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Credit Control Part B — Transcript

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0:21Welcome, welcome to banking and finance
0:25laws course. This is the fourth week.
0:28This week we are discussing the powers
0:30and functions of the Reso Bank of India
0:34and the other banks other banks. This is
0:37the 18th session. In the previous
0:40session we have discussed about credit
0:42control and in this session also we will
0:45discuss some more measures of the credit
0:48control that is as part of selective
0:51credit control. There are qualitative
0:53measures and quantitative measures being
0:56taken by Reserve Bank of India and other
0:58banks. We have looked at few qualitative
1:01measures in the previous class and we
1:04will continue with other measures
1:06qualitative as well as quantitative
1:09measures that the RBI and other banks
1:11will take to ensure credit control in
1:14the country and as part of the powers
1:18and functions of the Reserve Bank of
1:20India and other banks. We have discussed
1:23in this week the establishment of
1:25Reserve Bank of India, its note issuing
1:28power, its credit control in the
1:31previous class and we are continuing the
1:33discussion on credit control in this
1:36class also. So there are measures
1:39relating to willful defaulters. RBI
1:42started realizing there are few people
1:44who are intentionally
1:46doing some fraud to the uh banks or to
1:51the financial institution and they are
1:53intentionally not repaying the loan and
1:56they are trying ways to default the
1:59loans or other uh payment obligations.
2:02So RBI started being more cautious and
2:05they observed such trend happening with
2:07some big business people or with some
2:11people with fraudulent intention and RBI
2:14decided to regulate it and so that it
2:17does not affect the financial stability
2:20of the country. So it started issuing
2:23some kind of guidelines to govern the
2:25willful defaulters. So there are some uh
2:29specific guidelines also and general
2:31guidelines also like for banks they have
2:34given some specific guidelines.
2:36Similarly for NBFCs what kind of so for
2:39a particular category of financial
2:41institution RBI can give guidelines for
2:44a particular category within that for
2:47one particular bank also it can give
2:49that means RBI is empowered to give
2:52directions to all banks in general or to
2:55all financial institutions including
2:57banks in general or to all banks in
3:00general and to one particular bank also
3:02like that. So this is the power that RBI
3:06has under the RBI act and these
3:09directions can be addressed to all the
3:12banks and all the financial institutions
3:14and like that. Now what does these
3:17regulations or these guidelines try to
3:19govern willful defaulters like? So they
3:22try to say that there is a tendency that
3:25whenever there is a siphoning of funds
3:27to offshore accounts the banks have to
3:30carefully look at the customer look at
3:32the transactions look at and see are
3:35these people going to be future willful
3:37defaulters. Are there any people who are
3:39intentionally evading tax payments? Are
3:42there any fraudulent transactions
3:44happening? So the RBI provides a
3:47framework for these identifying these
3:49willful defaulters reporting about
3:52willful defaulters and also RBI provides
3:56a framework where it gives measures so
3:58that the willful defaulters do not
4:01default and prior only before they
4:04default you identify with their
4:06fraudulent transactions and try to
4:08address that through their suppressing
4:11them. So in a way it is like prevention
4:14is better than cure. In a way you try to
4:16identify them with their activities
4:19prior before their default and you
4:21report it and try to ensure that they
4:23don't do they don't take away the funds
4:25before they become uh they default the
4:28payment. So this is one of the
4:30qualitative measure ensured to ensure
4:32that these people don't default the
4:34payments that they have taken from the
4:37banks or financial institutions. The
4:40other major measure about the
4:42qualitative measure is the priority
4:44sector lending. Now priority sector
4:46lending can be said to be the major
4:49component of selective credit control.
4:52In a way this is the one particular
4:55measure which has farreaching
4:57consequences to the entire economy and
4:59to the public at large and it imposes
5:02major restrictions on the banks also.
