Under the selective or qualitative credit control methods, the RBI encourages flow of credit only to certain types of industries and discourages the use of bank. Credit Control: Quantitative Measures v/s Qualitative Measures RBI. Quantitative Measures. Bank Rate Policy. Open Market Operations. Cash Reserve Ratio. Statutory Liquidity Ratio. Qualitative Measures. Margin requirements. Consumer Credit Regulation. RBI Guidelines. Rationing of credit. Moral Suasion. Direct Action. Quantitative Methods. BANK RATE: It is the rate at which bills are discounted & rediscounted by the banks with the RBI. During inflation, the.
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The two categories are: Quantitative or General Methods II.
Credit Control By RBI / Central Bank - Objectives, Measures, Importance
Qualitative or Selective Methods. Quantitative or General Methods: The bank rate is the rate at which the Central Bank of a country is prepared to re-discount the first class securities.
It means the bank is prepared to advance loans on approved securities to its member banks. As the Central Bank is only the lender of the last resort the bank rate is normally higher than the market rate. During deflationary gap central bank decreases the bank rate.
It is cheap to borrow from the central bank or the part of the commercial banks which in turn the Commercial banks methods of credit control by rbi decreases their lending rates.
The open market operations means buying and selling of bonds and shares by RBI is open market. It is also called buying and selling of government security by the central bank from the public and commercial banks.
RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during deflation. Graph showing variations in the Bank Rate from — current year  By quantitative credit control we mean the control of the total quantity of credit.
CREDIT CONTROL METHODS OF RBI
For Example- let us consider that the Central Bank, on the basis of its calculations, considers that Rs. But the actual credit at that given point of time is Rs. Thus methods of credit control by rbi then becomes necessary for the central bank to bring it down to 50, by tightening its policies.
Similarly if the actual credit is less, say 45, then the apex bank regulates its policies in favor of pumping credit into the economy. Different tools used under this method are- Chart showing effect of increase in bank rate Bank rate[ edit ] Bank rate also known as the discount rate is the official minimum rate at which the central bank of the country is ready to rediscount approved bills of exchange or lend on approved securities.
Section 49 of the Reserve Bank of India Actdefines Bank Rate as "the standard rate at which it RBI is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act".
It may methods of credit control by rbi re-discount some of its bills with the central bank or it may borrow from the central bank against the collateral of its own promissory notes. It paves way for the optimum utilization of money. Credit Authorization Scheme The RBI introduced credit authorization scheme inas one of the types of selective credit control.
Under the scheme, commercial banks were asked to obtain prior. Later the limit was gradually methods of credit control by rbi and it was Rs. However the scheme was discontinued in The idea behind the scheme was to watch the flow of credit to the borrowers closely and also ensure that the commercial banks are lending loans of large amount as per the credit appraisal as well as the actual requirements of the borrower.
Even methods of credit control by rbi, the RBI has been monitoring and scrutinizing all bank credits exceeding Rs. When RBI increases the bank rate, the commercial banks are discouraged from taking loans as now they have to pay a higher interest rate on loans from central bank then before.
The commercial banks in turn start charging higher interest rate from consumers traders and businesses seeking loans which increases the cost of credit. It does so by affecting the demand for credit the cost of the credit and the availability of the credit.
An increase in bank rate results in an increase in the cost of credit; this is expected to lead to a contraction in demand for credit.
In as much as bank credit is an important component of aggregate money supply in the economy, a contraction in demand for credit consequent on an increase in the cost of credit restricts the total availability of money in the economy, and methods of credit control by rbi may prove an anti-inflationary measure of control.
Likewise, a fall in the bank rate causes other rates of interest to come down. The cost of credit falls, i.
Cheap credit may induce a higher demand both for investment and consumption purposes.