Credit Control refers to the various measures used by the RBI to regulate the amount of credit (loans and advances) that commercial banks can create. The primary objective is to manage the money supply in a way that promotes economic growth while maintaining price stability.
The tools of credit control are broadly divided into two categories:
- Quantitative (or General) Tools
- Qualitative (or Selective) Tools
Quantitative (General) Tools
These tools regulate the total volume of credit in the economy and affect all sectors without discrimination. They control the quantity of credit.
1. Bank Rate / Repo Rate
This is the rate at which the RBI lends to commercial banks. By increasing the rate, the RBI makes borrowing expensive, which reduces the lending capacity of banks and tightens credit. By decreasing the rate, it makes borrowing cheaper, which encourages lending and expands credit.
2. Cash Reserve Ratio (CRR)
This is the percentage of a bank’s deposits that it must keep with the RBI as cash. By increasing the CRR, the RBI reduces the amount of lendable funds available with banks. By decreasing it, the RBI increases the funds available for lending.
3. Statutory Liquidity Ratio (SLR)
This is the percentage of a bank’s deposits that it must maintain in the form of liquid assets. An increase in SLR restricts a bank’s lending capacity, while a decrease in SLR increases it.
4. Open Market Operations (OMOs)
This involves the buying and selling of government securities by the RBI. When the RBI sells securities, it sucks money out of the system, contracting credit. When it buys securities, it injects money into the system, expanding credit.
Qualitative (Selective) Tools
These tools are used to regulate the flow of credit to specific sectors or for particular purposes. They control the use and direction of credit.
1. Margin Requirements
The margin is the difference between the market value of a security offered as collateral and the amount of the loan granted against it.
- Example: If the margin requirement for a loan against shares is 40%, a bank can only lend ₹60 for shares worth ₹100.
- To restrict credit for a specific purpose (like speculative stock trading), the RBI can increase the margin requirement. To encourage credit, it can decrease the margin.
2. Credit Rationing
The RBI can fix a maximum limit or a ceiling on the amount of loans that can be granted to a particular sector or for a specific purpose. This is used to curb credit flow to non-essential or speculative activities.
3. Moral Suasion
This is an informal method where the RBI uses persuasion, advice, and requests to encourage commercial banks to follow its policy direction. While it’s not a formal rule, banks generally comply with the RBI’s guidance due to its position as the apex bank.
Summary of Tools
| Category | Quantitative (General) Tools | Qualitative (Selective) Tools |
| Scope | Affect the entire economy. | Target specific sectors. |
| Purpose | Control the total volume of credit. | Control the direction and use of credit. |
| Examples | Repo Rate, CRR, SLR, OMOs. | Margin Requirements, Credit Rationing, Moral Suasion. |