Credit control is asignificant tool used by Reserve Bank of India. It is an important weapon ofthe monetary policy used to control demand and supply of money which is alsotermed as liquidity in the economy.
Administers of the Central Bank controlover the credit that the commercial banks grant. Main purpose of credit controlis to bring “economic development with stability”. It means that banks will notonly control inflationary trends in the economy but also boost economic growthwhich would ultimately lead to increase in real national income stability. Aswe know RBI have functions like issuing notes and custodian services, if creditcontrol is not controlled by RBI it would lead to social and economic stabilityin the country.WhyCredit Control is needed?There are several reasonsfor which credit control is needed. Some of them are:· To keep a check on the sectors of theeconomy which is recognised by the government as “prioritized” which is around15 in number.· To control channelization of credit sothat credit is not delivered for undesirable purposes.
· To control inflation as well as deflation.· To develop and boost the economy byallowing sufficient flow of bank credit to different sectors.EssentialObjectives of Credit Control1. Price Stability:Frequentprice fluctuations cause disturbances and maladjustments in the economic systemand have serious social consequences.
So, important objective of credit controlpolicy is stabilisation of price. Credit supply is regulated by Central Bankwith respect to needs of people which can bring about price stability in thecountry.2. Economic Stability:Instabilityin a capitalist economy is generally brought by operation of business cycle. Toensure economic stability in the economy credit control policy of central bankeliminates cyclic fluctuations.3. Maximisation of Employment:Unemploymentis economically wasteful and socially undesirable.
So economic stability withmaximum employment and high per capita income has been considered as one of theimportant objective of credit control policy of a country.4. Economic Growth:Themain objective of credit control policy in the not so developed countriesshould be economic growth promotion within the shortest possible time.Underdeveloped countries generally suffer from deficiency of financialresources. So, planned expansion of bank credit can be one of the ways to solvethe problem of financial scarcity in these countries.5.
Stabilisation of Money Market:Toreduce the fluctuations in the interest rates to the minimum central bank’scredit policy control stabilises the money market. Credit control should bepractised in such a way that demand and supply of money should be achieved mostly.6. Exchange rate stability:Oneof the objective of credit control is exchange rate stability. Difference inthe exchange rate is harmful for the foreign trade of the country. So, thecentral bank, in the countries largely dependent upon foreign trade, shouldattempt to eliminate the fluctuations in the foreign exchange rates through itscredit control policy.
Methodsof Credit Control of an economyTo control creditcreation RBI generally employs two methods:· Quantitative method· Qualitative method 1. Quantitativemethod:It is also known as traditional method. Ituses bank rate policy, open market operations and variable reserve ratio. Itincludes margin requirement, credit rationing, consumer credit regulation anddirect action.It is one of the methods used by RBI tocontrol credit creation. Quantitative controls are designed to regulate thevolume of credit created by qualitative measures of banking system. It isdesigned to regulate the flow of credit in specific uses.a.
Bank Rate:It is defined as the rateprescribed by the central bank. It is nothing but the minimum rate at which thecentral bank will discount first class bills of exchange or will advance loansagainst approved securities. It is also known asdiscount rate. Between bank rate and other money market interest rates there isa direct and organic type relationship such that whenever there is a change inbank rates it will directly reflect in change in interest rate of commercialbanks for short term money and bank loans and advances.There is also anotherrate known as market rate which is slightly different from the bank rate. It israte of discount at which lending institutions in the country where as rate ofinterest is the rate at which banks pay to depositors.Bank rate is one of theimportant instrument of credit control.
Suppose credit expansion is required,central bank will lower the bank rate making the credit cheaper followed bycommercial banks who lower their interest rates. Under inflationary conditionsto discourage credit creation the central bank will raise the bank rate.Consequences of raise in bank rate will be raise in cost of borrowing making itdearer, discouraging businessman, entrepreneurs, speculators and traders borrowmore thus reducing bank credit volume.Businesses whichprimarily depend upon borrowed funds such as production of investment goods andbusiness or construction activities will be slowed down and which ensuresunemployment. Dealers who keep goods stock with the money they borrowed willreduce their stock as cost of borrowing will increase and there is apossibility of decline in price.
