Meaning: -Credit
control measures refer to those measures adopted by RBI to increase or
decrease the credit or money supply in the economy. If there is more money
supply, it will lead to inflation, and therefore, RBI will adopt credit control
measures to restrict money supply.
a.
QUANTITATIVE CREDIT (GENERAL) CONTROL
The general credit control is quantitative credit controls, which
maintain proper quantity of credit or money supply in the market. These methods
are formulated to affect proper liquidity in the market. Some of the important
general credit controls are:
1.
Bank Rate: -It
is the rate at which central bank (RBI) lends money to commercial banks by
discounting bills of exchange. It acts as a guide line to the banks for fixing
interest rates. If bank rate increases, interest rate wills goes up, and
vice-versa. The bank rate is decided by the Central Bank. In April 2010, the
bank rate was maintained at 6% p.a. Bank rate acts as a guideline to the banks
for fixing interest rates. If the bank rates increases the interest rates
increase, and vice-versa.
2.
Open Market
Operation: -Open Market Operation implies deliberate direct sales and purchase of securities. The
Central Bank sells the securities in the open market to decrease the money
supply of the banks.OMO lead to
expansion of credit when RBI buys securities. When RBI sells securities in the open market, the credit creating base
of the commercial bank is reduced. When RBI
purchases securities, the credit creation base of the banks is increased.
Decreased of money supply raises the interest rate.
3.
Cash Reserve Ratio: -The CRR also affects
money supply in the economy. It is the ratio or percentage of a bank’s (demand
and term) deposits to be kept in reserve with RBI. Increase in CRR
reduces the cash for lending, and a low CRR increases the cash for
lending by banks. The CRR was 15% in 1991. Subsequently CRR
was reduced. In April 2010, CRR was revised at 6%.
4.
Statutory regulation
Ratio: -under
SLR, the government has imposed an obligation on the banks to maintain a
certain ratio to its total deposits with
the RBI in the form of liquid assets like cash, gold, and other securities. The
SLR has been reduced form 38.5% in 1991 to present level of 25%.
5.
Development of Credit: -Various
measures have been taken by RBI to deploy (arrange) credit to various
sectors of the economy. For this a certain percentage of credit has been
earmarked. For example, 40% of the total net bank credit has been earmarked
(allocate) to the priority sector at low interest rates.
