Selective Credit Control :
Under the Selective Credit Control, the authority of the Reserve Bank is exercised by virtue of the provisions of Section 21 and 35 A of Banking Regulation Act. The Reserve Bank may give directions to banks generally or to any bank or a group of banks in particular on different aspects of granting credit, namely, –
(a) the purposes for which advances may or may not be made,
(b) the margins to be maintained in respect of secured advances,
(c) the maximum amount of advances or other financial accommodation which may be made by a bank to or the maximum amount of guarantees which may be given by a bank on behalf of any one company, firm, association of persons or individuals, having regard to the bank’s financial position such as paid-up capital, reserves nd deposits and other relevant considerations, and
(d) the rate of interest and other terms of conditions subject to which advances or other financial accommodation may be granted or guarantees may be given.
While the first two instruments control the quantum of credit, the third instrument works as a leverage on the cost of credit. Selective Credit Control is imposed to manage the balance between the supply and demand of the essential commodities. The main purpose of the Selective Credit Control is to restrict the speculative hoarding of essential commodities using bank credit.
Some of the main restrictions on loans and advances are:
(i) As per the provisions of the Banking Regulation Act, no banking company in India can grant loans or advances against the security of its own shares,
(ii) No banking company can hold shares in a company (a) as pledge or mortgagee in excess of the limit of 30 per cent of the paid up capital of that company or 30 percent of the bank’s paid-up capital and reserves, whichever is less. No banking company can commit to grant or grant loans or advances to or on behalf of any of its directors,
(iii) Further restrictions on the loans and advance to the director as a partner, guarantor of any loans and advances,
(iv) No banking company can grant loans against (a) Fixed Deposits of other Banks (b) Certificate of Deposits.
The restrictions on different types of loans and advance may be imposed from time to time by the Reserve Bank of India according to the requirement of the situation as well.