Credit Control measures of Reserve Bank of India - General Knowledge Today

Credit Control measures of Reserve Bank of India

Credit control is most important function of Reserve Bank of India. Credit control in the economy is required for the smooth functioning of the economy. By using credit control methods RBI tries to maintain monetary stability.

There are two types of methods:

  1. Quantitative control to regulates the volume of total credit.
  2. Qualitative Control to regulates the flow of credit

Quantitative methods:

  1. Manipulation of Bank Rate :
    Bank rate is the rate at which the reserve bank is prepared to buy or re discount bills of exchange or other commercial paper eligible for purchase under the act.Increase the bank rate reduces the credit creation power of banks and decrease in bank rate increases the credit creation power of the banks.
  2. Open market operations :
    The term open market operation refers to purchase or sale of government securities by the central bank.Purchase of securities by the central bank in open market reduces in multiple expansion of credit and sale of securities leads to credit contraction by the bank.
  3. Manipulation of Cash reserve ratio : CRR
    The central bank can control credit by variation of cash reserve ratio.A raise in this ratio reduces the credit creation ability of the banks and results it in increasing the credit creation ability of the banks.
  4. Repo & Reverse Repo
  5. Altering Statutory Liquidity Ratio

Qualitative Methods:

  1. Selective Qualitative Credit controls
    With the help of selective credit control methods the central bank can control and direct the flow of credit in the country. Rationing of credit is involved in this. These control regulates the use of credit by discriminating between essential and non essential purposes.
  2. Moral persuasion and direct action :
    Central bank may refuse to grant further loans or re discount of bill for the banks to control their credit creation ability.The central bank may request banks not to use the accommodation of obtained for financing speculative or non essential transactions.

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Last Updated: November 22, 2013

Comments

  1. Abijith A says:

    Great Work.... Sir !!!!!

  2. avinash says:

    Good Work.......

  3. ajith says:

    Although it is great to see people praising the author of this excellent site, however I believe that the author would have made this "comments" section accessible for people to discuss and not always praise.

    He has recvd enough praises now please DISCUSS!!

  4. Admin says:

    :) I am the first person to agree with you Ajith. Infact I also feel awkward for too much appreciation, but infact everybody is welcome with bricks and bouquets. I feel that now we should start discussing but the limitations of a blogger is that It can not work as a forum, so probably the best thing would be to come up with a forum.

  5. Anonymous says:

    plz tell me hw Altering SLR help in Credit Control????? @ singhseema_ictm@yahoo.in

  6. sweety agarwal says:

    both through bank rate and repo rate ,bank gets money from central bank.which is preferred and why?

  7. rajni says:

    why there is 1% difference between repo rate and revese repo rate

  8. t.thejas says:

    thanks a lot. i studied this for my examination.

    ---------------
    by a 'tamilan'

  9. Ajanta das says:

    Such type of articles benefit students of competitive exams a lots.We are very hungry of such articles to clear our concept about our economy. Thank u.................................. VERY MUCH....................

  10. prabaharan says:

    Good working and thank you sir

  11. purvanshi says:

    thankz .. instead of my book.. i studied frm dis.. short n sweet. thanku once again

  12. Msafiri Mabera says:

    Good article for all students and practitioners in law of banking

  13. vicky says:

    Please send more notes of economics with proper explanation and examples I will be thankful to you