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Role of RBI in Credit Control

The Reserve Bank of India (RBI) regulates credit to maintain economic stability through various quantitative and qualitative methods, including bank rates, open market operations, and credit rationing. Its objectives include controlling inflation, promoting growth, and ensuring financial system stability. Recent reforms and measures, such as the Monetary Policy Committee and inflation targeting, highlight RBI's adaptive approach to managing economic challenges.

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97 views16 pages

Role of RBI in Credit Control

The Reserve Bank of India (RBI) regulates credit to maintain economic stability through various quantitative and qualitative methods, including bank rates, open market operations, and credit rationing. Its objectives include controlling inflation, promoting growth, and ensuring financial system stability. Recent reforms and measures, such as the Monetary Policy Committee and inflation targeting, highlight RBI's adaptive approach to managing economic challenges.

Uploaded by

harshitrohilla2410
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Role of RBI in Control of Credit

An overview of RBI’s methods to


regulate credit in India
Introduction

• The Reserve Bank of India (RBI) controls credit to maintain economic


stability.
• Credit control refers to regulating availability and cost of credit.
• RBI ensures financial discipline and price stability through various tools.
Objectives of Credit Control

• Maintain price stability (control inflation/deflation)


• Promote economic growth
• Ensure financial system stability
• Stabilize exchange rates
• Manage business cycles
Types of Credit Control

• Quantitative (General) Credit Control


• Qualitative (Selective) Credit Control
Quantitative Methods: Bank Rate
Policy
• Bank rate: rate at which RBI lends to commercial banks.
• Higher bank rate → reduced borrowing → control inflation.
• Lower bank rate → increased borrowing → boost growth.
Quantitative Methods: Open
Market Operations
• RBI buys/sells government securities in the market.
• Selling securities absorbs liquidity.
• Buying securities injects liquidity.
Quantitative Methods: CRR & SLR

• CRR: Portion of deposits banks keep with RBI.


• Higher CRR → lower lending capacity.
• SLR: Portion of deposits in liquid assets like gold/securities.
• Higher SLR restricts credit creation.
Quantitative Methods: Repo and
Reverse Repo Rates
• Repo Rate: Short-term lending rate by RBI.
• Reverse Repo: Rate at which RBI borrows from banks.
• Used to control short-term liquidity.
Qualitative Methods: Margin
Requirements
• Margin: Difference between loan and value of collateral.
• Higher margin limits speculative borrowing.
Qualitative Methods: Credit
Rationing & Moral Suasion
• Credit Rationing: Limits credit to certain sectors.
• Moral Suasion: RBI persuades banks via guidelines.
Qualitative Methods: Direct Action

• RBI penalizes non-compliant banks.


• Actions include denying facilities or imposing restrictions.
Recent Reforms and Measures

• Monetary Policy Committee (MPC) formed in 2016.


• Inflation targeting framework: 4% ±2%.
• Use of Operation Twist and LAF for liquidity management.
Impact of RBI's Credit Control

• Controls inflation and stabilizes prices.


• Boosts or restricts economic growth as needed.
• Maintains banking sector health.
• Stabilizes currency and forex markets.
Challenges in Credit Control

• NBFCs not fully regulated by RBI.


• Informal credit sector is hard to monitor.
• Lag in policy rate transmission.
• Supply-side inflation less responsive to monetary tools.
Case Study: RBI During COVID-19

• Repo rate cut from 5.15% to 4%.


• Loan moratorium for 6 months.
• Targeted Long-Term Repo Operations (TLTRO).
• CRR reduction to boost liquidity.
Conclusion

• RBI plays a vital role in economic and credit stability.


• Uses both quantitative and qualitative tools.
• Adapts policies to manage inflation and promote growth.

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