5:05Now in 1967 National Credit Council was
5:09set up to study the credit needs of the
5:11economy and to identify the sectors
5:14which require prioritization and ensure
5:17that the credit access to those sectors
5:19are reached. So this was just before the
5:22social control on banks or just before
5:24the nationalization of banks. So because
5:27the credit needs of the country and the
5:29credit access to those sectors is a very
5:32very important criteria for economic
5:35growth of any nation and a nations
5:38cannot grow grow economy cannot grow
5:41unless their credit need and credit
5:43access is matched. So this requires that
5:47level of uh uh what we call uh suitable
5:51identification of the sector and also
5:53allowing the credit to flow to those
5:55sector requires very careful planning,
5:59careful understanding and carefully
6:01designed scheme through which that
6:04particular sectors get the credit
6:06access. This is essentially the crux of
6:08priority sector lending and Reserve Bank
6:11of India declares from time to time what
6:14are priority sectors. So it is not uh
6:17what you call static. It is dynamic.
6:19There might be priority sector in 10
6:21years back may not be the priority
6:23sector now. Say for example in 1950 it
6:26may not be a prior priority sector or
6:29something like that. So any priority
6:31sector is a sector which where the RBI
6:34thinks that there is a need that the
6:35credit should go to that particular
6:37sector. Now section 21 of the banking
6:40regulation act empowers Reserve Bank of
6:43India to issue directions to the banks
6:46and Reserve Bank of India can determine
6:48the policy in relation to advances to be
6:52followed by banking companies generally
6:54are by any banking company in particular
6:57and the purposes for which they are to
7:00be made the rate of interest etc and
7:03banks are bound to follow them. So here
7:06RBI is empowered by the provisions of
7:09the banking regulation act. Not just the
7:11RBI act but banking regulation act also
7:14empower the Reserve Bank of India to
7:16regulate the banks. And what is this
7:18regulation? They can determine the
7:21policy in relation to advances. So what
7:23is the policy of lending that banks
7:25should follow that RBI can determine and
7:29it can give this to the generally to all
7:31banking companies that is to all
7:34commercial banks or private commercial
7:36banks or by any banking company in
7:38particular say this particular bank
7:40should give so it can give to one
7:42particular bank or the purposes for
7:45which they have to be made that is maybe
7:47agriculture or small industries
7:49something like that the purpose to which
7:51the loan has to be given also can be
7:53determined by RBI. The rate of interest
7:56that should be charged on these loans
7:58loans also can be determined by the RBI
8:01and this power is interested to the RBI
8:05by virtue of section 21 of the banking
8:08regulation act in addition to the RBI
8:10act. Now banks are bound to follow them.
8:13There is no because it is the RBI
8:15direction and they are bound to follow
8:18that. Now say for example one particular
8:20priority sector guideline reads like
8:22this like all commercial banks with more
8:25than 20% 20 branches are required to
8:28lend 40% of their net bank credit to the
8:32priority sectors. Now what is this net
8:35bank credit? That means if bank has a
8:38total deposits of 100 cr after its
8:41statutory liquidity ratio and cash
8:43reserve ratio and other obligations.
8:45Suppose it is giving loans up to 80 cr.
8:48Now out of 80 cr at least 40% of it that
8:53means 32 cr should go to priority
8:56sectors. So out of 80 cr 32 cr should go
8:59only to priority sectors. So priority
9:02sectors include agriculture, housing,
9:05education, microenterprise
9:07etc. So G RBI from time to time through
9:10its directive will declare what is the
9:12priority sector what percentage of loan
9:15should go to that and here there is
9:17again a twist within the priority
9:20sectors they can provide further ceiling
9:22to specific sectors like say total 40%
9:25you are giving to priority sectors
9:28within that at least 18% should go to
9:32agriculture like that they can determine
9:34that means again there is a ceiling
9:37So this is how the that means you cannot
9:40give 32 cr to whomever you like within
9:43that certain portion should mandatorily
9:45be given to agriculture loan as
9:47agriculture loan like that they can
9:49within priority sector you can specify
9:52what priority sector receives how much
9:54also there is also a preference to
9:57weaker sections to avail these loans
9:59such as people coming small and marginal
10:02farmers persons with disability people
10:05belonging to scheduled cast and
10:07scheduled tribes or minorities etc. they
10:10may be given further preference in the
10:13loan receiving process and RBI mandates
