With this new role assigned to the Bank Rate and to meet the growing demand for credits from all sectors of the economy under the liberalised economic conditions, the Bank Rate has been reduced in phases in subsequent years. • OBJECTIVE This will be the ninth increase in the interest rates since March 2010. There are two reasons for raising statutory liquidity requirements by the Reserve Bank of India: (a) It reduces commercial banks’ capacity to create credit and thus helps to check inflationary pressures. Mumbai: On 2 December, the Reserve Bank of India (RBI) asked HDFC Bank, the largest private sector lender in the country, to halt all launches of its digital business generating activities under its programme Digital 2.0 and also asked the bank to stop issuing credit cards to new customers. In order to check excessive borrowings from the Reserve Bank by the commercial banks, the Reserve Bank introduced the system of net liquidity ratio in September 1964. Moreover, since these economies are highly sensitive to inflationary pressures, the monetary policy should also serve to control inflationary tendencies by increasing savings by the people, checking credit expansion by the banking system and discouraging deficit financing by the government. The reserve system was made more flexible by making two changes: (a) By dropping proportional reserve system which required keeping of 40 per cent of reserves in gold (coins and bullion) and foreign securities, with the provision that the value of gold would not be less than Rs. In view of the Narsimham Committee report, the government decided to reduce SLR in stages from 38.5% to 25%. Again in line with the monetary policy aimed at facilitating adequate availability of credit to support industrial recovery, the CRR was further reduced to 8% in April 2000, to 7.5% in May 2001, to 5.5% in October 2001, to 4.75% in November 2002, to 4.50% in June 2003. This minimum statutory liquidity ratio is in addition to the statutory cash-reserve ratio. We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. Apart from meeting developmental and expansionary requirements of the economy, the Reserve Bank has also been assigned the task of controlling the inflationary pressures in the economy. As a result the country has been experiencing an inflationary rise in prices ever since 1955-56 and particularly after 1973-74. On the other hand, when the central bank sells securities to the banks, it reduces their cash reserves and the credit creation capacity. The interest rate regime is now tilting in favour of savers. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Such an integration requires- (a) limiting deficit financing to a reasonable limit, and (b) the credit policy cooperating with the policy of deficit financing so as to maintain a reasonable balance between aggregate demand and aggregate supply. The Reserve Bank used the technique of variable cash-reserve ratio for the first time in June 1973 when it raised the ratio from 3% to 5% and further to 7% in September 1973. During the planning era, in its attempt to check inflation, the Government of India and the Reserve Bank have accorded a high priority to monetary control. During the planning period, the large and continuous increase in the deficit financing and government expenditure has been expanding the monetary demand for goods and services. Credit control has a number of sections that include - credit approval, credit limit approval, dispatch approvals as well as collection process. The monetary policy can then play a positive role in promoting economic growth by extending credit facilities to development programmes. Content Guidelines 2. Share Your Word File The objective is to make a shift from point L on SRPC2 to point E2 on SRPC1 (in Fig. The major part of the total credit available goes to the public sector through statutory requirements and other means. (a) In its review of the monetary policy 2011-12, the RBI on January 24, 2012 left the Repo Rate unchanged at 8.50 % after raising it 13 times between March 2010 and October 2012. Inflation is expected to come down further during 2012-13. On July 15, 2013, Marginal Standing Facility (MSF) rates were raised by 200 basis points (bps.) Lack of Integration of Monetary and Fiscal Policies: Fundamental weakness in the operation of monetary policy has been the lack of integration between the fiscal policy, particularly relating to deficit financing, and the credit policy relating to the private commercial sector. The limit was later raised gradually to Rs. The interest rate on MSF will be 100 basic points above the Repo Rate and 200 basic pints above the Reverse Repo Rate. Potential Linked Credit Plans (PLPs) Through the technique of open market operations, the central bank seeks to influence the excess reserves position of the banks by purchasing and selling of government securities, commercial papers, etc. An excessive budget deficit, for example, shifts the burden of control of inflation to monetary policy. An increase in the cash- reserve ratio reduces the excess reserve of the bank and a decrease in the cash-reserve ratio increases their excess reserves. August 29, 1998. Indeed it has been the major function of the […] (b) To control and reduce the inflationary pressures in the economy. Another limitation of the monetary policy in India arises from the preponderance of currency in the total money supply. In March 1968, the bank rate was reduced to 5% in