Credit control is a
significant tool used by Reserve Bank of India. It is an important weapon of
the monetary policy used to control demand and supply of money which is also
termed as liquidity in the economy. Administers of the Central Bank control
over the credit that the commercial banks grant. Main purpose of credit control
is to bring “economic development with stability”. It means that banks will not
only control inflationary trends in the economy but also boost economic growth
which would ultimately lead to increase in real national income stability. As
we know RBI have functions like issuing notes and custodian services, if credit
control is not controlled by RBI it would lead to social and economic stability
in the country.
Credit Control is needed?
There are several reasons
for which credit control is needed. Some of them are:
To keep a check on the sectors of the
economy which is recognised by the government as “prioritized” which is around
15 in number.
To control channelization of credit so
that credit is not delivered for undesirable purposes.
To control inflation as well as deflation.
To develop and boost the economy by
allowing sufficient flow of bank credit to different sectors.
Objectives of Credit Control
price fluctuations cause disturbances and maladjustments in the economic system
and have serious social consequences. So, important objective of credit control
policy is stabilisation of price. Credit supply is regulated by Central Bank
with respect to needs of people which can bring about price stability in the
in a capitalist economy is generally brought by operation of business cycle. To
ensure economic stability in the economy credit control policy of central bank
eliminates cyclic fluctuations.
Maximisation of Employment:
is economically wasteful and socially undesirable. So economic stability with
maximum employment and high per capita income has been considered as one of the
important objective of credit control policy of a country.
main objective of credit control policy in the not so developed countries
should be economic growth promotion within the shortest possible time.
Underdeveloped countries generally suffer from deficiency of financial
resources. So, planned expansion of bank credit can be one of the ways to solve
the problem of financial scarcity in these countries.
Stabilisation of Money Market:
reduce the fluctuations in the interest rates to the minimum central bank’s
credit policy control stabilises the money market. Credit control should be
practised in such a way that demand and supply of money should be achieved mostly.
Exchange rate stability:
of the objective of credit control is exchange rate stability. Difference in
the exchange rate is harmful for the foreign trade of the country. So, the
central bank, in the countries largely dependent upon foreign trade, should
attempt to eliminate the fluctuations in the foreign exchange rates through its
credit control policy.
of Credit Control of an economy
To control credit
creation RBI generally employs two methods:
It is also known as traditional method. It
uses bank rate policy, open market operations and variable reserve ratio. It
includes margin requirement, credit rationing, consumer credit regulation and
It is one of the methods used by RBI to
control credit creation. Quantitative controls are designed to regulate the
volume of credit created by qualitative measures of banking system. It is
designed to regulate the flow of credit in specific uses.
a. Bank Rate:
It is defined as the rate
prescribed by the central bank. It is nothing but the minimum rate at which the
central bank will discount first class bills of exchange or will advance loans
against approved securities.
It is also known as
discount rate. Between bank rate and other money market interest rates there is
a direct and organic type relationship such that whenever there is a change in
bank rates it will directly reflect in change in interest rate of commercial
banks for short term money and bank loans and advances.
There is also another
rate known as market rate which is slightly different from the bank rate. It is
rate of discount at which lending institutions in the country where as rate of
interest is the rate at which banks pay to depositors.
Bank rate is one of the
important instrument of credit control. Suppose credit expansion is required,
central bank will lower the bank rate making the credit cheaper followed by
commercial banks who lower their interest rates. Under inflationary conditions
to 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 it
dearer, discouraging businessman, entrepreneurs, speculators and traders borrow
more thus reducing bank credit volume.
primarily depend upon borrowed funds such as production of investment goods and
business or construction activities will be slowed down and which ensures
unemployment. Dealers who keep goods stock with the money they borrowed will
reduce their stock as cost of borrowing will increase and there is a
possibility of decline in price. Producers of goods will receive reduced orders
from dealers which will result in decrease of productive activities and
unemployment increase which will lead to decline in prices and money incomes.
When the bank rate is lowered, opposite action happens such as expand in
business activity and rise in employment as cost of borrowing decreases.
Rise in bank rate will
also 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 a
result on deposit goes up in money market. Foreigners, who now obtain higher
rates on their investments, will not withdraw any money. As a result, capital
will move into the country due to better returns and money outflow will stop.
Domestic currency demand
will rise, raising its value and making the exchange rates more valuable.
Moreover, funds which were borrowed have become costly which will result in
decrease in spent of goods which were purchased leading to a decline in volume
of imports. Thus, trade balance will become favourable with increase in
However, it should be
clear that to make bank rate mechanism successful the money market must be an
integral whole, that is, there must be a direct relationship between bank rate
and other market interest rates.
