Question

what changes are supposed to be included in a credit policy ?

Answer 1

The term credit policy is an integral part of monetary policy. The central bank takes decision regarding money supply in the country and direction of interest rates. Credit policy is used to decide the interest rate at which the banks gives credit to customers. Some of the key objectives of the monetary policy are:

- Increase in employment

- Exchange rate should be stabilized

- Stability in prices

- Growth of economy

- Balance between investments and savings

Below changes are considered by the central bank in credit policy:

1) Ready Forward Contracts (REPO):

REPO is when the central bank lends funds to banks for short term basis giving governement bonds as security. The banks agrees to repurchase the security at future date. Repo rate refers to the rate of interest charged by central government for lending money.

The central bank also borrows funds from banks to maintain excess liquidity by selling of securities and repurchasing them over a period of time. This is called reverse repo.

The central bank uses reverse repo and repo as a means to maintain the liquidity in the economy. The repo rate also referred to as the policy rate and acts as an indicator for the entire economy with respect to borrowing and lending operations.

2) Bank Rate:

It refers to the rate of interest at which central bank lends money to commercial and scheduled banks. Any change in bank rate by the central bank in an indication for the bank to change their deposit rates and also the prime lending rate.

3) Marginal Standing Facility:

It is a facility through which scheduled banks borrow money from central bank on an overnight basis at a rate which is higher than repo rate.

4) Liquidity Adjustment Facility:

Funds under this facility are used by the banks to manage their daily liquity. It covers credit at the repo rate as well as reverse repo rate.

5) Statutory Liquidity Ratio (SLR):

It refers to the part of liability of current accounts, savings bank account and fixed deposits of banks which is to be kept in the method of pre-defined assets that are liquid like approved securities like public sector bonds. It ensures that the requirement needs for the funds of the government of partly, but without fail met by the banks.

6) Cash Reserve Ratio (CRR):

It regulates the supply of money in the system. CRR is the part of the bank deposits that a banks need to keep with central bank in the form of cash.