ECONOMICS

PROJECT
ROLE OF RBI IN
CONTROL OF CREDIT

Year
2022/
2023

PREPARED BY: SUBMITTED TO:

MUHAMMAD BILAL BALOCH [Link]
 ACKNOWLEDGMENT

I would like to express my special thanks of

gratitude to my Economics teacher [Link] for
her sincere guidance in preparing my project report.
I would also like to thank my parents who helped
me a lot in finishing this project within the limited
time.

Thanks again to all who helped me.

 CONTENT
• HISTORY OF RBI
• INTRODUCTION OF RBI
• STRUCTURE OF RBI
• FUNCTIONS OF RBI
• CREDIT CONTROL
• NEED FOR CREDIT CONTROL
• LIMITATIONS OF CREDIT CONTROL
• CURRENT RATES OF RBI
• DEMONETISATION
• CASH CRUNCH
• CONCLUSION
• BIBLIOGRAPHY
 HISTORY OF
RESERVE BANK OF
INDIA
The Reserve Bank of India was established
following the Reserve Bank of India Act of
1934. Though privately owned initially, it was
nationalised in 1949 and since then fully
owned by Government of India . The
Reserve Bank of India was founded on 1
April 1935 to respond to economic troubles
after the First World War

. The Reserve Bank of India was conceptualised based on the

guidelines presented by the Central Legislative Assembly which
passed these guidelines as the RBI Act 1934. RBI was
conceptualised as per the guidelines, working style and outlook
presented by Dr. B. R. Ambedkar in his book titled “The Problem
of the Rupee – Its origin and its solution” and presented to the
Hilton Young Commission. The bank was set up based on the
recommendations of the 1926 Royal Commission on Indian
Currency and Finance, also known as the Hilton–Young
Commission. The original choice for the seal of RBI was the East
India Company Double Mohur, with the sketch of the Lion and
Palm Tree. However, it was decided to replace the lion with the
tiger, the national animal of India. The Preamble of the RBI
describes its basic functions to regulate the issue of bank notes,
keep reserves to secure monetary stability in India, and generally
to operate the currency and credit system in the best interests of
the country. The Central Office of the RBI was established in
Calcutta (now Kolkata) but was moved to Bombay (now
Mumbai) in 1937. The administration nationalised commercial
banks and established, based on the Banking Companies Act,
1949 (later called the Banking Regulation Act), a central bank
regulation as part of the RBI. Furthermore, the central bank was
ordered to support economic plan with loans .
The national economy contracted in July 1991 as the Indian
rupee was devalued. The currency lost 18% of its value
relative to the US dollar, and the Narsimham Committee
advised restructuring the financial sector by a temporal
reduced reserve ratio as well as the statutory liquidity ratio.
New guidelines were published in 1993 to establish a private
banking sector. This turning point was meant to reinforce
the market and was often called neo- liberal. The central
bank deregulated bank interests and some sectors of the
financial market like the trust and property markets. This
first phase was a success and the central government forced
a diversity liberalisation to diversify owner structures in 1998.
 RESERVE BANK OF INDIA
The Reserve Bank of India (RBI) is India's central bank, which
controls the issue and supply of the Indian rupee. RBI is the
regulator of entire Banking in India. RBI plays an important part in
the Development Strategy of the Government of India.

RBI regulates commercial banks and non-banking finance

companies working in India. It serves as the leader of the banking
system and the money market. It regulates money supply and
credit in the country. The RBI carries out India's monetary policy
and exercises supervision and control over banks and non- banking
finance companies in India. RBI was set up in 1935 under the
Reserve Bank of India Act,1934.

