Qualitative methods of credit control

Qualitative method of Credit Control in Central Bank. A Central bank use qualitative methods to meet up certain missions. The efficiency of credit control measures in an economy depends upon a number of factors. First, there should exist a well-organized money market. Second, a large amount of money in the movement should form part of the organized money market. Finally, the money and capital markets should be widespread in exposure and flexible in nature.

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Rationing of credit: Sometimes central bank orders commercial banks to give loan in a certain sector, that is called rationing of credit. The demand and usage of the loan are considered here to select those sectors. Central banks loosely control in some sectors and tightened control in some sectors.

As a result commercial bank cannot grant the loan to any sector. For example, giving priority to our RMG sector or ignore some industries for importing, etc. Rationing of credit can be applied in two ways:. Direct Action: If any commercial bank ignores the rules and regulations provided by the central bank, then punishable steps will be taken against the particular banks.

To control credit supply this type of step is taken. For example, sometimes a central bank does not provide loans or demand more with interest but to punish commercial banks that disobey the rules. Moral persuasion: Central bank sometime controls the flow of credit morally. It makes the commercial bank flexible in time of credit supply. Central bank gives advice and requests to understand the importance of credit control. By this commercial banks encourage ethically to their responsibility. An increase in bank rate leads to an increase in other rates of interest and conversely, a decrease in bank rate results in a fall in other rates of interest.

Selective method of credit control: In this method, selective sectors are followed to grant credit. That means where the credit is must it is given there.

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Publicity Policy: By using media, the central bank sometimes tries to control credit flow. It publishes different to add, news, magazine, bulletin etc to encourage the scheduled bank to control credit.Under the selective or qualitative credit control methods, the RBI encourages flow of credit only to certain types of industries and discourages the use of bank credit for certain other purposes.

Under this method, extension of credit to essential purposes is encouraged and to non-essential purposes is discouraged. Hence these methods not only prevent the flow of credit into undesirable channels but also direct the flow of credit to useful channels. The following are the different methods of selective credit control methods adopted by the RBI. Sincethe RBI has issued many directions to the banks. Of them, few examples are quoted below:.

The RBI issued its first directive on 17 May with a view to restrict advances against paddy and rice. Later it was extended to food grain, pulses, oil seeds, vegetable and sugar etc. The RBI fixed higher minimum lending rates for loans given subject to selective credit controls. Moral suasion aims at strengthening natural confidence and understanding between the monetary authority and the banks as well as financial institutions.

It is not a statutory obligation. It is only a persuasion of commercial banks not to apply for further accommodation from RBI. RBI has been sending letters periodically to the commercial banks requesting them to cooperate with it for controlling credit.

The RBI held regular meetings and discussions with commercial banks to highlight the need for mutual cooperation cooperation to implement the monetary policy effectively. Here there is no element of compulsion. So the effectiveness of this method depends on the willing cooperation extended by the commercial banks. Fixation of margin requirements was introduced for the first time in India in The term margin denotes that part of the loan amount, which cannot be borrowed from bank.

Hence this portion of finance is to be compulsorily brought by the borrower from own source. The RBI has power to vary the margin requirements depending upon the business conditions prevailing in the country. By using this method, during the period of inflation with a view to control credit, the RBI raises the margin and during deflation it lowers the margin to expand the credit.

This method also enables the commercial banks to direct their funds to essential activities rather than speculative activities.

Rationing of credit is another method of selective credit control. It is made by regulating the purposes for which the loans are given among the various member banks. To ensure overall development of a nation, development of various sectors is a must. Finance is to be distributed to various sectors as per these requirements.The following points highlight the two categories of methods of credit control by central bank. The two categories are: I.

Quantitative or General Methods II. Qualitative or Selective Methods. The bank rate is the rate at which the Central Bank of a country is prepared to re-discount the first class securities. As the Central Bank is only the lender of the last resort the bank rate is normally higher than the market rate.

