Question

Briefly explain any two qualitative credit control instruments.

Answer 1

Qualitative or selective instruments regulate the direction and allocation of credit among different uses and sectors.

1. Regulation of Margin Requirements: Banks normally lend less than the full value of the security offered. The central bank fixes the required margin; a lower margin permits larger loans and expands credit, while a higher margin restricts credit.
2. Credit Rationing: The central bank places ceilings on the total loans and advances of commercial banks or on the ratio of loans to deposits. It may also fix limits for particular purposes, thereby limiting excessive lending and directing funds towards approved sectors.