Producers of goods will receive reduced ordersfrom dealers which will result in decrease of productive activities andunemployment increase which will lead to decline in prices and money incomes.When the bank rate is lowered, opposite action happens such as expand inbusiness activity and rise in employment as cost of borrowing decreases.Rise in bank rate willalso set right an adverse balance of trade.
This will result in export of gold.Increase in bank rate will also result in increase in other money rates as aresult on deposit goes up in money market. Foreigners, who now obtain higherrates on their investments, will not withdraw any money. As a result, capitalwill move into the country due to better returns and money outflow will stop.Domestic currency demandwill rise, raising its value and making the exchange rates more valuable.Moreover, funds which were borrowed have become costly which will result indecrease in spent of goods which were purchased leading to a decline in volumeof imports. Thus, trade balance will become favourable with increase ininterest rate.
However, it should beclear that to make bank rate mechanism successful the money market must be anintegral whole, that is, there must be a direct relationship between bank rateand other market interest rates.Elasticity of economicstructure of the company is also required so that changes made in money andcredit conditions will result in change in other variables like costs, wage,price, production and employment.b.
OpenMarket Operations:It is the process bywhich central bank sale and purchase securities to the commercial banks. Totalcash reserves of commercial banks declines as it purchases securities from thecentral bank.As total cash reservesfall credit creation power creation of commercial banks is cut down. As cashreserves are reduced volume of credit will get lowered by commercial banks. Asa result of which securities which are sold by Central Bank serves asanti-inflationary measure of control.
Similarly, when CentralBank purchase securities it results in increase in cash flow to the commercial banks.As the cash had increased, more credit can be created by the commercial bankswhich will result in more finance. As aresult of which securities which are purchased by Central Bank serves asanti-deflationary measure of control.Sale of government securitieswhich are frequently resorted by Reserve Bank of India are generouslycontributed by commercial banks. So, the open market conditions play two rolesin India, one as an instrument to make available more budgetary resources andthe other as an instrument to draw off excess liquidity in the system.c. Variable ReserveRatios:Variable reserve ratiosare nothing but proportion of bank deposits that are required to keep in formof cash by the commercial banks so that credit for liquidity can be created bythem.
Increase in cash reserveratio will result in decrease in value of deposit multiplier. Similarly,decrease in cash reserve ratio will result in increase in value of depositmultiplier.Decrease in value ofdeposit multiplier will result in decrease in credit availability as a resultmay act as an anti-inflationary measure.On the other hand,increase in value of deposit multiplier will result to increase in creditcreation as a result more finance will be available for consumption and investmentexpenditure. Therefore, decrease in reserve ratios will work asanti-deflationary method of credit control.Reserve requirements ofthe commercial bank can be changed by the Reserve Bank of India.To change reserverequirements Reserve Bank uses two types of reserve ratios one of them is theStatutory Liquidity Ratio (SLR) and the Cash Reserve Ratio(CRR).The Statutory LiquidityRatio is defined as how much proportion of aggregate deposits commercial banksare required to keep in a liquid form.
These aggregate deposits are used by thecommercial bank to purchase government securities. So, we can say thatStatutory Liquidity Ratio on one hand can be used to draw off excess liquidityof banking system and on the other hand can be used for revenue flow for thegovernment.The Reserve Bank of Indiahas the authority to raise the SLR to 40 percent of total deposits ofcommercial banks. Presently, the SLR ratio of our country is 25 percent.Proportion of aggregatecash deposits which is required to be kept with Reserve Bank of India by thecommercial banks are also known as cash reserve ratios. Presently, Cash ReserveRatio of our country is at 9 percent.2.
