Credit Control measures of Reserve Bank of India
Credit control is most important function of Reserve Bank of IndiaThe Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 with ...... Credit control in the economyeconomy 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:
Quantitative control to regulates the volume of total credit.
Qualitative Control to regulates the flow of credit
Manipulation of Bank Rate :
Bank rate is the rate at which the reserve bank is prepared to buy or re discountWhen a security is quoted at a price below its nominal or face value, it is said to be at a discount. bills of exchangeRegulated market place where capital market products are bought and sold through intermediaries. or other commercial paperA short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually ..... 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.
Open market operationsOpen market Operation refers to the purchase and sale of the Government securities by the Reserve bank of India from / to public on its ..... :
The term open market operationPurchase or sale of government securities by the monetary authorities (RBI in India) to increase or decrease the domestic money supply. 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.
Manipulation of Cash reserve ratioThe Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of India, with reference to the ..... : 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.
Altering Statutory Liquidity Ratio
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.
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.