Elasticity of economic
structure of the company is also required so that changes made in money and
credit conditions will result in change in other variables like costs, wage,
price, production and employment.
It is the process by
which central bank sale and purchase securities to the commercial banks. Total
cash reserves of commercial banks declines as it purchases securities from the
As total cash reserves
fall credit creation power creation of commercial banks is cut down. As cash
reserves are reduced volume of credit will get lowered by commercial banks. As
a result of which securities which are sold by Central Bank serves as
anti-inflationary measure of control.
Similarly, when Central
Bank 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 banks
which will result in more finance. As a
result of which securities which are purchased by Central Bank serves as
anti-deflationary measure of control.
Sale of government securities
which are frequently resorted by Reserve Bank of India are generously
contributed by commercial banks. So, the open market conditions play two roles
in India, one as an instrument to make available more budgetary resources and
the other as an instrument to draw off excess liquidity in the system.
c. Variable Reserve
Variable reserve ratios
are nothing but proportion of bank deposits that are required to keep in form
of cash by the commercial banks so that credit for liquidity can be created by
Increase in cash reserve
ratio will result in decrease in value of deposit multiplier. Similarly,
decrease in cash reserve ratio will result in increase in value of deposit
Decrease in value of
deposit multiplier will result in decrease in credit availability as a result
may act as an anti-inflationary measure.
On the other hand,
increase in value of deposit multiplier will result to increase in credit
creation as a result more finance will be available for consumption and investment
expenditure. Therefore, decrease in reserve ratios will work as
anti-deflationary method of credit control.
Reserve requirements of
the commercial bank can be changed by the Reserve Bank of India.
To change reserve
requirements Reserve Bank uses two types of reserve ratios one of them is the
Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio(CRR).
The Statutory Liquidity
Ratio is defined as how much proportion of aggregate deposits commercial banks
are required to keep in a liquid form. These aggregate deposits are used by the
commercial bank to purchase government securities. So, we can say that
Statutory Liquidity Ratio on one hand can be used to draw off excess liquidity
of banking system and on the other hand can be used for revenue flow for the
The Reserve Bank of India
has the authority to raise the SLR to 40 percent of total deposits of
commercial banks. Presently, the SLR ratio of our country is 25 percent.
Proportion of aggregate
cash deposits which is required to be kept with Reserve Bank of India by the
commercial banks are also known as cash reserve ratios. Presently, Cash Reserve
Ratio of our country is at 9 percent.
2. Qualitative Method:
Qualitative method is one
of the methods used by Central Bank in recreating economic stabilisation and
for management of credit.
a. Margin Requirements:
To influence the flow of
credit against specific commodities changes in margin requirements are designed.
Advance loans are given to customers by commercial banks against some security
or securities given by the borrower and that are acceptable by banks.
More specifically, amount
equal to full amount of security is never lend out by commercial banks instead
they lend less than its value. The margin requirements in case of specific
securities are determined by the Central Bank. Flow of credit will be
influenced by change in margin requirements.
Increase in margin
requirement will result in decrease in borrowing value of security and
similarly, decrease in margin requirement will result in increase in borrowing
value of security.
b. Credit Rationing:
Credit rationing refers
to the method in which there is a ceiling on maximum amount of loans and
advances by the central bank.
c. Regulation of Consumer
Regulation of Consumer
Credit refers to putting a limitation on credit flow for consumer durables
goods. This can be achieved by regulating the number of instalments through
which loan is distributed and regulating the total credit which can be extended
for purchase of specific durable goods. Restriction or liberalisation of loan
conditions to stabilise the economy can be achieved by using this method by
d. Moral Suasion:
Credit control can also
be achieved by moral suasion and credit monitoring arrangement. The only factor
by which moral suasion can be successful is if the central bank is strong
enough to influence the commercial banks.
Method of moral suasion
has been successfully used by RBI since 1949 so that commercial banks will
follow policies regarding credit. There is another method called publicity in
which RBI makes direct appeal to the public and related data are published
which will have a serious effect on commercial circles and banks.
of Credit Control Measures:
In an economy, success of
credit control measures depends on various factors. Some of them are:
Money market should be well organised.
Organised money market should contain a
large proportion of circulated money.
There should be coverage and elasticity in
capital markets and money.
and Service Tax:
Goods and Services
Tax (GST) is an indirect tax levied
in India on
the sale of goods and services. Goods and services are divided into five tax
slabs for collection of tax – 0%, 5%, 12%, 18% and 28%. Individual state
governments apply GST separately for few items such as petroleum products and
Government of India
implemented GST from July1, 2017 through one hundred and amendment. The
objective of GST was to remove multiple cascading taxes applied by central and
There is a separate body
known as Goods and Service tax council consisting of finance ministers of
centres and all states which governs the tax rates, rules and regulations of
Several formal taxes such as central
exercise duty, services tax, additional customs duty, surcharges, state level
value added tax are replaced by single GST.
