The following points highlight the five main causes of the ineffectiveness of credit control policy of the Reserve Bank.
The causes are: 1. Lack of Control on Indigenous Bankers 2. Lack of Organised Money-market 3. No well Organised Bill Market in India 4. More Cash Reserve with the Member Banks 5. Lack of Elasticity in Indian Economy.
Cause # 1. Lack of Control on Indigenous Bankers:
The major portion of the credit in the Indian economy is provided by the indigenous bankers.
But in-spite of this the Reserve Bank exercises no control on the activities of these indigenous bankers.
Therefore, it can be said that an important sector of the Indian money market lies outside the purview of the Reserve Bank.
Cause # 2. Lack of Organised Money-market:
As we are aware that the Indian Money Market is not properly organised. That is why there is wide diversity of interest rates in the market. There is little relationship between the bank-rate and the current interest rates in the money market. Interest rate is the important reason for the ineffectiveness of the credit control policy of the Reserve Bank.
Cause # 3. No well Organised Bill Market in India:
In our country the bill market is not properly organised. Consequently there is a stringency of first class bills of exchange in the Indian money market. That is why the re-discounting of exchange bills has not been popular in Indian banking system.
Cause # 4. More Cash Reserve with the Member Banks:
The banks here in India have large deposits even after meeting the minimum. Statutory Reserve requirement of the Reserve Bank. Therefore, the Scheduled Banks did not have to depend upon the Reserve Bank for financial accommodation. The bank rate policy of the Reserve Bank did not succeed under these circumstances.
Cause # 5. Lack of Elasticity in Indian Economy:
To have the effectiveness of the credit control policy of the Reserve Bank, it is essential that there should be sufficient amount of elasticity in the economy of the country. The idea is that the prices, wages and the interest rates should change in the same proportion in which the bank rate changes. But the Indian Economy Lack in this future.