Question

Explain the following:

Rationing of Credit

Explain the following credit control instrument:

Credit Rationing

Answer 1

Rationing of credit refers to the method by which the Central Bank limits the maximum amount of credit granted or fixes credit quotas for certain purposes or sectors. 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 18^th 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.