Credit control methods by the Reserve Bank of India

Quantitative Credit Control Methods

In this method the central bank controls the quantity of credit given by commercial banks by using the following weapons.

Bank Rate

It is the rate at which bills are discounted and rediscounted by the banks with the central bank. During inflation, the bank rate is increased and during deflation, bank rate is decreased.

Open Market Operation

Direct buying and selling of government securities by the central bank in the open market is called as open market operations. During inflation the securities are sold in the market by the Central Bank. During the deflation period, the central bank buys the bills from the market and pays cash to commercial banks.

Variable reserve ratio

Every commercial bank has to keep a minimum cash reserve with the Reserve Bank of India depending on the deposits of the commercial bank. During inflation this ratio is increased and during deflation the ratio is decreased.

Qualitative Credit Control Methods

This is also called as selective credit control methods. The following weapons are used under this method:

Fixation of Margin

Banker lends money against price of securities. The amount of loan depends upon the margin requirements of the banker. The word margin here it means the difference between the loan value and market value of securities.

The central bank has the power to change the margins, which limits the amount of loan to be sanctioned by the commercial banks. During inflation higher margin would be fixed and during deflation lower margin would be fixed.

Regulation of consumer credit

Customer gets this type of foreign exchange reserves and exchange value of the rupee in relation to other country’s currencies. Currencies should be exchanged only with RBI or its authorized banks.

Direct action

To regulate the volume of bank loans the central bank may issue directives to the commercial banks from time to time. The directives may be in the form of oral or written statements or appeals or warnings. By means of these directives the RBI may decrease or increase the volume of credit.

Rationing of credit

It is a method of regulating and controlling purpose for which credit is guaranteed by the commercial bank. It may be of two types.

Variable portfolio ceilings

In this method the central bank fixes a maximum amount of loans and advances for every commercial bank.

Variable capital assets ratio

In this method the central bank fixes a ratio, which the capital of the commercial bank must bear to the total assets of the bank. By changing these ratio the credit can be regulated.

Moral Suasion

This is a gracious method followed by RBI. In this method the RBI gives advices and suggestions to the bankers to follow the instructions given by it, by sending letters and conducting meeting of the Board of Directors.

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