Question

Explain in brief four methods usually adopted by the central bank to control credit in the country.

Answer 1

Methods of Credit Control: The contract bank manages credit volume using both quantitative and qualitative methods. 

1. Quantitative methods: Quantitative approaches refer to the increase or decrease in credit volume. The methods are as follows.
   1. Bank rate policy: The bank rate policy refers to the central bank's change in interest rates for loans against securities. If the central bank raises the bank rate, interest rates will likewise rise. People will borrow less because of the high interest rates, lowering the credit volume. Reducing bank rates leads to lower interest/market rates, resulting in more borrowing and credit volume.
   2. Open market operation: Open market operation refers to buying and selling securities on the open market. The central bank offers securities, and buyers pay with commercial bank cheques. The funds will move from commercial banks to the central bank. Credit expansion rates will fall, and vice versa.
2. Qualitative methods: Qualitative techniques involve establishing norms that facilitate credit generation. The qualitative methods are outlined below.
   1. Credit rationing: Credit rationing occurs when the central bank limits the amount of credit granted. During financial crises, each bank receives rationed credit. Credit for speculators is discouraged and should be offered for describing fields.
   2. Direct action: Direct action is imposing a charge on commercial banks that do not comply with central bank policy. The central bank may reject credit or re-discount bills of exchange.
   3. Moral persuasion: The central bank uses moral persuasion to indirectly influence the credit policies of member banks. The commercial bank followed the central bank's advice and persuasion methods. Commercial banks should cooperate with the central bank. Otherwise, better outcomes cannot be obtained.
   4. Margin requirement: Margin requirement refers to the portion of a security's price that the bank keeps. It protects against price changes. The contract bank manages credit by adjusting the margin requirements. The marginal percentage varies between borrower classes. The goal is to discourage speculation without the other. 
      Suppose:
      Secutities                     = 2,00,000
      Loan                            = 1,00,000
      Marginal requirement = 1,00,000