Credit Control: Quantitative Measures v/s Qualitative Measures RBI

Credit control is most important function of Reserve Bank of India. Credit control in the economy is required for the smooth functioning of the economy. By using credit control methods RBI tries to maintain monetary stability. There are two types of methods:

1. Quantitative control to regulates the volume of total credit.
2. Qualitative Control to regulates the flow of credit

Here is a brief description of the quantitative and qualitative measures of credit control used by RBI.

Quantitative Measures

The quantitative measures of credit control are as follows:

Bank Rate Policy

The bank rate is the Official interest rate at which RBI rediscounts the approved bills held by commercial banks. For controlling the credit, inflation and money supply, RBI will increase the Bank Rate.

Open Market Operations

Open Market Operations refer to direct sales and purchase of securities and bills in the open market by Reserve bank of India. The aim is to control volume of credit.

Cash Reserve Ratio

Cash reserve ratio refers to that portion of total deposits in commercial Bank which it has to keep with RBI as cash reserves.

Statutory Liquidity Ratio

SLR refers to that portion of deposits with the banks which it has to keep with itself as liquid assets(Gold, approved govt. securities etc.) If RBI wishes to control credit and discourage credit it would increase CRR & SLR.

Qualitative Measures

Qualitative measures are used by the RBI for selective purposes. Some of them are

Margin requirements

This refers to difference between the securities offered and amount borrowed by the banks.

Consumer Credit Regulation

This refers to issuing rules regarding down payments and maximum maturities of instalment credit for purchase of goods.

RBI Guidelines

RBI issues oral, written statements, appeals, guidelines, warnings etc. to the banks.

Rationing of credit

The RBI controls the Credit granted / allocated by commercial banks.

Moral Suasion

Psychological means and informal means of selective credit control.

Direct Action

This step is taken by the RBI against banks that don’t fulfil conditions and requirements. RBI may refuse to rediscount their papers or may give excess credits or charge a penal rate of interest over and above the Bank rate, for credit demanded beyond a limit.