Functions & Instruments of Credit Control and Qualitative Credit Control
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 A central bank is an independent national authority that conducts monetary policy,
regulates banks, and provides financial services including economic research. Its goals are
to stabilize the nation's currency, keep unemployment low, and prevent inflation.

Most central banks are governed by a board consisting of its member banks. The country's
chief elected official appoints the director. The national legislative body approves him or
her. That keeps the central bank aligned with the nation's long-term policy goals. At the
same time, it's free of political influence in its day-to-day operations. The Bank of England
first established that model.
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 In the monetary system of all countries, the central bank occupies a most important place.
 The Central Bank is an apex institution of the monetary system which regulates the functioning
of the commercial banks of a country.
 The Central Bank of India is ‘Reserve Bank of India’.
 A Central Bank is primarily meant to promote the financial and economic stability of the
country.
 The Central Bank of a country promotes economic growth and stability and controls inflation
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 Under section 22 of RBI Act, the bank has the sole right to issue
currency notes of all denominations except one-rupee coins and notes.
 The one-rupee notes and coins and small coins are issued by Central
Government (Ministry of Finance), and their distribution is undertaken
by RBI as the agent of the government.
 The RBI has a separate issue department which is entrusted with the
issue of currency notes.
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 The RBI acts as a banker, agent and adviser to the government. It has an obligation to transact
the banking business of Central Government as well as State Governments.
 Example, RBI receives and makes all payments on behalf of the government, remits its funds,
buys and sells foreign currencies for it and gives it advice on all banking matters.
 RBI helps the Government – both Central and state – to float new loans and manage public
debt.
 On behalf of the central government, it sells treasury bills and thereby provides short-term
finance.
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 RBI acts as a banker to other banks. It provides financial assistance to scheduled banks and
state co-operative banks in the form of rediscounting of eligible bills and loans and advances
against approved securities.
 RBI acts as a lender of last resort. It provides funds to the bank when they fail to get it from
any other source.
 It also acts as a clearing house. Through RBI, banks make inter-banks payments.
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 RBI has the power to control the volume of credit created by banks. The RBI through its
various quantitative and qualitative measures regulates the money supply and bank credit in an
economy.
 RBI pumps in money during recessions and slowdowns and withdraws money supply during
an inflationary period.
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 RBI has the responsibility of removing fluctuations from the exchange rate market and
maintaining a competitive and stable exchange rate.
 RBI functions as custodian of nations foreign exchange reserves.
 It has to maintain a fair external value of Rupee.
 RBI achieves its objective through appropriate monetary and exchange rate policies.
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 The RBI collects and compiles statistical/data information on banking and financial operations,
prices, FDIs, FPIs, BOP, Exchange Rate and industries etc., of the economy.
 The Reserve Bank of India publishes a monthly Bulletin/publication for the same.
 It not only provides information but also highlights important studies and investigations
conducted by RBI.
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 The RBI has wide powers to supervise and regulate the commercial and co-operative banks in
India.
 RBI issues licenses regulate branch expansion, manages liquidity and Assets, management and
methods of working of commercial banks and amalgamation, reconstruction and liquidation of
the banks.
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 The RBI acts as a clearing house for all member banks. This avoids unnecessary transfer of
funds between the various banks.
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 The management of the money supply and credit control is an important function of the
Reserve Bank of India. The money supply has an important bearing on the functioning of the
economy.
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INSTRUMENTS OF CREDIT CONTROL AND QUALITATIVE CREDIT CONTROL
 The quantitative or general measures influence the total volume of the credit while the
qualitative measures influence the selective or particular use.
 Reserve Bank of India has the power to influence the volume of credit created by banks in
India. The banking regulation act 1949 says that the Reserve Bank of India can ask any
particular bank (or even all the banks i.e. banking system of the country) to not to lend to
particular groups/ persons.
 Apart from this RBI is armed with weapons to control the money market in India. For example
each bank has to get a license from RBI to do banking business in India and this license is
always subject to cancellation by RBI provided the bank does not fulfill the requirements
stipulated by RBI.
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1.
Bank Rate Policy: The bank rate is the Official interest rate at which RBI rediscounts the
approved bills held by commercial banks. For controlling the credit, inflation and money
supply, RBI will increase the Bank Rate. Current Bank Rate is 5.4%.
2.
Open Market Operations: OMO The Open market Operations refer to direct sales and
purchase of securities and bills in the open market by Reserve bank of India. The aim is to
control volume of credit.
3.
Cash Reserve Ratio: Cash reserve ratio refers to that portion of total deposits in commercial
Bank which it has to keep with RBI as cash reserves. The current rate is 4%.
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 Statutory Liquidity Ratio: It refers to that portion of deposits with the banks which it has to
keep with itself as liquid assets(Gold, approved govt. securities etc.). the current SLR is 18.5%.
If RBI wishes to control credit and discourage credit it would increase CRR & SLR.
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 Qualitative credit is used by the RBI for selective purposes. Some of them are;
1.
Margin requirements: This refers to difference between the securities offered and amount
borrowed by the banks.
2.
Consumer Credit Regulation: This refers to issuing rules regarding down payments and
maximum maturities of installment credit for purchase of goods.
3.
Guidelines: RBI issues oral, written statements, appeals, guidelines, warnings etc. to the
banks.
4.
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Rationing of credit: The RBI controls the Credit granted / allocated by commercial banks.
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6. Moral Suasion: psychological means and informal means of selective credit control.
7. Direct Action: This step is taken by the RBI against banks that don’t fulfill conditions and
requirements. RBI may refuse to rediscount their papers or may give excess credits or charge a
penal rate of interest over and above the Bank rate, for credit demanded beyond a limit.
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 thank YOU
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