How is RBI controlling the commercial banks?


Reserve Bank of India controls the -commercial banks through the following measures:

 (i) RBI Fixes the Bank Rate and Repo Rate Bank rate is the interest rate at which the RBI, lend funds to other commercial banks in the country, It is also called the discount rate, In older to control the supply of currency in the economic system RBI often uses the bank rate. On the other hand, Repo Rate Is the rate at which commercial banks will borrow the funds from the RBI against the securities. In order to make it expensive or cheaper to borrow the money, RBI fixed this rate. 

(ii) Variable Reserve Ratios The commercial banks have to keep a certain proportion of their total assets in the form of liquid assets so that they are always in a position to honor the demand for withdrawal by their customers. These reserve ratios are named as Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). The CRR refers to the percentage of deposits with the commercial banks which they have to maintain with the RBI in cash form and SLR refers to the percentage of deposits to be maintained as reserves in the form of gold or foreign securities. Thus, by varying reserve ratios, lending capacity of commercial banks can be affected. 

(iii) Fixing Margin Requirements The margin refers to the “proportion of the loan amount which is not financed by the bank’. This method is used to encourage credit supply for the needy sector and discourage it for other non-necessary sectors by increasing margin for the non necessary sectors; and by reducing it for priority sectors.

 (iv) Credit Rationing RBI can fix the upper limit of credit amount to be granted for various purposes. This can help in lowering the credit exposure of commercial banks to 10 undesirable sectors.

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