Role of RBI in Credit Control
Submitted by: ____________________
Class: XI
Subject: Economics
School: ____________________
Date: ____________________
Index
1. Introduction
2. Meaning and Definition
3. Application of the Concept
4. Tools of Credit Control by RBI
5. Numerical Example
6. Pros & Cons of RBI’s Credit Control
7. Student’s Own Views / Perception
8. Learning from This Work
1. Introduction
The Reserve Bank of India (RBI), India's central bank, plays a crucial role in the country’s
financial and economic stability. One of its major responsibilities is credit control, which
helps regulate the supply of money and maintain price stability in the economy. This power
becomes especially significant during inflation or recession, where excess or shortage of
money can destabilize the market. RBI uses several quantitative and qualitative tools to
manage and direct the credit flow in the country.
2. Meaning and Definition
Credit Control refers to the policies and methods used by the central bank to regulate the
quantity and quality of credit issued by commercial banks.
According to the RBI, it is “the regulation of credit by the central bank to ensure stability
and growth in the economy.”
3. Application of the Concept
Credit control impacts:
- Inflation and deflation: Reduces excess money during inflation and increases liquidity
during deflation.
- Investment decisions: Influences lending rates, which in turn affects borrowing by
businesses.
- Consumer behavior: Affects loans, EMIs, and general spending by individuals.
- Growth and employment: Helps maintain a balance between growth and price stability.
4. Tools of Credit Control by RBI
A. Quantitative Methods (General Tools)
1. Bank Rate Policy
- The interest rate at which RBI lends money to commercial banks.
- ↑ Bank rate → ↓ borrowing → ↓ credit.
2. Cash Reserve Ratio (CRR)
- Percentage of bank's total deposits to be kept with RBI.
- ↑ CRR → ↓ loanable funds → ↓ credit.
3. Statutory Liquidity Ratio (SLR)
- Minimum % of deposits to be held in liquid assets like gold/government securities.
- ↑ SLR → ↓ liquidity → ↓ credit.
4. Open Market Operations (OMO)
- Buying/selling of government securities.
- RBI sells securities → absorbs liquidity → ↓ credit.
B. Qualitative Methods (Selective Tools)
1. Margin Requirements
2. Credit Rationing
3. Moral Suasion
4. Direct Action
5. Numerical Example
Assume:
- Total Bank Deposits = ₹1,00,000
- CRR = 10%
→ Reserve to be kept = ₹10,000
→ Loanable = ₹90,000
If RBI increases CRR to 15%,
→ Reserve = ₹15,000
→ Loanable = ₹85,000
This reduces credit availability in the market.
6. Pros & Cons of RBI’s Credit Control
Pros:
- Controls inflation and stabilizes prices.
- Promotes economic growth in times of slowdown.
- Helps control speculative investments.
- Ensures disciplined banking and lending.
Cons:
- Can reduce funds for genuine businesses if too strict.
- Delays in policy transmission to markets.
- May slow down economic growth during aggressive tightening.
- Affects poor and middle-income borrowers the most.
7. Student’s Own Views / Perception
As a student, I believe that credit control is an essential tool for maintaining a balance in the
economy. The RBI must act with caution, as over-controlling credit can reduce
opportunities and weaken growth. However, in times of crisis like inflation or excessive
borrowing, RBI’s policies play a critical role in stabilizing the economy. There should be
more targeted credit policies for small businesses and rural areas.
8. Learning from This Work
- Understood how monetary policy impacts the economy.
- Learned about real-world applications of classroom concepts.
- Developed awareness of RBI’s functioning and responsibility.
- Saw how interest rates and liquidity affect credit availability.
