Credit control by_central_bank

  • 1,111 views
Uploaded on

slides by Prof. O.V. Nandimath

slides by Prof. O.V. Nandimath

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
1,111
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
38
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide
  • Sec. 18 of RBI Act, empowers Clearing Corporation of India The Clearing Corporation of India Ltd. (CCIL) was set up in April, 2001 for providing exclusive clearing and settlement for transactions in Money, GSecs and Foreign Exchange. The prime objective has been to improve efficiency in the transaction settlement process, insulate the financial system from shocks emanating from operations related issues, and to undertake other related activities that would help to broaden and deepen the money, debt and forex markets in the country. The company commenced operations on February 15, 2002 when the Negotiated Dealing System (NDS) of RBI went live.
  • Sec. 17 – to maintain 20% of the total profits as Reserve FundSec. 42 of RBI Act (for Scheduled Banks) – such % of amount to be maintained with the RBISec. 18 of BR Act (for non-scheduled banks) – such % of amount to be maintained (i) either with them; or (ii) with RBI’s current accountSec. 24 0f BR Act - SLR
  • Sec. 21 of the Banking Regulation Act – Power of the RBI to control advances by banking companies
  • Sec. 21 of the Banking Regulation Act
  • Power of the RBI to issue directions Sec. 35-A of BR Act – Power to give directions
  • Sec. 18 of RBI Act

Transcript

  • 1. Central banking – methods of credit control – an overview
  • 2. Central bank – quick recap • They are different from commercial banks • It does not aim at profit – although it may actually earn good amount of profit • It aims at controlling the banking system and supporting the economic policy of the government • It is empowered with special powers to control and regulate the working of the commercial banking systems of the country • It is rather popularly known for its action to control credit in the economy
  • 3. Two methods of credit control 1. Quantitative credit control methods 1. Bank rate or discount policy 2. Open market operation & reserve requirements 2. Qualitative or selective credit control methods 1. 2. 3. 4. 5. 6. Regulations or margin requirements Regulation of consumer credit Control through directives Moral suasion Rationing of credit Direct action
  • 4. Quantitative methods • Bank Rate Policy – Commercial banks when in additional need of cash – obtain from the Central Bank either • By rediscounting some of the securities; or • Borrow from the Central Bank against the securities • For this Central Bank charges interest at the rate, which is known as Bank Rate or Discount Rate
  • 5. BANK RATE GOVING UP • LENDING RATES OF THE COMMERCIAL BANKS WILL GO UP • PEOPLE ARE DISCOURAGED TO TAKE LOANS • MERCHANTS LIQUIDATE THEIR STOCKS • DEALERS IN STOCK EXCHANGE MAY LIQUIDATE THEIR STOCKS TO PAY OFF THEIR LOANS BANK RATE GOVING DOWN • LENDING RATES GO DOWN • PEOPLARE ARE ENCOURAGED TO TAKE LOANS • MERCHANTS HOLD THE STOCKS • STOCK’S WILL BE HELD ON TO BY THE BROKERS • MORE PURCHASE OF STOCKS WILL ALSO TAKE PLACE
  • 6. Quantitative methods • Open Market Operations – Deliberate and direct buying and selling of securities and bills in the money market by the Central Bank on its own initiative
  • 7. Quantitative methods • Reserve Ratio Requirements • The requirement of a commercial bank to maintain a minimum percentage of their time and demand liabilities with the Central Bank also know as ‘Cash Reserve Ratio’ • The objective – To ensure liquidity & solvency among the banks – To provide Central Bank with supply of deposits for its local operations – To influence ultimately restrict commercial banks’ extension of credit
  • 8. Selective credit control methods • Unlike the quantitative controls – they are not indiscriminately impact across all sectors • Historically – these were designed and applied during the World War II period • Advantages – They distinguish between essential and non essential uses of the Bank credit – Only non essential uses are brought under the scope of Central Bank controls; and – They affect not only lenders but borrowers as well
  • 9. Selective credit control methods • Margin requirements – The stock-market crash of 1929 in USA – There was extensive speculation in stock markets in US – The Federal Reserve Bank of America ordered commercial banks to restrict their loans and advances to stock brokers by raising the margin requirements
  • 10. Regulation of customer credit • The restraint under these regulations were two fold – They limited the amount of credit for the purchase of any article listed in the regulation; and – They limit the time for repaying the debt
  • 11. Moral suasion • Implies persuasion and request made by the Central Bank to the commercial banks to follow the general monetary policy of the former
  • 12. Rationing of credit • Method of controlling and regulating the purpose for which credit is granted by the commercial banks
  • 13. Direct action • in 1959 – RBI directed the entire banking system to refrain from excessive lending