The Reserve Bank of India (RBI) controls the credit created by commercial banks in India, which is its most important function. RBI uses quantitative and qualitative methods to regulate the volume, direction, and use of credit in the economy. Quantitative methods like bank rate, open market operations, cash reserve ratio, and statutory liquidity ratio aim to directly influence the total amount of credit. Qualitative methods like credit rationing, margin requirements, and moral suasion are used to indirectly encourage or discourage certain types of credit usage. Proper credit control by RBI is important for maintaining price stability and economic growth in India.

1. CREDIT CREATION BY
RBI
Economics Project

2. INDEX
◦ Introduction
◦ RBI History
◦ Need of RBI
◦ Function of RBI
◦ Credit control by RBI
◦ Importance of Credit Control
◦ Methods and instruments of Credit Control
◦ Quantitative methods
◦ Qualitative methods
◦ Bibliography

3. INTRODUCTION
◦ The most important function of the Central Reserve Bank of India (RBI) is to control credit
created by commercial banks.
◦ Money and credit represent a powerful force for good or evil in the economy. The central bank
must ensure that money and credit are properly managed so that inflammatory and defamatory
pressures can be controlled by the economy.

4. RBI HISTORY
◦ Headquarters : Mumbai, Maharashtra
◦ Established : 1 April 1935, 84 years ago.
◦ Governor : Shaktikanta Das, IAS
◦ Currency : Indian Rupee
◦ Bank Rate : 6.00%
◦ Interest on reserves : 4.00%
◦ Website : rbi.org.in
◦ Central Bank of : Republic of India

5. NEED OF RBI
◦ The money used all citizens make, the loans the government takes, manage inflation for use, provides
policies for lending, setup more financial institutions to help us meet our desires and aspiration
namely monetary policy and fiscal policy
◦ The RBI is India’s Central Bank and is wholly owned by the Government of India established on 1 April
1935, the RBI central office is located in India’s commercial capital of number the bank is often
referred to by the name ministered.
◦ RBI handles the important functions of :
Monetary policy.
Regulation and supervision of the banking and non-banking financial institutions, including credit
information companies.
Management of foreign exchange reserve.
Bankers to banks.
Banker to the Central & State governments.
Currency management.

6. FUNCTIONS OF RBI
◦ Issue of Bank Notes
◦ Banker to Government
◦ Custodian of Cash Reserves of Commercial Banks
◦ Sender of Last Resort
◦ Central clearance and Accounts Settlement
◦ Controller of Credit

7. CREDIT CONTOL OF
RESERVE BANK OF INDIA
◦ Commercial banks create credit in the process of lending. They have the power of credit
creation. The importance of credit in the settlement of business transactions had increased.
◦ There has been a shift from a money economy to a credit economy in which traders and
businessman can carry out their business transactions without immediate payment or receipt of
money.
◦ Neither too much nor too little credit is desirable for the economy.
◦ The control over the volume or quantity of credit created one of the aspects of credit control.
The Central Reserve Bank of India (RBI) also has the responsibility to control the direction of
credit flow in line with the overall economic priorities.

8. THE IMPORTANCE OF CREDIT CONTOL
To obtain stability in the internal price level
To attain stability is the exchange rate
To stability money market of a country
To eliminate business cycle inflation and depression by controlling supply of credit
To maximize income, employment and output in a country
To help the economic growth of the country within specified period of time

9. METHODS AND INSTRUMENTS OF
CREDIT CONTROL
Quantitative or General Methods
1. Bank Rate
2. Open Market Operations
3. Variable Cash Reserve Ratio
4. Stationery Liquidity Ratio
Qualitative or Selective Methods
1. Rationing of Credit
2. Margin Requirements
3. Regulation of consumable credit
4. Moral suasion
5. Direct action

10. QUANTITATIVE METHODS
Quantitative methods are those which aim at controlling the total volume of credit. They are used
to regulate the quantity of credit creation by banks. By using methods the control banks control
the amount of credit.
Bank Rate
The bank rate is the rate at which the Central Reserve Bank of India (RBI) grants loans to
commercial banks against government security and other approved first-class securities.
Reserve Bank adopts a cheap and Dear Monetary Policy according to the economic condition of
the country.

11. Cheap Monetary Policy -
◦ Reserve Bank of India decreases bank rates to increase the quantity of credit in the country this
is called Cheap Monetary Policy.
◦ Decrease in Bank rate >> decrease in the cost of credit i.e, decrease in interest rate.
◦ As a result of this quantity of credit increases.
Dear Monetary Policy
Reserve Bank of India (RBI) increases bank notes to decrease the quantity of credit in the country, this
is called dear monetary policy.
Increase in bank rate – increase in the cost of credit i.e increase in the interest rate.
This will result in a decrease in the quantity of credit.
Bank

12. OPEN MARKET OPERATION
◦ Open market operations refer to the deliberate and direct buying and selling of securities and
bills in the money market by the central bank.
◦ Purchase and selling the securities may lead to expansion and contractions of money supply in
the money market. It influences cash reserves with the commercial banks and hence these
operations control their credit creation power.
Inflationary pressure :
The central bank would sell the government securities to the commercial banks. The bank will
transfer a part of the cash reserves to the central bank for the payment of the securities.
Consequently, the cash reserve with the commercial banks will be reduced. It would lead to a
contraction in the credit creation power of the commercial banks.

