Topics
Factors of Production
- Meaning of Production Mechanism
- Factors of Production
The Productive Mechanism
Theory of Demand and Supply
Elementary Theory of Demand
- Demand Curve
- Determinants of Demand
- Individual Demand Function
- Market Demand Function
- Law of Demand
- Causes of Operation of Law of Demand
- Exceptions to the Law of Demand
- Changes in Demand
- Causes Behind Shifts of Demand Curve
- Difference Between Extension and Increase in Demand
Elasticity of Demand
- Introduction to Elasticity of Demand
- Methods of Measuring Price Elasticity of Demand
- Degrees (Or Kinds) of Price Elasticity of Demand
- Factors Affecting Price Elasticity of Demand
- Income Elasticity of Demand
Market
Theory of Supply
- Determinants of Supply
- Concept of Stock
- Law of Supply
- Reasons Behind the Operation of the Law of Supply
- Distinction Between Supply and Stock
- Change in Quantity Supplied (Or Movements Along the Supply Curve)
- Changes in Supply
- Distinction Between Change in Quantity Supplied (Or Movement Along Supply Curve and Change in Supply Or Shift of the Supply Curve)
- Difference Between Extension and Increase in Demand
- Contraction of Supply and Decrease in Supply
- Elasticity of Supply
Banking in India
Demonetisation
Meaning and Types of Markets
- Concept of Market
- Classification of Market Structure
- Perfect Competition
- Monopoly
- Monopolistic Competition
- Oligopoly
- Concept of Monopsony
- Distinction Between Perfect Competition, Monopoly and Monopolistic Competition
- Similarities Between Monopolistic Competition and Perfect Competition
- Similarities Between Monopolistic Competition and Monopoly
Inflation
Money
Consumer Awareness
Commercial Banks
- Commercial Banks
- Importance of Banks
- Banking > Functions of Commercial Bank
- Primary Functions
- Agency Functions
- General Utility Functions
- Concept of Credit Creation
- Nationalisation of Banks
Central Bank
- Quantitative and Qualitative Credit Control Measures Adopted by RBI
- Central Bank Function - Banker's Bank
- Central Bank Function - Goverment Bank
- Meaning of Central Bank
- Differences Between a Central Bank and a Commercial Bank
- Central Bank
- Functions of a Central Bank
- Monetary Policy of the Central Bank
- Quantitative Methods
- Qualitative (Or Selective) Methods
- Demonetisation
Public Finance
- Public Finance
- Nature of Public Finance
- Difference Between Public Finance and Private Finance
Inflation
- Inflation
- Wholesale Price Index (WPI)
- Consumer Price Index (CPI)
- Food Basket
- Relationship Between Value of Money and Price Level
- Types of Inflation
- Demand Pull Inflation
- Cost Push Inflation
- Effects of Inflation
Consumer Awareness
- Factors Causing Exploitation of Consumers
- Rise of Consumer Awareness
- Legal Measures Available to Protect Consumers from Being Exploited (COPRA, RTI)
- Awareness of Food Adulteration and Its Harmful Effects
- Consumer Awareness
- Consumer is Exploitation
- Consumer Movement
- Consumer Rights
- Food Adulteration
- Consumer Protection Act 1986 (COPRA)
- Right to Information Act 2005
- Understanding the Importance of Educating Consumers of Their Rights
- Consumer Duties
- Standardisation of Product
- Introduction
- Regulation of Consumer Credit
- Regulation of Margin Requirements
- Credit Rationing
- Direct Action
- Moral Suasion
- Publicity
- Limitations on the Power to Control Credit
- Key Points: Qualitative (Or Selective)
Introduction
Qualitative methods direct credit towards or away from specific sectors or purposes. They are targeted, not general.
Regulation of Consumer Credit
Consumer credit regulation means controlling the use of bank credit by consumers to purchase expensive durable consumer goods (e.g., motor cars, computers) on hire-purchase or instalment plans.
How does it work?
- The consumer pays a cash down payment (a percentage of the price upfront)
- The remaining amount is financed by a bank loan
- The loan is repaid by the consumer in instalments over a fixed period
How does the central bank regulate it?
The central bank can change:
- The interest rate charged on such loans
- The amount of the down payment required
- The number of instalments
- The maximum repayment period
| Central Bank Wants To... | Action Taken |
|---|---|
| Increase consumer credit | ↓ Reduce down payment + ↑ Increase repayment period |
| Decrease consumer credit | ↑ Raise down payment + ↓ Reduce repayment period |
Imagine you want to buy a laptop on EMI. If the RBI wants people to borrow more, it makes EMIs easier (less upfront payment, more time to repay). If it wants to slow spending, it makes the loan harder to get (high down payment, fewer months to repay).
