In the Indian banking system, credit rationing, that is, the regulation and limitation of credit supplied by commercial banks, is mainly carried out by which of the following institutions?

Introduction / Context:
Credit rationing is a part of monetary policy through which authorities influence the total volume and direction of credit in the economy. In India, different financial institutions have different roles, such as commercial banking, insurance, and policy making. This question checks whether you know which institution has the authority and responsibility to implement credit rationing as part of overall monetary and credit policy.

Given Data / Assumptions:

• The practice in question is credit rationing, meaning control over how much credit banks can extend and to which sectors.
• The options are the Reserve Bank of India (RBI), State Bank of India (SBI), Life Insurance Corporation (LIC), and the Finance Ministry.
• We assume the usual allocation of functions in the Indian financial and policy system.

Concept / Approach:
In India, the central bank, the Reserve Bank of India, is responsible for formulating and implementing monetary policy. This includes various quantitative and qualitative instruments, such as cash reserve ratio, statutory liquidity ratio, open market operations, and selective credit controls. Credit rationing falls under selective credit controls where the RBI may direct banks to restrict lending to certain speculative sectors and encourage lending to priority sectors. SBI is a commercial bank, LIC is an insurance company, and the Finance Ministry sets fiscal policy and broad guidelines but does not directly ration credit at the operational level.

Step-by-Step Solution:
Step 1: Identify which institution in India is the central bank and monetary authority. This is the Reserve Bank of India.Step 2: Recall that monetary policy instruments include both general credit controls and selective credit controls, both of which are used by the RBI.Step 3: Understand that credit rationing is a form of control on the quantity and direction of bank lending, which is a central bank function.Step 4: Recognise that SBI, although large, is just one commercial bank and follows the directions issued by the RBI, not the other way around.Step 5: LIC deals with life insurance and invests funds but does not control bank credit policies.Step 6: The Finance Ministry designs fiscal policy and coordinates with the RBI but does not directly execute detailed credit rationing at the bank level.Step 7: Therefore, credit rationing in India is carried out by the RBI.

Verification / Alternative check:
Standard Indian economy textbooks describe the RBI as the controller of credit. Instruments such as directives on maximum credit to certain sectors, changes in margin requirements, and priority sector lending norms are associated with the central bank. Commercial banks are expected to comply with these guidelines. When you review past exam questions on monetary policy tools, the Reserve Bank of India is always identified as the authority that applies such controls, confirming it as the correct answer.

Why Other Options Are Wrong:
SBI: It is a major commercial bank but is itself subject to credit control measures imposed by the RBI and does not set system wide credit rationing rules.

LIC: This is an insurance corporation that collects premiums and provides life insurance; it does not regulate bank credit.

Finance Ministry: Although it influences policy at a broad level, day to day credit rationing measures are the responsibility of the central bank, not the ministry.

Common Pitfalls:
Some learners confuse the size and visibility of SBI with regulatory power and think that the largest bank must be responsible for credit rationing. Others mix up fiscal policy and monetary policy roles. To avoid these errors, remember the simple rule that the central bank handles the money supply and bank credit, while the government ministry manages taxes and spending. In India, this central banking role belongs to the RBI.

Final Answer:
Credit rationing in India is done by the Reserve Bank of India (RBI).