Question

Bring out the methods of credit control.

Give two methods of credit control.

What are the methods of credit control?

What are quantitative or general controls of credit control?

What are qualitative or selective methods?

How does the central bank perform its duty to control credit?

Write a short note on quantitative methods of credit control.

Write a short note on qualitative methods of credit control.

Answer 1

1. Quantitative or General Methods:

1. Bank Rate Policy: The bank rate is the rate at which the Central Bank of a country is prepared to rediscount the first-class securities.
2. Open Market Operations: In a narrow sense, the Central Bank starts the purchase and sale of Government securities in the money market. In the Broad Sense, the Central Bank purchases and sells not only Government securities but also other proper eligible securities like bills and securities of private concerns.
3. Variable Reserve Ratio:
   1. Cash Reserves Ratio: Under this system, the central bank controls credit by changing the cash reserves ratio. For example, if the commercial banks have excessive cash reserves on the basis of which they are creating too much credit, this will be harmful to the larger interest of the economy. So it will raise the cash reserve ratio, which the commercial banks are required to maintain with the central bank.
   2. Statutory Liquidity Ratio: Statutory Liquidity Ratio (SLR) is the amount that a bank has to maintain in securities. The quantum is specified as some percentage of the total demand and time liabilities (i.e., the liabilities of the bank which are payable on demand anytime and those liabilities which are accruing in one month’s time due to maturity) of a bank.

2. Qualitative or selective methods:

1. 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 is another important tool the central bank uses to regulate credit in the economy. This method was first introduced by the Bank of England towards the end of the 18th century. Under this system, the central bank can impose two types of restrictions: it may set a minimum capital-to-loan ratio that commercial banks must maintain, or it may limit the amount of rediscounting support it provides to a specific bank.
   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 as well as to influence 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 consumers to buy expensive, durable consumer goods like motor cars, computers, etc.