Credit Control by RBI

1. Credit Control by RBI By: Vishal Chopra

2. Credit Definition • A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date. When a consumer purchases something using a credit card, they are buying on credit (receiving the item at that time, and paying back the credit card company month by month). Any time when an individual finances something with a loan (such as an automobile or a house), they are using credit in that situation as well. • The borrowing capacity of an individual or company.

3. Credit Creation Process Central Bank is the first source of money supply in the form of currency in circulation. The Reserve Bank of Indian is the note issuing authority of the country. The RBI ensures availability of currency to meet the transaction needs of the economy. The Total  Volume of money in the economy should be adequate to facilitate the various types of economic activities such as production, distribution and consumption. The commercial banks are the second most important sources of money supply. The money that commercial banks  supply is called credit money. 

4. Contd.. The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act. After maintaining the required reserves, the bank can lend the remaining portion of primary deposits. Here bank's lend the money and the process of creditcreation starts. 

5. Credit Control The reserve Bank is the most appropriate body to control the creation of credit. For smooth functioning of the economy RBI control credit through, •Quantitative or General Methods.•Qualitative or selective methods.

6. Contd.. Quantitative or General Methods 1) Cash Reserve Ratio (CRR) 2) Statutory Liquidity Ratio (SLR) 3) Bank Rate 4)Open Market Operation (OMO) 5)Repo and Reverse repo rate

7. Cash Reserve Ratio (CRR) CRR, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. Current CRR = 6% Statutory Liquidity ratio Banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements Current SLR=24%

8. Contd.. Bank rate Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. Current Bank rate=6% Open Market Operation An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations.

9. Contd.. Repo rate & Reverse repo rate A repurchase agreement or ready forward deal is a secured short-term(usually 15 days) loan by one bank to another against government securities. Repo rate=6.25 % Reverse Repo=5.25 %

10. Qualitative or selective methods 1) Selective credit control2) Moral Persuasion3) Rationing of Credit4) Direct action

11. Selective credit control The RBI has been operating selective controls since 1956 in respect of certain commodities which are in short supply. These controls are being enforced with the objective to discourage the use of bank finance so as to check an undue rise in their prices. Advances against: Foodgrains, pulses, Oilseeds, Vegetable oils, Sugar, Cotton and Kapas have been covered be selective credit control. The framework of selective credit consist of following instruments: • Fixation of party-wise ceiling on credit. • Imposition of minimum margin. • Fixation of minimum lending rate.