.
 
Reverse repo rate is the rate that banks get from RBI for parking their short term excess funds with RBI. Repo and reverse repo operations are used by RBI in its Liquidity Adjustment Facility. RBI contracts credit by increasing the repo and reverse repo rates and by decreasing them it expands credit. Repo rate was 6.75% in March 2011 and Reverse repo rate was 5.75% for the same period. On Feb 2016 repo rate was 6.75% and Reverse repo rate was 5.75%
 
(2) Qualitative Credit Control
 
Under Selective Credit Control, credit is provided to selected borrowers for selected purpose, depending upon the use to which the control try to regulate the quality of credit - the direction towards the credit flows.
The Selective Controls are as follows.
 
Ceiling On Credit
The Ceiling on level of credit restricts the lending capacity of a bank to grant advances against certain controlled securities.
 
Margin Requirements
A loan is sanctioned against Collateral Security. Margin means that proportion of the value of security against which loan is not given. Margin against a particular security is reduced or increased in order to encourage or to discourage the flow of credit to a particular sector. It varies from 20% to 80%. For agricultural commodities it is as high as 75%. Higher the margin lesser will be the loan sanctioned.
 
Discriminatory Interest Rate (DIR)
Through DIR, RBI makes credit flow to certain priority or weaker sectors by charging concessional rates of interest. RBI issues supplementary instructions regarding granting of additional credit against sensitive commodities, issue of guarantees, making advances etc. .
 
Directives
The RBI issues directives to banks regarding advances. Directives are regarding the purpose for which loans may or may not be given.
 
Direct Action
It is too severe and is therefore rarely followed. It may involve refusal by RBI to rediscount bills or cancellation of license, if the bank has failed to comply with the directives of RBI.
 
Moral Suasion
Under Moral Suasion, RBI issues periodical letters to bank to exercise control over credit in general or advances against particular commodities. Periodic discussions are held with authorities of commercial banks in this respect.


Tuesday, 09th Feb 2016, 04:53:55 AM

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