Quatitatitive measures of credit control

Quatitatitive measures of credit control are also called general measures of credit control. These measures refer to the methods which are used to direct the total volume of credit in the banks. These measures consists of the following methods

  1. Bank rate: it means the rate of interest at which central bank discounts the bills of the commercial banks. If central bank wants to expand the credit then central bank will reduce the bank rate. Reduce bank rate will reduce the cost of borrowing of the commercial banks who in turn charge low rate of interest from their borrowers. This means the price of credit will decrease. Business community will borrow more money which leads to more investment, production, generate more employment and income in hands of people. Thus the purchasing power of people will increase and aggregate demand will also increase. While on the other hand if there is the situation of inflation means there is increase in the general price level central bank will contract the credit by increasing the bank rate. Increased bank rate will increase the cost of borrowing of the commercial banks who in turn charge high rate of interest from their borrowers. This means the price of credit will increase. Business community will discouraged to borrow money which leads to fall in investment, production, employment and income in hands of people. Thus the purchasing power of people will decrease and aggregate demand also decrease which will solve the situation of inflation. The present bank rate is 9 %.
  2. Open market operations: it means buying and selling of securities of central bank in the open market. If the central bank wants to expand the credit then it would purchase the securities from the commercial banks. Which will in turn generate the money supply in the market and if the central bank contract the credit then this means it will sell the securities to the commercial banks which in turn reduce the money supply with the commercial banks.

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Qualitatitive measures of credit control

Qualitatitive measures of credit control are also called selective measures of credit control. These measures refers to the measures which are directed towards the particular use of credit not its total volume. These measures consist of the following methods.

  1. Margin requirement: if the central bank increases its margin then it will reduce the money supply and on the other hand if the central bank decrease its margin then it will increase the money supply.
  2. Issue directions: the central bank also issue directions to the commercial banks in oral or written form which the commercial banks have to follow.
  3. Credit rationing: the central bank also rations the credit given by the commercial banks.
    Image courtesy  [Stuart Miles] at FreeDigitalPhotos.net
    Image courtesy [Stuart Miles] at FreeDigitalPhotos.net
  4. Moral suasion: is morally implied on the commercial banks to follow the rules and regulations by the central banks.
  5. Direct action: if the commercial banks don’t follow the rules and regulations of the central bank then central bank can take direct action against the commercial banks.

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Simple Meaning of NPA

Today I will discuss the meaning of very important term related to financial institutions like banks. The term is NPA and the full form of NPA is “Non-performing Asset”. Now a days we are daily reading or listening that banks NPAs are increasing on regular basis. Let us understand the meaning of NPA.

As the name suggests, it is that asset which is non performing or in other words which is not giving any return or even the principal amount. Continue reading “Simple Meaning of NPA”

Types of banks-part 2

Last time, we have discussed 3 types of banks. Today we will discuss more types of banks:

1.)   Types of banks on the basis of function:

i)                    Commercial banks: These are the banks which do banking business to earn profit, which advances loan for short period of time. These banks do not issue notes but create credit on the basis of their cash deposits. Thus commercial banks deal with money and credit for the purpose of earning profit. SBI, PNB, Canara banks etc. are its examples. Continue reading “Types of banks-part 2”

Meaning of various banking terms

One day I have seen the abbreviation CSW in my bank statement. I was not able to get the meaning of same and I searched a lot then found that the meaning of CSW is “cash withdrawal”. Then I decided to write an article about various abbreviations or terms used in banking industry and most of these you must have seen in your bank statement. Here is the list of various banking terms used: Continue reading “Meaning of various banking terms”

Banking sector reforms

Banking sector reforms in India

An efficient banking structure can promote greater amount of investment which can help to achieve a faster growth of the economy. In India, the year 1991 saw a drastic change in the economic policy of government. Liberalization, privatization, globalization emerged as vital parameters of growth and development. But at that time India was facing macro economic crisis. Continue reading “Banking sector reforms”

Capital Adequacy Norms

Basle capital accord of July 1988 recommended capital adequacy among banks. It is a cushion against unforeseen losses.

Narsimaham committee recommended the adoption of the bank of international settlement (BIS) norm on capital adequacy for banks. Which has been accepted by RBI and all banks in India and all branches of foreign banks in India are required to achieve the international norm of 8%. The adoption was introduced in phased manner from April 1992 covering all banks by 1996. The rate has been increased to 9% by the end of March 2000.

The capital adequacy ratio is the comparison between bank’s net worth with risk weighted assets which appear on the asset side of the balance sheet. Capital is divided into tier 1 and tier 2 capitals

Tier 1 capital is the core capital and provides permanent support to the bank against unexpected losses. It includes paid up capital, statutory reserves, and other disclosed free reserves.

Tier 2 capital or supplementary capital is less permanent or less readily available. It includes undisclosed reserves, cumulative perpetual preference shares.

 Required capital of 8%= present capital (tier 1 & tier 2) / aggregate risk weighed assets

 Thus the above discussed are capital adequacy norms by Indian banks.

Development banking

Industrial finance is very much essential for industrial development. No business can reach its full potential of growth and success without adequate finance. Financial requirement is of two types.

Short term and long term funds.

Short term funds are in form of working capital to meet day to day requirements of business and long term funds help in acquiring fixed assets. All financial institutions in India can be divided into following categories: Continue reading “Development banking”