13. Deflationary pressure
◦ In this situation, the central bank will purchase securities from commercial banks. In the process,
the cash reserve with the commercial banks will increase and they would be able to create more
credit.
◦ The weapon is used to fulfil the seasonal credit requirements of commercial banks.
Cash reserve ratio
The Reserve bank of India controls the credit through changes in central reserve
ratio (CRR) or commercial banks.
Free commercial banks are regulated by law to maintain a certain percentage of
their deposit with the central bank which is called the cash reserve ratio (CRR).

14. ◦ The central bank has the power to change the percentage of calories
that are to be kept with it. If the ratio increases the credit creation
capacity of commercial banks decreases. On the other hand, if the ratio
decreases the credit creation capacity of the commercial bank
decreases.
◦ This ratio where it’s from 3% to 15% as directed by the reserve bank of
India.
◦ By changing the reserve requirement of the central bank can affect the
amount of cash with the commercial banks and shows them to curtail
or expand credit.

15. Statutory Liquidity Ratio
◦ Every scheduled bank is required by law to maintain a minimum of 20% so cash, gold or any
unencumbered verities of its total demand and time liabilities, which is called a statutory
liquidity ratio (SLR).
◦ The Bank of India is empowered to change this ratio. It also influences the credit creation
capacity of the banks. The effect of both CRC AND SLR on credit expansion is similar.

16. QUALITATIVE METHODS
◦ Qualitative Methods are used to affect the use, distribution and direction of credit.
◦ It is used to encourage such economic authorities so desirable and to discourage those who are
injurious to the economy.
◦ So bank of India from time to time had adopted the following qualitative methods of credit
control.
Rationing of credit
In this method reserve bank of India seeks to limit the maximum or ceiling of loans and advances
and also in certain cases fixes a ceiling to specific categories of loans and advances.
It aims to control and regulate the purposes for which the credit is granted by commercial banks.

17. Variable portfolio ceiling
◦ According to this, the central bank fixes a ceiling on the
number of loans and advances for each bank and the bank
cannot advance loans beyond this limit.
Variable capital asset ratio
This is the ratio which the central bank fixes about the capital
of a bank to its total assets.

18. Margin Requirements
◦ Commercial banks do not land up to the full amount of the value of the security. The loan
amount is less than the securities value. It keeps emerging as a question against fall in the value
of the security.
◦ Margin refers to the difference between the current market value and this is the value of the
security. It is a portion of the value of the securities charged to a bank, which the borrower is
expected to pay out of his resources.
◦ The rise in the margin requirement restricts the amount of loan that a bank grants against the
security while a lower margin increases it.
◦ In this way, the amount of fixing margin requirements has a direct impact on the amount of
credit for speculation purposes.
◦ During the depression, the margin can be reduced so that there is an increase in the level of
economic activity through an increase in demand for bank credit.
◦ Conversely, during inflation, margin requirements can be raised by the monitory authorities to
contain the boom in the stock of the margin market.

19. Regulation of consumers credit
◦ With the introduction of instalment trading in non-essential consumers Products like motor
vehicles, and electrical and electronic goods have gone up to their predicted goods level.
◦ The bank of India RBI may restrict consumers’ expenses on non-essential items by directing the
commercial banks to fix the minimum percentage of down payment, length of the period over
which instalment payment may be spread, et cetera.
◦ For example, suppose to buy a washing machine, the buyer is required to make a down
payment of one-fourth of its total price and the rest is to be paid in 15 equal monthly
instalments under the regulation of consumers credit, the down payment amount may be
increase and several instalments reduced the reduced demand for the product and control
consumers spending which is necessary for controlling prices.

20. Control through directives
◦ RBI has been empowered to ensure directives to commercial banks in respect of their lending
policies, purposes for which loans may or may not be granted, margin to be kept in case of
secured loans et cetera.
◦ How many issue directives may be given either by statute or by mutual agreement between the
central bank and commercial banks.
◦ Directives may be issued to encourage the flow of credit to certain areas or to prevent the flow
of credit in undesirable directions.

21. Publicity
◦ RBI me a call so follow the policy of publicity to make known to the public view about credit
expansion or contraction.
◦ RBI regularly publish statements of assets and liabilities of commercial banks or information to
the public they also publish reports of the general money market and banking condition.
◦ This is a way of exerting more pressure on the commercial banks and also making the public
aware of the policies being adopted by banks and the central banks in light of prevailing
economic conditions in the country.

22. Moral suasion
◦ It refers to the advice or request made by the central bank to the commercial banks to follow
the monetary policy and carry out their lending activities and other aspirations in such a way to
achieve the objective of the central bank's policy.
◦ And be in the form of advice to commercial banks regarding their investment occurred to be
taken while granting loans and advances against such commodities the price of which may rise
due to speculative activity.

23. Direct action
◦ Direct action refers to the direction and control of the central bank that may enforce on all
banks or a particular bank concerning the lending and investment.
In such cases :
1. Real me refused to sanction further accommodation to the bank
2. RBI may reject together any application for grant of discounting facilities in the bank
3. It may change penal rate of interest on loans taken by a bank beyond the prescribed time limit

24. Bibliography
: Economics – Macroeconomics – NCERT
Macroeconomics – Sandeep Garg
www.Wikipedia.com
www.economictimes.com