Taxes applied on inter-state
transportation 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 adopted
which means taxation is administered by both union and state governments.
Those transactions that take place in
single state are applied central GST by central government and state GST by
Those transactions which occur inter state
and transactions in which goods are imported an integrated GST is applied by
the central government.
GST is a consumption-based
tax/destination-based tax, therefore, taxes are paid to the state where the
goods or services are consumed not the state in which they were produced.
Initial GST Rates:
GST is imposed at
variable rates on various items. Some of them are: –
For soaps and washing detergents GST
applied is 2.5% and 28% respectively.
On movie tickets GST on movie tickets is
based on slabs with 18% GST for tickets that cost less than Rs.100 and 28% GST
on tickets costing more than Rs.100.
GST on readymade clothes is around 5%.
For under-construction property booking GST
is around 12%.
Products which are still not affected by
GST are daily products, products of milling industries, fresh vegetables and
fruits, meat products, groceries etc.
Revised GST Rates:
GST rates on 29 goods and
53 services have been revised after the 25th GST council meeting in
Delhi on January 18, 2018.
The new GST rates will be
effective from January 25, 2018.
The announcement was made
by Finance Minister Arun Jaitley just few days ahead of annual budget 2018-19. The
decision was jointly taken by federal and state finance ministers.
of goods in which GST reduced from 28 per cent to 18 per cent are: –
Public transports such as bus which
exclusively run on bio fuels.
Old and used motor vehicles such as
medium, large cars and SUVs
of goods in which GST reduced from 18 per cent to 12 per cent are: –
Sugar boiled confectionary
Fertilizer grade Phosphoric acid
12 types of bio-pesticides
Bamboo wood building joinery
Drip irrigation system including laterals,
of 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 household
domestic consumers by private LPG distributors
Scientific and technical instruments,
apparatus, equipment, accessories, parts, components, spares, tools, mock ups
and modules, raw material and consumables required for launch vehicles and
satellites and payloads.
of goods in which GST reduced from 12 per cent to 5 per cent are: –
Articles of straw, of esparto or of other
plaiting materials, basket ware and wickerwork Velvet fabric (with no refund of
un-utilised input tax credit).
of goods in which GST reduced from 3 per cent to 0.25 per cent are: –
Diamonds and precious stones.
of goods in which GST increased from 12 per cent to 18 per cent are: –
Cigarette filter rods.
of goods in which GST increased from zero to 5 per cent are: –
Benefits of GST to the
Indian Economy: –
of bundled indirect taxes such as VAT, CST, Service tax, CAD, SAD, and
tax compliance and a simplified tax policy compared to current tax
of cascading effect of taxes i.e. removes tax on tax.
of manufacturing costs due to lower burden of taxes on the manufacturing
sector. Hence prices of consumer goods will be likely to come down.
the burden on the common man i.e. public will have to shed less money to
buy the same products that were costly earlier.
demand and consumption of goods.
demand will lead to increase supply. Hence, this will ultimately lead to
rise in the production of goods.
of black money circulation as the system normally followed by traders and
shopkeepers will be put to a mandatory check.
of GST on Financial Services Sector:
of branches to be registered separately:
the implementation of GST, a bank or NBFC with operations spread across India
could discharge its compliance on service tax through one ‘centralised’
registration. After GST regulation, these institutions will be required to
get a separate tax registration for each of the states they work in.
b. Leveraged and de-leveraged Input Tax Credit:
banks and NBFCs had been majorly opting for the reversal of 50% of the Central
Value Added Tax (CENVAT) credit that they avail against the inputs and input
services, while the CENVAT credit on the capital goods was given without any
reversal conditions. Under GST, the 50% of the CENVAT credit that was
availed for inputs, input services and capital goods has been reversed. This
leaves banks and NBFCs with a decreased credit of 50% on capital goods, and in
turn raises the cost of capital.
this can be counterbalanced by the advantages posed by operating one’s business
in the new taxation scenario. A unified domestic market can help with more
opportunities for expansion and reduced production costs enhancing one’s
Evaluation and adjudication:
The impact of GST
on banking services and NBFCs will also be felt in terms of evaluation
procedures. Service tax was assessed by the particular regulators in the state
where a branch is registered. In addition, every registered branch of the
concerned bank or NBFC had to validate its position for the chargeability in
the respective state and provide a reason for utilising the input tax credit in
assessment will involve more than one assessing authority, and each of them may
have a different judgement for the same underlying issue. Although such
contradictions can prolong the decision-making process for the financial
institutions, the adverse effects of evaluation by one authority can be offset
through decisions made by another assessor.