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Unit 1.8 Powers To Control Advances, Selective Credit Control, Monetary and Credit Policy

The document discusses the Reserve Bank of India's powers to control advances and credit through various monetary policy tools. It describes general credit control instruments like bank rate policy, reserve requirements, open market operations, and moral suasion. Selective credit control allows the RBI to direct banks on credit purposes, margins, and interest rates for specific companies or sectors. The RBI's monetary and credit policy aims to manage inflation and growth through regular statements on macroeconomic conditions, monetary projections, the policy stance, and regulatory measures.

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58 views6 pages

Unit 1.8 Powers To Control Advances, Selective Credit Control, Monetary and Credit Policy

The document discusses the Reserve Bank of India's powers to control advances and credit through various monetary policy tools. It describes general credit control instruments like bank rate policy, reserve requirements, open market operations, and moral suasion. Selective credit control allows the RBI to direct banks on credit purposes, margins, and interest rates for specific companies or sectors. The RBI's monetary and credit policy aims to manage inflation and growth through regular statements on macroeconomic conditions, monetary projections, the policy stance, and regulatory measures.

Uploaded by

Riblu Bharali
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 1.

8 POWERS TO
CONTROL ADVANCES,
SELECTIVE CREDIT
CONTROL, MONETARY AND
CREDIT POLICY
IC 344 – 14/02/2022
Control advances and selective credit
▪ The core business of a banking company is to lend money in the form of loans and advances.

▪ RBI has to facilitate the flow of an adequate volume of bank credit to industry, agriculture and
trade to meet their genuine needs.

▪ At the same time, to keep inflationary pressures under check, it has to restrain undue credit
expansion and also ensure that credit is not diverted for undesirable purposes.

▪ The instruments of credit control are of two types as under:


(a) General or Quantitative
(b) Selective or Qualitative

1. Bank Rate Policy: The Bank rate has been defined in Section 49 of RBI Act as “ the
standard rate at which it (RBI) is prepared to buy or rediscount bills of exchange or other
commercial paper eligible to purchase under this Act

2/14/2022 TEZPUR UNIVERSITY


Control advances and selective credit
2. Reserve Requirements: The Reserve Bank of India is vested with the powers to vary the
CRR and SLR as explained earlier

3. Open Market: Operations Open market operations are a flexible instrument of credit
control by means of which the Reserve Bank on its own initiative alters the liquidity
position of the bank by dealing directly in the market instead of using its influence
indirectly by varying the cost of credit by REPO and REVERSE REPO

4. Moral Suasion: Moral Suasion indicates the advice and exhortations given by the Reserve
Bank to the banks and other players in the financial system, with a view to regulate and
control the flow of credit, generally, or to any one particular segment of the economy.

5. Direct Action: This technique indicates the denial of the Reserve Bank to extend facilities
to the banks which do not follow sound banking principles or where the Reserve Bank feels
the capital structure of the bank is very weak.

2/14/2022 TEZPUR UNIVERSITY


Selective credit control
▪ The Reserve Bank of India made use of the selective credit control, for the first time, when it
issued a directive on May 17, 1956, asking the banks to refrain from excessive lending
against paddy and rice and raised the existing margins by 10 per cent
▪ Under the Selective Credit Control, the authority of the Reserve Bank is exercised by virtue
of the provisions of Section 21 and 35 A of Banking Regulation Act.
▪ The Reserve Bank may give directions to banks generally or to any bank or a group of banks
in particular on different aspects of granting credit, namely, –
(a) the purposes for which advances may or may not be made
(b) the margins to be maintained in respect of secured advances
(c) the maximum amount of advances or other financial accommodation which may
be made by a bank to or the maximum amount of guarantees which may be given by a
bank on behalf of any one company, firm, association of persons or individuals, having
regard to the bank’s financial position such as paid-up capital, reserves and deposits and
other relevant considerations, and
(d) the rate of interest and other terms of conditions subject to which advances or
other financial accommodation may be granted or guarantees may be given.

2/14/2022 TEZPUR UNIVERSITY


Monetary and Credit Policy
As part of the Monetary Management, the Reserve Bank of India announces their policies on a
regular basis, which is called as Monetary and Credit Policy
Monetary Policy statement consists of two parts.
Part A cover Monetary Policy and is divided into four sections viz., –
1. Overview of global and domestic macroeconomic developments
2. Outlook and projections for growth, inflation and monetary aggregates
3. Stance of monetary policy and
4.monetary measures.
Part B deals with the developmental and regulatory policies consisting five sections viz.,
(a) Financial Stability
(b) Financial Markets
(c) Credit Delivery and Financial Inclusion
(d) Regulatory and Supervisory Measures and
(e) Institutional Developments

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Thank you all

2/14/2022 TEZPUR UNIVERSITY

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