The Reserve Bank of India is the Supreme montary authority of India. To know the credit control policies of RBI see the presentation.

1. The RBI and
Credit Control

2. The RBI and credit control
The RBI has been assigned the task of controlling
the inflationary pressures in the economy.
Credit control measures by the RBI :
Quantitative and qualitative
Quantitative methods: regulate only the
quantity of credit and not the use of which it is
put to.

3. 1) Bank Rate:
• The bank rate is the rate at
which the Reserve bank
advances to the member banks
against approved securities or
rediscounts the eligible bills of
exchange and other papers.

4. • The bank rate is considered as a pace-setter
in the money market: changes in the bank rate
influence the entire interest rate structure
(both short term and long term interest rates)
• Rise in bank rate – dear money policy that
increases the cost of borrowing
• Fall in bank rate – cheap money policy
reducing the cost of borrowing
• Current Bank Rate
• 9.00% (w.e.f. close of business of 17/04/2012)
• Decreased from 9.50% to 9.00% which was
continuing since 13/02/2012
•

5. NET LIQUIDITY RATIO:
In order to check excessive borrowings from the RBI by
commercial banks, the Net liquidity ratio was introduced in
September, 1964
A commercial bank can borrow from the RBI at the bank rate
only if it maintains a minimum net liquidity ratio to its total
demand and time liabilities – if the NLR falls below the
minimum ratio fixed by the RBI, the commercial banks will have
to pay a penal rate of interest.
Net liquidity of borrowing banks = a) cash in hand and balances
with the RBI b) balances in currency accounts with other banks
c) investments in government and other securities MINUS
borrowing from the RBI, SBI and IDBI
NLR was abandoned in 1975

6. • OPEN MARKET OPERATIONS : Refers to the
purchase or sale of Govt. securities.
• The RBI seeks to influence the excess
reserves position of the banks by
purchasing and selling of government
securities, commercial papers, etc.
• When the central bank purchases
securities from the banks – it increases
their cash reserve position and hence
their credit creation capacity.

7. • When the central bank sells securities to the
banks – it reduces their cash reserve
position and credit creation capacity.
• RBI can only trade with Government
securities.
• The purchase or sale of securities tends to
increase or decrease the quantity of money
in circulation as well as the cash reserves of
the commercial banks immediately and
directly.

8. • When there is money stringency in the
money market – the RBI will purchase
securities
• In the event of inflation – too much
money circulation, the RBI sells
securities in the market.
• Open market operations in India are not
quite effective.

9. • Cash reserve ratio (CRR) – refers to
keeping a portion of net demand and
time liabilities (NDTL) of banks with the
central banks (In India it’s Reserve Bank
of India, RBI). Central bank fixes this
percentage of NDTL. Central bank can
change this percentage as a monetary
measure to control the availability of
funds in the economy i.e. to inject
liquidity or to suck liquidity. RBI doesn’t
pay any interest on such funds held with
it.

10. • CRR is used to affect the credit creation policy
of commercial banks.
• An increase in the cash reserve ratio – reduces
the excess reserve of the banks.
• A decrease in CRR – increases the excess
reserve of the banks
• Cash Reserve Ratio (CRR)4.50%
(wef 22/09/2012) -announced on
17/09/2012Decreased from 4.75%which was
continuing since 10/03/2012

11. • Statutory liquidity ratio (SLR) : Every bank
is required to maintain at the close of
business every day, a minimum proportion
of their Net Demand and Time Liabilities as
liquid assets in the form of cash, gold and
un-encumbered approved securities. The
ratio of liquid assets to demand and time
liabilities is known as Statutory Liquidity
Ratio (SLR). RBI is empowered to increase
this ratio up to 40%. An increase in
SLR also restrict the bank’s leverage
position to pump more money into the
economy.

