Credit Control by RBI

Introduction– the most important function of Central Bank(RBI) is control the credit created by the commercial bank. Money and credit represent a powerful force to good or Evil in the economy. It is the duty of the central bank to ensure that money  and credit is  properly managed so that in inflationary and deflationary pressure can be control by the economy.

Commercial bank create credit in the process of lending. They have the power of credit creation. The important of credit in the settlement of the business transactions has increased. There have been a shift from money economy to credit economy in which traders and businessman are able to carry out their business transaction without immediate payment or receipt of money.

Variation in the Reserve Requirement is another important tool used by the Reserve Bank for controlling credit in the country the credit creation capacity of the bank may be influence may be influenced by the change in ratio:

Following are the two main types of this ratio

This ratio is also known as Bank reserve ratio cash reserve ratio implies that a commercial bank is required to keep a certain portion of total deposit with Reserve Bank disposal is known as cash reserve the central bank generally keep this ratio in the range of 3 % to 15% of the aggregate time and demand liability.

This ratio implies that a commercial bank needs to keep a certain portion of its total deposit with itself in the form of liquid asset. It is defined as certain percentage of total time and demand liabilities. This tool is used for influencing the velocity of credit money in an economy. It can be increased or decreased by RBI. Reserve Bank may increase the ratio to curtail credit volume generated by commercial bank. the regulation of credit value for the impacts the velocity of lending money in an economy.

Repo rate and reverse repo rate

When the commercial bank have any shortage of funds then Reserve Bank provide financial help in terms of loan. the rate at which bank borrow rupees from RBI is called repo rate.  Any reduction in the repo rate will helped commercial bank to lending money at a lower rate. on the other hand if repo rate increase than borrowing from RBI becomes more expensive.

The rate at which the Reserve Bank of India borrows money from commercial bank is called reserve repo rate. commercial bank are very comfortable to lend money to RBI because their money are in safe hand with a good interest. if reserve repo rate is increased then in encourage to transfer more funds to RBI due to this attractive interest rate it can cause the money to be drawn out of the banking system.