Role of RBI in Control of Credit

• HISTORY

• INTRODUCTION

• STRUCTURE

• FUNCTIONS

• DEMONETISATION

• CREDIT CONTROL

• NEED

• LIMITATIONS

• CURRENT RATES

• OBJECTIVE

• CONCLUSION

• BIBLIOGRAPHY
 HISTORY OF RESERVE BANK OF
INDIA

The Reserve Bank of India was established following the Reserve Bank of India Act
of 1934. Though privately owned initially, it was nationalised in 1949 and since
then fully owned by Government of India . The Reserve Bank of India was founded
on 1 April 1935 to respond to economic troubles after the First World War. The
Reserve Bank of India was conceptualised based on the guidelines presented by
the Central Legislative Assembly which passed these guidelines as the RBI Act
1934. RBI was conceptualised as per the guidelines, working style and outlook
presented by Dr. B. R. Ambedkar in his book titled “The Problem of the Rupee –
Its origin and its solution” and presented to the Hilton Young Commission. The
bank was set up based on the recommendations of the 1926 Royal Commission
on Indian Currency and Finance, also known as the Hilton–Young
Commission. The original choice for the seal of RBI was the East India
Company Double Mohur, with the sketch of the Lion and Palm Tree. However, it
was decided to replace the lion with the tiger, the national animal of India. The
Preamble of the RBI describes its basic functions to regulate the issue of bank
notes, keep reserves to secure monetary stability in India, and generally to
operate the currency and credit system in the best interests of the country. The
Central Office of the RBI was established in Calcutta (now Kolkata) but was moved
to Bombay (now Mumbai) in 1937.

The administration nationalised commercial banks and established, based on

the Banking Companies Act, 1949 (later called the Banking Regulation Act), a
central bank regulation as part of the RBI. Furthermore, the central bank was
ordered to support economic plan with loans .

The national economy contracted in July 1991 as the Indian rupee was
devalued. The currency lost 18% of its value relative to the US dollar, and
the Narsimham Committee advised restructuring the financial sector by a
temporal reduced reserve ratio as well as the statutory liquidity ratio. New
guidelines were published in 1993 to establish a private banking sector. This
turning point was meant to reinforce the market and was often called neo-
liberal. The central bank deregulated bank interests and some sectors of the
financial market like the trust and property markets. This first phase was a success
and the central government forced a diversity liberalisation to diversify owner
structures in 1998.
 RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is India's central bank, which controls the issue
and supply of the Indian rupee. RBI is the regulator of entire Banking in India. RBI
plays an important part in the Development Strategy of the Government of India.

RBI regulates commercial banks and non-banking finance companies working in

India. It serves as the leader of the banking system and the money market. It
regulates money supply and credit in the country. The RBI carries out India's
monetary policy and exercises supervision and control over banks and non-
banking finance companies in India. RBI was set up in 1935 under the Reserve
Bank of India Act,1934.

Until the Monetary Policy Committee was established in 2016, it also

controlled monetary policy in India. It commenced its operations on 1 April 1935
in accordance with the Reserve Bank of India Act, 1934. The original share capital
was divided into shares of 100 each fully paid . Following India's independence on
15 August 1947, the RBI was nationalised on 1 January 1949.
The central bank is an independent apex monetary authority which regulates
banks and provides important financial services like storing of foreign exchange
reserves, control of inflation, monetary policy report till August 2016. A central
bank is known by different names in different countries. The functions of a central
bank may vary from country to country and are autonomous or body and perform
or through another agency vital monetary functions in the country. A central bank
is a vital financial apex institution of an economy and the key objects of central
banks may differ from country to country still they perform activities and
functions with the goal of maintaining economic stability and growth of an
economy.
 STRUCTURE OF RBI

