Q. 293.5( 2 Votes )

Discuss how the c

Answer :

Among many functions of RBI, controlling credit is one of the most important function. By using credit control methods RBI tries to maintain monetary stability. There are two types of methods:

1. Quantitative control to regulates the volume.


2. Qualitative control to regulate the flow of credit.


Quantitative measures:


a. Bank Rate policy: When banks borrow long term funds from RBI. They’ve to pay an interest rate to RBI. To increase the money supply in the market RBI decreases the bank rate while to decrease the money supply it increases the Bank rate.


b. Open market operation: When RBI either buy or sell the government securities in the open market to control the supply of money. during inflation i.e. when money supply increased in economy RBI starts selling the securities.


c. cash reserve ratio: it is the portion of total deposits in commercial Bank which it has to keep with RBI as cash reserves. When the economy has inflationary trend then the RBI increases the CRR.


d. Statutory liquidity ratio: it refers to that portion of deposits with the banks which it has to keep with itself as liquid assets(Gold, approved govt. securities etc.)


Qualitative measures:


a) Margin Requirements
The aim of this method is to prevent excessive use of credit to purchase securities by speculators. The central bank fixes minimum margin requirements on loans for purchasing securities


b) Regulation of consumer credit
Under this instrument, the central bank regulates the use of bank credit by consumers in order to buy durable consumer goods in installments


c) Moral suasion
Moral suasion implies persuasion and request made by the central bank to the commercial banks to follow the general monetary policy in the context of the current economic situation.


d) Publicity
The central bank publishes weekly or monthly or quarterly statements of the assets and liabilities of the commercial banks for the information of the public.


OR


Commercial banks are the banks that accept deposits from the public and lend the money in the investments projects that give interest.


The commercial banks create credit mainly through two processes one is by the advancement of loans and second through accepting deposits.


The banks issue loans from the amount that is held in the form of a cash reserve.


Example:


Money deposited =Rs 10000 ( primary deposit of Bank)


Cash reserve ratio =10%


Amount kept as a reserve by the bank with the RBI =Rs 1000


Rs 9000 for lending purpose


Total credit creation=Original deposit*Credit multiplier coefficient


Credit multiplier coefficient=1/r r=cash resrve requirement


Credit multiplier coefficient =1/10%=10


Total credit created =1000*10=10000


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