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The Central Bank May Take Direct Action Against the Defaulting Commercial Banks. - Economics

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The Central bank may take direct action against the defaulting commercial banks.

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Solution

A Central Bank may adopt the technique of direct action against the defaulting commercial banks or which fails to follow the directions given by it. This method can be used to enforce both quantitative and selective (qualitative) credit controls and is generally used not in isolation, but as a supplement to other methods.
The following modes of direct action may be taken by the Central Bank­
  1. The Central Bank may refuse rediscounting facilities to those commercial banks, which may be granting too much credit for speculative and unproductive purposes in excess of their capital and reserves.
  2. The Central Bank may restraint them from granting advances against the collateral securities of certain commodities.
  3. It may charge a penal rate of interest on those banks which want to borrow from it, beyond prescribed limit.
  4. The Central Bank may threaten a commercial bank to be taken over by it, if it fails to follow the Bank's policies and instructions.
Concept: Central Bank Function - Banker's Bank
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