All In One - Economics

Book: All In One - Economics

Chapter: 3. Money and Credit

Subject: Social Science - Class 10th

Q. No. 13 of Self Assessment

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Why is it important to have control over the formal sector loans by the Government of India?

RBI is the central government institution that controls all formal sector loans. All the commercial banks and many other financial institutions are supervised under RBI. RBI is the central bank of India, and it is the apex bank in the country. One of the main function of the central bank is to supervise all the commercial banks. It is important to have control because

• When commercial banks advance the credit without any ratios and then loans will become cheaper which will lead increase in the borrowers, and that will increase the credit in the economy which in turn will lead to inflation. Therefore mere control over credit is essential for the economy.

• To control the credit, the central bank increases or decreases the cash reserve ratio (CRR) which is kept as a reserve by all commercial banks in the central bank. When the economy is in inflation (continuous rise in the price level), then the central bank will increase the CRR which will reduce the lending capacity of the commercial bank and the process is reversed when there is deflation.

• The control of the central bank also reduces the exploitation. When it is not monitored by any authority, then start exploiting by charging a higher interest rate, advancing less value for the mortgage, etc. as the exploitation done by the informal sector.

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