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Questions
Explain how credit rationing helps to control credit in an economy.
How is ‘rationing of credit’ used as a method to control credit in the economy?
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Solution
Credit rationing is a qualitative credit control method used by central banks to limit the maximum amount of loans available to specified industries or commercial banks.
- Ceiling on Loans: The Central Bank sets a strict loan ceiling for specified industries or commercial banks. Once this limit is reached, banks are unable to make additional loans to that sector, even if borrowers are ready to pay higher interest rates.
- Sector-Specific Allocation: It directs loans to priority sectors (such as agriculture or small businesses), while depriving speculative or non-essential sectors of extra funds.
- Controls Inflation: By restricting the absolute amount of credit that commercial banks can create, it directly reduces the total money supply and purchasing power in the economy, effectively lowering inflationary pressure.
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RELATED QUESTIONS
Define bank rate.
Which of the following is a selective/qualitative method of credit control?
The central bank controls credit _____ .
Which of the following is not a quantitative method of credit control?
Match the following and select the correct option:
| Column A | Column B | ||
| (i) | A rate of interest at which the central bank (RBI) lends money to member commercial banks to meet they long term needs. | A. | Cash Reserve Ratio |
| (ii) | A rate of interest at which RBI lends money to commercial banks to meet their short term needs. | B. | Statutory liquidity ratio |
| (iii) | A minimum percentage of total deposits kept by banks with the Central Bank. | C. | Repo rate |
| (iv) | A minimum percentage of total deposits to be kept by banks inform of liquid assets with themselves. | D. | Bank rate |
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Increase in cash reserve ratio adversely affects the capacity of commercial banks to create credit.
Reason (R): An increase in cash reserve ratio reduces the excess reserves of commercial banks and hence limits their credit creating power.
Give any two reasons as to why a country needs a central bank.
Define the term Statutory Liquidity Ratio.
Differentiate between quantitative and qualitative methods of credit control.
Briefly explain the following credit control methods adopted by the Central Bank.
Moral persuasion
Which of the following statements are correct and which are incorrect? Give reasons.
- Central bank is a currency authority.
- Bank rate is a qualitative method of credit control.
- Quantitative methods regulate direction of credit.
- Bank rate is the rate at which commercial banks give loans to the public.
- Central bank should sell government securities when credit is to be expanded.
Who controls the credit supply in an economy?
What do you mean by credit control?
What are quantitative methods of credit control?
Give an example of margin requirements.
Describe two quantitative credit control measures of the Central Bank.
