CSIR UGC

Access free live classes

Download
andGATE
+
tests on the app

IIT JAM Search

Login Join for
JEE 
Free
Karnataka CET SEARCH
Exams
Karnataka PSC
SBI Exams
Kerala PSC
IBPS Exams
MHT CET
LIC Exams
RBI Exams
MPPSC
Notifications
NDA
Upcoming Bank Exam
NEET PG
Syllabus
NEET UG
Study Material
NTA UGC
Magazine Download
Railway Exam
Bank Exams Notes
SSC & Practice
Tests
TS EAMCET
Scholarship Test
Test Series
UPSC
Learning Festival
WBPSC
Rankers Guide
CFA
Paper
Bank Analysis
Exam » Bank Exam Study Materials » General Awareness » Credit Control in Banking

Credit Control in Banking

Credit Control is a role of the Reserve Bank of India's central bank, which regulates credit,
or the supply and the demand of money or liquidity in the economy. The central bank
controls the credit extended by commercial banks to their customers through this
function.

Share

The lending method used by the financial institutions and the banks to lend
the money to the customers is known as credit control. The strategy focuses on
providing credit to consumers with a solid credit score or the credit
history. Customers with a strong credit score have a good track record of paying
their bills on time. When granting a new credit line to customers, this enables the
lenders to reduce the risk of default. Credit control enables banks and financial
organizations to identify delinquent users with a poor credit history and ensure that
they are granted credit. This can eventually assist lenders in reducing the likelihood
of clients defaulting on their debts and increasing the successful lending.

Methods of Credit Control

There are basically two methods of controlling the credit. They are Qualitative and
the Quantitative or the General Methods.

Qualitative Method
Marginal Requirement Fixation- The central bank establishes the margin that
financial institutions and commercial banks must keep for amounts provided in the
form of loans against commodities, stocks, and shares using this method. To prevent
speculative trading on stock exchanges, the central bank sets margin restrictions for
the underlying securities.

Credit Rationing- The central bank uses this strategy to try to limit the maximum
amount of loans and advances to a specific sector. Furthermore, the central bank
may set a ceiling for different types of loans and advances in specific instances. This
restriction is also expected to be adhered to by commercial banks. This makes it
easier to reduce bank lending exposure to undesirable industries.

Regulation of the consumer credit– The apex bank establishes the down payments
and the length of time over which installments are to be spread in order to regulate
consumer credit. Higher limitations are imposed during inflation to control prices by
reducing demand, whereas relaxations are offered during depression to promote
demand for commodities.

Control through the directives- The central bank uses this strategy to issue regular
directives to the commercial banks. Commercial banks are guided by these
directives in developing their lending policies. The central bank can use a directive
to alter credit structures and limit credit supply for a specified purpose. The Reserve
Bank of India (RBI) issues guidelines to commercial banks prohibiting them from
lending money to the speculative sector, such as securities, in excess of a specified
amount.

Publicity- Another way of selective credits control.. The Reserve Bank of India (RBI)
uses it to issue various reports on what is excellent and poor in the system. The
publicly available information can assist commercial banks in targeting credit
supply to specific industries.

The Moral Suasion- It refers to the Reserve Bank of India (RBI) exerting pressure on
the banking system of India without taking any serious action to ensure compliance
with the laws. It’s a recommendation to the banks and aids in the restraint of
lending during periods of high inflation. Monetary policy keeps commercial banks
informed about the central bank’s expectations. Central banks may offer directions,
recommendations, and suggestions to commercial banks to reduce loan supply for
the speculative motive under moral suasion.

Direct Actions-The RBI has the power to take actions against a banks using this way.
Second, the RBI has the authority to refuse credit to bank whose borrowings exceed
their capital. By adjusting some rates, the central banks can penalize a bank. Finally,
it has the authority to impose a prohibition on specific banks if they fail to obey its
instructions and works against the monetary policy’s goals.

Quantitative Methods
Bank Rate Policy- The bank rate is the lowest rate at which a country’s central bank
will lend money to its commercial bank and RBI utilizes it to regulate the credit in
the economy. Because the central bank provides funding to the commercial banks
by rediscounting bills, it is also known as the discount rate.

Open Market operations- The RBI’s purchase and the sale of securities are referred
to as OMO. In an inflationary scenario, for example, the RBI will begin selling
government securities, which will reduce money supply in the system (because the
buyer of the securities will pay in Rupee, thus currency from the system will go out).
The decline in money supply will lead to a reduction in funds with commercial
banks, which will further minimize their lending capability. As a result of the
decrease in lending, credit in the economy is reduced. However, it is limited by a
number of factors, including an underdeveloped securities market, surplus reserves
held by commercial banks, commercial bank debts, and so on.

Variation in the Reserve Ratio– The commercial banks are required by the RBI to
keep a certain percentage of their net demand and time obligations in Cash
Reserves. Banks must also keep a specified amount of their net demand and time
obligations in the form of liquid assets. The Cash Reserve Ratio (CRR) and the
Statutory Liquidity Ratio (SLR) are the two reserve ratios. The reserve position of
commercial banks, which regulates the availability of money in the economy, can
be affected by even little changes in these ratios.

Repurchase Option- The central bank conducts repo transactions, also known as
repurchase transactions, to manage the cash market situation. The Central Bank
grants commercial banks loans against government-approved securities for a set
length of time at a fixed rate, known as the Repo Rate, on the premise that the
borrowing bank will repurchase the securities at the established rate once the
period is up. The central bank conducts these transactions in order to drain or drain
money from the system.

Conclusion
When it comes to keeping lending organizations cash flows under check, credit
control is crucial. Subsequently, only prospective consumers with a solid credit
history of repaying their debts are chosen, according to credit control. This will
ensure that the business has sufficient cash flow and liquidity to continue operating.

Frequently Asked Questions