Question

Briefly explain two qualitative methods of credit control adopted by this institution.

Explain any three methods of qualitative credit control.

Discuss the qualitative methods of controlling credit by the central bank in an economy.

Answer 1

The methods used by the RBI to influence the flow of credit in particular directions of the economy are called qualitative methods. The two qualitative methods of credit control are as follows:

1. Margin Requirements: A margin is the difference between the amount of the loan and the market value of the security offered by the borrowers against the loan. By changing the margin requirement, the central bank can alter the amount of loans made against securities by the banks.
2. Rationing of Credit: Rationing of credit means fixation of credit quotas for different sectors of the economy.
3. Moral Suasion: Under this method, the central bank adopts the policy of persuasion and moral influence on the commercial banks in order to get them to fall in line with its policy. The central bank frequently announces its policy and urges the commercial banks to adopt it.
4. Publicity: Publicity is another method of selective credit control. The central bank expresses its views about the conditions prevailing in the economy relating to money supply prices, production, employment, etc., to put moral pressure on the banks. It may put forward its views by using facts and figures through the media of publicity. The central bank uses this method both for influencing the credit policies of the commercial banks and to influence the public opinion in the country.
5. Direct Action: Direct action refers to various directives issued by the central bank to commercial banks from time to time to regulate their lending and investment activities. The central bank can take direct actions against commercial banks.
6. Regulation of Consumer Credit: An important instrument of selective credit control is the regulation of consumer credit. It aims at regulating the consumer instalment credit on hire purchase finance. Hire purchase finance is the method of using bank credit by the consumers to buy expensive, durable consumer goods like motor cars, computers, etc.