view of the recessionary conditions. The Reverse Repo Rate (short term borrowing rate) was also raised by 50 basis Points from 5.75% to 6.25%. Monetary and fiscal policies are closely interrelated and therefore should be pursued in coordination with each other. The increases in the bank rate were adopted to reduce bank credit and control inflationary pressures. The effective SLR on total outstanding net demand and time liabilities of the scheduled commercial banks come down to 27% by the end of December 1996. HDFC Bank submits plan to stop repeated glitches after RBI action Plan submitted to RBI includes both short and long-term solutions, which may take up to three months … This is Class 12 Economics Project as per the CBSE Guidelines ( 2019-20) Download This Project From Here : https://drive.google.com/file/d/1EJZakkGzp5ubvAIYpShMQRB26LVsXOXx/view?usp=drivesdk Topic : Role of RBI in Control of Credit ➡️ Reserve Bank of India - Histroy ➡️ Reserve Bank of India - Introduction ➡️ Structure of Reserve Bank of India ➡️ Functions of Reserve Bank of India ➡️ Demonetisation ➡️ Methods of Credit Control ➡️ Need of Credit Control ➡️ Limitations of Credit Control ➡️ Current Rates ( As on 14 Dec 2019 ) ➡️ OBJECTIVE ➡️ CONCLUSION ➡️ BIBILIOGRAPHY. This reduction is due to the new liberalised policy of the government. The main reasons for increase in bank credit have been: (a) The flexible approach adopted by the Reserve Bank to provide adequate credit for promoting the interests of growth and investment in the economy, particularly in the priority sector; (b) The deliberate policy of the Reserve Bank to provide liberal and concessional credit to priority sector and weaker sections such as agriculture, small scale industry, the retail trade, the self-employed and exports; (c) Preferential treatment given to the government agencies and private sector in the extension of bank credit after the nationalisation of banks. The transition to a single independently varying rate is expected to more accurately signal the monetary policy stance. It was 12% w.e.f October 8, 1991. The Seventh Five Year Plan prefers an anti-inflationary fiscal policy to an anti- inflationary monetary policy and emphasises a positive, promotional and expository role for monetary policy. Accordingly, the liquidity ratio was raised from 25% to 30% in November 1972, to 32% in 1973, to 35% in October 1981, to 36% in September 1984, to 38% to in January 1988, and to 38.5% effective from September 1990. The Lead District Officer (LDO) of the Reserve Bank of India (RBI) selectively attends the BLBC meetings. The monetary policy in the country is, thus, prominently featured as anti-inflationary. Private industries can secure funds for investment purposes through public financial institutions. The Reserve Bank has also been using moral suasion as a selective credit control measure. MORAL SUASION:-This is a tactful technique followed by RBI. (iv) A more direct involvement of the monetary authority in the allocation of credit to the non­government sector has become an important element of national economic policy, especially after the nationalisation of major banks in July 1969. It has been sending periodic letters to the commercial banks to use restraint over their credit policies in general and in respect to certain commodities and unsecured loans in particular. It was reduced to 13% in April 1996. There is an inverse relationship between inflation rate and unemployment rate. If you continue browsing the site, you agree to the use of cookies on this website. Rangarajan has summed up the performance of monetary policy of the Reserve Bank over the years in the following manner: (i) The monetary measures of the Reserve Bank have generally been a response to fiscal policy. • LIMITATIONS The Reserve Bank of India has undertaken the following selective credit controls to check speculative activities and inflationary pressures and extend credit in developmental lines: Since 1956, the Reserve Bank has been making extensive use of the selective controls and has issued many directives to the banks: (a) The first directive was issued on May 17, 1956 to restrict advances against paddy and rice. The Reserve Bank has also been providing short-term finance to the rural cooperatives. But, the Reserve Bank’s credit control measures may not prove effective in case the inflationary pressures are caused by deficit financing and shortage of goods. This has been made possible through changes in the reserve requirements of the Reserve Bank. Since July 1987, the CAS has been liberalised to allow for greater access to credit to meet genuine demands in production sectors without the prior sanction of the RBI. (iii) The areas of operation of monetary policy did not remain confined to those related to the regulation of monetary supply and keeping prices in check. RBI Project 1. The bank rate was again raised to 11% in July 1991. iv. The monetary policy in India during the planning period has been directed to meet the twin objectives of- (a) expansion of the economy and (b) control of inflationary pressures. As a first step in the pursuit of this objective, CRR was reduced in two phases from 15% to 14.5% in April 1993 and further to 14% in May 1993. It was reduced to 10% in June 1997, to 9% in October 1997, to 8% in March 1999, to 7% in April 2000, to 6.5% in October 2001, to 6.25% in October 2002, to 6.00% in April 2003. The depreciation of the rupee (to a record low of Rs. The