Until the Monetary Policy Committee was established in 2016, it

also controlled monetary policy in India. It commenced its
operations on 1 April 1935 in accordance with the Reserve Bank of
India Act, 1934. The original share capital was divided into shares of
100 each fully paid . Following India's independence on 15 August
1947, the RBI was nationalised on 1 January 1949.
The central bank is an independent apex monetary
authority which regulates banks and provides important
financial services like storing of foreign exchange reserves,
control of inflation, monetary policy report till August 2016. A
central bank is known by different names in different
countries. The functions of a central bank may vary from
country to country and are autonomous or body and
perform or through another agency vital monetary
functions in the country. A central bank is a vital financial
apex institution of an economy and the key objects of
central banks may differ from country to country still they
perform activities and functions with the goal of
maintaining economic stability and growth of an economy.
STRUCTURE
OF RBI
The central board of
directors is the main
committee of the
central bank. The
Government of India
appoints the directors
for a four-year term.
The board consists of
a governor, and not more than four deputy governors; four
directors to represent the regional boards two — usually the
Economic Affairs Secretary and the Financial Services Secretary
— from the Ministry of Finance and ten other directors from
various fields. The Reserve Bank — under Raghuram Rajan's
governorship — wanted to create a post of a chief operating
officer (COO), in the rank of deputy governor and wanted to re-
allocate work between the five of them (four deputy governor
and COO). The bank is headed by the governor, currently
Shaktikanta Das. There are four deputy governors BP Kanungo,
N. S. Vishwanathan, and Mahesh Kumar Jain. Currently there are
3 deputy governors. Viral Acharya resigned from the post in July.
Two of the four deputy governors are traditionally from RBI
ranks and are selected from the bank's executive directors. One
is nominated from among the chairpersons of public sector
banks and the other is an economist. An Indian Administrative
Service officer can also be appointed as deputy governor of RBI
and later as the governor of RBI as with the case of Y. Venugopal
Reddy and Duvvuri Subbarao. Other persons forming part of the
central board of directors of the RBI are Dr. Nachiket Mor, Y. C.
Deveshwar, Prof Damodar Acharya, Ajay Tyagi and Anjuly
Duggal.
 Uma Shankar, chief general manager (CGM) in charge of the
Reserve Bank of India's financial inclusion and development
department has taken over as executive director (ED) in the
central bank. Sudha Balakrishnan, a former vice-president at
National Securities Depository Limited, assumed charge as the
first chief financial officer (CFO) of the Reserve Bank on 15 May
2018; she was given the rank of an executive director.
 FUNCTIONS OF RBI

1. Regulator of the Banking System

RBI has the responsibility of regulating the nation's financial system.
As a regulator and supervisor of the Indian banking system it ensures
financial stability & public confidence in the banking system. RBI uses
methods like On-site inspections, off-site surveillance, scrutiny &
periodic meetings to supervise new bank licences, setting capital
requirements and regulating interest rates in specific areas. RBI is
currently focused on implementing norms.
2. Banker's bank
Reserve Bank of India also works as a central bank where commercial
banks are account holders and can deposit money. RBI maintains
banking accounts of all scheduled banks. Commercial banks create
credit. It is the duty of the RBI to control the credit through the CRR,
bank rate and open market operations. As banker's bank, the RBI
facilitates the clearing of cheques between the commercial banks and
helps the inter-bank transfer of funds. It can grant financial
accommodation to schedule banks. It acts as the lender of the last
resort by providing emergency advances to the banks.
3. Developmental role
The central bank has to perform a wide range of
promotional functions to support national objectives
and industries. The RBI faces a lot of inter-sectoral
and local inflation-related problems. Some of these
problems are results of the dominant part of the
public sector. Key tools in this effort include Priority
Sector Lending such as agriculture, micro and small
enterprises (MSE), housing and education. RBI work
towards strengthening and supporting small local
banks and encourage banks to open branches in
rural areas to include large section of society in
banking net.

4. Custodian to foreign exchange

The Reserve Bank has custody of the country's
reserves of international currency, and this enables
the Reserve Bank to deal with crisis connected with
adverse balance of payments position.