Qualitative Method:Qualitative method is oneof the methods used by Central Bank in recreating economic stabilisation andfor management of credit. a. Margin Requirements: To influence the flow ofcredit against specific commodities changes in margin requirements are designed.Advance loans are given to customers by commercial banks against some securityor securities given by the borrower and that are acceptable by banks.
More specifically, amountequal to full amount of security is never lend out by commercial banks insteadthey lend less than its value. The margin requirements in case of specificsecurities are determined by the Central Bank. Flow of credit will beinfluenced by change in margin requirements.
Increase in marginrequirement will result in decrease in borrowing value of security andsimilarly, decrease in margin requirement will result in increase in borrowingvalue of security.b. Credit Rationing:Credit rationing refersto the method in which there is a ceiling on maximum amount of loans andadvances by the central bank.c. Regulation of ConsumerCredit:Regulation of ConsumerCredit refers to putting a limitation on credit flow for consumer durablesgoods. This can be achieved by regulating the number of instalments throughwhich loan is distributed and regulating the total credit which can be extendedfor purchase of specific durable goods. Restriction or liberalisation of loanconditions to stabilise the economy can be achieved by using this method byCentral Bank.
d. Moral Suasion:Credit control can alsobe achieved by moral suasion and credit monitoring arrangement. The only factorby which moral suasion can be successful is if the central bank is strongenough to influence the commercial banks.Method of moral suasionhas been successfully used by RBI since 1949 so that commercial banks willfollow policies regarding credit. There is another method called publicity inwhich RBI makes direct appeal to the public and related data are publishedwhich will have a serious effect on commercial circles and banks.Successof Credit Control Measures:In an economy, success ofcredit control measures depends on various factors. Some of them are:· Money market should be well organised.
· Organised money market should contain alarge proportion of circulated money.· There should be coverage and elasticity incapital markets and money. Goodsand Service Tax:Goods and ServicesTax (GST) is an indirect tax leviedin India onthe sale of goods and services. Goods and services are divided into five taxslabs for collection of tax – 0%, 5%, 12%, 18% and 28%. Individual stategovernments apply GST separately for few items such as petroleum products andalcoholic drinks. Government of Indiaimplemented GST from July1, 2017 through one hundred and amendment. Theobjective of GST was to remove multiple cascading taxes applied by central andstate governments.
There is a separate bodyknown as Goods and Service tax council consisting of finance ministers ofcentres and all states which governs the tax rates, rules and regulations ofGST. Taxation Scheme:· Several formal taxes such as centralexercise duty, services tax, additional customs duty, surcharges, state levelvalue added tax are replaced by single GST.· Taxes applied on inter-statetransportation of goods are also been replaced with GST.
· Transactions such as sale, transfer,purchase, lease, import of goods and services are applied GST tax.· In India, a dual GST model is adoptedwhich means taxation is administered by both union and state governments.· Those transactions that take place insingle state are applied central GST by central government and state GST bystate governments.
· Those transactions which occur inter stateand transactions in which goods are imported an integrated GST is applied bythe central government.· GST is a consumption-basedtax/destination-based tax, therefore, taxes are paid to the state where thegoods or services are consumed not the state in which they were produced. Initial GST Rates:GST is imposed atvariable rates on various items. Some of them are: -· For soaps and washing detergents GSTapplied is 2.
5% and 28% respectively.· On movie tickets GST on movie tickets isbased on slabs with 18% GST for tickets that cost less than Rs.100 and 28% GSTon tickets costing more than Rs.100.· GST on readymade clothes is around 5%.· For under-construction property booking GSTis around 12%.
