The RBI and Credit Control

Credit control is a very important function of RBI as the Central Bank of India. For smooth
functioning of the economy RBI control credit through quantitative and qualitative methods.
Thus, the RBI exercise control over the credit granted by the commercial bank.

The reserve Bank is the most appropriate body to control the creation of credit in view if its
functions as the bank of note issue and the custodian of cash reserves of the member banks.
Unwarranted fluctuations in the volumeof credit by causing wide fluctuations in the value of
money cause greatsocial & economic unrest in the country. Thus, RBI controls credit in such
amanner, so as to bring Economic Development with stability. It means, bank will accelerate
economic growth on one side and on other side it willcontrol inflationary trends in the
economy. It leads to increase in realnational income of the country and desirable stability in the
economy.
Objectives of credit control :


To obtain stability in the internal price level.

To stabilize money market of a country.

To eliminate business cycles-inflation and depression-by controllingsupply of credit.


To meet the financial requirements of an economy not only duringnormal times but also during
emergency or war.

To help the economic growth of a country within specified period of time.

This objective has become particularly necessary for the lessdeveloped countries of present day
world.
Methods and instruments of credit control :
There are many methods of credit control. These methods can be broadlydivided into two
categories :I. Quantitative or General Methods.II. Qualitative or selective methods.The
quantitative methods of credit control aim at influencing the quantity or total volume of credit
in an economy during a particular period of time.

3) Cash Reserve Ratio (CRR) :
The RBI controls credit through change in Cash Reserve Ratio of commercial banks. According
to section 42(1) of RBI Act every schedule bank has to maintain a certain percentage reserve of
its time and demanddeposits. This ratio can be varied from 3% to 15% as directed by the
Reserve


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Bank. Reserve Bank itself changed this ratio according to the creditrequirement of the
economy. It has been changed several times in the historyof Reserve Bank of India. The cash
reserve ratio affects on the lend ablefunds of commercial banks. If this ratio increases the credit
creation capacityof commercial banks decreases. On the other hand if this ratio decreases
thecredit creation capacity of commercial banks increases.On 17 April 2008, the Reserve Bank
of India hiked the cash reserveratio of scheduled commercial banks, regional rural banks,
scheduled stateco-operative banks and scheduled primary (urban) co-operative banks by
50 basis points to 8 per cent in two stages effective 26 April 2008 and 10 May2008. The
monetary authority stated that as a result of the above increase inCRR on liabilities of the
banking system, an amount of about Rs.18,500crore of resources of banks would be absorbed.
In this context, it may benoted that surplus liquidity in the banking system amounted to
Rs.2,43,566crore as on 4 April 2008. The Reserve Bank's move comes at a time whenthere are
only 12 days left for its monetary policy. The monetary policy isdue to be announced on 29 April
2008.The hike in the cash reserve ratio of banks is a measure aimed at reducing liquidity in
the banking system therebyreducing the money supply which in turn is expected to help curb
inflation.The CRR hike will put margins of banks under a bit of a pressure since theywont be
earning anything on the money that they park with the RBI as cashreserve. The CRR hike will
put margins of banks under a bit of a pressuresince they wont be earning anything on the
money that they park with theRBI as cash reserve.On 29 April 2008, the Reserve Bank of India
released its annualmonetary policy statement for the year 2008-09. It increased the cash
reserveratio for scheduled commercial banks by 25 basis points to 8.25 per centwith effect
from 24 May 2008. It was only less than a fortnight ago that the bank had raised the cash
reserve ratio. On 17 April, the monetary authorityhad announced that the CRR would be raised
by 25 basis points with effectfrom 26 April 2008 and by another 25 basis points with effect from
10 May2008. The two increases announced on 17 April were expected to suck outRs.18,500
crore from the banking system.Recently, RBI has hiked the cash reserve ratio (CRR) by 25 basis
points to 9 per cent beginning 30 August 2008. The 25 basis points hike in the cashreserve ratio
will suck out about Rs.8,000-8,500 crore of liquidity from the banking system.


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4) Statutory Liquidity Ratio (SLR) :
According to the section 24 of the Banking Regulation Act. Every scheduleBank have to
maintain a minimum of 25% as cash of its total deposits. TheReserve Bank of India is
empowered to change this ratio. As on 21, 1997, itwas fixed to 25% of the total deposits of
Banks. It also influences the creditcreation capacity of the banks. The effect of bi\both cash
reserve ratio andstatutory liquidity ratio on credit expansion is similar. Penalties are levied
byRBI for not maintaining these ratios from scheduled banks.