Page 51 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes
Did u know? What is the differences between Bank Rate and Repo Rate?
While repo rate is a short-term measure, i.e. applicable to short-term loans and used for
controlling the amount of money in the market, bank rate is a long-term measure and is
governed by the long-term monetary policy of the Reserve Bank.
4. Cash Reserve Ratio (CRR): All commercial banks are required to keep a certain amount of
their total deposits with RBI in form of cash. This percentage is called the cash reserve
ratio. This instrument can change the money supply very soon. Higher the CRR, lower
will be the loanable funds available with the commercial banks and so will be the amount
of credit created by them. Higher the CRR, lower is the money supply in the economy and
vice versa.
5. Statutory Liquidity Ratio (SLR): Statutory Liquidity Ratio is the percentage of demand
and time deposits that banks need to keep with themselves in any or combination of the
following forms:
(a) Cash,
(b) Gold valued at a price not exceeding the current market price,

(c) Unencumbered approved securities valued at a price as specified by the RBI from
time to time.
This is the proportion of deposits which Banks have to keep liquid in addition to CRR. This also
has the same bearing on money supply in the economy as CRR.

Qualitative Measures

1. Fixation of Margin Requirement: Banker lends money against price of securities. The
amount of loan depends upon the margin requirements of the banker. The word margin
here means the difference between the loan value and market value of securities. The
central bank has the power to change the margins, which limits the amount of loan to be
sanctioned by the commercial banks. As obvious, during inflation higher margin would
be fixed while during deflation, lower margin would be fixed.
2. Regulation of consumer credit: Customer gets this type of foreign exchange reserves and
exchange value of the rupee in relation to other country's currencies. Currencies should be
exchanged only with RBI or its authorized banks.
3. Credit rationing: It is a method of regulating and controlling purpose for which credit is
guaranteed by the commercial bank. It may be of two types:
(a) Variable portfolio ceilings: In this method, the central bank fixes a maximum amount of
loans and advances for every commercial bank.

(b) Variable capital assets ratio: In this method, the central bank fixes a ratio, which the
capital of the commercial bank must bear to the total assets of the bank. By changing
these ratio the credit can be regulated.

4. Moral suasion: This is a gracious method followed by RBI. In this method the RBI gives
advices and suggestions to the bankers to follow the instructions given by it, by sending
letters and conducting meeting of the Board of Directors.
5. Direct action: To regulate the volume of bank loans the central bank may issue directives
to the commercial banks from time to time. The directives may be in the form of oral or
written statements or appeals or warnings. By means of these directives the RBI may
decrease or increase the volume of credit.

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