Credit control is most important function of Reserve Bank of India. Credit control in the economy is required for the smooth functioning of the economy. By using credit control methods RBI tries to maintain monetary stability. There are two types of methods: 1. Quantitative control to regulates the volume of total credit. 2. Qualitative Control to regulates the flow of credit Quantitative methods: 1. Management of Bank Rate : Bank rate is the rate at which the reserve bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the act.Increase the bank rate reduces the credit creation power o f banks and decrease in bank rate increases the credit creation power of the banks. 2. Open market operations : The term open market operation refers to purchase or sale of government securities by the central bank.Purchase of securities by the central bank in open market reduces in multiple expansion of credit and sale of securities leads to credit contraction by the bank.OMO is now very frequently used by RBI. 3. Management of Cash reserve ratio : CRR The central bank can control credit by variation of cash reserve ratio.A raise in this ratio reduces the credit creation ability of the banks and results it in increasing the credit creation ability of the banks. 4. Repo & Reverse Repo 5. Altering Statutory Liquidity Ratio 6. MSF Qualitative Methods: 1. Selective Qualitative Credit controls With the help of selective credit control methods the central bank can control and direct the flow of credit in the country. Rationing of credit is involved in this. These control regulates the use of credit by discriminating between essential and non essential purposes. 2. Moral persuasion and direct action : Central bank may refuse to grant further loans or re discount of bill for the banks to control their credit creation ability.The central bank may request banks not to use the account balance
Posted on: Thu, 24 Jul 2014 10:22:22 +0000
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