Q: How does the RBI control the commercial banks ?

Ans: 

RBI controls the commercial banks through the following measures:

(1)  RBI Fixes the Bank Rate and Repo Rate: Bank rate is the interest rate at which the RBI lends funds to other commercial banks in the country. It is also called the discount rate. In order 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 credit dearer, RBI increases these rates.

(2)   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 honour the demand for withdrawal by their customers. Generally, the following two reserves are required to be maintained:

(3)   Cash Reserve Ratio: CRR refers to the percentage of deposits of the commercial banks which they have to maintain with the RBI in cash form.

(4)  Statutory Liquidity Ratio: SLR refers to the percentage of deposits to be maintained as reserves in the form of gold or foreign securities by commercial banks. By varying reserve ratios, lending capacity of commercial banks is affected.

(5)   Fixing Margin Requirements: The margin refers to the "proportion of the loan amount which is not financed by the bank". By increasing or decreasing margin requirements, the RBI tries to control the lending capacity ' banks.

(6)  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 undesirable sectors.

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