The central board of directors is the main committee of the central bank. The
Government of India appoints the directors for a four-year term. The board
consists of a governor, and not more than four deputy governors; four directors
to represent the regional boards two — usually the Economic Affairs
Secretary and the Financial Services Secretary — from the Ministry of Finance and
ten other directors from various fields. The Reserve Bank — under Raghuram
Rajan's governorship — wanted to create a post of a chief operating officer
(COO), in the rank of deputy governor and wanted to re-allocate work between
the five of them (four deputy governor and COO).
The bank is headed by the governor, currently Shaktikanta Das. There are four
deputy governors BP Kanungo, N. S. Vishwanathan, and Mahesh Kumar Jain.
Currently there are 3 deputy governors. Viral Acharya resigned from the post in
July.
Two of the four deputy governors are traditionally from RBI ranks and are
selected from the bank's executive directors. One is nominated from among the
chairpersons of public sector banks and the other is an economist. An Indian
Administrative Service officer can also be appointed as deputy governor of RBI
and later as the governor of RBI as with the case of Y. Venugopal
Reddy and Duvvuri Subbarao. Other persons forming part of the central board of
directors of the RBI are Dr. Nachiket Mor, Y. C. Deveshwar, Prof Damodar
Acharya, Ajay Tyagi and Anjuly Duggal.
Uma Shankar, chief general manager (CGM) in charge of the Reserve Bank of
India's financial inclusion and development department has taken over as
executive director (ED) in the central bank .
Sudha Balakrishnan, a former vice-president at National Securities Depository
Limited, assumed charge as the first chief financial officer (CFO) of the Reserve
Bank on 15 May 2018; she was given the rank of an executive director.[41]
 FUNCTIONS OF RBI

1. Regulator of the Banking System

RBI has the responsibility of regulating the nation's financial system. As a
regulator and supervisor of the Indian banking system it ensures financial stability
& public confidence in the banking system. RBI uses methods like On-site
inspections, off-site surveillance, scrutiny & periodic meetings to supervise new
bank licences, setting capital requirements and regulating interest rates in specific
areas. RBI is currently focused on implementing norms.

2. Banker's bank
Reserve Bank of India also works as a central bank where commercial banks are
account holders and can deposit money. RBI maintains banking accounts of all
scheduled banks. Commercial banks create credit. It is the duty of the RBI to
control the credit through the CRR, bank rate and open market operations. As
banker's bank, the RBI facilitates the clearing of cheques between the commercial
banks and helps the inter-bank transfer of funds. It can grant financial
accommodation to schedule banks. It acts as the lender of the last resort by
providing emergency advances to the banks.

3. Developmental role
The central bank has to perform a wide range of promotional functions to support
national objectives and industries. The RBI faces a lot of inter-sectoral and local
inflation-related problems. Some of these problems are results of the dominant
part of the public sector.
Key tools in this effort include Priority Sector Lending such as agriculture, micro
and small enterprises (MSE), housing and education. RBI work towards
strengthening and supporting small local banks and encourage banks to open
branches in rural areas to include large section of society in banking net.

4. Custodian to foreign exchange

The Reserve Bank has custody of the country's reserves of international currency,
and this enables the Reserve Bank to deal with crisis connected with adverse
balance of payments position.

5. Issue of currency
Other than the Government of India, the Reserve Bank of India is the sole body
authorised to issue banknotes in India.
The bank also destroys banknotes when they are not fit for circulation. All the
money issued by the central bank is its monetary liability, i.e., the central bank is
obliged to back the currency with assets of equal value, to enhance public
confidence in paper currency. The objectives are to issue banknotes and give the
public adequate supply of the same, to maintain the currency and credit system
of the country to utilise it in its best advantage, and to maintain the reserves.
The RBI maintains the economic structure of the country so that it can achieve the
objective of price stability as well as economic development because both
objectives are diverse in themselves.

6. Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and
prescribes broad parameters of banking operations within which the country's
banking and financial system functions. Its objectives are to maintain public
confidence in the system, protect depositors' interest and provide cost-effective
banking services to the public. The Banking Ombudsman Scheme has been
formulated by the Reserve Bank of India (RBI) for effective addressing of
complaints by bank customers. The RBI controls the monetary supply, monitors
economic indicators like the gross domestic product and has to decide the design
of the rupee banknotes as well as coins.
 CREDIT CONTROL METHODS OF
RBI

It is one of the important function of RBI for controlling supply of money or credit.
There are 2 types of methods employed by the RBI to control credit creation:

1. Quantitative method
2. Qualitative method

Quantitative method:

1. Bank rate:
 It is the rate of interest at which central bank lends funds to commercial
banks. During excess demand or inflationary gap, central bank increases
bank rate. Borrowings become costly and commercial banks borrow less
from central bank. During deflationary gap central bank decreases the bank
rate. It is cheap to borrow from the central bank or the part of the
commercial banks which in turn the Commercial banks also decreases their
lending rates.

2. Open market operations:

The open market operations means buying and selling of bonds and shares
by RBI is open market. It is also called buying and selling of government
security by the central bank from the public and commercial banks.

3. Repo Rate:
 The term ‘Repo’ stands for ‘Repurchase agreement’. Repo is a form of
short-term, collateral-backed borrowing instrument and the interest rate
charged for such borrowings is termed as repo rate. In India, repo rate is
the rate at which Reserve Bank of India lends money to commercial banks
in India if they face a scarcity of funds.

4. Reverse Repo Rate:

Reverse repo as the name suggests is an opposite contract to the Repo

Rate. Reverse Repo rate is the rate at which the Reserve Bank of India
borrows funds from the commercial banks in the country.

5. Cash Reserve Ratio (CRR):

 It is the ratio of bank deposits that commercial bank has to keep with the
central bank. At the time of inflation the RBI increases the rate of CRR,
similarly at the time of deflation RBI decreases the rate of CRR.

6. Statutory Liquidity Ratio (SLR):

Every bank required to maintain a fixed percentage of its assets in the form
of cash or other liquid assets called SLR. At the time of inflation the RBI
increases the SLR, similarly at the time of deflation RBI decreases the rate of
SLR.

Qualitative method:

1. Margin requirements: It is the difference between the market value of loan

and the security value of loan. At the time of inflation the margin
requirement value decreases by RBI for discouraging people and
commercial banks for approaching more and more amount of loan. On the
other hand at the time of deflation the RBI increases the value of margin
just to encourage issuing of more amount of loan to the commercial banks
and general public.
2. Moral suasion: It refers to written or oral advices given by central bank to
commercial banks to restrict or expand credit.
3. Rationing of credit: It is the related to limiting the amount of credit, which
is issued by all the commercial banks. RBI fixes the size of issuing the credit
according to the requirement of the country.
 NEED FOR CREDIT CONTROL

Controlling credit in the economy is amongst the most important functions of

the Reserve Bank of India. The basic and important needs of credit control in the
economy are-

• To encourage the overall growth of the "priority sector" those sectors of the
economy which is recognized by the government as "prioritized" depending
upon their economic condition or government interest. These sectors broadly
totals to around 15 in number.
• To keep a check over the channelization of credit so that credit is not delivered
for undesirable purposes.
• To achieve the objective of controlling inflation as well as deflation.
• To boost the economy by facilitating the flow of adequate volume of bank
credit to different sectors.
• To develop the economy.
 LIMITATIONS OF CREDIT CONTROL

The Central bank is the main government-controlled bank in a country, which

controls the financial affairs of the country by fixing main interest rates, issuing
currency, supervising the commercial banks and controlling the foreign exchange
rate. And credit control is a strategy employed by manufacturers and retailers to
promote good credit among the creditworthy and deny it to delinquent borrowers.

