Question

Bring out the methods of credit control.

Answer 1

Methods of Credit Control

1. Quantitative or General Methods:

• Bank Rate Policy:
  The bank rate is the rate at which the Central Bank of a country is prepared to rediscount the first-class securities.

2. Open Market Operations:

• In a narrow sense, the Central Bank starts the purchase and sale of Government securities in the money market.
• In Broad Sense, the Central Bank purchases and sells not only Government securities but also other proper eligible securities like bills and securities of private concerns.

3. Variable Reserve Ratio:
 a. Cash Reserves Ratio:

• Under this system, the Central Bank controls credit by changing the Cash Reserves Ratio.
• For example, if the Commercial Banks have excessive cash reserves on the basis of which they are creating too much credit, this will be harmful to 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.

 b. Statutory Liquidity Ratio:

• Statutory Liquidity Ratio (SLR) is the amount which a bank has to maintain securities.
• The quantum is specified as some percentage of the total demand and time liabilities (i.ethe liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one month’s time due to maturity) of a bank.