Briefly explain the quantitative methods of Credit control.

1.	Briefly explain the quantitative methods of Credit control.
Answer» As per Banking Regulation act of 1949, “RBI has the power to adopt and implement various credit control measures to achieve objectives like proper regulation of volume of credit and prices. Different quantitative measures implemented by RBI are as follows: (a) Bank Rate Policy: It is the standard rate at which RBI is prepared to buy or re-discount bills of exchange or commercial papers eligible for purchase according to the banking regulation act. It is the rate at which RBI extents advances to commercial banks. This influences the lending rates of commercial banks. Earlier in 1991 the rate was 12% and as on 2005, it was 6% and it was 5.5% in 2008. (b) Open Market Operations: It refers to purchase and sale of various assets like gold, Government securities, foreign exchange, etc by RBI. The expansion and control of supply of money is done by “Open market operations”. RBI purchases securities during deflation arid sells them during inflation. (c) Variable reserve requirements: As per the banking regulation act, every bank has to keep certain percentage of its total deposits with RBI in the form of reserve fund. By changing the ratio (increase or decrease) of these reserves, RBI can controlthe credit power of banks. These variable requirements are of two types. They are Cash reserve ratio (CRR) and Statutory liquidity ratio (SLR): (i) Cash reserve ratio (CRR): It is the portion of total deposits of the commercial banks . which they have to keep with RBI in the form known as cash reserves. At present CRR is at 5% as of 21^stJanuary 2005. (ii) Statutory liquidity ratio (SLR): It is the portion of total deposits of commercial banks which they have to keep with themselves and these deposits must not be Used for credit purpose. In other words, SLR refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets viz., cash, gold or approved Government securities. The SLR has been reduced to 25% on the entire net demand. This is as per the recommendations of Narasimham committee.

Answer»

As per Banking Regulation act of 1949, “RBI has the power to adopt and implement various credit control measures to achieve objectives like proper regulation of volume of credit and prices.

Different quantitative measures implemented by RBI are as follows:

(a) Bank Rate Policy: It is the standard rate at which RBI is prepared to buy or re-discount bills of exchange or commercial papers eligible for purchase according to the banking regulation act. It is the rate at which RBI extents advances to commercial banks. This influences the lending rates of commercial banks. Earlier in 1991 the rate was 12% and as on 2005, it was 6% and it was 5.5% in 2008.

(b) Open Market Operations: It refers to purchase and sale of various assets like gold, Government securities, foreign exchange, etc by RBI. The expansion and control of supply of money is done by “Open market operations”. RBI purchases securities during deflation arid sells them during inflation.

(c) Variable reserve requirements: As per the banking regulation act, every bank has to keep certain percentage of its total deposits with RBI in the form of reserve fund. By changing the ratio (increase or decrease) of these reserves, RBI can controlthe credit power of banks.

These variable requirements are of two types. They are Cash reserve ratio (CRR) and Statutory liquidity ratio (SLR):

(i) Cash reserve ratio (CRR): It is the portion of total deposits of the commercial banks . which they have to keep with RBI in the form known as cash reserves. At present CRR is at 5% as of 21^stJanuary 2005.

(ii) Statutory liquidity ratio (SLR): It is the portion of total deposits of commercial banks which they have to keep with themselves and these deposits must not be Used for credit purpose. In other words, SLR refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets viz., cash, gold or approved Government securities. The SLR has been reduced to 25% on the entire net demand. This is as per the recommendations of Narasimham committee.

Briefly explain the quantitative methods of Credit control.

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