· Products which are still not affected byGST are daily products, products of milling industries, fresh vegetables andfruits, meat products, groceries etc. Revised GST Rates:GST rates on 29 goods and53 services have been revised after the 25th GST council meeting inDelhi on January 18, 2018.The new GST rates will beeffective from January 25, 2018.The announcement was madeby Finance Minister Arun Jaitley just few days ahead of annual budget 2018-19. Thedecision was jointly taken by federal and state finance ministers.Listof goods in which GST reduced from 28 per cent to 18 per cent are: -· Public transports such as bus whichexclusively run on bio fuels.
· Old and used motor vehicles such asmedium, large cars and SUVsListof goods in which GST reduced from 18 per cent to 12 per cent are: -· Sugar boiled confectionary· Fertilizer grade Phosphoric acid· Bio-diesel· 12 types of bio-pesticides· Bamboo wood building joinery· Drip irrigation system including laterals,sprinklers· Mechanical SprayerListof goods in which GST reduced from 18 per cent to 5 per cent are: -· Tamarind Kernel Powder· Mehndi pastes in cones· LPG supplied for supply to householddomestic consumers by private LPG distributors· Scientific and technical instruments,apparatus, equipment, accessories, parts, components, spares, tools, mock upsand modules, raw material and consumables required for launch vehicles andsatellites and payloads.Listof goods in which GST reduced from 12 per cent to 5 per cent are: -· Articles of straw, of esparto or of otherplaiting materials, basket ware and wickerwork Velvet fabric (with no refund ofun-utilised input tax credit).Listof goods in which GST reduced from 3 per cent to 0.25 per cent are: -· Diamonds and precious stones.Listof goods in which GST increased from 12 per cent to 18 per cent are: -· Cigarette filter rods.Listof goods in which GST increased from zero to 5 per cent are: -· Rice bran. Benefits of GST to theIndian Economy: – Removal of bundled indirect taxes such as VAT, CST, Service tax, CAD, SAD, and Excise. Less tax compliance and a simplified tax policy compared to current tax structure.
Removal of cascading effect of taxes i.e. removes tax on tax. Reduction of manufacturing costs due to lower burden of taxes on the manufacturing sector. Hence prices of consumer goods will be likely to come down. Lower the burden on the common man i.e.
public will have to shed less money to buy the same products that were costly earlier. Increased demand and consumption of goods. Increased demand will lead to increase supply. Hence, this will ultimately lead to rise in the production of goods.
Control of black money circulation as the system normally followed by traders and shopkeepers will be put to a mandatory check. Impactof GST on Financial Services Sector: a. Networkof branches to be registered separately:Beforethe implementation of GST, a bank or NBFC with operations spread across Indiacould discharge its compliance on service tax through one ‘centralised’registration. After GST regulation, these institutions will be required toget a separate tax registration for each of the states they work in. b. Leveraged and de-leveraged Input Tax Credit:Previously,banks and NBFCs had been majorly opting for the reversal of 50% of the CentralValue Added Tax (CENVAT) credit that they avail against the inputs and inputservices, while the CENVAT credit on the capital goods was given without anyreversal conditions. Under GST, the 50% of the CENVAT credit that wasavailed for inputs, input services and capital goods has been reversed.
Thisleaves banks and NBFCs with a decreased credit of 50% on capital goods, and inturn raises the cost of capital.Although,this can be counterbalanced by the advantages posed by operating one’s businessin the new taxation scenario. A unified domestic market can help with moreopportunities for expansion and reduced production costs enhancing one’sprofitability.c. Evaluation and adjudication:The impact of GSTon banking services and NBFCs will also be felt in terms of evaluationprocedures.
Service tax was assessed by the particular regulators in the statewhere a branch is registered. In addition, every registered branch of theconcerned bank or NBFC had to validate its position for the chargeability inthe respective state and provide a reason for utilising the input tax credit invarious states.The GSTassessment will involve more than one assessing authority, and each of them mayhave a different judgement for the same underlying issue. Although suchcontradictions can prolong the decision-making process for the financialinstitutions, the adverse effects of evaluation by one authority can be offsetthrough decisions made by another assessor.