Get AHSEC Class 12 Finance Chapter: 3 CREDIT CONTROL TECHNIQUES OF THE RESERVE BANK OF INDIA Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: 3 CREDIT CONTROL TECHNIQUES OF THE RESERVE BANK OF INDIA Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 3 CREDIT CONTROL TECHNIQUES OF THE RESERVE BANK OF INDIA
1. What do you mean by credit control? What are the objectives of credit control?
Ans: Credit control refers to the measures and strategies employed by central bank of a country, such as the Reserve Bank of India, to regulate and manage the extent and nature of credit extended by commercial banks. These controls are crucial for maintaining economic stability. Through various monetary policy tools, the central bank influences the availability and cost of credit, thereby affecting borrowing and spending behavior in the economy. By adjusting interest rates, reserve requirements and open market operations, the central bank can either stimulate or curb lending activities. The goal is to strike a balance between promoting economic growth and preventing inflation, ensuring that credit flows to productive sectors without destabilizing the overall financial health of the nation.
Credit control, managed by the Reserve Bank of India (RBI), aims to achieve economic stability and growth. Its objectives are:
i. Price Stability: RBI uses credit control techniques to stabilize consumer prices. This boosts consumer confidence, encourages business activities and promotes trade by ensuring consistent prices for goods.
ii. Exchange Rate Stability: Maintaining a steady exchange rate is crucial for smooth international trade and relations. Stable rates discourage speculation, ensuring reliable foreign trade.
iii. Cyclical Fluctuation Control: To manage economic cycles, RBI adjusts credit supply. During booms, it tightens credit to limit excessive money supply, while in recovery periods, it eases credit to boost money flow.
iv. Income and Employment Maximisation: Credit control supports income, employment and economic growth, contributing to overall prosperity. Financial Requirements: One crucial goal of the Reserve Bank of India’s credit control is to fulfil the financial needs of the nation.
vi. Money Market Stability: Credit control maintains stability in the money market, ensuring efficient financial operations.
vii. Balance of Payment Equilibrium: Credit control helps maintain a balanced international trade situation, preventing trade imbalances.
2. What are the Quantitative Credit Control Techniques by Reserve Bank of India?
Ans: Quantitative Credit Control Techniques by Reserve Bank of India
1. Bank Rate: The bank rate is the interest rate at which the central bank lends money to commercial banks. It affects the overall cost of borrowing in the economy. When the central bank adjusts the bank rate:
i. Credit Expansion: Lowering the bank rate encourages borrowing by making loans more affordable. This boosts economic activity as businesses and individuals take advantage of cheaper credit, leading to increased money supply.
ii. Credit Contraction: Raising the bank rate makes borrowing more expensive. This discourages borrowing, reduces the demand for loans and subsequently decreases the money supply, helping manage inflation.
2. Open Market Operation: Open market operations involve the buying and selling of government securities by the central bank. These transactions impact the liquidity of the banking system. When the central bank engages in open market operations:
i. Credit Expansion: Purchasing government securities injects money into the banking system. Banks have more funds to lend at lower rates, stimulating credit creation and fostering economic growth.
ii. Credit Contraction: Selling government securities withdraws money from the banking system. With reduced liquidity, banks lend less, leading to reduced credit availability and moderating inflation.
3. Cash Reserve Ratio (CRR): The cash reserve ratio is the percentage of deposits that banks are required to hold in reserve with the central bank. The CRR can be varied by the RBI from 3% to 15% of banks’ net demand and time liabilities (NDTL). Adjusting the CRR affects the amount of money banks can lend out:
i) Credit Expansion: Lowering the CRR allows banks to keep a smaller portion of their deposits as reserves, giving them more funds to lend. This encourages credit expansion and supports economic activity.
ii). Credit Contraction: Raising the CRR mandates banks to hold a larger portion of their deposits as reserves. This limits their lending capacity, curbing excessive credit growth and managing inflation.
4. Statutory Liquidity Ratio (SLR): The statutory liquidity ratio mandates the percentage of certain liquid assets that banks must maintain. These assets include cash, gold and government securities:
i). Credit Expansion: Reducing the SLR increases the funds available for lending, promoting credit expansion. Banks have greater liquidity to extend loans, supporting economic activities.
ii). Credit Contraction: Increasing the SLR compels banks to hold a larger portion of their assets in liquid form, limiting their lending capacity. This helps manage credit growth and control inflation.
5. What are the Qualitative or selective credit control techniques of RBI?
Ans: Qualitative or selective credit control techniques are designed to direct the flow of credit toward priority sectors and productive uses while curbing non-essential consumption and speculative activities. These measures provide the central bank with tools to guide banks’ lending behavior in ways that contribute to economic stability and growth.