12. • The minimum SLR is in addition to the CRR.
• Reasons for raising SLR:
• 1) It reduces commercial banks’ capacity to
create credit and thus helps to check
inflationary pressures
• 2) It makes larger resources available to the
government.
• Current Statutory Liquidity Ratio (SLR)
• 23%(w.e.f. 11/08/2012) (announced on
31/07/2012)Decreased from 24% which was
continuing since 18/12/2010
•

13. • Repos
• The RBI introduced repurchase auctions
(Repos) since December, 1992 with
regards to dated Central Government
securities.
• When banking systems experiences
liquidity shortages and the rate of interest
is increasing – the RBI will purchase
Government securities from Banks –
payment is made to banks – improves
liquidity and expands credit.

14. • Since November, 1996 RBI
introduced Reverse Repos to sell
Govt. securities through auction at
fixed cut-off rates of interest. It will
provide short term avenues to
banks to park their surplus funds,
where there is considerable
liquidity and call rate has a
tendency to decline.

15. • Selective credit controls
• Selective methods of credit control regulate
the use of credit by discriminating between
essential and non-essential purposes.
• * The central bank may prohibit or caution
banks against particular type of securities.
• May prescribe margins against secured
advances.

16. • May regulate hire-purchases and
installment transactions.
• It can stipulate the rates of interest on
different types of bank advances.
• All the above are used to ensure that
resources flow into essential lines –
prevents speculation and hoarding of
commodities.

17. • The RBI can issue directives to
banks in respect of :
• 1) Their lending policies – the
purpose for which advances may
or may not be granted.
• 2) The margins to be maintained on
secured advances
• 3) The rate of interest charged.

18. • Moral persuasion and direct action
• When commercial banks pursue an
unsound credit policy or borrow
excessively, the RBI may refuse to
grant loans or rediscount bills.
• The RBI may charge penal rate of
interests – direct action
• Moral persuasion involves persuading
the banks not to ask for further loans.

19. • RBI and economic development
• 1) RBI and commercial banks
• A) The RBI is vesting with the great responsibility
of developing commercial banks in India.
• b) In the past the RBI used these powers to
ensure safety of depositors’ money.
• C) Recently the RBI is guiding commercial banks
effectively in investing their funds for productive
purposes. D) The RBI has shown great initiative in
creating and expanding banking facilities to rural
areas – the Deposit Insurance Scheme was
initiated by the RBI

20. • 2) RBI and Monetary stability
• * Since 1956 as volume of investment
has increased rapidly and prices have
been rising continuously in India
• * As deficit financing is resorted to by
our planners, inflation set in – The RBI
has made frequent use of Bank rate
policy and other quantitative measures –
selective credit controls also have been
in use effectively.

21. • 3) RBI and agricultural credit
• * Though the RBI does not directly lend to
agriculturists, its operations are through the
State cooperative banks and the State
government.
• Since 1950 the RBI has operated two funds :
The national agricultural credit (Long term
operations fund) and The National
agricultural credit (stabilization) fund.
• The RBI uses National agricultural credit to
grant long and medium term loans to state
government.

22. • Through the National agricultural credit, it
grants loans to state co-operative banks to
enable them to convert their short term loans
into medium term loans.
• The RBI inspects the working of cooperative
banks
• It rediscounts agricultural bills maturing
within 15 months at concessional rates.
• The RBI has an agricultural credit board

23. • Co-ordination of the activities of the
state government, co-operative banks
and committees to study problems
relating to rural credit is undertaken by
the RBI
• The RBI has set up the Agricultural
refinance corporation and owns a part
of its capital – this corporation
undertakes term financing and
refinancing activities (Now NABARD
looks after these functions)

24. • RBI and Industrial finance
• The RBI along with the government has
taken initiative in setting up some
institutions for term financing of
industries.
• The RBI owns part of the capital of the
Industrial Finance Corporation and that
of the State Financial Corporations – it
lends funds to them.

25. • It opened a Department of Industrial finance
to look after the Bank’s activities in the
Industrial field.
• It took initiatives to set up the Unit Trust of
India.
• The IDBI which is the king-pin of our
development banks is a subsidiary of the RBI
• The credit guarantee scheme intended to
help the small scale industries is managed
by the RBI

26. • The RBI and foreign trade
• The RBI has taken several steps to
promote exports – to bridge the
gap in our trade balance.
• RBI has sponsored many schemes
under which term loans are given
to exporters.
• RBI rediscounts export bills of a
longer use at concessional rates.