Central banks have two main methods for controlling credit in an economy: quantitative and qualitative. Quantitative methods like adjusting the bank rate, conducting open market operations, and setting reserve requirements aim to broadly restrict or encourage credit across all sectors. Qualitative or selective controls target specific uses of credit and can include imposing margin requirements, regulating consumer loans, issuing directives, and rationing credit for certain purposes. Both approaches influence monetary conditions but qualitative controls allow distinguishing essential vs non-essential credit uses.

1. Central banking – methods of credit
control – an overview

2. Central bank – quick recap
• They are different from commercial banks
• It does not aim at profit – although it may actually
earn good amount of profit
• It aims at controlling the banking system and
supporting the economic policy of the government
• It is empowered with special powers to control and
regulate the working of the commercial banking
systems of the country
• It is rather popularly known for its action to control
credit in the economy

3. Two methods of credit control
1. Quantitative credit control methods
1. Bank rate or discount policy
2. Open market operation & reserve requirements
2. Qualitative or selective credit control methods
1.
2.
3.
4.
5.
6.
Regulations or margin requirements
Regulation of consumer credit
Control through directives
Moral suasion
Rationing of credit
Direct action

4. Quantitative methods
• Bank Rate Policy
– Commercial banks when in additional need of cash –
obtain from the Central Bank either
• By rediscounting some of the securities; or
• Borrow from the Central Bank against the securities
• For this Central Bank charges interest at the
rate, which is known as Bank Rate or Discount Rate

5. BANK RATE GOVING UP
• LENDING RATES
OF THE
COMMERCIAL
BANKS WILL GO
UP
• PEOPLE ARE
DISCOURAGED
TO TAKE LOANS
• MERCHANTS
LIQUIDATE THEIR
STOCKS
• DEALERS IN
STOCK
EXCHANGE MAY
LIQUIDATE THEIR
STOCKS TO PAY
OFF THEIR LOANS
BANK RATE GOVING DOWN
• LENDING RATES
GO DOWN
• PEOPLARE ARE
ENCOURAGED TO
TAKE LOANS
• MERCHANTS
HOLD THE
STOCKS
• STOCK’S WILL BE
HELD ON TO BY
THE BROKERS
• MORE PURCHASE
OF STOCKS WILL
ALSO TAKE PLACE

6. Quantitative methods
• Open Market Operations
– Deliberate and direct buying and selling of securities and
bills in the money market by the Central Bank on its own
initiative

7. Quantitative methods
• Reserve Ratio Requirements
• The requirement of a commercial bank to maintain
a minimum percentage of their time and demand
liabilities with the Central Bank also know as ‘Cash
Reserve Ratio’
• The objective
– To ensure liquidity & solvency among the banks
– To provide Central Bank with supply of deposits for its local
operations
– To influence ultimately restrict commercial banks’ extension
of credit

8. Selective credit control methods
• Unlike the quantitative controls – they are not
indiscriminately impact across all sectors
• Historically – these were designed and applied
during the World War II period
• Advantages
– They distinguish between essential and non essential uses
of the Bank credit
– Only non essential uses are brought under the scope of
Central Bank controls; and
– They affect not only lenders but borrowers as well

9. Selective credit control methods
• Margin requirements
– The stock-market crash of 1929 in USA
– There was extensive speculation in stock markets in US
– The Federal Reserve Bank of America ordered commercial
banks to restrict their loans and advances to stock brokers
by raising the margin requirements

10. Regulation of customer credit
• The restraint under these regulations were two fold
– They limited the amount of credit for the purchase of any
article listed in the regulation; and
– They limit the time for repaying the debt

11. Moral suasion
• Implies persuasion and request made by the
Central Bank to the commercial banks to follow the
general monetary policy of the former

12. Rationing of credit
• Method of controlling and regulating the purpose
for which credit is granted by the commercial banks

13. Direct action
• in 1959 – RBI directed the entire banking system to
refrain from excessive lending