If the Central Bank wants to control credit, it will raise the bank rate. As a result, the market rate and other lending rates in the money-market will go up. Borrowing will be discouraged. The raising of bank rate will lead to contraction of credit. Similarly, a fall in bank rate mil lowers the lending rates in the money market which in turn will stimulate commercial and industrial activity, for which more credit will be required from the banks.

Thus, there will be expansion of the volume of bank Credit. In narrow sense—the Central Bank starts the purchase and sale of Government securities in the money market.

But in the Broad Sense—the Central Bank purchases and sale not only Government securities but also of other proper and eligible securities like bills and securities of private concerns. When the banks and the private individuals purchase these securities they have to make payments for these securities to the Central Bank.

This gives result in the fall in the cash reserves of the Commercial Banks, which in turn reduces the ability of create credit.

qualitative methods of credit control

Through this way of working the Central Bank is able to exercise a check on the expansion of credit. Further, if there is deflationary situation and the Commercial Banks are not creating as much credit as is desirable in the interest of the economy. Then in such situation the Central Bank will start purchasing securities in the open market from Commercial Banks and private individuals. With this activity the cash will now move from the Central Bank to the Commercial Banks.

With this increased cash reserves the Commercial Banks will be in a position to create more credit with the result that the volume of bank credit will expand in the economy. For example—If the Commercial Banks have excessive cash reserves on the basis of which they are creating too much of credit which is harmful for the larger interest of the economy. So it will raise the cash reserve ratio which the Commercial Banks are required to maintain with the Central Bank.

This activity of the Central Bank will force the Commercial Banks to curtail the creation of credit in the economy. 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. Similarly, when the Central Bank desires that the Commercial Banks should increase the volume of credit in order to bring about an economic revival in the country.

The Central Bank will lower down the Cash Reserve ratio with a view to expand the cash reserves of the Commercial Banks. With this, the Commercial Banks will now be in a position to create more credit than what they were doing before.

Thus, by varying the cash reserve ratio, the Central Bank can influence the creation of credit. From the analysis and discussions made above of these two methods of credit, it can be said that the variable cash reserve ratio method is superior to open market operations on the following grounds:.

While Cash Reserve Ratio does not require such type of securities market for the successful implementation. But the variable cash reserve ratio method is more effective when the commercial banks happen to have excessive cash reserves with them. The qualitative or the selective methods are directed towards the diversion of credit into particular uses or channels in the economy. Their objective is mainly to control and regulate the flow of credit into particular industries or businesses.

Under this method the credit is rationed by limiting the amount available to each applicant. The Central Bank puts restrictions on demands for accommodations made upon it during times of monetary stringency. In this the Central Bank discourages the granting of loans to stock exchanges by refusing to re-discount the papers of the bank which have extended liberal loans to the speculators.

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This is an important method of credit control and this policy has been adopted by a number of countries like Russia and Germany. Under this method if the Commercial Banks do not follow the policy of the Central Bank, then the Central Bank has the only recourse to direct action.

This method can be used to enforce both quantitatively and qualitatively credit controls by the Central Banks.It seeks to regulate the credit system in such a way as to encourage genuine and desirable economic activities and discourage reckless expansion of unproductive and undesirable credits. Fluctuations in the volume of credit, course fluctuates purchasing power of money, this fact has far-reaching economic and social consequences. That is why credit Cantrol has become important function of any Central Bank.

What is the Importance of Qualitative Methods of Credit Control?

They create credit without any increase of cash with them. The Central Bank applied its credit control to bring out measure requirement of credit in the country.

This will help in keeping the price stable. Credit control measures certainly influence the price level in the country. The internal price level affects the volume of exports and imports of the country, which may bring fluctuations in the foreign exchange rates. While using any measure of the credit control it should be ensured that there would be no violent fluctuations in the exchange rates. These are 1 Quantitative method. These methods aim is to control the cost and quantity of credit by adopting techniques.

