RESERVE BANK OF INDIA AND CREDIT CONTROL

Introduction Central bank of the country Established on recommendation of Hilton Young Commission Body corporate under RBI Act 1934,which came into effect from 1 april 1935 Apex institution of monetary system Organises ,runs ,supervises,regulates and develops monetary system

Origin Most central banks established in 20th century Central bank should be an autonomous institution In 1773 Warren Hastings recommended establishment of general bank in bengal Amalgamation of 3 presidency banks in 1921 Hilton young commission suggested establishment of central bank,the RBI of india

A bill giving effect Introduced in Legislative Assembly in Jan 1927 Fresh bill introduced in Indian Legislative Assembly on September 8, 1933 Bank was inaugurated on april 1, 1935

Nationalisation of RBI Nationalised in 1948 3 major reasons: Trend towards nationalisation To control inflationary tendencies Instrument for economic development

Organisational structure of RBI

1. Central board Direction in hands of central board of directors 1 governor, 4 deputy governors and 15 directors Board delegates functions to committees Committee meets once a week generally on Wednesday Discuss important affairs of the bank

2.Local board Headquarters at Mumbai ,Kolkata, New Delhi and Chennai 4 regional areas i.e western ,eastern , northern and southern 5 members each Function: to advise central board on such matters as may be generally referred to them It performs such duties as central board may delegate to them

Functions of RBI Functions of RBI Traditional functions Central banking functions General banking functions Prohibitory functions Developmental functions

Central banking functions Note issuing Regulation of credit Bank of banks Banker of government Regulation of exchange rate

6. Other functions Export assistance Clearing house facilities Change of currency Transfer of currency Publication of information Control over nationalised banks Training in banking

B. General banking functions Accepting deposits Bills discounting Advancing loans Deal in foreign securities Deal in costly metals

C. Prohibitory functions Cannot participate in trade,commerce or industrial activities Cannot purchase its own shares or shares of any other bank Cannot give loan against security of any immovable property Cannot pay any interest on its deposits Cannot advance loans without securities

Introduction One of the important functions of RBI is to formulate and administer monetary policy of the country. It controls: The supply of money The availability of money Cost of money ,i.e rate of interest

Objectives of monetary policy Controlled expansion of money supply expansion of money supply was needed to meet the increased demand of funds RBI reorganised the need for expansion of credit Needed to finance development process Essential for growth and stability

2. Sectoral allocation of funds Allocate funds to predetermined sectors RBI has also determined the rates at which these are made available Allocation is made according to priorities

Monetary policy in 1990s Basic goal was to neutralise the impact of fiscal deficit Decrease in incremental CRR and SLR Tarapore committee: CRR reduced to 3 % Abolition of ad-hoc treasury bills from April 1997 Replaced by Ways and Means advances(WMA) Method of managing mis matches in receipts and payments

Monetary policy of 2000-2001 Liquidity management through open market operations Reduction in bank rate, CRR and repo rates Reduction of cost of funds Liberalisation of the cost of funds

Aggressively reduce NPAs Setting up of credit information bureau Universal banking Technology upgrading Entry of banks into insurance business

Monetary and credit policy of 2001-2002 Changes in prime lending rates Flexibility of holding CRR Restriction on urban co-operative banks deposit schemes for senior citizens Review of liquidity adjustment facility Interest rate foe export credit

Monetary policy 2012-2013 RBI governor , Dr D Subbarao announced this policy on april 17 2012. Challenge to control inflation Policy intended to: Adjust policy rates to level consistent with the current growth moderation Guard against risks of demand led inflationary pressures re-emerging Provide greater liquidity cushion to financial system

Monetary policy 2013-2014 Dr D Subbarao announced this policy on may 3, 2013 Its aim was: To continue address accentuated risks to growth Guard against risks of inflationary pressures Manage liquidity to ensure adequate credit flow

Monetary policy 2015-2016 Monetary and liquidity measures: Reduction in repo rate Cash reserve ratio unchanged at 4% Overnight repos Reverse repo rate Bank rate

Recommendations of CHAKRAVARTY COMMITTEE (1985) TO REVIEW THE WORKING OF MONETARY PLICY Coordination between monetary and fiscal policies Price stability Matching between authority and responsibility Strengthen credit delivery system to priority system Need for monetary budget and credit budget Monetary targeting improve yield on treasury bills

Discourage use of treasury bills for long term finance Improve yield on dated govt securities Not more than 2 lending rated for monetary sector Facilitate use of bill finance Minimise use of cash credit

Achievements of RBI Flexible monetary policy Stable structure of interest rates Sound banking and credit structure Cheap remittance facilities Successful management of public debt Foreign exchange stability

Increase in public confidence Control over money market Development of bill market Rational allocation of credit Monetary stability Contribution to economic development

Presented By:- Himani Sharma Roll No.:-5120 Class:- B.Com (2nd) CREDIT CONTROL Presented By:- Himani Sharma Roll No.:-5120 Class:- B.Com (2nd)

Meaning Main Function of the central bank is to manage and control the monetary system. Necessary to achieve and maintain growth rate. The policy of credit expansion or contraction.

