Question

Explain various methods of credit control of RBI and how it works at various levels of economic conditions.​

Answer 1

Explanation:

Methods of Credit Control:

1. Quantitative or general methods, and

2. Qualitative or selective methods.

1. Quantitative or General Methods:

The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control.

These methods regulate the lending ability of the financial sector of the whole economy and do not discriminate among the various sectors of the economy. The important quantitative methods of credit control are- (a) bank rate, (b) open market operations, and (c) cash-reserve ratio.

2. Qualitative or Selective Methods:

The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control. Unlike the quantitative methods, which affect the total volume of credit, the qualitative methods affect the types of credit, extended by the commercial banks; they affect the composition rather than the size of credit in the economy.

The important qualitative or selective methods of credit control are; (a) marginal requirements, (b) regulation of consumer credit, (c) control through directives, (d) credit rationing, (e) moral suasion and publicity, and (f) direct action.

Bank Rate Policy:

The bank rate policy is the traditional method of credit control used by a central bank. The bank rate or the discount rate is the rate at which a central bank is prepared to discount the first class bills of exchange. According to M. Spalding, the bank rate is “the minimum rate charged by the central bank for discounting approved bills of exchange.”

In its capacity as ‘lender of last resort’, the central bank helps the commercial banks by rediscounting the first class bills (i.e., by advancing loans against approved securities). The rate of interest which the central bank charges from the commercial banks for rediscounting the bills is called bank rate.

Answer 2

Answer:

The various methods employed by the RBI to control credit creation power of the commercial banks can be classified in two groups:

• quantitative controls -Quantitative controls are designed to regulate the volume of credit created by the banking system

Quantitative or traditional methods of credit control include banks rate policy, open market operations and variable reserve ratio.

• qualitative controls-qualitative measures or selective methods are designed to regulate the flow of credit in specific uses.

Qualitative or selective methods of credit control include regulation of margin requirement, credit rationing, regulation of consumer credit and direct action.

It regulates and supervise banks and other financial institutions. The RBI plays a vital role in economic growth of the country and maintaining price stability. ... It also supervises if the banks and other financial institutions are doing the job assigned to them regarding financial inclusion...

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