The Methods of Credit Control
What are the main Methods of Credit Control?
The most important function of the Central Bank is to control credit. The Central Bank uses various methods to control credit. This method can be classified into two broad categories. They are: Methods of Credit Controls Quantitative Methods 1. Bank rate policy 2. Open market operations
3. Variation of cash reserve ratio
4. 'Repo' or Repurchase Transactions
Qualitative Methods
1. Fixation of margin requirements
2. Rationing of credit
3. Regulation of consumer credit
4. Controls through directives
5. Moral suasion
6. Publicity
7. Direct action
Quantitative Methods of Credit Control
The quantitative methods of credit control are the general and traditional methods. They aim at the regulation of the quantity of credit and not its application in various uses. They are expected to control and adjust the total quantity of deposits created by the commercial banks. They relate to the volume in general. These methods are indirect in nature. The objectives of quantitative methods of credit control are as follows: (i) Controlling the volume of credit in the economy. (ii) Maintaining equilibrium between saving and investment in the economy. (iii) Maintaining the stability in exchange rates. (iv) Correcting disequilibrium in the balance of payments of the country. (v) Removing shortage of money in the money market. The important methods under this category are, 1. Bank Rate Policy It is also known as discount rate policy. Bank rate is the rate at which the Central Bank is prepared to rediscount the approved bills or to lend on eligible paper. This weapon can be used independently or along with other weapon. By changing this rate the Central Bank control the volume of credit. The bank rate is raised in times of inflation and is lowered in times of deflation. A rise in the bank rate is usually preceded by the following events: (i) Over supply of money and rising price level. (ii) Great demand for money caused by active
The most important function of the Central Bank is to control credit. The Central Bank uses various methods to control credit. This method can be classified into two broad categories. They are: Methods of Credit Controls Quantitative Methods 1. Bank rate policy 2. Open market operations
3. Variation of cash reserve ratio
4. 'Repo' or Repurchase Transactions
Qualitative Methods
1. Fixation of margin requirements
2. Rationing of credit
3. Regulation of consumer credit
4. Controls through directives
5. Moral suasion
6. Publicity
7. Direct action
Quantitative Methods of Credit Control
The quantitative methods of credit control are the general and traditional methods. They aim at the regulation of the quantity of credit and not its application in various uses. They are expected to control and adjust the total quantity of deposits created by the commercial banks. They relate to the volume in general. These methods are indirect in nature. The objectives of quantitative methods of credit control are as follows: (i) Controlling the volume of credit in the economy. (ii) Maintaining equilibrium between saving and investment in the economy. (iii) Maintaining the stability in exchange rates. (iv) Correcting disequilibrium in the balance of payments of the country. (v) Removing shortage of money in the money market. The important methods under this category are, 1. Bank Rate Policy It is also known as discount rate policy. Bank rate is the rate at which the Central Bank is prepared to rediscount the approved bills or to lend on eligible paper. This weapon can be used independently or along with other weapon. By changing this rate the Central Bank control the volume of credit. The bank rate is raised in times of inflation and is lowered in times of deflation. A rise in the bank rate is usually preceded by the following events: (i) Over supply of money and rising price level. (ii) Great demand for money caused by active