Remember: This method targets durable consumer goods purchased on hire-purchase finance.
Regulation of Margin Requirements
A margin requirement is the difference between the market value of the security (collateral) offered by the borrower and the amount of loan granted against it by the bank.
Why do banks keep a margin?
To protect themselves against any fall in the value of the security.
Formula
Margin = Value of Security − Loan Amount Granted
Numerical Example (from source):
- Stock of foodgrains valued at = ₹10,000
- Margin requirement fixed by RBI = 10%
- Loan the trader can get = ₹10,000 − 10% = ₹9,000
How does the central bank use margin to control credit?
Credit Rationing
Credit Rationing aims to limit the maximum (ceiling) amount of bank loans and advances, and, in some cases, to fix the maximum limit of loans for specific purposes.
Two Forms of Credit Rationing:
Effect:
- ↑ RBI increases the ceiling → Banks can give more loans → Credit expands
- ↓ RBI decreases the ceiling → Banks can give fewer loans → Credit contracts
It is like telling a shopkeeper: "You can sell only up to ₹1 lakh worth of goods today." By raising or lowering this cap, RBI directly controls how much banks can lend.
Direct Action
Direct Action refers to various directives (orders) issued by the central bank to commercial banks to control and regulate their lending and investment activities.
Key Points:
- Not used against ALL banks — only against erring banks that don't follow RBI's policies
- It is a punitive / penalty-based method
Forms of Direct Action:
Moral Suasion
Moral Suasion (suasion = short for persuasion) is the method of persuasion, request, informal suggestion, and advice given by the central bank to commercial banks, without any legal force.
How does it work?
- The central bank convenes meetings with the heads of commercial banks
- It explains the need for a particular monetary policy
- It appeals to banks to voluntarily follow the policy
- Example: RBI may request banks not to grant loans for speculative purposes
The central bank relies upon its moral influence as the head and leader of all financial institutions in the country.
It's like a respected school principal advising students. There's no punishment if you don't listen — but because everyone respects the principle, they usually do. RBI doesn't force banks; it persuades them.
Remember: Moral Suasion is the only informal / non-legal method among all credit control tools.
Publicity
Publicity is the method by which the central bank publicly expresses its views on prevailing economic conditions — related to money supply, prices, production, and employment — to exert moral pressure on banks and the public.
How does it work?
- RBI publishes facts and figures through the media and the press
- It communicates its views on the state of the economy
- This influences both:
The credit policies of commercial banks
The public opinion in the country
When RBI publicly announces that inflation is rising and banks must be careful about lending, banks feel the pressure to act responsibly — even without being given a direct order.
Remember: Publicity works on two levels — it influences banks AND the general public.
Limitations on the Power to Control Credit
| # | Limitation | In Short |
|---|---|---|
| 1 | Policy of the Central Bank | RBI can raise CRR or use OMO to reduce banks' cash reserves, limiting credit creation |
| 2 | Cash Reserve Ratio (CRR) | Banks must always keep a minimum % of deposits as cash — they cannot lend it all out |
| 3 | Availability of Good Securities | Banks only lend against solid collateral; a lack of good securities limits loans |
| 4 | Willingness of Customers to Borrow | Banks can offer loans, but if customers don't want to borrow (e.g., in a recession), credit is not created |
| 5 | Banking Habits of the People | If people prefer cash over cheques, banks need higher reserves → less credit creation |
| 6 | Total Amount of Cash in the Country | Total cash in the economy (controlled by RBI) sets the upper limit on credit creation |
| 7 | Public Confidence | If people lose trust in banks, they withdraw cash → banking system collapses → no credit |
| 8 | Nature of the Credit Process | Every loan must be backed by real, valuable security — banks cannot create money from nothing |
Key Points: Qualitative (Or Selective)
- Selective methods control who gets credit and for what, not how much credit exists in total
- Margin Requirement is the most important selective instrument
- Moral Suasion is the only informal, non-legal method — it relies on persuasion
- Direct Action is used only against erring (non-compliant) banks — it is punitive
- Publicity works on both banks, and the general public
- Credit Rationing fixes a ceiling on total loans or the ratio of loans to deposits
- Consumer Credit Regulation targets hire purchase finance for durable goods
