Role of RBI in Control of Credit

The Reserve Bank of India as a central Bank for Indian economy take necessary steps for control of credit in India. The control of credit used by RBI for the monetary policy and control the inflation. The Role of RBI in Control of Credit make RBI one of supreme body for development of Indian Economy. For better understanding, you can understand control of credit as Control of money.

The Demand and supply of money controlled with the use of credit control. The credit control used by RBI for the sustainable development of Indian Economy. The control of credit help RBI and Government to achieve economic growth and control inflation trend. The RBI is sole authorizer of Issuance of currency and custodian of cash reserves in India. The Role of RBI in Control of Credit in India ensure that there should be Social and Economic stability in the country.

Role of RBI in Control of Credit

Role of RBI in Control of Credit

Reserve Bank of India frequently changes Bank Rate, Repo rate, Statutory Liquidity Ratio, Cash Reserve Ratio, Reverse Repo Rate for the control of credit flowing in Indian economy. As the situation and goal changes, RBI use different tools of monetary policy.

In this article we will discuss about below points,

  1. Role of RBI in Control of Credit in India
  2. Methods of Credit control used by Reserve Bank of India
  3. Need for Credit control in India
  4. Limitation of Credit control policy

Also read Developmental Role of RBI in India

Methods of Credit control used by Reserve Bank of India

The money flow in our economy controlled by Reserve Bank of India to avoid higher inflation rate and unemployment rate. There are two methods for control of credit known as Quantitative and Qualitative method.

Quantitative or traditional methods of credit control include banks rate policy, open market operations and variable reserve ratio. Qualitative or selective methods of credit control include regulation of margin requirement, credit rationing, regulation of consumer credit and direct action.

  1. Quantitative Method
  2. Qualitative Method
Control of Credit

Control of Credit

The Quantitative method includes below methods,

  1. Bank rate
  2. Open Market operations
  3. change Repo Rate
  4. Reverse Repo rate
  5. Cash reserve ratio
  6. Statutory Liquidity Rate,

The Qualitative method includes below methods,

  1. Margin requirements
  2. Credit ratios
  3. Regulation of consumer credit
  4. Moral suasion

Bank Rate

The Bank rate controlled by RBI for credit control. The Bank rate is the interest rate at which a Reserve Bank of India lends money to other commercial Banks. In situation of inflation in our country, RBI increase the Bank Rate. When there is priority for Growth more at that time RBI decrease or maintain lower Bank Rate.

When Reserve Bank of India increase Bank Rate, the lending become costly for the commercial Banks. This effect margin of commercial bank. The commercial Bank also increase lending rate for it’s customer to protect their margin. So there will be burden of increased interest rate on customer, so they try to avoid borrowing. That will effect business activities and it will lead to decrease in Demand. That lead to control of Inflation. Thus Role of RBI in Control of Credit done.

Open Market Operations

The sale and purchase of securities and bonds done by Reserve Bank of India and commercial Banks. This activity known as open Market operations for control of credit. The more bonds and securities purchase lead to increase in credit flow. The Bonds and securities of Government and companies purchased by RBI and Banks. This will lead to increase in credit on hand of Government and companies. They can spend more on their developmental goal.

On the the other hand, when RBI and commercial Banks purchase Bonds, the cash reserve decrease. With lower level of cash reserve, the purchasing power of RBI and Banks decrease. The Role of RBI in credit control include purchase and sell of Bonds.

The change in Repo Rate, Reverse Repo Rate, Cash Reserve Ratio and SLR effect the credit flow in our economy. Repo Rate known as a Rate which Reserve Bank of India lends money to commercial Bank or financial institution against Government securities.

The Reverse Repo Rate is opposite of Repo rate. The Cash Reserve Ratio known as CSR. The Bank’s need to maintain Cash Reserve Ratio set by Reserve Bank of India. It is ratio of Cash kept in reserve against total cash deposits in Bank. The decrease in Cash Reserve Ratio lead to increase in Money flow in Market.

Margin Requirements

The Margin requirement refer to difference between market value of Loan and security value of That loan. In the situation of Inflation, RBI increase the Margin requirement which discourage the customer for availing loan. Because of decrease in Margin Requirements, the Bank stops to lend more money to customer as loan on their securities/ gold/ properties.

The margin requirements set by RBI effect secured loans, Gold Loans, Mortgage loans. When the margin requirement decreases customer can avail more loan on their Gold, securities and mortgage of properties.

Need for credit control in India

The role of RBI in control of credit make sure less amount of inflation and more economical growth. As we know control of credit is one of important function of our central Bank. The development role and promotional role of RBI suggest that RBI should lend more Rural credit and credit to priority & weaker sector.

The Credit control measure ensure that the flow of credit doesn’t hamper our social and economical goal. The credit flow are analyzed by RBI so that they can track performance of monetary policy. The overall goal for credit control is development of Indian economy.

Limitation of Role of RBI in control of Credit

There is one famous statement that “Market is supreme”. The Reserve Bank of India’s action can change the credit market but there can’t be full control on credit. The economical survey suggest details about unemployment rate, Inflation rate, NPA ratio.

The Bank’s lends money to trustworthy clients but sometimes the credit become NPA. The increase in NPA can collapse the financial or Non financial institutions. This can cause ripple effect in our economy. When the cash in Hand increase the credit control become more tough.

Conclusion

The Role of RBI in Control of Credit is supreme in Indian Economy. The Reserve Bank of India manage the credit flow in our economy to balance the inflation and economic growth. The change in credit can lead to instability market so there can be lengthy planning before implementation of Credit control policies.

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