These techniques are Qualitative/Selective Credit Control Techniques
1. Issue of Directives: The Reserve Bank of India (RBI) has the authority to issue directives to commercial banks through written or oral communication. These directives guide banks on their lending policies, restricting specific types of transactions and urging caution against certain activities. The RBI can also call for periodical reports, inspect banks’ books, grant or deny permission for opening new branches and require banks to submit annual progress reports. This method influences banks to align their lending practices with the central bank’s monetary policy goals.
2. Regulation of Consumer Credit: This technique aims to regulate consumer spending on non-essential consumer durables. The RBI places restrictions on bank loans used to finance installment sales of items like automobiles, electronics and appliances. By controlling consumer credit, the RBI can manage excessive consumer spending and ensure that credit flows to more productive sectors of the economy .
3. Credit Rationing: Credit rationing involves setting credit quotas for specific categories of loans and advances to commercial banks. This approach restricts credit flow to undesirable sectors while channeling it towards priority sectors. By controlling the allocation of credit, the RBI can encourage lending to sectors that contribute to economic growth and development.
4. Margin Requirements: Margin requirements refer to the difference between the loan amount and the market value of assets pledged as collateral. The RBI adjusts margin requirements to influence the size of loans. It can raise margins for non-desirable sectors to discourage lending and lower margins for priority sectors to encourage lending. This technique directly affects the borrowing capacity of businesses and individuals.
5. Moral Suasion: Moral suasion involves the RBI using informal persuasion to influence o mmercial banks’ lending practices. During periods of inflation, the RBI advises banks to reduce financing for speculative or non-essential activities, Conversely, during deflationary periods, the RBI encourages banks to ease their lending criteria, lower margins and stimulate credit flow to counter economic downturns.
6. Direct Action: Under direct action, the RBI takes punitive measures against banks that fail to comply with its directives. These measures can include penalties, fines, denial of rediscounting facilities, or refusal of credit supply. This technique compels banks to align their activities with the RBI’s policy goals, ensuring that lending practices support the broader economic objectives of the country.
7. Write a short note on :
a. Cash Reserve Ratio (CRR)
B. Statutory Liquidity Ratio (SLR)
Ans: a. Cash Reserve Ratio (CRR): Cash Reserve Ratio (CRR) is a crucial monetary policy tool used by the Reserve Bank of India (RBI) to regulate the amount of funds that banks must maintain with the central bank as a percentage of their total deposits. The CRR can be varied by the RBI from 3% to 15% of banks’ net demand and time liabilities (NDTL). By adjusting the CRR, the RBI can influence the liquidity levels of banks and the overall money supply in the economy. A reduction in CRR boosts the funds available for lending, encouraging credit expansion and economic growth. Conversely, an increase in CRR limits the lending capacity of banks, curbing excessive credit growth and helping control inflation. CRR plays a significant role in maintaining the stability of the financial system while steering economic growth.
b. Statutory Liquidity Ratio (SLR): The Statutory Liquidity Ratio (SLR) mandates that banks maintain a certain percentage of their assets in the form of liquid assets like cash, gold and government securities. The SLR serves as a safeguard to ensure banks have readily available resources to meet their obligations and maintain stability. Adjusting the SLR directly impacts the amount of funds available for lending. Lowering the SLR provides banks with more liquidity, enabling increased lending and stimulating economic activity. Conversely, raising the SLR restricts lending capacity, contributing to credit moderation and aiding in controlling inflation.
The SLR, along with other tools, helps the RBI shape credit flows to align with economic priorities. (add from long asn, as per the marks given)
6. What are the differences between CRR and SLR?
| Points | Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
| Meaning | It’s the percentage of total deposits (Net Demand and Time Liabilities or NDTL) that banks must hold as cash reserves with the RBI. | It’s the percentage of total deposits (demand and time deposits) that banks must maintain in the form of liquid assets like government securities. |
| Purpose | It’s used to control the money supply in the economy and facilitates the Lender of Last Resort (LOLR) relationship between banks and the RBI. | It’s designed to ensure liquidity in the banking system, acting as a buffer against sudden withdrawals and loan defaults. |
| Held with | The cash reserves are held with the RBI. | Banks themselves hold the specified liquid assets. |
| Liquidity Effect | Reduces liquidity in banks, but enables them to avail the lender of last resort facility | Increases banks’ liquidity by providing a safety net against liquidity shocks. |
| Effectiveness | CRR is considered less effective in SLR is seen as a more effective tool for managing the money supply, especially managing liquidity in the banking system. during situations of simultaneous inflation and depreciation. | SLR is seen as a more effective tool for managing liquidity in the banking system. |
6. What are the similarities between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)?
Ans: The similarities between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) :-
(a) Frequency: Both the CRR and SLR need to be maintained on a daily basis.
(b) Penalty: Banks face penalties if they fail to maintain the required CRR or SLR.
(c) Applicability: Similar to CRR, it’s applicable to Scheduled Commercial Banks, Small Finance Banks, Payments Banks, Local Area Banks, Co-operative Banks.
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