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Quantitative & Qualitative Credit Controls Measures

Quantitative & Qualitative Credit Controls Measures

Quantitative Controls:

These are controls designed to regulate the overall volume of credit created i.e. loans given by banks. The principal instruments used under these controls are as follows:

Bank Rate:

  • It is that rate of interest at which the RBI provides refinancing facilities to commercial banks by rediscounting their bills of exchange or other commercial papers.
  • In other words, Bank Rate is the rate at which the RBI extends credit to commercial banks. The Bank Rate at present is 9 percent.

Cash Reserve Ratio:

  • The RBI Act, 1934 stipulates that a commercial bank is required to keep a certain percentage of its total deposits with the RBI in cash.
  • The RBI can vary this percentage. As such, this is also called Variable Reserve Ratio. This ratio at present is 4 percent.              Quantitative & Qualitative Credit Controls Measures
  • Generally, the RBI permits Banks to maintain minimum daily average holding of 70 percent of the mandated 4 percent CRR.
  • However, it tightened this requirement w.e.f. July, 2013 by raising the minimum daily average holding from 70 percent to 95 percent. This measure aims at squeezing liquidity from the system.

Statutory Liquidity Ratio:

  • It is that ratio/percentage of its total deposits which a commercial bank has to maintain with itself at any given point of time in the form of liquid assets like cash in hand, current balances with other banks and first class securities (generally government securities).
  • This ratio at present is 22 percent. The Banking Regulation Act, 1949 has been amended to empower the RBI to lower it as and when it deems necessary.

Open Market Operations:

  • These are operations which involve the sale and purchase of government securities by the RBI vis-a-vis the banking system.          Quantitative & Qualitative Credit Controls Measures
  • These operations not only help in stabilising the prices of government securities but more importantly, controlling the inflationary pressures from time to time as well as increasing/decreasing the supply of money.
  • The RBI uses this tool on a regular basis to adjust liquidity.

Qualitative or Selective Credit Controls:

  • They are controls designed to regulate both the volume of loan and the purpose for which loans are given by commercial banks.
  • The techniques of Selective Credit Controls are minimum margins for lending against specific securities, ceiling on the amount of credit for specific purposes (called rationing of credit) and discriminatory rates of interest charged on certain types of advances.
  • Through selective credit controls, the RBI tries to maintain sectoral and regional balance. Selective controls also include exercising its moral suasion by the RBI over banks and, as a last resort, taking direct action by way of punitive measures.
  • Selective controls have special importance in India to check speculation and hoarding by traders on the basis of loans taken from banks.                      Quantitative & Qualitative Credit Controls Measures


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