Question

What are the qualitative measures of credit control? 

Discuss four qualitative measures of the Central Bank to control credit in the economy.

Answer 1

1. Marginal Requirements: Margin requirement implies ascertaining the value of the loan that can be granted upon the mortgage of a certain security. The banks keep a margin, which is the difference between the market value of a security and its loan value. For example, a commercial bank grants loan of Rs 80,000 against security of Rs 1,00,000. So, the margin is calculated as Rs 1,00,000 – Rs 80,000 = Rs 20,000. When the central bank decides to restrict the flow of money, then the margin requirement of loan is raised. This is referred to as ‘Regulation of Margin Requirements’.
2. Selective Credit Control (SCC’s): An instrument of monetary policy that affects the flow of credit to particular sectors positively and negatively is known as selective credit control. The positive aspect is concerned with the increased flow of credit to the priority sectors. However, the negative aspect is concerned with measures to restrict credit to a particular sector.
3. Moral Suasions: A persuasion technique followed by the central bank to pressurise the commercial banks to abide by the monetary policy is termed as moral suasion. This involves meetings, seminars, speeches and discussions, which explain the present economic scenario and thereby persuade the commercial banks to adapt the changes needed. In other words, this is an unofficial monetary policy that exercises the power of talk.
4. Direct Action: This method is widely applied by the central bank to implement both quantitative and qualitative credit controls. It is typically used alongside other tools to achieve better outcomes. Direct action involves the central bank issuing instructions to commercial banks regarding their lending and investment practices. Such measures may include denying the discounting of bills of exchange, imposing a higher interest rate as a penalty, or refusing to extend further credit to certain banks.