Credit control method is the method adopted by the central bank (RBI) for controlling the amount of money in the market as an attempt to control the inflation keeping in mind the development of the country and its growth. Credit control method of RBI- GA for exams.There are two major responsibilities which RBI fulfills. These are controlling inflation and keeping the growth rate high. To maintain these it uses various method which are called credit control methods. In this post we will discuss how RBI controls the credit inflows in the market with help of banks and financial institutions.
The methods used by RBI to control money can be categories into
- Quantitative method
- Qualitative method
Quantitative method of Credit Control by RBI
Quantitative method of credit control is used by RBI to directly and instantly control the credit. It controls volume of loan/ money in the market and so it reduces/ increases the quantity of notes/ credit in the market and that is why it is called quantitative money control method. There are various methods under this.
- Bank Rate
Bank rate is the rate at which RBI discounts the bill of exchange of the commercial banks and lend them credit for the long terms. During the inflation, it increases the bank rate and during the deflation, it increases the bank rate.
- CRR (Cash reserve ratio)
This is another quantitative attempt by RBI. CRR is the rate at which banks have to deposit a small portion for their all deposits with the RBI. During the inflation, CRR is increased and during the deflation, CRR is reduced.
- Open market operation
Open market operation is used by RBI to sell the government securities in open market. During the inflation, The RBI sells the govt securities and during the deflation, RBI buys the securities again from the public.
Qualitative credit control method
Qualitative credit control methods are generally those where RBI gives instructions to the commercial banks on how to control the credit.
FIXATION OF MARGIN:
The Banker will be lending money against the price of securities. The amount of loan will be depending upon the margin requirements of the banker. The word ‘margin’ in the above statement means the difference b/w the loan value & market value of securities.
The RBI will be having the power to change the margins, which limits the loan amount to be sanctioned by the commercial banks. During inflation, the margin would be higher & it will be lower at the time of deflation.
REGULATION OF CONSUMER CREDIT:
The buyer gets this kind of foreign exchange reserves & exchange value of the Rupee in relation to other country’s currencies. Currencies should only be exchanged with RBI or its authorised banks.
To control the volume of bank loans the RBI may issue instructions to the commercial banks from time to time. The instructions may be in the form of oral or written statements or appeals or warnings. By means of these instructions, the central bank may increase or decrease the volume of credit.
RATIONING OF CREDIT:
It is a system of regulating & controlling purpose for which credit is guaranteed by the commercial bank. It is of two types.
Good luck to candidates!