Credit Control Policy of RBI (2024)

RBI uses a Credit control monetary policy strategy to ensure that the country’s economic development is accompanied by stability. It means that banks will not only contain inflationary trends in the economy but will also stimulate economic growth, resulting in increased real national income stability in the long run. Because of its functions, including issuing notes and keeping track of cash reserves, the RBI does not regulate credit because it would cause social and economic instability in the country.

RBI- The Reserve Bank of India is India’s central bank and regulatory organisation in charge of overseeing the country’s financial sector. It is owned by the Government of India’s Ministry of Finance. It is in charge of issuing and distributing the Indian rupee.

Credit Control Policy

Credit control is a monetary policy tool used by the Reserve Bank of India to control the demand and supply of money, or liquidity, in the economy. The Reserve Bank of India (RBI) supervises the credit granted by commercial banks.

Credit Control Objectives

The following are the broad aims of India’s credit control policy:

• To maintain an acceptable amount of liquidity in order to achieve a high rate of economic growth while maximising resource use without causing severe inflationary pressure.
• To achieve stability in the country’s currency rate and money market.
• To meet financial obligations during a downturn in the economy as well as in regular times.
• Controlling the business cycle and meeting the needs of the company.

Methods Used By Rbi For Credit Control And Types Of Credit Control

RBI uses two types of credit control methods for money supply in the Indian economy, Qualitative and Quantitative.

Qualitative Method

By quality, we refer to the purposes for which a bank loan is used. Qualitative approaches regulate how money is channelled, and credit is extended in the economy. It is a selective approach of control in that it restricts credit for some sections while expanding credit for others, referred to as the ‘priority sector,’ depending on the scenario.

The Following Are The Types That Are Used In This Method

Marginal Requirement

Loan current value of security supplied for ban-value of loans authorised is a minimum criterion. For those commercial activities whose credit flow is to be controlled in the economy, the marginal requirement is raised.

Credit Rationing

There is a maximum limit to the number of loans and advances that can be made using this approach, which commercial banks cannot exceed. The Reserve Bank of India establishes a ceiling for various categories. This type of rationing is utilised when credit flow needs to be monitored, especially for speculative operations. The Reserve Bank of India can also impose a minimum “capital: total assets” ratio (the ratio of capital to total assets).

Publicity

The Reserve Bank of India (RBI) uses the media to publicise its opinions on the current market situation and the directives that commercial banks must follow in order to contain the turmoil. However, this strategy is not very effective in poor countries because of the high rate of illiteracy, which makes it difficult for people to understand laws and their repercussions.

Quantitative Method

The control of the overall amount of credit is referred to as quantitative credit control.

Bank Rate

The discount rate is another name for the bank rate. It’s the official lowest rate at which the country’s central bank is willing to re-discount approved bills of exchange or lend on recognised securities. Bank Rate is defined as “the standard rate at which it (RBI) is prepared to acquire or re-discount bills of exchange.

When a commercial bank, for example, has lent or invested all of its available funds and has little or no cash above the regulatory minimum, it may request funding from the central bank.

Working on the Bank Rate

Changes in bank rates are implemented in order to manage price levels and economic activity by altering loan demand. Its operation is based on the idea that changes in the bank rate cause changes in the market interest rate. Consider a country that is experiencing inflationary pressures. In such circ*mstances, the central bank will raise the bank rate, resulting in a higher loan rate. Borrowing will be discouraged as a result of this rise.

Role Of Rbi In Controlling Credit In India

The Reserve Bank of India, as the country’s central bank, takes essential actions to keep credit under control. The Reserve Bank of India (RBI) uses credit control to implement monetary policy and keep inflation under control. The RBI’s role in credit control makes it one of the most important bodies for the development of the Indian economy. Control of credit can be thought of as money control for a better understanding.

• Credit control is used to control the demand and supply of money. The credit-control system is utilised by the Reserve Bank of India to ensure the long-term development of the Indian economy.
• Controlling credit helps the RBI and the government achieve economic growth while also keeping inflation under control.
• In India, the RBI is the only authority for currency issuance and the custodian of cash reserves.
• The RBI’s role in credit control in India ensures that the country maintains social and economic stability.

Conclusion

In the Indian economy, the RBI’s role in credit control is crucial. The Reserve Bank of India controls the flow of credit in our economy in order to keep inflation and economic growth in check. Credit changes can cause market instability, so credit control policies must be carefully planned before being implemented.