10:17bank lending to priority sector through
10:20the master directives and circular which
10:22it issues from time to time and this is
10:25a major component of selective credit
10:28control measure of the RBI because
10:31entire country's bank loans for major
10:34portion of those loans are going to the
10:37sectors which RBI determines
10:40prior and also some portion of that has
10:42to go to the people from weaker sections
10:45and they get loans from time to time. So
10:48this ensures that people who should
10:52receive the loan, which sector should
10:54receive the loan, how much which sector
10:56should receive the loan. So this is
10:58aligned with the national development in
11:01general and to the national economic
11:03growth. So these were the qualitative
11:05measures that we have seen and there are
11:08also quantitative measures that the
11:11Reserve Bank of India engage to ensure
11:13uh credit control. Now what are
11:16qualitative measures? Qualitative
11:18measures are the measures which ensure
11:20that the credit is received by people
11:22who should receive it. Credit is
11:24received by sectors who should receive
11:26it and the credit is not lost to
11:29cheaters and fraudulent people. Credit
11:32is not gone to the people who are not
11:34credit worthy that the credit is not
11:37given to people who do not repay and
11:39quantitative measure is a measure where
11:42the volume of credit availability how
11:45much money should be available in the
11:47market. How much money should be
11:50available to the public at large? How
11:53much money should be there for giving
11:55loans? So this kind of volume the
11:58measures taken to uh give the volume of
12:01money in the market is also called
12:04quantitative measures. So sometimes even
12:07the volume is determined by there is a
12:09combination say for example when we say
12:12uh the 40% of the credit should go to
12:14credit se uh to the priority sectors as
12:17credit control measure obviously that
12:20volume is coming into this sector. So
12:22some amount of overlap between these
12:25measures will be there. But however,
12:27quantitative measures are measures which
12:29are directly focused on maintaining only
12:32the volume of money where it should go
12:34and how it has to be regulated and how
12:37much money should be available in the
12:39market so that it is available for
12:42lending and so on. Now there are few
12:44measures like cash reserve ratio known
12:47as CRR, open market operations, bank
12:51rate and repo rate and statutory
12:53liquidity ratio. This will determine the
12:56volume of money that is available in the
12:58market for the purpose of lending by the
13:01banks. Now when we try to understand
13:04what is a cash reserve ratio and what is
13:06a statutory liquidity ratio. Cash
13:09reserve ratio or the CR is the
13:11percentage of money that banks have to
13:14maintain with the RBI. That means the
13:17RBI might say that 3% of bank deposits
13:21have to be deposited with the RSO bank.
13:24Then in this case, if the bank has 100
13:27cr deposits, 3 crores goes with the RBI
13:30and that 3 cr is not available to the
13:32bank at all. So they can't give loans
13:34with that money. So this money is gone.
13:37So if it increases from 3% to 5% 5 cr is
13:41gone. If it increases it to 7% 7 cr is
13:45gone. If it reduces it to 1% only 1 cr
13:48is gone. So by fluctuating the
13:51percentage of CR the RBI tries to
13:54regulate the volume of money that is
13:57available in the market for the people
13:58to get loans. So this will also rest in
14:02a way protect country economy from going
14:05into inflation or going into the only
14:08more demanding or lenders liability. In
14:11a way we don't allow lenders to give
14:13loan just because they have money if
14:15there is no credit need. So genuine
14:17credits will get the genuine people who
14:20want credit for genuine need would get
14:23that loan like that. So these are
14:24techniques which reserve bank could use
14:27and it is also for safety purpose that
14:29if the bank is not performing well that
14:32money is available to repay the
14:33depositors like that. So in a way cash
14:36reserve ratio has multiple uh multiple
14:40reasons why banks maintain the money
14:42with Reserve Bank of India and multiple
14:44purposes it serves. The other one is
14:48statutory liquidity ratio. Statutory
14:51liquidity ratio is the percentage of
14:54money that banks need to maintain in
14:57cash form with them to honor their
14:59customers demands. Suppose if bank has
15:02100 cr deposits and some amount like 5
15:05cr it keeps with the RBI. Then if a
15:08customer and 95 cr it can't give loan.
15:11Suppose a customer may come to withdraw
15:13his money in the in his account. So you
15:16have to honor the customer's demands. So
15:18you have to keep certain amount of money
15:21as liquid that is in cash form.
