The methods of credit control

B Regulation of Consumer Credit: This is another method of selective credit control which aims at the regulation of consumer instalment credit or hire-purchase finance.

Credit control by rbi slide share

Discriminatory: It is discriminatory and affects different banks differently. Both the assumptions are unrealistic. This makes open market operations less effective in controlling the volume of credit. Cheap credit may induce a higher demand both for investment and consumption purposes. Other Factors: The reserve ratio held by the commercial banks is determined not only by legal requirements but also by how much they want to hold in relation to their deposits in addition to such requirements. Further, since open market operations involve the sale and purchase of securities on a day-to-day and week-to-week basis, the commercial banks and the central bank which deal in them are likely to incur losses. This leads to fall in their prices and production. Their objective is mainly to control and regulate the flow of credit into particular industries or businesses. Thus, the statutory liquidity ratio, on the one hand is used to siphon off the excess liquidity of the banking system, and on the other it is used to mobilise revenue for the government. This can be explained with the help of the deposit multiplier formula. D Direct Action: Central banks in all countries frequently resort to direction action against commercial banks.

They will stick to the legal minimum requirements of cash to deposits and at the same time continue to create credit on the strength of the excessive reserves. Attain stability in the exchange rate and money market of the country.

In this way by raising the cash reserve ratio of the Commercial Banks the Central Bank will be able to put an effective check on the inflationary expansion of credit in the economy.

Credit control measures of central bank ppt

Despite these limitations, open market operations are more effective than the other instruments of credit control available with the central bank. Besides, there may not exist a close relation between the bank rate and the other rates as postulated in the theory of bank rate. Difficult to distinguish between Essential and Non-essential Factors: It may be difficult for the central bank to distinguish precisely between essential and non-essential sectors and between speculative and productive investment for the purpose of enforcing selective credit controls. This is because it lacks definiteness in the sense that it is inexact and uncertain as regards changes not only in the amounts of reserves but also the place where these changes can be made effective. It may, however, be a success where the central bank commands prestige on the strength of the wide statutory powers vested in it by the government of the country. This provides an incentive to investors and businessmen to get more advances from the banks. The effectiveness of open market operations depends upon the existence of a broad and well-organised market for securities. On the other hand, a reduction in the bank rate will not induce them to borrow during periods of falling prices. This can be done by regulating the total volume of credit that may be extended for purchasing specific durable goods and regulating the number of installments through which such loan can be spread. Second, interest rates form an insignificant part of the total cost of holding and production of goods. RBI fixes ceiling for specific categories.

But it may purchase stocks through some other source. On the other hand, if it wants to expand credit, it reduces the margin requirements.

meaning of credit control

So this policy is not effective in unit banking. It is non-discriminatory because it applies equally to borrowers and lenders. To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.

It is a 'selective method' of control as it restricts credit for certain section where as expands for the other known as the 'priority sector' depending on the situation.

Quantitative or General Methods II.

Difference between qualitative and quantitative methods of credit control

The Reserve Bank of India is empowered to raise this ratio up to 40 per cent of aggregate deposits of commercial banks. Its Merits: This method of selective credit control has certain merits which make it unique. Then in such situation the Central Bank will start purchasing securities in the open market from Commercial Banks and private individuals. The central bank may even threaten a commercial bank to be taken over by it in case it fails to follow its policies and instructions. C Rationing of Credit: Rationing of credit is another selective method of controlling and regulating the purpose for which credit is granted by the commercial banks. On the other hand, the central bank raises the amount of down payments and reduces the maximum periods of repayment in boom. First, there should exist a well-organised money market. A Regulation of Margin Requirements: This method is employed to prevent excessive use of credit to purchase or carry securities by speculators. Despite these weaknesses in practice, margin requirements are a useful device of credit control. So Rs will be the minimum which the consumer will have to pay to the bank at the time of purchase of the bicycle and the remaining amount in ten equal instalments of Rs 25 each. This can be explained with the help of the deposit multiplier formula. The two categories are: I. A borrower may not show any intention of purchasing stocks with his borrowed funds and pledge other assets as security for the loan. Minimum Margin Requirements: This weapon is selective in respect to the field of its application.

Hawtrey and the other by Keynes. This is the ratio which the central bank fixes in relation to the capital of a commercial bank to its total assets.

Selective credit control

But in the case of the regulation of consumer credit which is applicable both to banking and non-banking institutions, it becomes cumbersome to administer this technique. Limitations of Open Market Operations: The effectiveness of open market operations as a method of credit control is dependent upon the existence of a number of conditions the absence of which limits the full working of this policy. On the contrary, when the central bank lowers the reserve requirements of the banks, it should also sell securities to those banks which already have excess reserves with them, and have been engaged in excessive lending. So the bank rate policy cannot be a success in a rigid society. Business Climate: The success of the method of credit control also depends on the business climate in the economy. They presuppose that businessmen and producers are very sensitive to interest rate changes and interest charges form a considerable part of the cost of holding and production of goods. Raising the reserve ratio for all banks is not justified in the former region though it is appropriate for the latter region. This can be done by regulating the total volume of credit that may be extended for purchasing specific durable goods and regulating the number of installments through which such loan can be spread. No Specificity: Selective credit controls fail to fulfill the specificity function.

Also the 'Bank of Karad' had to come to an end in On the other hand, when the central bank aims at an expansionary policy during a recessionary period, it purchases government securities from the commercial banks and institution dealing with such securities.

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Credit control in India