Question

Describe any two quantitative credit control methods.

Answer 1

1. Bank Rate Policy: The bank rate is the rate at which the central bank rediscounts the· first-class securities of commercial banks. The bank rate determines the market rate of interest at which commercial banks grant loans to borrowers. Whenever the central bank wants to reduce credit in the market, it raises the bank rate. When central bank credit becomes more expensive, commercial banks increase their market Rate of interest. This increase discourages borrowers from borrowing, and the volume of credit is reduced. Similarly, when the central bank wants to expand credit, it reduces the bank rate.
2. Open Market Operations: The open market operations mean the sale and purchase of securities by the central bank in the open market. When the central bank wants to reduce the volume of credit, it sells securities in the market. The sale of securities props up the cash reserves of commercial banks towards the central bank. Similarly, when the central bank wants to expand credit, it buys securities in the open market. This increases the money supply in the banking system. In comparison with bank rate policy, open market operations are a more direct and effective method of credit control.
3. Cash Reserve Ratio (CRR): Commercial banks are required to keep a specified percentage of their cash reserves with the central bank. An increase in the cash reserve ratio reduces the capacity of commercial banks to grant credit. On the other hand, a decrease in the cash reserve ratio expands the credit-granting capacity of commercial banks.
4. Statutory Liquidity Ratio (SLR): Commercial banks also have to keep a certain percentage of their demand and time liabilities in liquid form, consisting of cash and government securities. When the central bank wants to reduce the volume of credit, it raises the statutory liquidity ratio. As a result, commercial banks have to keep more liquid assets, and their capacity to grant credit is reduced. Similarly, the central bank can expand credit by reducing the statutory liquidity ratio.