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BANKING MONETARY POLICY METHODS OF CREDIT CONTROL

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BANKING
MONETARY POLICY
• UGC NTA NET
• TRB Commerce
• SSC
• UPSC
• TNPSC
• BANK EXAMS
• For Competitive
Exam
PROF. M NITHYALAKSHMI
DRBCCC HINDU COLLEGE
METHODS OF
CREDIT CONTROL
BY RBI
MONETARY POLICY
The Policy made by Central Bank(RBI) to
control the money supply in the Economy. i.e.
"printing" more money, or decreasing the
money supply by changing interest rates or
removing excess.
How it control?
MPC Monetary Policy Committee of India,
RBI is responsible for fixing bench mark interest
rate (like Repo Rate, Reverse Repo Rate etc.) in
India.
According to Section 45zb of (Amendment)
RBI Act 1934 Monetary Policy Committee
provides with Empowered Six Members. These
Members were appointed by Central Govt. and
shall hold office for periods for 4 years
Monetary Policy Committee is headed by RBI
Governor.
Tools of Monetary Policy
Quantitative instruments
• Open market Operation
• Liquidity adjustment facility (Repo Rate, Reverse Repo
Rate)
• Marginal Safety Facility
• Reserve Ratio (SLR, CRR)
• Bank rate
Qualitative instruments
• Credit Rationing
• Selective Credit Control
• Margin Requirements
• Moral Suasion
• Direct Action
Quantitative measures –
Open Market Operation
Open Market Operation(OMO)
In this method RBI Buys and Sells Securities, Bills
and Bond of govt. in Open Market. When RBI
purchase money supply will increase in reverse
when RBI sellS cash flow will decreased.
Quantitative Measure – Liquidity
Adjustment Facility(LAF)
LAF Technique used by RBI to control the
short term Money Supply, by two tools Repo
Rate and Reverse Repo Rate
Repo rate – The interest rate at which RBI
provides loans to Commercial Bank by
Mortgaging its Securities.
Reverse repo rate – The interest at which RBI
borrows from commercial bank by Mortgaging
its Securities.

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BANKING MONETARY POLICY.pptx

  • 1. BANKING MONETARY POLICY • UGC NTA NET • TRB Commerce • SSC • UPSC • TNPSC • BANK EXAMS • For Competitive Exam PROF. M NITHYALAKSHMI DRBCCC HINDU COLLEGE METHODS OF CREDIT CONTROL BY RBI
  • 2. MONETARY POLICY The Policy made by Central Bank(RBI) to control the money supply in the Economy. i.e. "printing" more money, or decreasing the money supply by changing interest rates or removing excess. How it control? MPC Monetary Policy Committee of India, RBI is responsible for fixing bench mark interest rate (like Repo Rate, Reverse Repo Rate etc.) in India.
  • 3. According to Section 45zb of (Amendment) RBI Act 1934 Monetary Policy Committee provides with Empowered Six Members. These Members were appointed by Central Govt. and shall hold office for periods for 4 years Monetary Policy Committee is headed by RBI Governor.
  • 4. Tools of Monetary Policy Quantitative instruments • Open market Operation • Liquidity adjustment facility (Repo Rate, Reverse Repo Rate) • Marginal Safety Facility • Reserve Ratio (SLR, CRR) • Bank rate Qualitative instruments • Credit Rationing • Selective Credit Control • Margin Requirements • Moral Suasion • Direct Action
  • 5. Quantitative measures – Open Market Operation Open Market Operation(OMO) In this method RBI Buys and Sells Securities, Bills and Bond of govt. in Open Market. When RBI purchase money supply will increase in reverse when RBI sellS cash flow will decreased.
  • 6. Quantitative Measure – Liquidity Adjustment Facility(LAF) LAF Technique used by RBI to control the short term Money Supply, by two tools Repo Rate and Reverse Repo Rate Repo rate – The interest rate at which RBI provides loans to Commercial Bank by Mortgaging its Securities. Reverse repo rate – The interest at which RBI borrows from commercial bank by Mortgaging its Securities.
  • 7. Quantitative Measure – Marginal Standing Facility MSF is a loan facility avaiable for banks to borrow from the RBI in a emergency when Inter- Bank liquidity dries up completely. How MSF differ from Repo Rate? MSF is a loan facility was created for commercial bank to borrow loan at emergency condition and can borrow more liquidity from its securities deposit at a rate higher than repo rate.
  • 8. Quantitative Measure – Reserve Ratio a. SLR – STATUTORY LIQUIDITY RATIO All Commercial Bank in the Country Required to keep a certain percentage of their (Demand and Time Deposit) liquid asset in their hold itself. It prevents the Bank from lending all its Deposits which is too Risky b. CRR – CASH RESERVE RATIO The CRR is the amount of fund that the bank are bound to keep with RBI, as a certain percentage of there NDTL. Bank cannot lend it to anyone, Bank earn no interest rate or profit on this.
  • 9. Quantitative Measure – Bank Rate The Bank rate is the rate which is fixed by RBI at which it rediscounts Bills of Exchange and Govt. Securities held by Commercial Banks. How Bank Rate Differ from Repo Rate Repo Rate for short term measure on other hand Bank Rate is for long term measures.
  • 10. QUALITATIVE MEASURES – Credit Rationing In this RBI controls the maximum amount of credit flow to certain sector. RBI also make compulsory for the bank to provide certain fractions of their loans to certain sectors such as priority sector lending etc..,
  • 11. QUALITATIVE MEASURES – Selective Credit Control Selective Credit Control is tool in the hands of RBI to Restricts bank financing against sensitive commodities
  • 12. QUALITATIVE MEASURES – Margin Requirements RBI can Prescribe Margin against collateral for instance lend only Rs.70 for Rs.100 value Property, Margin Requirement being 30%. If RBI raises Margin Requirement, Customers will be able to Borrow Less.
  • 13. QUALITATIVE MEASURES – Moral Suasion Moral Suasion refer to method of request, a method of advice by the RBI to the Commercial Bank to take certain measures as per the trend of the economy
  • 14. QUALITATIVE MEASURES – Direct Action RBI issues certain guidelines from time to time based on the Current Situation in the Economy. These guideline should be followed by banks. If any bank violates these guidelines RBI penalizes them