Question

Write short answer for the following question :

Explain qualitative meansures of credit contorl adopted by the Central Bank.

Answer 1

Meaning: -Selective credit controls have been taken to control money supply or credit, i.e. either to increase or decrease the money supply to specific purposes. Such controls the flow of money into unproductive channels or purposes. The selective controls are

QUALITATIVECREDIT (SELECTIVE) CONTROL

1. Ceiling on the Level of Credit: -The ceiling (upper limit) on the level of credit restricts the lending capacity of a bank to grant various advances against certain controlled commodities or securities.
2. Margin Requirements: -The RBI imposes minimum margin requirements, which vary from 20% to 80% for lending against securities or commodities. Margin against a particular security is decreased or increased in order to encourage or discourage the flow of credit to a particular sector.
3. Directives: - The RBI issue directives (orders) to banks regarding advances. Directives are issued in the following aspects.

• Minimum margin requirements against securities.
• Maximum limit on advances to borrowers.
• The Percentage of CRR and Statutory Liquidity Ratio (SLR)
• Minimum lock-in period, etc.

The RBI takes necessary action on those banks, which fail to comply with its directives.

4. Moral Suasion: -Under moral suasion, the RBI issues periodical letters to bank to exercise control over credit. Such periodical letters act as a remainder to the banking sector to follow credit control norms (rule).
5. Direct Action: - The Centralbank may take direct action on commercial banks for not observing the guidelines. The banks have to follow central bank directives or guidelines in case of granting credit such as margin requirements.
6. Publicity: -Central bank publishes information regarding money market and credit situation in the market. This information can be useful to the banks in framing credit policy and fixing interest rates.
7. Regulation of consumer Credit: -The central bank frames guidelines relating to consumer credit. The bank providing consumer credit to buy consumer durables and other items have to follow such guidelines.