The Reserve Bank of India, the Central Bank of India, is the highest monetary institution responsible for overseeing, regulating, controlling and developing India’s monetary and financial system. The Reserve Bank of India Act, established in April 1934. The Reserve Bank of India serves as the government banker for the central and state governments. In addition to bankers, the Reserve Bank of India plays an important role in various fields, such as representing India at the IMF meeting, handling governments (central and state), lending schemes for issuing currencies in the country, and bankers of the Reserve Bank and custodians of the diplomatic exchange.
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RBI is also a credit controller created by commercial banks; it controls credit.
You are watching: Role of RBI in Control of Credit: Quantitative and Qualitative Instruments Explained
Therefore, in this article, despite the various functions of RBI, we will explore its core function as the role of the Reserve Bank of India in credit control.
What is the Reserve Bank of India’s credit control policy?
It refers to the policy of the national central bank to regulate and control credit policies.
The Reserve Bank of India has taken various measures to control the credit supply of commercial banks. This is why the Reserve Bank of India’s monetary policy is often called credit control policies, and these measures are called monetary policy tools, where the Reserve Bank of India controls credit policies based on two methods, which is:
1. Quantitative instruments
2. Qualitative instruments
Quantitative instruments
In quantitative tools, the Reserve Bank of India has five main policy rates using its credit control policy, which are:
1. Bank interest rates:
This is the rate at which the Reserve Bank of India provides commercial banks with reverified facilities. The Reserve Bank of India raised bank interest rates during inflation and lowered bank interest rates during slowing or recession.
In short, bank interest rates are the interest rates that the Reserve Bank of India has long provided loans to Indian commercial banks.
notes:
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Refinancing: When a piece of paper is used for funding requirements more than once, i.e. when the same instrument is used more than once to meet the financial requirements, it is “refinancing”.
When we cancel the security of financial documents, the activity, i.e. pays money with interest, and cancels the event, which is called “bond discount”
Therefore, re-entry means when a security is discounted more than once.
2. Cash reserve ratio (CRR):
It is the average daily balance (net demand and time liabilities, i.e. NDTL) of the bank, i.e. the total deposit of the bank, the bank must maintain cash with the Reserve Bank of India, and the money is returned to the bank when the bank is at high financial risk.
When RBI increases CRR, it is called tight monetary policy, and when the Reserve Bank of India lowers CRR, it is called free monetary policy.
3. Legal liquid ratio (SLR):
SLR is the ratio of NDTL, i.e. the total deposit of Indian banks, and the bank must save 18% on any given time point in the form of cash, gold or government security at any given time point. The main reason for retaining the large savings of the bank itself is to maintain an adequate banking system for any future problems (such as bankruptcy) when the government requests the loan amount and it is easy for banks to provide loans to central and state governments.
4. Repurchase and reverse repurchase rates:
The short-term auction activity conducted by the Reserve Bank of India India (RBI) since 1992 is essentially a short-term auction activity that manages short-term fluctuations in the money supply.
Therefore, the Reserve Bank of India often adopts repurchases, which means “repurchasing”.
Therefore, the repurchase rate refers to the injecting liquidity, i.e. the funds in which the Reserve Bank of India purchases government securities or bonds from the bank and sells them on a fixed date. In short, when any commercial bank wants to obtain a loan from the Reserve Bank of India, the interest that the bank will refund the loan amount to the Reserve Bank of India will be the repurchase rate.
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Although the reverse repurchase rate refers to absorbing liquidity by borrowing funds from banks in the short term. In short, when the RBI itself asks the bank for funds, in return, there is interest to return it to the bank, the interest on the rate of return will be your reverse repurchase rate.
This repository and reverse repo rate can be applied from both sides, i.e. also from the bank side and from the Reserve Bank of India. However, if the reverse repurchase rate is adopted from the Reserve Bank of India (RBI), it is called open market operation (the bank can control the credit flow by buying and selling government securities on the open market. Selling securities allows the Reserve Bank of India to absorb cash from the economy while buying liquidity back into the market.). )
5. Edge Stand Facilities (MSF):
MSF is a reservation bank that can borrow additional funds from the RBI overnight by reducing its SLR portfolio to a limit of 2% of the NDTL (repurchase rate + 0.25%).
This provides a security wall for the banking system to prevent accidental liquidity shocks.
Qualitative instruments
These tools are used to regulate credit availability within specific sectors of economic activities by expanding or contracting funding flows. Broadly speaking, they can be divided into three types:
1. Margin requirements:
Margin requirements are the difference between the secured market value of the guaranteed guarantee as collateral and the amount of the loan approved for it. For example, if a person promises a property value of Rs 1 crore to obtain a loan of Rs 8 crore, the margin requirement will reach Rs 2 crore. The central bank adjusted its margin requirements that affect credit supply: a decrease would encourage more borrowing, while an increase would limit borrowing.
2. Credit Rating:
Learning is assigned to the maximum loan limit involved in establishing various departments or activities. Commercial banks have the right to operate within these restrictions and prohibit quotas from being exceeded when credit is extended.
3. Moral speech:
Ethical Soviet is a strategy in which the Reserve Bank of India (RBI) convinces or exerts informal pressure on commercial banks to comply with their monetary policy. Banks can be urged to adopt a restrictive lending approach during inflation and take a more tolerant stance during inflation.
in conclusion
The Reserve Bank of India (RBI) plays a crucial role in ensuring the stability and growth of India’s economy through its effective credit control measures. By implementing a mixture of quantitative tools such as CRR, SLR, Repo rate and MSF, as well as qualitative methods such as margin requirements, credit rationing and ethics of the USSR, RBI carefully manages credit flows in the economy. This dual approach not only curbs inflation and stimulates growth, but also ensures a balanced and resilient financial system that is crucial to India’s long-term economic progress.
Source: https://dinhtienhoang.edu.vn
Category: Optical Illusion