CREDIT CONTROL MEASURES (OR) TOOLS
We will look into some of the Quantitative and Qualitative tools:
Quantitative Tools
1. Bank rate
1) Introduced in 1949.
2) It is the interest rate at which RBI lends to its clients for long term (here long term means more than year).
3)If we increase the bank rate, the money supply in the economic system decreases. And also if we decrease the bank rate, the money supply in the economic system increases.
2. Cash Reserve Ratio (CRR)
1) Here bank has to keep a certain amount of NDTL deposited by the people, as a reserve in the central bank.
2) By doing this, we give lending rights to the Bank as we deposit the money repectively. But it is risky.
3) So, out of the total deposits, some percentage of the deposit money should be given to RBI in cash form.
4) Except Regional rural banks (RRB) , all the banks have to follow this.
5) No interest given by RBI.
6) If we increase the CRR, money supply decreases and vice versa.
7) Short term liquidity management tool.
8) During pandemic, the CRR was decreased from 4% to 3%. But now again it has been bought back to 4%.
3. STATUTORY LIQUIDITY RATIO (SLR)
1) Here the bank itself reserves certain
percentage in form of cash, gold or govt. Security from the part of NDTL.
2) This year the percent is 18%.
3) If SLR increases, money supply decreases and if SLR decreases, money supply increases.
Note: Through CRR, bank does not get any return but through SLR Bank does get return since they save it three forms. One is gold whose values may increase in future and also govt security, because the govt returns with interest.
LAF (Liquidity Adjustment Facility)
1) Introduced in 2000.
4. Repo Rate
1) Introduced in 1992.
2) Repo means repurchase options or agreements.
3) It is the rate of interest at which RBI lends to its clients against govt security for short term.
4) It is called repurchase because the clients get their govt security back.
5) Banks use this to manage short term liquidity crunch.
6) If repo increases, money supply decreases. And if repo decreases, money supply increases.
7) To assure basic stability in financial markets.
Reverse Repo Rate
1) Introduced in 1996
2) It is the rate of interest at which RBI pays to its clients against govt security. It is also short term.
3) Tool by which surplus money is drained out.
4) If reverse repo increases, money supply decreases and vice versa.
Note : If money supply is high, demand increases then inflation occurs. To avoid this, reverse repo is increased.
5. Marginal Standing Facility (MSF)
1) Introduced in 2011.
2) Also called as overnight loan or call money.
3) Banks can borrow up to 2% of their NDTL from the RBI.
4) Penal rate – some % higher than repo but some % less than reverse repo.
5) If MSF increases, the money supply decreases. If MSF decreases, the money supply increases.
6) Aligned with bank rate.
MPC – Monetary Policy Committee : When Repo Rate is fixed, the money supply is controlled, then others gets aligned.
Reserved requirements are SLR and CRR.
LTRO – Long Term Repo Operations, introduced during the pandemic period. The duration of the period is one to three years, unlike repo which is one year.
Content Credits : Leo Tejasveena