overall trend in the economy during the planning period has been that of continuous expansion of currency and credit with an objective of meeting the developmental needs of the economy. Progress is being made on the plan of action provided to the RBI and the bank has taken this positively as it will raise the standard, according to a senior official of HDFC Bank. (with repo rate remaining unchanged at 7.25%). The bank rate was raised from 3% to 3.5% in November 1951 and was further raised to 4% in January 1963, to 5% in September 1964, to 6% in February 1965. Functions of Reserve Bank of India: The Reserve Bank of India performs all the traditional functions … 1), indicating falling- inflation-and increasing unemployment. • BIBLIOGRAPHY. • CREDIT CONTROL The CRR was raised to its existing maximum limit of 15 % with effect from July, 1989. 4 crore in November 1983, in respect of borrowers in private as well as public sector. … Existence of large quantity of money in the black market also poses a serious limitation to the monetary policy of the Reserve Bank. Written by George Mathew , Edited by Explained Desk | Mumbai | Updated: December 10, 2020 12:10:58 pm. The RBI also moved to a single policy rate regime. Role of RBI in Control of Credit This expansion has been achieved by adopting the following measures: The Reserve Bank revised its open operations policy in October 1956, according to which it started giving discriminatory support to the sale and purchase of government securities. The Indian economy is expected to grow at the rate of 6.9% during 2011-12 after having grown at the rate of 8.50% in each of the two preceding years. Subsequently, it was further raised to 7% in May to 9% in July 1974 and to 10% in July 1981. Wholesale Price Index (WPI) inflation after remaining at a higher level of over 9.00 % throughout the year has been falling since December 2011 as a result of nearly two years of tight monetary policy with adjustments of key policy rates (such as Repo Rate, Reverse Repo Rate, etc.) Cheaper loans will encourage demand for houses, automobiles and consumer durables. In case of accounts with an aggregate exposure of INR 1 billion or more, the resolution plans would require independent credit evaluation by any one credit agency authorised by RBI. In 1964, when the system was introduced, the net liquidity ratio was fixed at 28%, and for every point drop in the ratio, the interest rate was to go up by 0.5%. It requires that the banks should lend to the large borrowing concerns on the basis of credit appraisal and actual requirements of the borrowers. The RBI played a critical role in the reconstruction scheme of Yes Bank in March 2020 by putting together a bailout plan headed by State Bank of India. • INTRODUCTION Disclaimer Copyright, Share Your Knowledge since March 2010. But the anti-inflation monetary management has an adverse impact on economic growth. Banking, India, Reserve Bank, Policies, Monetary Policy of RBI. Under the original Banking Regulation Act 1949, banks were required to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposits liabilities. It aims at adequately financing of economic growth and, at the same time, ensuring reasonable price stability in the country. Banks can borrow up to 1% of their net demand and time Liabilities (NDTL). These institutions and bankers play a significant role in financing trade and industry in Indian economy. The banking regulator has asked the bank to stop all new digital business generating activities under its Digital 2.0 plan and issuance of new credit cards. So far the Reserve Bank has been assigned the minor role that the process of economic development, to the extent it depends upon the bank finance, should not be hampered because of the inadequacy of funds. In the new monetary policy, the RBI raised the Saving Bank interest rate from 3.50% to 4.00% after about two decades. The Reserve Bank of India (RBI) has directed HDFC Bank to stop issuing new credit cards and halt the launch of any new digital businesses. • CURRENT RATES Further, in case of accounts with an aggregate exposure of INR 15 billion or more, the resolution plans would require vetting by the restructuring committee constituted by the RBI. It is believed that “a fiscal policy that keeps the budget deficit down would give greater autonomy to monetary policy.”. Various failures and limitations of the Reserve Bank’s monetary policy are discussed below: The monetary policy in India has not been given an active and crucial role in the expansion and development of the economy. The RBI has advised HDFC Bank to temporarily stop all launches of the digital business generating activities planned under its programme Digital 2.0 (to be launched) and other proposed business generating IT applications, and sourcing of new credit card customers. These operations have also been used as a tool of public debt management. (b) The CRR was cut by 50 basic points to 6.50% from 6.00% where it had stood since April 2010, in a move to ease liquidity in the banking system. They assist the Indian government in raising borrowings. Continuous increase in money supply in the country has been caused by adopting the method of deficit financing to finance the budgetary deficit of the government. But, no serious efforts were made to bring about the necessary integration of monetary and fiscal policies to meet the genuine needs of the investment and growth requirements of price stability. (c) Growth