Transcript Reserve bank of India and Credit controlx

Introduction
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Central bank of the country
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Established on recommendation of Hilton Young Commission
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Body corporate under RBI Act 1934,which came into effect from 1
april 1935
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Apex institution of monetary system
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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
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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
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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
Central
banking
functions
Traditional
functions
Developmental
functions
General
banking
functions
Prohibitory
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
1.
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
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Monetary policy 2013-2014
Dr D Subbarao announced this policy on
may 3, 2013
 Its aim was:
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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
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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
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
Stabilization of
Money Market
Price Stability
Objectives
Control over
Trade Cycles
Economic
Stability
High level of
Employment
Techniques of
Credit Control
 Central bank – Main body to control credit.
 Control credit through its MONETARY POLICY.
 Methods are:-
Quantitative or General Methods
II. Qualitative or Selective Methods
I.
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 ----- 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
 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
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.
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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.
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.
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Marginal requirement = Value of Security - Amount
advanced
Banks keep margin while lending
 Do not advance to the full value of security pledged
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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.
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Regulation Of Consumer’s
Credit
Invented by the Federal Reserve
System of the US.
 Regulated by the control of:Hire purchase finance
Cash Down
Payments
Installment purchase
Sale of durable goods
 Can control the credit by varying :
Maximum Maturities
Period
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
Scale down
the amount of
loans
Decline to
give loans
Fix quota of
credit
Fix
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
Strength to
Monetary Policy
Precise Control
Removal Of Sectorial
Imbalances
Directive and
Effective
Flexible
Wide Effect
Balanced Growth
Disadvantages Of Selective
Credit Controls
Leakage of
credit
Reduced
Effectiveness
Purpose of
lending loan
Applicable only
to Commercial
Banks
Not useful in
Unorganized
Sector
Purpose of
taking loan
Difficulties In Credit
Control
Problem in
controlling
all types of
credit
Lack of
Banking
Traditions
Uncontrolle
d Banking
sector
Unorganized
Banking
System
Lack of Cooperation