5. Issue of currency
Other than the Government of India, the Reserve
Bank of India is the sole body authorised to issue
banknotes in India. The bank also destroys
banknotes when they are not fit for circulation. All
the money issued by the central bank is its monetary
liability, i.e., the central bank is obliged to back the
currency with assets of equal value, to enhance
public confidence in paper currency. The objectives
are to issue banknotes and give the public adequate
supply of the same, to maintain the currency and
credit system of the country to utilise it in its best
advantage, and to maintain the reserves.
The RBI maintains the economic structure of the
country so that it can achieve the objective of price
stability as well as economic development because
both objectives are diverse in themselves.
6. Regulator and supervisor of the financial system
The institution is also the regulator and supervisor of the financial
system and prescribes broad parameters of banking operations
within which the country's banking and financial system functions.
Its objectives are to maintain public confidence in the system,
protect depositors' interest and provide cost-effective banking
services to the public. The Banking Ombudsman Scheme has been
formulated by the Reserve Bank of India (RBI) for effective
addressing of complaints by bank customers. The RBI controls the
monetary supply, monitors economic indicators like the gross
domestic product and has to decide the design of the rupee
banknotes as well as coins.
 CREDIT
CONTROL
METHODS OF RBI

It is one of the important function of RBI for controlling supply

of money or credit. There are 2 types of methods employed by
the RBI to control credit creation:

RBI to control credit

Quantitative method

Qualitative method

Quantitative method

1. Bank rate:

It is the rate of interest at which central bank lends funds to

commercial banks. During excess demand or inflationary gap, central
bank increases bank rate. Borrowings become costly and commercial
banks borrow less from central bank. During deflationary gap central
bank decreases the bank rate. It is cheap to borrow from the central
bank or the part of the commercial banks which in turn the
Commercial banks also decreases their lending rates.
 2. Open market operations:

The open market operations means buying and selling of bonds

and shares by RBI is open market. It is also called buying and
selling of government security by the central bank from the public
and commercial banks.

3. Repo Rate:

The term ‘Repo’ stands for ‘Repurchase agreement’. Repo is a form

of short-term, collateral-backed borrowing instrument and the
interest rate charged for such borrowings is termed as repo rate. In
India, repo rate is the rate at which Reserve Bank of India lends
money to commercial banks in India if they face a scarcity of funds.

4. Reverse Repo Rate:

Reverse repo as the name suggests is an opposite contract to the

Repo Rate. Reverse Repo rate is the rate at which the Reserve
Bank of India borrows funds from the commercial banks in the
country.
 5. Cash Reserve Ratio (CRR):

It is the ratio of bank deposits that commercial bank has to keep

with the central bank. At the time of inflation the RBI increases the
rate of CRR, similarly at the time of deflation RBI decreases the rate
of CRR.

6. Statutory Liquidity Ratio (SLR):

Every bank required to maintain a fixed percentage of its assets in

the form of cash or other liquid assets called SLR. At the time of
inflation the RBI increases the SLR, similarly at the time of deflation
RBI decreases the rate of SLR.
 Qualitative method:

1. Margin
2. Moral suasion:
requirements:

It is the difference between It refers to written or oral

the market value of loan advice given by the central
and the security value of banks to commercial banks
loan. At the time of inflation to restrict or expand credit.
the margin requirement
value decreases by RBI for
discouraging people and
commercial banks for
3. Rationing of
approaching more and
credit:
more amount of loan. On
the other hand at the time It is the related to limiting
of deflation the RBI the amount of credit, which
increases the value of is issued by all the
margin just to encourage commercial banks. RBI
issuing of more amount of fixes the size of issuing the
loan to the commercial credit according to the
banks and general public. requirement of the country.
 NEED FOR CREDIT
CONTROL

Controlling credit in the economy is among the most important

functions of the Reserve Bank of India. The basic and important
needs of credit control in the economy are-