projection for 2011-12 was further lowered to 7.00%. This requires a restrictive credit policy. There is now a strong need to enlarge the role of the capital market and for enterprises to bid for resources on the basis of their capacity and creditworthiness. The amendment of the Act in 1956 empowered the Reserve Banks to use the cash reserve ratio as an instrument of credit control by varying them between 2 and 20% on the demand liabilities and between 2 and 8% on the time liabilities- Further, amendment of the Act in 1962 removes the distinction between demand and time deposits and authorises the Reserve Bank to change cash-reserve ratio between 3 and 15%. The high levels of deficit financing have not only created excess monetary demands rather than increasing investment and output, but also have adversely affected the ability of the monetary authority to control overall monetary expansion. Selective credit controls are qualitative credit control measures undertaken by the central bank to divert the flow of credit from speculative and unproductive activities to productive and more urgent activities. 1 crore or more to any single party. The Reverse Repo Rate will be operative but it will be pegged at a level 100 basic points below the Repo Rate. According to this system, a commercial bank can borrow from the Reserve Bank at the bank rate only if it maintains a minimum net liquidity ratio to its total demand and time liabilities, and it will have to pay a penal rate of interest to the Reserve Bank, if the net liquidity ratio falls below the minimum ratio fixed by the Reserve Bank. (b) Modifying the minimum reserve system so that the Reserve Bank need keep only gold worth Rs. You can change your ad preferences anytime. The monetary control measures have no influence on the circulation of black money because the borrowers and lenders of this money keep their transactions secret and outside the orbit of monetary policy. In India, during the planning period, the aim of the monetary policy of the Reserve Bank has been to meet the needs of the planned development of the economy. Issue Department. The pattern of allocation of credit is in accordance with the plan priorities. The action plan will take 10-12 weeks for implementation, and further timeframe will depend on the RBI's inspection. The Reserve Bank has adopted a number of credit control measures to check the inflationary tendencies in the country: The bank rate is the rate at which the Reserve Bank advances to the member banks against approved securities or rediscounts the eligible bills of exchange and other papers. Bank rate is considered as a pace-setter in the money market. Through these institutions, the Reserve Bank provides medium-term and long-term credit facilities for development. Preparation of credit plans Planning plays an important role in the implementation of the Lead Bank Scheme and a bottom-up approach is adopted to map the existing potential for development. The main reason for the failure of the monetary policy in India during the planning period is the substantial and continuous expansion of money supply in the economy which is primarily due to two factors- (a) a large increase in the net Reserve Bank credit to the government because of large scale deficit financing undertaken by the government; and (b) a large expansion in the bank credit to the private commercial sector. Net liquidity of a borrowing bank comprises- (a) cash in hand and balances with the Reserve Bank plus (b) balances in currency account with other banks, plus (c) investments in government and other approved securities, minus (d) borrowing from the Reserve Bank, the State Bank of India and the Industrial Development Bank of India. At present, advances against the following categories of commodity are subject to selective credit control- (i) Foodgrains; (ii) pulses; (iii) oilseeds; (iv) vegetable oils; (v) sugar; and (vi) gur and Khandsari. The post was created through the Reserve Bank of India Act, 1934, and has the responsibility to … v. Credit Facilities through Financial Institutions: The Reserve Bank has also been instrumental in the establishment of various financial institutions like Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Reconstruction Corporation of India (IRCI), Industrial Credit and Investment Corporation of India (ICICI), State Finance Corporations (SFCs). Therefore, tight monetary policy stance was maintained during 2013-14 and 2014-15. List of Returns / Statements to be submitted by scheduled commercial banks to Rural Planning and Credit Department Software for Download Appointment of Statutory Auditors The situation, however, has changed since the introduction of economic reforms in early 1990s. The Reserve Bank of India (RBI) is India's central bank, responsible for the issue and supply of the Indian rupee and the regulation of the Indian banking system.It also manages the country's main payment systems and works to promote its economic development.. Until the Monetary Policy Committee was established in 2016, it also had full control monetary policy in India. IV.17 Under the LBS, one bank in each district is assigned the leadership role and acts as a consortium leader to co-ordinate the efforts of the banks in that district, particularly in matters such as branch expansion and credit planning to meet the credit needs of the district. Explore more on Rbi Credit Policy. 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