Sometimes central bank fails to control the flow of credit at an optimum level.
Those reasons are described below;

• To be successful in credit control program, full control over the money

market is essential. But sometimes it is not possible.
• There are different terms of the loan period credit control method can only
affect a short-term loan.
• The unorganized money market is not suitable for use of credit control
method.
• There is not much co-operation between commercial banks with the
central bank.
• An unstable economy is not suitable to use credit control method.
• If steps for credit control arc not taken at primary level, it will not be effective
later.
• If the lengthy plan is taken for credit control it will not work as satisfactorily.
CURRENT RATES (As on 16 December 2019 )
 DEMONETISATION

On 8 November 2016, the Government of India announced the demonetisation of

all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series on the
recommendation of the Reserve Bank of India (RBI). The government claimed that
the action would curtail the shadow economy and crack down on the use of illicit
and counterfeit cash to fund illegal activity and terrorism.
The Reserve Bank of India laid down a detailed procedure for the exchange of the
demonetised banknotes with new ₹500 and ₹2,000 banknotes of the Mahatma
Gandhi New Series and ₹100 banknotes of the preceding Mahatma Gandhi Series.
The key points were:

• Citizens had until 30 December 2016 to tender their old banknotes at any
office of the RBI or any bank branch and credit the value into their respective
bank accounts.
• Cash withdrawals from bank accounts were restricted to ₹10,000 per day
and ₹20,000 per week per account from 10 to 13 November 2016. This limit
was increased to ₹24,000 per week from 14 November.
• For immediate cash needs, the old banknotes could be exchanged for the new
₹500 and ₹2,000 banknotes as well as ₹100 banknotes over the counter of
bank branches by filling up a requisition form along with a valid ID proof. It
was announced that this facility would be available until 30 December 2016.
• Cash crunch and effects

The scarcity of cash due to demonetisation led to chaos, and most people
holding old banknotes faced difficulties exchanging them due to endless lines
outside banks and ATMs across India, which became a daily routine for
millions of people waiting to deposit or exchange.
the ₹500 and ₹1,000 banknotes since 9 November. ATMs were running out of
cash after a few hours of being functional, and around half the ATMs in the
country were non-functional. Sporadic violence was reported in New Delhi,
but there were no reports of any grievous injury, people attacked bank
premises and ATMs and a ration shop was looted in Madhya Pradesh after the
shop owner refused to accept ₹500 banknotes.
 OBJECTIVE OF MAKING THIS
PROJECT

The objectives of making this project is to Ensure an adequate level

of liquidity enough to attain high economic growth rate along with maximum
utilisation of resource but without generating high inflationary pressure.Attain
stability in the exchange rate and money market of the country.Meeting the
financial requirement during a slump in the economy and in the normal times as
well.Control business cycle and meet business needs. Violent price fluctuations
cause disturbances and maladjustments in the economic system and have serious
social consequences. Hence, price stability is an important objective of credit
control policy. The central bank, by regulating the supply of credit in accordance
with the commercial needs of the people, can bring about price stability in the
country.
 CONCLUSION

The effectiveness of credit control measures in an economy depends upon a

number of factors. First, there should exist a well-organised money market.
Second, a large proportion of money in circulation should form part of the
organised money market. Finally, the money and capital markets should be
extensive in coverage and elastic in nature.

Extensiveness enlarges the scope of credit control measures and elasticity lends it
adjustability to the changed conditions. In most of the developed economies a
favourable environment in terms of the factors discussed before exists, in the
developing economies, on the contrary, economic conditions are such as to limit
the effectiveness of the credit control measures.
 BIBLIOGRAPHY

• Introductory of Macroeconomics -T.R JAIN , V.K OHRI

• https://m.rbi.org.in/

• https://en.wikipedia.org/wiki/Reserve_Bank_of_India

• https://timesofindia.indiatimes.com/topic/Reserve-Bank-of-India

• https://economictimes.indiatimes.com/markets/rbi

• https://www.business-standard.com/topic/reserve-bank-of-india