Functions of Reserve Bank of India
Quantitative Credit Control by Reserve Bank of India:
To control the flow of quantum of credit, Reserve Bank adopts all those measures that are generally adopted by the Central Banks in different countries.
Bank Rate:
Rate of interest that the Reserve Bank charges from other scheduled banks on the loans given to them is called bank rate. Policy of bank rate has not been used as a weapon to check price rise.
Differential Rates of Interest:
In October 1960 the Reserve Bank started differential rates of interest programme. According to this programme, if any bank borrows from the Reserve Bank beyond the quota fixed for it, it has to pay higher interest rate than the prevailing bank rate.
It means that the bank controls the flow of credit through the sale and purchase of government securities in the open market.
Cash Reserve Ratio(CRR):
It is amount of funds that the banks have to keep with RBI. If RBI decides to increase this rate the available amount with the banks comes down. RBI uses this method (increase of CRR rate), to drain out the excessive money from the banks.
Statutory Liquidity Ratio (SLR):
It is the ratio of liquid asset, which all Commercial Banks have to keep in the form of cash, gold and unencumbered approved securities equal to not more than 40% of their total demand and time deposits liabilities.
Direct Action:
According to the 1949 Act, Reserve Bank can stop any Commercial Bank from any type of transaction. In case of defiance of the orders of Reserve Bank, it can resort to direct action against the member bank. It can stop giving loans and even recommend the closure of the member bank under pressing circumstances.
Credit Authorisation Scheme:
In 1965, Credit Authorisation Scheme was adopted. It aims at regularising of the credit given by the banks. Before sanctioning a credit limit of Rs. 2 crore or more to any one debtor, every bank will have to get authorisation from the Reserve Bank. Even after the authorisation the creditor bank can inspect the account books of the debtor to ascertain the use of the credit.
Liquidity Adjustment Facility (LAF):
It is the primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest rate signals to the market. Liquidity Adjustment Facility was introduced for the first time for June, 2000 onwards. Subsequent revisions were made in 2001 and 2004.
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