Question

How is RBI controlling the Commercial Banks?

Answer 1

Answer:

The Reserve Bank of India has the authority to inspect and manage commercial banks under the Banking Regulation Act, $1949$. On-site inspection and remote monitoring are the methods used to exercise these powers.

Explanation:

Through a variety of tools, including the Statutory Liquidity Ratio SLR and the Cash Reserve Ratio, RBI manages the commercial banks. Fixing interest rates and determining the type of lending to various sectors. CRR Bank Rate Prime Lending Rate PLR Repo Rate Reverse Repo Rate.

The following actions are taken by RBI to regulate commercial banks:

• The Bank Rate and Repo Rate are set by the RBI: The interest rate at which the RBI lends money to other commercial banks in the nation is known as the "bank rate." The discount rate is another name for it. The RBI frequently employs the bank rate to regulate the supply of money in the economy. Repo Rate, on the other hand, is the cost at which commercial banks will borrow money from the RBI in exchange for securities. RBI raises these rates to make credit more expensive.

• Variable Reserve Ratios: Commercial banks must maintain a specific percentage of their total assets in liquid assets to ensure that they can always honor customers' withdrawal requests.
• Cash Reserve Ratio (CRR): The CRR refers to the percentage of commercial banks' deposits that must be kept in cash with the RBI.
• Statutory Liquidity Ratio (SLR): This term describes the proportion of deposits that commercial banks must keep as reserves in the form of gold or foreign securities. Commercial banks' ability to lend money is impacted by reserve ratio variations.
• Setting Margin Requirements: The "proportion of the loan amount which is not financed by the bank" is referred to as the margin. The RBI attempts to regulate the lending capacity of banks by raising or lowering margin requirements.
• Credit Rationing: The RBI may set the maximum amount of credit that may be extended for different purposes, which may help to reduce credit demand.