Banking Awareness 2017 Lesson 4
What is Credit Control ?
In uncomplicated words, nosotros tin tell that Credit Control is a laid of actions used past times a authorities to bring down the sum of coin available for borrowing or spending. Using this, the RBI volition command the need too provide of coin (liquidity) inwards the economy.
Methods of Credit Control past times RBI
Mainly, nosotros tin carve upwardly these methods into 2 categories. They are,
Banking Awareness – Methods of Credit Control past times RBI
There are several sub categories inwards these 2 methods. They are,
- Bank Rate
- Net Liquidity Ratio
- Open Market Operation
- Cash Reserve Ratio
- Statutory Liquidity Ratio (SLR)
- Direct Action
- Credit Authorization Scheme
- Moral Suasion
- Margin Requirement
- Rationing of Credit
Now let’s bring a detailed await at them.
Quantitative Methods :
- Bank Rate : It is also known every bit discount rate. The depository fiscal establishment charge per unit of measurement is the charge per unit of measurement at which the Reserve Bank advances to the fellow member banks against approved securities or re-discounts the eligible bills of telephone substitution too other papers.
- Note : It is a Long Term lending.
- Net Liquidity Ratio : It was introduced inwards the twelvemonth 1964 past times the Reserve Bank of Republic of Republic of India (RBI) to command excessive borrowings past times commercial banks from RBI. Thus a commercial depository fiscal establishment tin borrow from the Reserve Bank at the Bank Rate exclusively if it maintains minimum Net Liquidity Ratio to its full need & fourth dimension liabilities.
- Open Market Operation (OMO) : With OMO tool RBI buys too sells authorities securities from / to populace too banks on its ain trouble organisation human relationship inwards social club to command liquidity inwards market.
- Cash Reserve Ratio (CRR) : It started inwards June 1973. Commercial Banks are required to hold for sure per centum of NDTL (Net Demand & Time Liabilities) every bit cash on fortnightly average basis.
- Important Points to Note :
- If CRR increases too then excess reserve of depository fiscal establishment decreases. If CRR decreases the exess reser of depository fiscal establishment increases.
- RBI volition non pay whatever involvement on CRR amongst number from 31st March 2007.
- Statutory Liquidity Ratio (SLR) : Every commercial depository fiscal establishment is required to hold liquid assets inwards shape of cash, gilt too other approved securities amongst RBI inwards social club to command depository fiscal establishment credit. There is no minimum bound but maximum bound is 40% of NDTL (Net Demand & Time Liability).
- Formula : Liquid assets (Demand + fourth dimension liabilities) x 100
Qualitative Methods :
It aims at diverting the depository fiscal establishment advances into for sure productive functions from unproductive functions.
- Direct Action : RBI tin number directives to the banking companies regarding their advances. These directions may relate to :
- The purpose for which advances may or may non survive made.
- The margins to survive maintained inwards honor of secured advances.
- The maximum sum of advance to whatever borrower.
- The charge per unit of measurement of involvement too other damage too weather condition for granting advances.
- Credit Authorization Scheme : Under this system the commercial banks has to obtain RBI’s authorisation earlier granting whatever fresh credit of Rs. 1 crore or to a greater extent than to whatever unmarried party.
- Moral Suasion : In uncomplicated words, nosotros tin tell that Suasion is nix but Influence. The influence used to brand banks too other fiscal institutions to give-up the ghost on to rules too human activity inwards the best interests of the economy. RBI periodically sends missive of the alphabet to the commercial banks to exercise restraint over their credit policies inwards full general too inwards honor to for sure commodities & unsecured loan inwards particular.
- Publicity : RBI uses media for the publicity of its views on the electrical current marketplace status too its directions that volition survive required to survive implemented past times the commercial banks to command the unrest.
- Margin Requirement : The margin requirement of loan refers to the departure betwixt the electrical current value of the safety offered for loans too the value of loans granted.
- Example :
- Value of Security = 100 Rs.
- Loan granted = eighty Rs.
- Margin of loan = 20%
- Rationing of Credit : It refers to fixation of credit quotas for unlike trouble organisation activities.
Other Methods :
- Liquidity Adjustment Facility (LAF) : LAF was introduced past times RBI during June 2000. It is a monetary policy tool which allows banks to borrow coin through repurchase agreements. LAF consists of Repo & Reverse Repo operations. It helps to command inflation.
- REPO Rate : Its abbreviation is Repurchase Rate. It was started inwards Dec 1992. It is a brusk term borrowing. It is the charge per unit of measurement at which the RBI lends coin to commercial banks. Reduction inwards repo charge per unit of measurement helps banks acquire coin at a cheaper charge per unit of measurement or vice-versa.
- Reverse Repo Rate : It is the charge per unit of measurement at which the RBI borrows coin from commercial banks.
- Marginal Standing Facility (MSF) : It is effective from ninth May 2011. MSF is the charge per unit of measurement at which scheduled banks could borrow funds overnight from the RBi against approved authorities securities maximum upto 2% of their NDTL.
- Important Note : MSF is pegged 100 bps or 1% inwards a higher house the repo rate.