Credit Control Policy of RBI

11-NOV-2014 12:54

    Credit control is a very important function of Reserve Bank of India as the Central Bank of India. For smooth operation of the economy Reserve Bank of India controls credit through qualitative and quantitative methods. Thus, the Reserve Bank of India exercise control over the credit granted by the commercial bank.

    RBI is the most appropriate body to organize the conception of credit apparent if its functions as the bank of note issue & the custodian of cash reserves of member banks. Superfluous fluctuations in the volume of credit by causing broad fluctuations in the worth of money cause great economic and social unrest in the nation. Thus, Reserve Bank of India controls credit in such a manner, so as to fetch ‘Economic Development with stability’.

    Objectives of Credit control

    • To get hold of stability in the internal price level.
    • To soothe money market of a nation
    • To eradicate business cycles - depression and inflation-by scheming supply of credit.
    • To meet the financial requirements of economy
    • To facilitate economic growth of a nation within specified time period

    Cash Reserve Ratio (CRR)

    The Reserve Bank of India controls credit through alteration in Cash Reserve Ratio of commercial banks. As per section 42(1) of RBI Act, every schedule bank has to uphold a certain percentage reserve of its time & demand deposits. This ratio can be varied from 3 percent to 15 percent as directed by the Reserve Bank. The CRR affects on the lendable funds of commercial banks. If CRR increases, the credit creation capacity of commercial banks decreases. If CRR decreases, the credit creation capacity of commercial banks increases.

    Statutory Liquidity Ratio (SLR)

    As per section 24 of Banking Regulation Act, every schedule Bank has to uphold a minimum of 25 percent as cash of its total deposits. RBI is empowered to change this ratio. It also influences the credit creation capacity of the banks.

    Repo Rate

    Repo rate is the rate at which the Reserve Bank of India i.e. the Central bank of the country lends money to commercial banks in the occasion of any shortfall of funds. Repo rate is used by the monetary authorities to control inflation.

    Reverse Repo Rate

    Reverse Repo rate is the rate at which the Reserve Bank of India borrows money from commercial banks. The rise in the Repo rate will augment the cost of borrowing & lending of banks which will discourage the public to borrow money & will persuade them to deposit.

     

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