Selective or Qualitative Credit Control Measures of RBI
Under the selective or qualitative credit control methods, the RBI encourages flow of credit only to certain types of industries and discourages the use of bank credit for certain other purposes.
Under this method, extension of credit to essential purposes is encouraged and to non-essential purposes is discouraged. Hence these methods not only prevent the flow of credit into undesirable channels but also direct the flow of credit to useful channels.
The Banking Regulation Act, 1949 has given extensive power to the RBI to apply selective credit control. The following are the different methods of selective credit control methods adopted by the RBI.
Since 1956, the RBI has issued many directions to the banks. Of them, few examples are quoted below:
1. The RBI issued its first directive on 17 May 1956 with a view to restrict advances against paddy and rice. Later it was extended to food grain, pulses, oil seeds, vegetable and sugar etc.
2. The RBI fixed higher minimum lending rates for loans given subject to selective credit controls.
2. Moral Suasion
Moral suasion aims at strengthening natural confidence and understanding between the monetary authority and the banks as well as financial institutions. It is not a statutory obligation. It is only a persuasion of commercial banks not to apply for further accommodation from RBI.
RBI has been sending letters periodically to the commercial banks requesting them to cooperate with it for controlling credit. The RBI held regular meetings and discussions with commercial banks to highlight the need for mutual cooperation cooperation to implement the monetary policy effectively. Here there is no element of compulsion. So the effectiveness of this method depends on the willing cooperation extended by the commercial banks.
3. Fixation of Margin Requirements
Fixation of margin requirements was introduced for the first time in India in 1956. The term margin denotes that part of the loan amount, which cannot be borrowed from bank. Hence this portion of finance is to be compulsorily brought by the borrower from own source.
The RBI has power to vary the margin requirements depending upon the business conditions prevailing in the country.
By using this method, during the period of inflation with a view to control credit, the RBI raises the margin and during deflation it lowers the margin to expand the credit. This method also enables the commercial banks to direct their funds to essential activities rather than speculative activities.
4. Rationing of Credit
Rationing of credit is another method of selective credit control. It is made by regulating the purposes for which the loans are given among the various member banks. To ensure overall development of a nation, development of various sectors is a must. Finance is to be distributed to various sectors as per these requirements.
Priority sector should be given preference in lending loans. For others, minimum attention only will be given in this respect. It paves way for the optimum utilization of money.
5. Credit Authorization Scheme
The RBI introduced credit authorization scheme in 1965, as one of the types of selective credit control. Under the scheme, commercial banks were asked to obtain prior.approval of RBI for giving any fresh credit of Rs.1 crore or more to any single party. Later the limit was gradually raised and it was Rs.6 crores in 1986.
However the scheme was discontinued in 1982. The idea behind the scheme was to watch the flow of credit to the borrowers closely and also ensure that the commercial banks are lending loans of large amount as per the credit appraisal as well as the actual requirements of the borrower.
Even now, the RBI has been monitoring and scrutinizing all bank credits exceeding Rs.5 crores to any single party for working capital needs and Rs.2 crores in the form of term loans. This scheme is also known as Credit Monitoring Arrangement.
Limitations of Selective Credit Control Measures in India
The RBI adopted many selective credit control measures to channelize the funds to productive sectors and restrict the financing to unproductive and speculative activities.
However, the successful operation of these measures suffers from certain limitations. They are as follows:
1. Banks find it difficult to ensure that the borrowers utilize the amount for the purpose for which it is borrowed.
2. Non-banking financial institutions and indigenous bankers also play a significant role in financing trade and industry in India. But the RBI has no control over these institutions.
3. The RBI’s selective credit controls are effective only when the inflationary pressures are created by bank finance.
4. Banks cannot have any control over the ultimate use of bank advances.