the process of credit creation is the backbone of economy. entire growth and development of modern economies depends on credit creation process. but if credit creation process is not controlled then it can affect the growth of economy. so it must be controlled. central bank do this work. in this video the control on credit creation process is explained in detail.for this central bank use s monetary policy to control this. monetary policy is explained in detail in this PPT.

1. Control on Credit Creation
PREPARED BY
HEMANT KUMAR JAIN
PGT ECONOMICS
KV AMBIKAPUR

2. Introduction
• Credit creation process is the backbone of the modern economies.
Development and growth of all the countries is based on credit
creation capacity.
• But it has its own limits also. If credit creation process becomes
uncontrolled then it can harm the economy’s growth process.
• If commercial banks distribute loans in excess then it may be a
cause of increase in money supply in economy. Then it would create
‘inflationary conditions’ in economy.
• If commercial banks distribute loans in short then it may be a cause
of decrease in money supply in economy. Then it would create
‘deflationary conditions’ in economy.
• So it is essential to control both situations. This will be done
through ‘control on credit creation process’ by Central Bank or RBI.
for this Monetary Policy is used.

3. Monetary Policy
• The Reserve Bank of India (RBI) has the responsibility
of conducting monetary policy. This responsibility is
explicitly mandated under the Reserve Bank of India
Act, 1934.
• Monetary Policy refers to “The policy of change in
money supply and various interest rates through
which RBI wants to achieve the various goals like
economic stability, growth of economy etc.”
• Central Bank or RBI uses various tools for attaining its
goals.

4. Tools / Instruments of Monetary Policy
Quantitative Tools
Bank Rate
CRR
SLR
Open Market
Operations
RePO Rate
Reverse RePO Rate
Qualitative Tools
Margin
Requirement
Rationing of
Credit
Moral Suasion
Direct Action

5. Quantitative Tools
• Quantitative tools refer to the tools which will
affect the total volume of money supply in
economy.
• Policies are made to reduce money supply
During the inflation and during recession
policies are made to increase money supply by
RBI.

6. Bank Rate:-The interest rate at which RBI lends money to
commercial banks for long run is known as Bank Rate.
Bank Rate ↓
• Cost of credit for Banks↓
• Interest rate for Public ↓
• Demand for loan ↑
• Supply of money↑
• Recession controlled
Bank Rate↑
• Cost of credit for Banks↑
• Interest rate for Public ↑
• Demand for loan ↓
• Supply of money↓
• Inflation controlled

7. Cash Reserve Ratio:-it refers to the minimum
percentage of bank’s total deposit that a
commercial bank has to keep with RBI in the form
of cash.
Statutory Liquidity Ratio:-It refers to the percentage
of banks total deposits that a commercial bank has
to Keep with itself in the form of cash or any other
liquid assets.

8. CRR / SLR↓
• Reserves to be kept with
RBI↓
• Availability of funds with
banks ↑
• Capacity of Loans
providing by banks ↑
• Supply of money ↑
• Recession controlled
CRR/ SLR↑
• Reserves to be kept with
RBI↑
• Availability of funds with
banks ↓
• Capacity of Loans
providing by banks↓
• Supply of money↓
• Inflation controlled

9. Open Market Operation: - open market operation refers to
sale and purchase of govt. securities by RBI in the open
market on behalf of govt.
Purchase of securities by RBI
• Cash reserves of banks↑
• Credit creation capacity
of banks↑
• Supply of money↑
• Recession controlled
Sale of securities by RBI
• Cash reserves of banks ↓
• Credit creation capacity
of banks↓
• Supply of money↓
• Inflation controlled

10. RePO Rate:- The interest rate at which RBI lends money to
commercial banks for short run is called RePO rate.
RePO Rate↓
• Cost of credit for Banks↓
• Interest rate for Public ↓
• Demand for loan ↑
• Supply of money↑
• Recession controlled
RePO Rate↑
• Cost of credit for Banks↑
• Interest rate for Public ↑
• Demand for loan ↓
• Supply of money↓
• Inflation controlled

11. Reverse RePO Rate:- it is the rate at which commercial banks can
deposit their excess funds with RBI or central bank.
Reverse RePO Rate↓
• Interest rate for Banks↓
• Funds deposited with RBI by
banks ↓
• Funds available for loans with
banks↑
• Supply of money↑
• Recession controlled
Reverse RePO Rate↑
• Interest rate for Banks↑
• Funds deposited with RBI by
banks ↑
• Funds available for loans with
banks↓
• Supply of money↓
• Inflation controlled

12. Qualitative Tools
• Qualitative Tools refer to the tools which do
not affect the volume of money supply in
economy but they can affect the direction of
money supply.
• Through these tools RBI can change the flow
of money supply from high availability to low
availability sectors/ goods.

13. Margin Requirement:-It refers to the difference between the value of
asset which is mortgage and amount of loan.
It is useful in case about the goods which are sensitive to inflation.
Margin requirement ↓
• Loans provided by
banks↑
• Demand for loan ↑
• Supply of money↑
• Recession controlled
Margin requirement↑
• Loans provided by banks ↓
• Demand for loan ↓
• Supply of money↓
• Inflation controlled

14. Schedule for overview of concept
Monetary Policy Tool Use of tool during Inflation Use of tool during Recession
Bank Rate ↑ ↓
CRR ↑ ↓
SLR ↑ ↓
Open Market Operation Sale of securities Purchase of securities
RePO Rate ↑ ↓
Reverse RePO Rate ↑ ↓
Margin Requirement ↑ ↓