15:25So liquid money. So when you have to
15:27maintain your finance in liquid form
15:29that is in cash form you can't give that
15:32percentage of money as credit. So out of
15:35100 cr if 7% is statutory liquidity
15:38ratio out of 100 cr that 7 cr you can't
15:42give it to the loan. Similarly 5 cr is
15:45cash reserve ratio and 10 cr is
15:47liquidity ratio out of 100 cr 15 cr you
15:51can't use it for credit purposes. So
15:53this is the percentage of money this
15:56determine the volume of money that is
15:58available in the market. So if one bank
16:01has 10,000 cr or 1 lakh cr deposits even
16:055% 7% would mean huge volume of money
16:08that is available in the market are not
16:11available in the market based on the
16:12RBI's uh percentage determination of
16:16cash reserve ratio and statutory
16:18liquidity ratio. So these ratios are
16:21used first as a safety purpose and also
16:24for honoring customers demand and at the
16:26same time it also affects the volume of
16:29money available for the credit purposes
16:32that can be lent by banks to the
16:35customers. Then the other kind of
16:38quantitative measure is called the open
16:41market operations of the bank. So open
16:44or market operation means selling and
16:46buying government bonds in the open
16:48market. Government bond is usually in
16:51the form of a kind of debt instrument
16:54kind of thing where government promises
16:57that a particular amount suppose you buy
16:59one lakh infrastructure bond after 4
17:02years I will the government promises to
17:05repay two lakhs for one lakh bond they
17:07you will get two lakhs after four years
17:10or you may get periodic return something
17:12like that. Now what happens if a bank
17:14buys government securities? So if a
17:17banker is buying those bonds then the
17:20money available for credit to the
17:22general public will decrease and if the
17:25bank sells these markets then what will
17:28happen when bank sells the bonds
17:30available with them the money will flow
17:32into the bank and that money will be
17:34available for lending to the public. So
17:37by selling and buying government
17:39securities the banks will uh will get
17:43more or less money whatever it wants. So
17:46these government bond transactions, open
17:48market transactions are gone governed by
17:51the government securities act 2006 and
17:55also section 17 18 and 18A of the
17:58reserve bank of India act. So these act
18:01and the government securities act is
18:04specifies how where and in to what
18:07extent banks can transacting government
18:09securities. But this is also one of the
18:12measure through which Reserve Bank of
18:14India regulates the volume of money that
18:16is available in the market for credit
18:19purposes to the general public and it is
18:22also used as a credit control measure.
18:25Now the other measure is the bank rate.
18:27Now bank rate is the rate at which RBI
18:30lends to the commercial banks on
18:32instruments such as bills etc. Now we
18:35have studied bill discounting in the
18:37second week. Now bills are discounted
18:40before their maturity period to
18:42encourage bonafide commercial
18:44transactions and the rate at which they
18:46are discounted determines the extent to
18:49which they will be discounted.
18:52Now uh when the rate of discount is high
18:55it will be less beneficial for the
18:57business people to discount their bills
19:00thus leading to avoidance of credit
19:02seeking through discount. So they won't
19:03go for discounting. If the rate of
19:06discount is low, there will be robust
19:08discount activity and consequently huge
19:10flow of credit. So in a way simply put
19:14the banks will discount the bills from
19:17the customers and banks can redisount
19:20those bills with RBI. Suppose a bank
19:23kept 5 cr for bill discounting. Suppose
19:26three bills came each worth 33 cr. So it
19:29can't honor those bills. So it will
19:31discount a bill with by with its money
19:34and uh it will redisount that same bill
19:37from the RBI and it will infuse the
19:39money into the market. So but this is
19:42the rate at which the Reserve Bank of
19:44India gives to the commercial banks that
19:48that will determine the rate at which
19:50banks will discount to the general
19:53public. So just like that when the
19:55Reserve Bank of India enhances the rate
19:58then people coming for discounting will
20:00not come through discounting they will
20:02take the regular loan because it will
20:04become very expensive for them. When the
20:06discount is very low then obviously
20:09people will come because it is easy
20:11money available upfront and before its
20:13maturity period. So they will come and
20:15discount and the money will go into the
20:17market. So this is a kind of credit
20:20control measure which helps them to do.