“Credit Control refers to the regulation of credit by the Central Bank for achieving the objective of economic growth and development.”

Objectives of Credit Control Exchange Rate Stability Price Stability Economic Stability High level of Employment Control over Trade Cycles Stabilization of Money Market

Techniques of Credit Control Central bank – Main body to control credit. Control credit through its MONETARY POLICY. Methods are:- Quantitative or General Methods Qualitative or Selective Methods General Methods Selective Methods Credit Control

A) Quantitative Or General Techniques Determine the total money supply of the country. Objective is to control the total volume of bank credit and interest rate.

General Techniques Bank Rate Open Market Operations Change in CRR Change in SLR

Bank Rate Rate of interest charged on loans & advances given by RBI to commercial banks. “Bank rate is the standard rate at which it is prepared to buy or discounts bills of exchange or other commercial papers eligible for purchase under this Act”. -- Sec 49 of The RBI, Act1934

Bank Rate and Rate of Interest Rate of interest:- Rate at which commercial banks advance loans to public. Bank rate:- Rate at which central bank advance loans to other banks. Direct link between both Bank Rate ----- Rate of Interest

Bank Rate Policy Policy by which central bank controls the credit creation. Manipulation of bank rate to influence the credit situation. Contraction of Credit Expansion of Credit

Open Market Operations The purchases and sales of government securities by the central bank in the open market. Directly influence the cash reserves with the banking system.

Open Market Operation Policy Policy by which the central bank contracts or expands the credit by sale or purchase of securities in open market. Contraction of Credit Expansion of Credit

Change In CRR “ Variation in cash reserve ratio implies changes in the minimum percentage of the deposits to be kept as reserve funds by the banks with the central bank.” -- R.A. Young First used by Federal Reserve System in 1933. Lowering or raising of CRR improves or restricts the power of commercial bank to create credit.

Policy of Varying CRR Contraction of Credit Expansion of Credit Policy by which central bank contracts or expands the credit by increasing or reducing in the CRR. Contraction of Credit Expansion of Credit

Change In SLR Policy Of Changing SLR Contraction of Credit Developed during Second World War. According to Statutory Liquidity Ratio the commercial banks have to keep a certain percentage of their assets in liquid form compulsorily. Policy Of Changing SLR Expansion of Credit Contraction of Credit

B) Qualitative Or Selective Techniques Meant to give the central bank as ability to affect particular segments of the economy on selective basis. Direct the flow of credit into desired channels for a particular segments of the economy.

Regulation of Consumer’s Credit Change in Marginal Requirement of loan Selective Techniques Regulation of Consumer’s Credit Change in Marginal Requirement of loan Rationing of Credit Moral Persuasion Publicity Direct Action

Varying Margin Requirement Method Initially used in America in 1929. Credit given for specific purpose is controlled. Marginal requirement = Value of Security - Amount advanced Banks keep margin while lending Do not advance to the full value of security pledged

For Example:- Ms Alice pledges goods worth Rs.1000 with a bank and gets loan of Rs.800 , then the difference between the asset pledged and loan ,i.e., Rs.200 is the marginal requirement. If marginal requirement is increased to 40%, then the loan will be Rs.600 only If marginal requirement is reduced to 10%, then the loan will be Rs.900.

Regulation Of Consumer’s Credit Invented by the Federal Reserve System of the US. Regulated by the control of:- Hire purchase finance Installment purchase Sale of durable goods Can control the credit by varying :- Cash Down Payments Maximum Maturities Period

Scale down the amount of loans Rationing Of Credit Central bank fix a limit for the credit facilities available to commercial bank. Limited accommodation by way of rediscounting facilities. Ways of rationing of credit:- limits of loans Fix Scale down the amount of loans Fix quota of credit Decline to give loans

Direct Action Restrictions imposed by the Central bank on commercial banks concerning lending & lending. Direct dealings with bank which adopt policies against the policies of RBI. No financial accommodation to the defaulting bank.

Moral Persuasion Not a statutory obligation. Merely a request to commercial banks not to apply fund for speculative activities. Central bank persuades & seeks the co-operation. Check & restrict non-essential activities. Success depends on the prestige enjoyed by the Central Bank.

Publicity And Propaganda Excessively used to implement credit control. Wide publicity of credit policy through Media Publicity. Purpose is to bring the banking community under the pressure of public opinion. In the interest of the economy. Takes the form of Periodicals Journals

Advantages Of Selective Credit Controls Directive and Effective Flexible Wide Effect Balanced Growth Removal Of Sectorial Imbalances Precise Control Strength to Monetary Policy

Disadvantages Of Selective Credit Controls Applicable only to Commercial Banks Not useful in Unorganized Sector Purpose of taking loan Purpose of lending loan Reduced Effectiveness Leakage of credit

Difficulties In Credit Control Lack of Banking Traditions Problem in controlling all types of credit Uncontrolled Banking sector Unorganized Banking System Lack of Co-operation

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