It is effective up to some extent in both conditions of inflation and deflation. When the central bank fund growing inflationary trend in the economy, it sell securities to the peoples through commercial bank, So, when customer purchase the securities they will pay to the commercial bank and commercial bank pay that money or cheques to the central bank So, the supply of money decreased.

qualitative methods of credit control

In case of deflation central bank can raise the supply of money and credit by purchasing securities, Securities are purchased from the peoples and money retuned to them. Thus, increasing the quantity of money in the economy and the supply of money increased.

When loans become costly peoples avoid to taking loans and prefer to deposit in the bank to earn high profit so, the supply of money decreased When there is deflation, the bank rate lowered and the discounting of bills become less costly. Therefore commercial banks also fall the interest rate on advances. When loans becomes less costly peoples taking loans and investing in the business so, the supply of money increased.

The central bank possesses other tools of credit control in the form of power to vary these reserves raptio according economy condition.

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If there is inflation, then the percentage of reserve ratio increased the capacity of commercial bank to create credit decreases resulting in high interest rate and discourages borrowing. If there are deflation, the reserve ration decreases and the capital of commercial bank to create credit increases resulting in low interest rate and encourage borrowing.

In case of inflation, the optimum or the upper limit decreases by the central bank to check credit. In case of deflation the optimum limit increases by the central bank to create credit. Its aim is to discourage uneventful and undesirable activities.The qualitative or selective methods of credit control are adopted by the Reserve Bank in its pursuit of economic stabilization and as part of credit management. Image Courtesy : massimolepri. Changes in margin requirements are designed to influence the flow of credit against specific commodities.

The commercial banks generally advance loans to their customers against some security or securities offered by the borrowers and acceptable to banks. More generally, the commercial banks do not lend upto the full amount of the security but lend an amount less than its value.

The margin requirements against specific securities are determined by the Reserve Bank. A change in margin requirements will influence the flow of credit. A rise in the margin requirements results in a contraction in the borrowing value of the security and similarly, a fall in the margin requirements results in expansion in the borrowing value of the security.

Rationing of credit is a method by which the Reserve Bank seeks to limit the maximum amount of loans and advances, and also in certain cases fix ceiling for specific categories of loans and advances. Regulation of consumer credit is designed to check the flow of credit for consumer durable goods. This can be done by regulating the total volume of credit that may be extended for purchasing a specific durable goods and regulating the number of instalments through which such loan can be spread.

Reserve Bank uses this method to restrict or liberalise loan conditions accordingly to stabilise the economy. Moral suasion and credit monitoring arrangement are other methods of credit control. The policy of moral suasion will succeed only if the Reserve Bank is strong enough to influence the commercial banks.

In India, from onwards the Reserve Bank has been successful in using the method of moral suasion to bring the commercial banks to fall in line with its policies regarding credit. Publicity is another method whereby the Reserve Bank makes direct appeal to the public and publishes data which will have sobering effect on other banks and the commercial circles.

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qualitative methods of credit control

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Program Faculty Research Domains Students Orientation Schedule Student Offices Student Representatives Guide for Degree Programs Requirements and Regulations for M. News Best wishes to our department's Autumn Quarter graduates. Department Events This Week SATURDAY, December 9, 2017, Autumn Quarter ends Wishing you a safe and happy holiday season.With a new week, we get a few things: Fantasy football, cheering on your favorite team, and, of course, taking a peek at the spreads in order to make sure you're on the right side of every outcome.

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After a road game last week, don't be shocked if the Vikings trip up. Carolina's defense will make things difficult on Case Keenum and Cam Newton will win this one with his legs. The Bengals technically are still in the AFC playoff race. That'll last at least another week.

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Andy Reid is too good of a coach to let this season slip away. Alex Smith and Co. The Lions aren't good enough, but they'll give fans some hope with a win over a poor Bucs team that likely will be looking for a new coach soon. I keep waiting for the other shoe to drop with a Titans team that looks far worse than its record. A proud Cardinals team can be the group to knock them off.

Methods of Credit Control used by Central Bank

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It's impossible to feel confident in taking Blake Bortles in a game he's laying points to Russell Wilson.