20:23So these are on commercial papers. Now
20:25the repo rate and the the reverse repo
20:29this is the rate of interest charged by
20:31RBI on the money lent to commercial
20:34banks. So when uh when there is a
20:36liquidity crunch and when the banks take
20:38loan this generally Reserve Bank of
20:40India is called the banker's bank. So
20:42banks can obviously go to Reserve Bank
20:44whenever they have any liquidity crunch
20:46and they can take loan from the Reserve
20:48Bank of India and whatever rate of
20:51interest that is charged by Reserve Bank
20:53of India on the money that they have
20:54lended to commercial banks is called the
20:57repo rate. when the repo rate itself is
21:00high suppose if the RBI is giving at 5.5
21:04repo rate then commercial banks will
21:06give to us to six or seven something
21:09like that generally they can't give less
21:11than 5.5 suppose if the repo rate is six
21:14then we will get loans at seven or eight
21:16like that so this will determine the
21:19rate at which general public will get
21:21loans rate of interest on their credit
21:24and the reverse repo rate is the rate of
21:27interest given by the RBI for the funds
21:30deposited with it by the commercial
21:32banks. So we have seen cash reserve
21:35ratio and other funds which the reserve
21:37fund which the banks will keep with the
21:40Reserve Bank of India. on those funds
21:42the rate of interest that the Reserve
21:44Bank of India gives to them that is
21:46called the reverse repor rate. And with
21:48these rates also suppose if the RBI is
21:50giving huge interest on the reverse
21:53repor rate is very high then banks
21:55instead of giving it to uh commercial
21:58lending they will put huge money with
22:00RBI. So this will also determine the
22:03quantity of money or the volume of money
22:06that is available for the public to get
22:08credit. And in a way the people when the
22:11rate of interest is very high also
22:13people will not come to take loans so
22:16much because they are already scared
22:18that there is rate of interest is very
22:20high maybe the loan repayment obligation
22:23will become burdensome for them like
22:25that. So one major thing is banks
22:27definitely have emerged as the most
22:30sought off institutional lender to the
22:33borrowers in India. So and if the credit
22:35needs are not matched with credit
22:37accessibility economic growth of the
22:40nation will suffer. So we need to
22:42regulate and channelize credit for which
22:45is a requisite economic function of
22:47national importance. And as part of
22:50credit control measures, we discussed
22:52both qualitative credit control measures
22:54and quantitative credit control
22:57measures. Both these credit control
22:59measures, qualitative and quantitative
23:02credit control measures collectively
23:04what we call it as selective credit
23:06control. This all the credit control
23:08measures put together qualitative and
23:11quantitative measures put together keeps
23:13our economy in a very healthy state and
23:16make sure that the credit needs of the
23:19nation and the credit needs of the
23:21public and the value of currency in the
23:24market. All these are maintained so that
23:26the RBI ensures that there is no
23:28inflation that the credit needs of
23:31particular weaker section people are
23:33also addressed and the credit needs of
23:35the marginalized farmers or any other
23:38sector which require the credit support
23:40are addressed. All these are ensured by
23:43the credit control measures that the
23:45Reserve Bank of India takes and gives as
23:48directives to the banks in terms of
23:52through its master directives are by its
23:54directives and the banks are bound to
23:57follow them by virtue of the provisions
24:00that are contained in the banking
24:02regulation act and the Reserve Bank of
24:04India act. So both these statutes
24:07empower the RBI to regulate the banks
24:10and the power is very far and wide. It
24:12can give to general instruction. It can
24:15to special interest instruction to one
24:17particular bank or to all the banks are
24:19like that. So it's a very farreaching
24:22power that the Reserve Bank of India has
24:24and credit control is a major tool
24:26through which uh government's econom
24:30economic growth is properly channelized
24:33are in a way we integrate our planned
24:36economic development with that of the
24:38financial access that is required for
24:41that growth. In a way this is a one of
24:43the major measure through which we help
24:46the nation to grow in the direction we
24:48are uh you know anticipating and
24:51visualizing. So this helps the
24:54government to plan properly and execute
24:57it also properly. So RBI being a banker
25:00to the government will help achieve that
25:02objective in a very systematic way by
25:04giving proper directions at appropriate
25:07time. So with this we conclude our
25:10discussion on credit control and we will
25:13discuss about banker customer
25:14relationship in the next class. Thank
25:18you.

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