Quantitative Methods

Quantitative Methods

The general credit control is quantitative credit controls, which maintain proper quantity of credit or money supply in the market. These methods are formulated to affect proper liquidity in the market.

Some of the important general credit controls are:

       1.  Bank Rate: -It is the rate at which central bank (RBI) lends money to commercial banks by discounting bills of exchange. It acts as a guide line to the banks for fixing interest rates. If bank rate increases, interest rate wills goes up, and vice-versa. The bank rate is decided by the Central Bank. In April 2010, the bank rate was maintained at 6% p.a. Bank rate acts as a guideline to the banks for fixing interest rates. If the bank rates increases the interest rates increase, and vice-versa.

        2.  Open Market Operation: -Open Market Operation implies deliberate direct sales and purchase of securities. The Central Bank sells the securities in the open market to decrease the money supply of the banks. OMO lead to expansion of credit when RBI buys securities. When RBI sells securities in the open market, the credit creating base of the commercial bank is reduced. When RBI purchases securities, the credit creation base of the banks is increased. Decreased of money supply raises the interest rate.

         3.   Cash Reserve Ratio: -The CRR also affects money supply in the economy. It is the ratio or percentage of a bank’s (demand and term) deposits to be kept in reserve withRBI. Increase in CRR reduces the cash for lending, and a low CRR increases the cash for lending by banks. The CRR was 15% in 1991. Subsequently CRR was reduced. In April 2010, CRR was revised at 6%.

        4.   Statutory regulation Ratio: -under SLR, the government has imposed an obligation on the banks to maintain a certain ratio  to its total deposits with the RBI in the form of liquid assets like cash, gold, and other securities. The SLR has been reduced form38.5% in 1991 to present level of 25%.

        5.  Development of Credit: -Various measures have been taken by RBI to deploy (arrange) credit to various sectors of the economy. For this a certain percentage of credit has been earmarked. For example, 40% of the total net bank credit has been earmarked (allocate) to the priority sector at low interest rates.

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