Credit Control by the Central Bank Though credit is very important for the functioning of any economy, it is not free from detrimental impacts on the economy. Extended credit cause inflation in the economy, which is the cause of sufferings of the poor and fixed -income group of people . Inflationary trend in the economy , sometimes demands the control of credit , which is done by the central bank of any country .
Credit Control by the Central Bank
Credit, created by the commercial banks , is of the utmost significance in any economy, As excessive credit creates problems in the country , occasionally , the control of credit become imperative in any economy . As guardian of the economy ,and to make the economy functioning soundly central bank of any country is assigned the responsibility to control the credit in any economy. The methods followed by the central banks may be classified as 1. Quantitative Methods and 2. Qualitative Methods. In detail.
Quantitative Method: The following methods are Quantitative Methods:
Bank Rate policy: Bank rate is the rate at which central bank lends funds to the commercial banks. By changing this rate central bank can control the credit in any economy. If the central bank raises the bank rate then money or credit becomes costly and commercial banks are compelled to lend at higher re which reduces the viability of investments for the investors and they show enhanced reluctances to borrow and invest and thus credit is controlled in any economy. On the contrary, when there is deflationary trend in any economy and central bank wants to increase credit or money circulation in any economy, it reduces the bank rate and the commercial bank can reduce their lending rate and the investors thinks borrowing to invest more viable.
Variation of Reserve Ratio: Commercial banks of any country are usually, required to be scheduled banks. Enlisted members of the central bank. Every scheduled banks is required to maintain certain reserves; one of which is statutory reserves a percentage of the deposits and funds of the commercial banks. Kept reserved with the central banks. This reserved reduces the loan able funds of the banks. By increasing this reserve bank ration, central banks brings more funds in own hand and thus can reduce the available funds of the banks and credit creation is reduced or controlled in any economy .
Open market Operation: Another important method of credit control by the central bank is open market operation purchase and /or sale of securities in the financial market. Under this method central bank sales securities or investment papers in the financial market and takes an amount of money in its hand. Which reduces the disposable money of the individuals and thus credit is controlled in the economy.
Qualitative Method of Credit Control: Indirect of control of credit or method without direct impact as qualitative method of credit control which are as follow.:
Rationing of Credit : Rationing of credit is a qualitative method of credit control Under this method credit bank rations bank rations the areas and amounts of credit in different areas loan by the commercial banks. Some areas of construction consumption import or exports are usually rationed or restricted for credit expansion:
Regulation of Consumer’s Credit: Commercial banks give loan to the individuals to purchase different consume lotion of consumer’s Credit goods .Central may regulate this credit and also installment sales, and thus consumer’s credit is regulated.
Direct Action: Sometimes central banks takes direct action upon commercial banks to stop their credit extension impose punishment for credit extension and thus controls credit.