What is selective credit control policy? | What are the types of selective credit control of a central bank?

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What is selective credit control policy?

Selective credit control methods or qualitative methods are meant to regulate and control the supply of credit among its possible users and uses. The aim of selective credit control is channelize the flower of bank credit from speculative and other undesirable purpose to socially desirable and economically useful.

What are the types of selective credit control of a central bank?

We discuss below the main types of the selective credit controls generally used by the central bank-

• Regulation of marginal requirement- This method is employed to prevent excessive use of credit to purchases or carry securities by speculative. The central bank fixes the minimum marginal requirement on loans for purchasing securities. It is the maximum loans which a borrower can have from the banks on the basis of security. If the central bank wants to curb speculative activities, it will raise the marginal requirement and vice-versa.

• Regulation of consumer credit- This is another method of selective credit control which aim at the regulation of consumer instalment credit. The main objective of this method is to regulate the dum and for desirable consumer goods in the interest of economic stability.

Under the consumer credit system, a certain percentage of the price of the desirable goods is paid by the consumer in cash. The balances is finances through the bank credit which is repayable by the consumer in instalments. The central bank control the consumer credit –

(i) By changing the amount that can be borrowed for the purchases of the consumer desirable and (ii) By changing the maximum period over which the instalment can be extended.

• Rationing of Credit- Credit rationing is a selective method of controlling and regulating the purpose for which credit is guaranteed by the commercial bank. Rationing of credit may assumes in two forms-

(i)The central bank may fix its rediscounting facilities for any particular bank,

(ii) The central bank may fix the minimum ratio regarding the capital of a commercial bank to its total assets.

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• Moral suasion- It means advising requesting and persuasion the commercial bank to co-operate with the central bank in implementation its general monetary policy. Through this methods the central bank morily uses its moral, influence to make the commercial bank to follow its policies. This method is a psychological method and its effectiveness desperation the immediate and favourable response from the commercial bank.

• Publicity- The central bank also uses publicity as an instruments of credit control. Through publicity the central bank seek to influence the credit policy of the commercial banks to educate people regarding the economic and monetary condition of the country etc. This is another way to extoling moral suasion of the commercial bank.

Discuss the quantitative methods of credit control used by central bank.

Central bank adopt two types of credit control. They are (i) The quantitative credit control and (ii) Qualitative credit control method.

Quantitative methods aim at controlling the cost and quantity of credit by adopting following methods-

Bank rate policy- The bank rate method or policy is the traditional method of credit control used by the central bank. The bank rate or discount rate is the first class bills of exchange. The rate of interest which the central bank charges from the commercial bank for re-discounting the bills is called bank rate. Bank rate policy aims at influencing-

(i)The cost and availability of credit to the commercial banks.

(ii) Interest rate and supply in the economy.

(iii) The level of economic activity in the economy

A rise the bank rate makes the credit costlier reduces the volume of credit, discourage economic activity and brings down the price level in the economy and vice-versa.

Limitation of bank rate policy

(i) Rigidities in the economic system.

(ii) Interest inelasticity of investment.

(iii) Larger surplus cash with commercial banks.

(iv) Little response of bank deposits to change in the rate.

Open market operation- It refers to the delivarate and direct buying and selling of securities in the money market by the central bank. The policy of open market operations by directly changes the cash reserves with commercial bank attempt to influence the total volume of credit creation system and ultimately the level of economic activity and the price level of the country.

It generally adopted to achieve various objective like to influence the cash reserve with the banking system to influence the interest rate to control of the extremes business and to achieve a favourable balance of payments position.

Limitation of open market operation

(i)Impact of off-setting force.

(ii) Attitude of commercial banks towards credit variations.

(iii) Inadequacy of securities.

(iv) Limited application in underdeveloped countries.

(v) Impact upon security prices.

Cash reserve ratio- Variable cash reserve ratio is a method of credit control was first suggested by Keynes in his book “Treatise on money” overly commercial bank is required by law to maintain a minimum percentage of its deposits with the central bank. This method is some directive and more effective method is dealing with abnormal situation like-inflationary situation.

Change cash reserve ratio is a power of method for influencing not only the volume of excess reserves with commercial bank but also the credit multiplies of the banking system. A change in reserve requirements affect the money supply in two ways-

(i) It change the level of excess reserves and

(ii) It changes the the credit multipliers generally the central bank rises cash reserve ratio to check inflation and vice-versa.

Conclusion

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