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TARGET 2017 (PRE+MAINS) What are RBIs qualitative and
quantitative instruments of credit control? May 6, 2010No comments The
government through the reserve bank of India employs the monetary
policy as an instrument of achieving the objectives of general economic
policy. The main objectives of the monetary policy are as follows:
Regulation of monetary growth and maintenance of price stability
Ensuring adequate expansion of credit Assist economic growth
Encourage flow of credit into priority and neglected sectors
Strengthening of the banking system of the country The quantitative or
general measures influence the total volume of the credit while the
qualitative measures influence the selective or particular use of credit.
Reserve Bank of India has the power to influence the volume of credit
created by banks in India. The banking regulation act 1949 says that the
Reserve Bank of India can ask any particular bank (or even all the banks
i.e. banking system of the country) to not to lend to particular groups/
persons. Apart from this RBI is armed with weapons to control the
money market in India. For example each bank has to get a license from
RBI to do banking business in India and this license is always subject to
cancellation by RBI provided the bank does not fulfill the requirements
stipulated by RBI. Each scheduled bank needs to send a weekly report
to RBI which shows its assets and liabilities. The quantitative measures
of credit control are : Bank Rate Policy: The bank rate is the Official
interest rate at which RBI rediscounts the approved bills held by
commercial banks. For controlling the credit, inflation and money supply,
RBI will increase the Bank Rate. Current Bank Rate is 6%. Open Market
Operations: OMO The Open market Operations refer to direct sales and
purchase of securities and bills in the open market by Reserve bank of
India. The aim is to control volume of credit. Cash Reserve Ratio: Cash
reserve ratio refers to that portion of total deposits in commercial Bank
which it has to keep with RBI as cash reserves. The current Cash
reserve Ratio is 6%. Statutory Liquidity Ratio: It refers to that portion of
deposits with the banks which it has to keep with itself as liquid
assets(Gold, approved govt. securities etc.) . the current SLR is 25%. If
RBI wishes to control credit and discourage credit it would increase CRR
& SLR. Qualitative measures: Qualitative credit is used by the RBI for
selective purposes. Some of them are Margin requirements: This refers
to difference between the securities offered and and amount borrowed
by the banks. Consumer Credit Regulation: This refers to issuing rules
regarding down payments and maximum maturities of installment credit
for purchase of goods. Guidelines: RBI issues oral, written statements,
appeals, guidelines, warnings etc. to the banks. Rationing of credit: The
RBI controls the Credit granted / allocated by commercial banks. Moral
Suasion: psychological means and informal means of selective credit
control. Direct Action: This step is taken by the RBI against banks that
dont fulfill conditions and requirements. RBI may refuse to rediscount
their papers or may give excess credits or charge a penal rate of interest
over and above the Bank rate, for credit demanded beyong a limit.
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