• To encourage the overall growth of the "priority sector" those

sectors of the economy which is recognized by the government
as "prioritized" depending upon their economic condition or
government interest. These sectors broadly total around 15 in
number.
• To keep a check over the channelization of credit so that
credit is not delivered for undesirable purposes.
• To achieve the objective of controlling inflation as well as
deflation.
• To boost the economy by facilitating the flow of adequate
volume of bank credit to different sectors.
• To develop the economy.
 LIMITATIONS OF
CREDIT CONTROL

The Central bank is the main government-controlled bank in a

country, which controls the financial affairs of the country by
fixing main interest rates, issuing currency, supervising the
commercial banks, and controlling the foreign exchange rate.
And credit control is a strategy employed by manufacturers
and retailers to promote good credit among the creditworthy
and deny it to delinquent borrowers. Sometimes central bank
fails to control the flow of credit at an optimum level. Those
reasons are described below;
• To be successful in the credit control program, full control over
the money market is essential. But sometimes it is not possible.
• There are different terms of the loan period credit control
method can only affect a short-term loan.
• The unorganized money market is not suitable for use of the
credit control method.
• There is not much cooperation between commercial banks
with the central bank.
• An unstable economy is not suitable to use the credit control
method.
• If steps for credit control arc are not taken at the primary level,
it will not be effective later.
• If the lengthy plan is taken for credit control it will not work as
satisfactorily.
 CURRENT RATE
(AS ON 25 AUG 2022)
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 DEMONITAZATION

On 8 November 2016, the Government of India announced the

demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi
Series on the recommendation of the Reserve Bank of India (RBI). The
government claimed that the action would curtail the shadow economy and
crack down on the use of illicit and counterfeit cash to fund illegal activity
and terrorism. The Reserve Bank of India laid down a detailed procedure for
the exchange of the demonetized banknotes with new ₹500 and ₹2,000
banknotes of the Mahatma Gandhi New Series and ₹100 banknotes of the
preceding Mahatma Gandhi Series. The key points were: • Citizens had until
30 December 2016 to tender their old banknotes at any office of the RBI or
any bank branch and credit the value into their respective bank accounts. •
Cash withdrawals from bank accounts were restricted to ₹10,000 per day
and ₹20,000 per week per account from 10 to 13 November 2016. This limit
was increased to ₹24,000 per week from 14 November. • For immediate cash
needs, the old banknotes could be exchanged for the new ₹500 and ₹2,000
banknotes as well as ₹100 banknotes over the counter of bank branches by
filling up a requisition form along with a valid ID proof. It was announced
that this facility would be available until 30 December 2016.
 CASH CRUNCH
AND EFFECTS

The scarcity of cash due to demonetisation led to chaos, and most people
holding old banknotes faced difficulties exchanging them due to endless
lines outside banks and ATMs across India, which became a daily routine for
millions of people waiting to deposit or exchange. the ₹500 and ₹1,000
banknotes since 9 November. ATMs were running out of cash after a few
hours of being functional, and around half the ATMs in the country were
non-functional. Sporadic violence was reported in New Delhi, but there were
no reports of any grievous injury, people attacked bank premises and ATMs
and a ration shop was looted in Madhya Pradesh after the shop owner
refused to accept ₹500 banknotes.
 CONCLUSION

The effectiveness of credit control measures in an economy

depends upon a number of factors. First, there should exist
a well-organized money market. Second, a large proportion
of money in circulation should form part of the organized
money market. Finally, the money and capital markets
should be extensive in coverage and elastic in nature.

Extensiveness enlarges the scope of credit control

measures and elasticity lends it adjustability to the changed
conditions. In most of the developed economies, a favorable
environment in terms of the factors discussed before exists,
in the developing economies, on the contrary, economic
conditions are such as to limit the effectiveness of the credit
control measures.
 BIBLIOGRAPHY

• Introductory of Macroeconomics -T.R JAIN , V.K OHRI

• [Link]

• [Link]

• [Link]

• [Link]

• [Link]

• [Link]

• [Link]
control-of-credit-economics
 THANK
YOU

Muhammad Bilal
Class 12-B