capital ratio which the commercial bank should have to the total assets of the bank. . Direct Action Direct action against the erring banks can take the following forms. a) The central bank may refuse to altogether grant discounting facilities to such banks.
b) The central bank may refuse to sanction further financial accommodation to a bank whose existing borrowing are found to be in excess of its capital and reserves. c) The central bank may start charging penal rate of interest on money borrowed by a bank beyond the prescribed limit. . Moral Suasion This method is frequently adopted by the Central Bank to exercise control over the Commercial Banks.
Under this method Central Bank gives advice, then requests. and persuades the Commercial Banks to co-operate with the Central Bank in implementing its credit policies. . Publicity Central Bank in order to make their policies successful, takes the course of the medium of publicity.
A policy can - - Banking be effectively successful only when an effective public opinion is created in its favour. . Regulation of Consumer’s Credit: The down payment is raised and the number of installments reduced for the credit sale. .
Changes in the Marginal Requirements on Security Loans: This system is mostly followed in U.S.A. Under this system, the Board of Governors of the Federal Reserve System has been given the power to prescribe margin requirements for the purpose of preventing an excessive use of credit for stock exchange speculation. This system is specially intended to help the Central Bank in controlling the volume of credit used for speculation in securities under the Securities Exchange Act, . The Repo Rate and the Reverse Repo Rate are the frequently used tools with which the RBI can control the availability and the supply of money in the economy.
RR is always greater than RRR in India Repo Rate: (RR) Reverse Repo Rate: (RRR) The rate at which the RBI is willing to lend to commercial banks is called Repo Rate. Whenever banks have any shortage of funds they can borrow from the RBI,