Class 12 Economics Project. Role of RBI in Control of Credit 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 nonbanking finance companies in India. RBI was set up in 1935 under the Reserve Bank of India Act,1934. https://bit.ly/3uSQan3 (Create Your own hosting Page and start earning now)

1. Role of RBI in Control of Credit
• History
• Introduction
• Structure
• Functions
• Credit Control
• Need
• Limitations
• Current Rates
• Demonetization
• Objective
• Conclusion

2. 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

3. 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 neoliberal. 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.

4. 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
nonbanking 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

5. 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.

6. Structure of Reserve Bank of INDIA
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

7. 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.

8. Functions of Reserve Bank of INDIA
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

9. 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

10. 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.

11. Credit Control Methods of Reserve
Bank of INDIA
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:
1. Quantitativemethod
2. Qualitativemethod
Quantitativemethod:
1. Bank rate:

12. 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.

13. 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.

14. 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.

15. Qualitative method:
1. Margin requirements: It is the difference between the market
value of loan and the security value of loan. At the time of
inflation the margin requirement value decreases by RBI for
discouraging people and commercial banks for approaching
more and more amount of loan. On the other hand at the time
of deflation the RBI increases the value of margin just to
encourage issuing of more amount of loan to the commercial
banks and general public.
2. Moral suasion: It refers to written or oral advices given by
central bank to commercial banks to restrict or expand credit.
3. Rationing of credit: It is the related to limiting the amount of
credit, which is issued by all the commercial banks. RBI fixes the
size of issuing the credit according to the requirement of the
country.

16. Need For Credit Control
Controlling credit in the economy is amongst 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 totals to 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.

17. 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 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 credit control
method.
• There is not much co-operation between commercial banks with the
central bank.
• An unstable economy is not suitable to use credit control method.
• If steps for credit control arc not taken at primary level, it will not be
effective later.

18. CURRENT RATES
(As on 16 December 2019 )

19. DEMONETIZATION
On 8 November 2016, the Government of India announced the
demonetization 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 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.

20. Objective of Making This Project
The objectives of making this project is to Ensure an adequate level
of liquidity enough to attain high economic growth rate along with
maximum utilization of resource but without generating high
inflationary pressure. Attain stability in the exchange rate and
money market of the country. Meeting the financial requirement
during a slump in the economy and in the normal times as well.
Control business cycle and meet business needs. Violent price
fluctuations cause disturbances and maladjustments in the economic
system and have serious social consequences. Hence, price stability is
an important objective of credit control policy. The central bank, by
regulating the supply of credit in accordance with the commercial
needs of the people, can bring about price stability in the country.

21. Conclusion
The effectiveness of credit control measures in an economy depends
upon a number of factors. First, there should exist a well-organised
money market. Second, a large proportion of money in circulation
should form part of the organised 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 favourable 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.

22. BIBLIOGRAPHY
• Introductory of Macroeconomics -T.R JAIN , V.K OHRI
• https://m.rbi.org.in/
• https://en.wikipedia.org/wiki/Reserve_Bank_of_India
• https://timesofindia.indiatimes.com/topic/Reserve-Bank-of-
India • https://economictimes.indiatimes.com/markets/rbi
• https://www.business-standard.com/topic/reserve-bank-of-
india
• https://bit.ly/34i5hui