Central Bank - Credit Control Measures

 Central Bank - Credit Control Measures

Central banks use credit control measures (also known as monetary policy tools) to regulate the availability, cost, and use of credit in the economy. These measures help maintain price stability, control inflation, and promote economic growth.

Objective of Credit Control Measures

·        Control inflation/deflation

·        Stabilize currency

·        Promote economic growth

·        Manage balance of payments

·        Encourage or discourage investment in specific sectors

 

Types of Credit Control Measures

1. Quantitative Credit Control (General Controls)

These measures influence the overall level of credit in the economy.

a. Bank Rate Policy (Policy Rate)

Definition: The rate at which the central bank lends to commercial banks.

Effect:

Higher bank rate → borrowing becomes expensive → reduced credit.

Lower bank rate → borrowing becomes cheaper → increased credit.

 

b. Open Market Operations (OMO)

Definition: Buying or selling government securities in the open market.

Effect:

Selling securities: Sucks liquidity out → less credit.

Buying securities: Injects liquidity → more credit.

 

c. Cash Reserve Ratio (CRR)

Definition: Percentage of total deposits banks must keep with the central bank.

Effect:

Higher CRR → less money available to lend → reduced credit.

Lower CRR → more money available → increased credit.

 

d. Statutory Liquidity Ratio (SLR)

Definition: Minimum percentage of deposits banks must maintain in the form of liquid assets.

Effect:

Higher SLR → less funds for loans.

Lower SLR → more credit expansion.

 

2. Qualitative Credit Control (Selective Controls)

These are aimed at regulating specific sectors or types of credit.

a. Margin Requirements

Definition: The difference between the loan amount and the value of the security offered.

Effect:

Higher margin → borrower needs to invest more → limits speculative borrowing.

 

b. Credit Rationing

Definition: Limiting the amount of credit available to particular sectors.

Effect: Ensures that essential sectors (e.g. agriculture, industry) get priority over speculative sectors.

 

c. Moral Suasion

Definition: Persuasive methods used by the central bank (e.g., meetings, circulars) to influence banks.

Effect: Encourages banks to follow credit policies in line with national interests.

 

d. Direct Action

Definition: Central bank may take punitive actions against non-complying banks.

Effect: Ensures discipline in the banking system.

  

Conclusion

Central bank credit control measures are essential tools for maintaining economic stability, controlling inflation, and ensuring balanced growth. By using a combination of quantitative tools (like CRR, SLR, bank rate, and open market operations) and qualitative tools (like margin requirements and moral suasion), central banks can influence the availability, cost, and direction of credit in the economy.

These measures help prevent excessive inflation, manage demand, support productive sectors, and promote overall financial discipline. However, the effectiveness of these tools depends on timely implementation, coordination with fiscal policy, and the responsiveness of the financial system.

In a dynamic global economy, credit control remains a vital function of central banks to safeguard economic health and guide sustainable development.

L.Keerthivasan

R. Dinesh Kumar

II B.Com

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