2. Meaning
Credit Control refers to the regulation of
credit by the Central Bank for achieving
definite objectives
3. Objectives of Credit Control
Internal Price stability
Exchange rate stability
Achievement of a high level of
Employment and output
Control over trade cycles
Economic planning
6. Qualitative Credit Control
Regulation of consumer’s credit
Change in marginal requirements of loans
Rationing of credit
Moral Persuasion
Publicity
Direct action
7. Quantitative Credit Control
Bank Rate
It is rate of interest at which the central
bank rediscounts the first class securities
of other banks.
Also called Discount Rate
8. Bank rate policy
Bank rate policy is that policy by which the
Central Bank controls the credit creation of
the banks
Contraction of credit
Expansion of credit
9. Conditions of success of Bank Rate
Relationship between different rates
Elasticity in the economy
Psychology of the investors
10. Limitations of Bank rate policy in
underdeveloped countries
Long term effect
Less elastic
Unorganised bill market
No increase in deposits
International flow of capital
Less dependence
Ignores the rate of profit
Less effective in planned economies
11. Open market operations
In broader sense, open market operation
refers to the sale and purchase of
securities by central bank in the open
market
In narrow sense, when the central bank or
the Government buys or sells only the
government securities then it is called
open market operations
13. Objectives of open market
operations
To remove the effects of inflow and outflow of gold
under gold standard
To check the export of capital to other countries
To regulate the power of the banks to expand credit
To remove the shortage of money in money market
To control credit properly by supplementing bank rate
policy in the event of bank rate proving ineffective
14. Limitations of open market
operations
Influence on the cash reserve ratio of banks
Change in the credit policy of the banks
Demand and supply of securities
No change in the credit policy of the customers
Powers of the central bank to purchase and sell
securities
The money market should be well organised
Normal conditions
15. Difference between Bank rate and
open market operations
Open market
1. Function independently
2. It influence the rate of interest
directly
3. Have immediate effect on both
short and long term effect on ROI
4. They can be changed as many
times as possible during a week,
day and month
5. This policy is free from such
compulsions on all banks
Bank rate
Does not function independently
It influence rate of interest indirectly
Has immediate effect on short term
ROI and but its long term effect is very
slow
It is not possible to change bank rate
again and again
Change in bank rate implies a sort of
compulsion on the commercial banks
to increase or decrease the market
rate of interest
16. Change in cash reserve ratio
According to this policy all banks must
keep a certain percentage of their deposits
with the central bank as reserve fund
17. Policy of variation in CRR
When central bank has to control credit it
raises the ratio of CRR
When central bank has to expand credit it
lowers its CRR
18. Change in liquidity ratio
According to it, the banks have to keep
compulsorily a certain portion of their
assets in liquid form. It comprises cash
and government securities, it also curtails
the power of the commercial banks to
create credit
19. Qualitative or Selective credit
control
Changes in the marginal requirement of
loans
Regulation of consumers credit
Moral persuasion
Publicity and propaganda
Direct action
20. Choice between qualitative and
quantitative control
Qualitative credit control
1. It is more direct and
effective
2. It influence both
creditors and debtors
3. It do not make any
distinction between
essential and non
essential credit
4. It control the entire
quantity of method
Quantitative credit control
It has its initial impact on
some external conditions
It influence creditors alone
It makes the distinction
It control the use of credit
for specific purposes
21. Difficulties in credit control
Difficulties in controlling various forms of credit
Lack of control over all banks
Unorganized banking system
Conditions of money and capital market
lack of traditions
Non banking elements in the money market
Lack of co operation from other banks
Lack of co operation from non financial
institutions