Rbi

1. Credit control

2. Meaning
 Credit Control refers to the regulation of
credit by the Central Bank for achieving
definite objectives

3. Objectives of Credit Control
 Internal Price stability
 Exchange rate stability
 Achievement of a high level of
Employment and output
 Control over trade cycles
 Economic planning

4. Methods of Credit Control
Credit Control
Quantitative Qualitative

5. Quantitative credit control
 Bank rate
 Open market
 Change in cash reserve ratio
 Change in liquidity ratio

6. Qualitative Credit Control
 Regulation of consumer’s credit
 Change in marginal requirements of loans
 Rationing of credit
 Moral Persuasion
 Publicity
 Direct action

7. Quantitative Credit Control
 Bank Rate
 It is rate of interest at which the central
bank rediscounts the first class securities
of other banks.
 Also called Discount Rate

8. Bank rate policy
 Bank rate policy is that policy by which the
Central Bank controls the credit creation of
the banks
 Contraction of credit
 Expansion of credit

9. Conditions of success of Bank Rate
 Relationship between different rates
 Elasticity in the economy
 Psychology of the investors

10. Limitations of Bank rate policy in
underdeveloped countries
 Long term effect
 Less elastic
 Unorganised bill market
 No increase in deposits
 International flow of capital
 Less dependence
 Ignores the rate of profit
 Less effective in planned economies

11. Open market operations
 In broader sense, open market operation
refers to the sale and purchase of
securities by central bank in the open
market
 In narrow sense, when the central bank or
the Government buys or sells only the
government securities then it is called
open market operations

12. Open Market Operation Policy
 Contraction of credit
 Expansion of credit

13. Objectives of open market
operations
 To remove the effects of inflow and outflow of gold
under gold standard
 To check the export of capital to other countries
 To regulate the power of the banks to expand credit
 To remove the shortage of money in money market
 To control credit properly by supplementing bank rate
policy in the event of bank rate proving ineffective

14. Limitations of open market
operations
 Influence on the cash reserve ratio of banks
 Change in the credit policy of the banks
 Demand and supply of securities
 No change in the credit policy of the customers
 Powers of the central bank to purchase and sell
securities
 The money market should be well organised
 Normal conditions

15. Difference between Bank rate and
open market operations
Open market
1. Function independently
2. It influence the rate of interest
directly
3. Have immediate effect on both
short and long term effect on ROI
4. They can be changed as many
times as possible during a week,
day and month
5. This policy is free from such
compulsions on all banks
Bank rate
Does not function independently
It influence rate of interest indirectly
Has immediate effect on short term
ROI and but its long term effect is very
slow
It is not possible to change bank rate
again and again
Change in bank rate implies a sort of
compulsion on the commercial banks
to increase or decrease the market
rate of interest

16. Change in cash reserve ratio
 According to this policy all banks must
keep a certain percentage of their deposits
with the central bank as reserve fund

17. Policy of variation in CRR
 When central bank has to control credit it
raises the ratio of CRR
 When central bank has to expand credit it
lowers its CRR

18. Change in liquidity ratio
 According to it, the banks have to keep
compulsorily a certain portion of their
assets in liquid form. It comprises cash
and government securities, it also curtails
the power of the commercial banks to
create credit

19. Qualitative or Selective credit
control
 Changes in the marginal requirement of
loans
 Regulation of consumers credit
 Moral persuasion
 Publicity and propaganda
 Direct action

20. Choice between qualitative and
quantitative control
Qualitative credit control
1. It is more direct and
effective
2. It influence both
creditors and debtors
3. It do not make any
distinction between
essential and non
essential credit
4. It control the entire
quantity of method
Quantitative credit control
It has its initial impact on
some external conditions
It influence creditors alone
It makes the distinction
It control the use of credit
for specific purposes

21. Difficulties in credit control
 Difficulties in controlling various forms of credit
 Lack of control over all banks
 Unorganized banking system
 Conditions of money and capital market
 lack of traditions
 Non banking elements in the money market
 Lack of co operation from other banks
 Lack of co operation from non financial
institutions